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Thorsten Polleit

Thorsten Polleit



Articles by Thorsten Polleit

Negative Interest Rates

August 23, 2019

Those who had hoped that things could not get worse with the monetary policy of the European Central Bank (ECB) have been proven wrong. At its last meeting on 25 July 2019, the Governing Council of the ECB kept interest rates unchanged: the main refinancing rate was kept at 0.00% and the deposit rate at -0.40%. At the same time, however, ECB President Mario Draghi has prepared the ground to lower interest rates even further in the coming months. What is the reasoning behind that?
According to the ECB Governing Council, inflation is too low, and the euro area economy is too weak. It was precisely this assessment that signaled to the markets to expect a rate cut in the near future. It has now become very likely that the deposit

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The Disaster of Negative Interest Policy

August 22, 2019

Those who had hoped that things could not get worse with the monetary policy of the European Central Bank (ECB) have been proven wrong. At its last meeting on 25 July 2019, the Governing Council of the ECB kept interest rates unchanged: the main refinancing rate was kept at 0.00% and the deposit rate at …

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Facebook’s Fake Money

July 19, 2019

Starting in 2020, Facebook wants to offer its customers a global high-tech currency and infrastructure. The US IT giant says that this will provide many people around the world with easy and cost-effective access to the monetary and financial system. The new blockchain-based money is called “Libra.” Technically, it is something akin to a crypto-money-banknote covered by a basket of official fiat currencies (such as US dollars, euros, and the like). The heart of the Libra project is the “Libra Association” (LA). The non-governmental association, based in Geneva, Switzerland, is supported by founding members such as eBay, Facebook, Mastercard, PayPal, Spotify, Uber, Visa, as well as other renowned firms, and will be responsible for

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Facebook’s Fake Money

July 18, 2019

Starting in 2020, Facebook wants to offer its customers a global high-tech currency and infrastructure. The US IT giant says that this will provide many people around the world with easy and cost-effective access to the monetary and financial system. The new blockchain-based money is called “Libra.” Technically, it is something akin to a crypto-money-banknote …

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Central Banks’ Crusade Against Risk

May 16, 2019

Since the latest the crisis in 2008/2009, central banks around the world have been doing their best to expel risks from financial markets. By lowering interest rates, fixing them at extremely low levels, or issuing more credit and money, monetary policymakers make sure that ailing borrowers are kept afloat. In fact, central banks have put a “safety net” under the economies and the financial markets in particular. As it seems, this measure has been working quite effectively over the last ten years or so.
Investors do no longer fear that big borrowers – be it big governments or big banks and big corporates – could default, as evidenced by the low credit spread environment. Liquidity in basically all important credit market segments

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Central Banks’ Crusade Against Risk

May 16, 2019

Since the latest the crisis in 2008/2009, central banks around the world have been doing their best to expel risks from financial markets. By lowering interest rates, fixing them at extremely low levels, or issuing more credit and money, monetary policymakers make sure that ailing borrowers are kept afloat. In fact, central banks have put …

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Central Banks Are Propping Up Stock Prices

April 12, 2019

Financial markets seem to have a great deal of confidence in the effectiveness of central bank monetary policy — in the sense that by keeping interest rates low, or bring interest rates down, the economies will keep expanding and asset prices, in particular, will keep rising. There is, however, good reason for savers and investors …

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Central Banks Are Messing with Your Head

March 22, 2019

Human action and the interest rate People value present goods more highly than future goods. For instance, an apple available today is considered more valuable than the same apple available in, say, one month. This is expressive of time preference — which is an undeniable fact, a category of human action. The sentence “Humans act” …

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Central Banks Are Messing With Your Head

March 22, 2019

Human action and the interest rate
People value present goods more highly than future goods. For instance, an apple available today is considered more valuable than the same apple available in, say, one month. This is expressive of time preference — which is an undeniable fact, a category of human action.
The sentence “Humans act” is a logically irrefutable truth. It cannot be denied without causing a logical contradiction. By saying “Humans can not act”, you act and thus contradict your very statement.
From the true insight that humans act we can deduce that human action takes place in time. There is no timeless human action. Were it otherwise, people’s goals would be instantaneously reached, and action would be impossible — but

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Why Marx Loved Central Banks

February 9, 2019

In his “Manifesto of the Communist Party” (1848), published together with Frederick Engels, Karl Marx calls for “measures” — by which he means “despotic inroads on the rights of property” –, which would be “unavoidable as a means of entirely revolutionising the mode of production,” that is, bringing about socialism-communism. Marx’s measure number five reads: …

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The Fed Has Become Increasingly Dependent on Easy-Money Policy

November 30, 2018

“I think we have much more of a Fed problem than we have a problem with anyone else”, said US President Donald J. Trump on 20 November 2018. While the press, mainstream economists, and bankers cry wolf, the US President hits the nail on its head: The Fed is the source of significant economic and …

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Trump is Right: The Fed is a Big Problem

October 30, 2018

President Donald J. Trump has taken on the Federal Reserve (Fed), saying that Fed chairman Jerome H. Powell is threatening US economic growth by further raising interest rates. Mainstream economists, the financial press and even some politicians react with indignation: the president’s comments undermine the Fed’s political independence, potentially endangering the confidence in the US dollar. …

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The Fed Is Flying Blind

September 28, 2018

US interest rates keep creeping upwards, largely because the US Federal Reserve (Fed) is expected to ramp up borrowings costs further in the coming quarters. The Federal Funds Rate is now in a bandwidth of 1.75 to 2.0 per cent, and the yield on 10-year Treasuries has recently climbed slightly above the 3 per cent …

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Central Banks Enrich a Select Few

September 3, 2018

The message unanimously churned out by politicians, central bankers, and ‘mainstream’ economists is that central banks are there for the ‘greater good’. They provide the economy with sufficient money and credit, and they fight inflation, thereby supporting output and employment growth. What is more, central banks, are supposedly in a position to effectively fend off or at least mitigate financial and economic crises. However, unfortunately, nothing could be further from the truth.
Throughout history, central banks have been created, first and foremost, to fill governments’ coffers. To increase the king’s or elected government’s financial means through an inflationary scheme – usually too elaborate and too treacherous for most

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Central Banks Enrich a Select Few at the Expense of Many

August 31, 2018

The message unanimously churned out by politicians, central bankers, and ‘mainstream’ economists is that central banks are there for the ‘greater good’. They provide the economy with sufficient money and credit, and they fight inflation, thereby supporting output and employment growth. What is more, central banks, are supposedly in a position to effectively fend off …

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All Is Not Well In Financial Markets

July 26, 2018

It seems to be a hard time for those expressing concern about the build-up of risks in the economic and financial system: the major economies in the world are expanding at a decent clip, credit default concerns are very low, and stock and housing prices keep going up, driven by investor optimism and supported by …

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Gold Should be Viewed as Money

July 13, 2018

On May 4 and 5, 2018, Warren E. Buffett (born 1930) and Charles T. Munger (born 1924), both already legends during their lifetime, held the annual shareholders’ meeting of Berkshire Hathaway Inc. Approximately 42,000 visitors gathered in Omaha, Nebraska, to attend the star investors’ Q&A session.
Peoples’ enthusiasm is understandable: From 1965 to 2017, Buffett’s Berkshire share achieved an annual average return of 20.9 percent (after tax), while the S&P 500 returned only 9.9 percent (before taxes). Had you invested in Berkshire in 1965, today you would be pleased to see a total return of 2,404,784 percent: an investment of USD 1,000 turned into more than USD 24 million (USD 24,048,480, to be exact).
In his introductory words,

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Economists Won’t Predict the Next Crash

July 6, 2018

You get a lot of attention if you shout out things like “The stock market is about to collapse”, or “The US dollar crash is just around the corner”, or “The housing market slump is about to unfold”. But from the viewpoint of sound economics, making these kinds of predictions is quite impossible. Putting probabilities to certain outcomes – such as “I assign a probability of 30 per cent that the stock market collapses in 2018” – might be fashionable among forecasters, but it certainly does not do the trick or make things any better.
Some Can
To be sure: One cannot, and should not, dismiss the idea that there might be people out there who have the ability to forecast events happening in the future correctly on a sustained basis. For

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Gold Should be Viewed as Money — Not as an Investment Instrument

June 8, 2018

Reprinted from Mises.org
On May 4 and 5, 2018, Warren E. Buffett (born 1930) and Charles T. Munger (born 1924), both already legends during their lifetime, held the annual shareholders’ meeting of Berkshire Hathaway Inc. Approximately 42,000 visitors gathered in Omaha, Nebraska, to attend the star investors’ Q&A session.
Peoples’ enthusiasm is understandable: From 1965 to 2017, Buffett’s Berkshire share achieved an annual average return of 20.9 percent (after tax), while the S&P 500 returned only 9.9 percent (before taxes). Had you invested in Berkshire in 1965, today you would be pleased to see a total return of 2,404,784 percent: an investment of USD 1,000 turned into more than USD 24 million (USD 24,048,480, to be exact).
In his introductory words, Buffett pointed out how important the

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How Central Banks Stoke Stock Prices

February 23, 2018

Reading through Security Analysis, the roadmap for investing first published in 1934 by Benjamin Graham and David L. Dodd, I learned something quite interesting: The basis of stock valuation had changed quite drastically in the period between 1927 and 1929. The stock buying public “departed more and more from the factual approach and technique of security analysis and concerned itself increasingly with the elements of potentiality and prophecy”, write Graham and Dodd.1What they mean is that in the pre WWI world, stocks were typically valued on the basis of a three-part concept: (i) a decent track record of firms’ dividend returns, (ii) a stable and satisfactory earnings record, and (iii) a strong balance sheet, with sufficient backing by tangible assets. The “New-Era”

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Central Banks Put a Safety Net Under Financial Markets

January 26, 2018

Most early business cycle indicators suggest that the global economy is pretty much roaring ahead. Production and employment are rising. Firms keep investing and show decent profits. International trade is expanding. Credit is easy to obtain. Stock prices keep moving up to ever higher levels. All seems to be well. Or does it? Unfortunately, the economic upswing shows the devil’s footprints: central banks have set it in motion with their extremely low, end in some countries even negative, interest rate policy and rampant monetary expansion.Artificially depressed borrowing costs are fueling a “boom.” Consumer loans are as cheap as never before, seducing people to increasingly spend beyond their means. Low interest rates push down companies’ cost of capital, encouraging

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Asset Prices Are Prices Too

December 12, 2017

We live in inflationary times. Some people might consider this statement controversial. This is because these days inflation is widely understood as a rise in the consumer price index (CPI) of more than 2 percent per year. However, there are convincing reasons to question this viewpoint. On the one hand, the CPI does not include “assets” such as, for instance, stocks, housing, real estate, etc. As a result, the price developments of these goods are not accounted for by the changes in the CPI.On the other hand, and even more essential, price changes of goods and services are associated with changes in the quantity of money. This is why economists used to understand a rise in the quantity of money as inflationary (and a decline in the quantity of money as deflationary):

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Are Markets Really as Calm as they Seem?

November 21, 2017

Indicators for financial market "stress" have reached their lowest levels in decades. For instance, stock market volatility has never been this low since the early 1990s. Credit spreads have been shrinking, and prices for credit default swaps have fallen to pre-crisis levels. In fact, investors are no longer haunted by concerns about the stability of the financial system, potential credit defaults, and unfavourable surprises in the economy or financial assets markets. How come?

Monetary policy plays the significant role. By slashing interest rates and ramping up the quantity of money in the banking system, central banks around the world have kick-started the economies following the 2008/2009 crash. But this is not the full story. The fact that investors expect

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The Great Complacency

November 1, 2017

One of the perhaps most striking features of current financial market price action is the conspicuous absence of investor risk concern. Stock market price volatility, for instance, has bottomed out on the lowest level since the early 1990s. At the same time, stock prices have reached all-time highs, and the valuation level has gone up substantially (with, say, the PE ratio standing now well above its long-term average). Investors are apparently quite confident that corporate earnings will continue to go up and a stock price correction is nowhere near.

Is it because we have finally left the worldwide economic and financial crisis behind us? Well, there are quite a few reasons to express some doubt. For example, total debt levels have not come down since the 2008/2009 crisis – on the

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Mario Draghi’s Fatal Conceit

August 30, 2017

22 hours agoThorsten PolleitOn 23 August 2017, the president of the European Central Bank (ECB) gave a speech titled “Connecting research and policy making” at the annual assembly of the winners of the Nobel Price for Economics in Lindau, Germany.1 What Mr Draghi talked about on this occasion — and especially what he didn’t talk about — was quite revealing.Any analysis of the causes of the latest financial and economic crisis is conspicuously absent from Mr Draghi’s remarks. One gets the impression that the crisis came basically unexpected, out of the blue. There is no mention of the role of central banks, the monopoly producers of unbacked paper (or: fiat) money, played for the crisis.No word that central banks had for many years manipulated downwards interest rates

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The Faults of Fractional-Reserve Banking

August 25, 2017

Reprinted from Mises.org
In a November 1, 2010, blog post titled “Could the World Go Back to the Gold Standard?,” Martin Wolf, the Financial Times chief economics commentator, comes to the conclusion that “we cannot and will not go back to the gold standard.”
Among a number of mainstream-economics arguments leveled against the desirability and feasibility of the gold standard, Mr. Wolf puts forth a line of reasoning that can serve particularly well as a starting point for debating his position. Mr. Wolf writes,
Economists of the Austrian school wish to abolish fractional reserve banking. But we know that this is a natural consequence of market forces. It is wasteful to hold a 100 per cent reserve in a bank, if depositors do not need their money almost all of the time. Banks have a strong

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Central Banks Are Hiding the True Price of Risk

August 11, 2017

7 hours agoThorsten PolleitIf you invest your money, you will have to deal with numerous risks. For instance, if you buy a bond, you run the risk of the borrower defaulting or being repaid with debased money. As a stock investor, you face the risk that the company’s business model will not live up to expectations, or that it, at the extreme, will go bankrupt. In an unhampered financial market, prices are formed for these and other risk factors.For instance, a bond with a high default risk will typically carry a high yield. The same goes for debt denominated in an unsound currency. Stocks of companies that are deemed risky tend to trade at a lower valuation level than those considered low risk. All these risk premiums, if determined in the unhampered market, constitute a

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The Fed Remains on Course – to Trouble

July 27, 2017

7 hours agoThorsten PolleitThe Federal Reserve (Fed) is widely expected to continue to tighten its monetary policy this year. According to a latest Reuters Poll, the Fed is likely to start shrinking its US$4 trillion balance sheet in September and, moreover, raise further its key interest rate, which is currently standing in a range of 1.0 to 1.25 percent, in the fourth quarter this year.According to mainstream economic wisdom, the time has come for the US economy to return to a more normal level of interest rates. Industrial output is expanding at a decent clip, official unemployment has declined markedly, and prices in the stock and housing market show a sustained upward drift. Considering these circumstances, the US economy can now shoulder a tighter monetary policy, it

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La Fed sigue su rumbo… hacia los problemas

July 27, 2017

[The Austrian 3, nº 4 (Julio-Agosto 2017)]The Power and Independence of the Federal ReservePeter Conti-BrownPrinceton University Press, 2016 · xiv + 347 páginasPeter Conti-Brown, un historiador del derecho que enseña en la Wharton School, discreparía enormemente del deseo de Ron Paul de acabar con la Fed. Nunca cita a Mises o Rothbard y el único trabajo austriaco que menciona, oculto en una nota al final, es The Rationale of Central Banking and the Free Banking Alternative, de Vera Smith. Aun así, los austriacos encontrarán muy valioso el libro de Conti-Brown. Ha expuesto con una considerable erudición muchos grandes problemas de la Fed de una manera que refuerza y apoya el alegato contra esta.La preocupación principal de la crítica austriaca a la Fed ha sido el papel vital de esa

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The Super Bubble Is in Trouble

June 27, 2017

7 hours agoThorsten PolleitYou do not need to be a financial market wizard to see that especially bond markets have reached bubble territory: bond prices have become artificially inflated by central banks’ unprecedented monetary policies. For instance, the price-earnings-ratio for the US 10-year Treasury yield stands around 44, while the equivalent for the euro zone trades at 85. In other words, the investor has to wait 44 years (and 85 years, respectively) to recover the bonds’ purchasing price through coupon payments.Meanwhile, however, the US Federal Reserve (Fed) keeps bringing up its borrowing rate; and even the European Central Bank (ECB) is now toying with the idea of putting an end to its expansionary policy sooner rather or later. Most notably, however, US

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