When it comes to the types of people in this world, there are those who say that the only way to fix the current economic catastrophe is to keep doing more of the same that got us in this condition in the first place (these are the people who say mean regression is irrelevant, and 10 men and women in an economic room can overturn the laws of math, nature, physics, and everything else and determine what is best for 7 billion people), and then there is everyone else. The former are called Keynesians. The latter are not. Only those in the former camp don’t see the lunacy of their fundamental premise, a good example of which is the following. Luckily, the world is nearing the tipping point when the camp of the former, which for the simple reason that it allowed the few to steal from the many under the guise that it is for the benefit of all, is about to be overrun, hopefully peacefully and amicable but not necessarily, and the camp of the latter finally has its day in the sun. Naturally, when that happens the status quo loses, as the entire educational and employment paradigm is one which idolizes the former and ridicules the latter even though the former has now proven beyond a shadow of a doubt it is a miserable failure (ref: $20+ trillion excess debt overhang which will, without doubt, lead to a global debt repudiation or restructuring, with some components of “odious debt”). So for all those still confused what some of the core premises of the ascendent “latter” are, below we present two one-hour lectures by Israel Kirzner. We urge readers to set aside two hours, which otherwise would be devoted to watching rubbish on TV or waiting in line for In N Out burger, and watch the two lectures below. Because, contrary to what the voodoo shamans of failure will tell you, there is a way out. It is a very painful way, but it does exist. The alternative is an assured and complete systemic collapse once the can kicking finally fails.
When it comes to the fabled President’s Working Group on Capital Markets, also known as the Plunge Protection Team, the myths about the subject are certainly far greater than any underlying reality. To be sure, vast amounts of popular folkflore has been expounded into the public arena, with most of it being shot down simply due to it assuming conspiracy theories of such vast scale that the human mind is unable to grasp the complexity, and ultimately the inverse Gordian Knot makes an appearance with the claim that vast conspiracies are largely untenable simply because it is impossible to keep a secret from so many people for so long. Yet what if the secret is not a secret at all but is fully out in the open, and is only a matter of interpretation, and contextualizing? Why just 3 years ago it would appear preposterous to allege the capital markets are a ponzi and that the Fed does everything in its power to keep stocks higher. Well, what a difference three years make: now the Chairman himself in a Washington Post OpEd has admitted that the sole gauge of Fed success is the loftiness of the Russell 2000, neither unemployment nor inflation really matter now that the Fed’s third mandate has been fully whipped out. Furthermore, Keynesian economics, and the entire top echelon of the educational system have also been accurately represented as a paradigm which merely perpetuates the status quo as the alternative is the realization that the whole system is a house of cards. As for the global capital markets being nothing short of a ponzi, we merely point you to the general direction of Europe, the ECB and the continent’s banks, where the monetary interplay is nothing short of the world’s biggest pyramid scheme. Yet the PPT, or whatever it is informally called, does not exist? Consider further that only recently did it become known that the former SecTres Hank Paulson himself was exposed as presenting material non-public information to a bevy of Goldman arb desk diaspora hedge funds, headed by with none other than the head of the President’s Working Group on Capital Markets Asset Managers committee David Mindich. So, if contrary to all the evidence that there is some vast underlying pattern, if not a conspiracy per se, one were to take the leap of faith and take the next step, where would one end up? Well, most likely looking at the Exchange Stabilization Fund, or ESF, which Eric deCarbonnel has spent so much time trying to unmask. Is it possible that the ESF, located conveniently at the nexus between US monetary policy, foreign policy and last but not least, a promoter of the interests of the US military-industrial complex, is precisely the organization that so many have been trying to expose for years? Watch and decide for yourself.
As a reminder deCarbonnel is not some tinfoil hat clad sub-basement dweller – it was his input that led us to the realization that in attempting to control the Treasury curve, the Fed will, and already has, experiment with selling puts on various Treasury maturities in an attempt to generate reflexivity whereby the synthetic determines the value of the underlying (something ETFs are now doing so very well), the value naturally always being higher, higher, higher irrelevant of what underlying demand there is (and as we showed last week, with a record amount of international outflows in the past month, the demand, at least from abroad, is just not there). So what does Eric assert?
After months of work, the video series on the Treasury’s Exchange Stabilization Fund is finally finished!
Why you should watch these five videos:
It is impossible to understand the world today without knowing what the ESF is and what it has been doing. Officially in charge of defending the dollar, the ESF is the government agency which controls the New York Fed, runs the CIA’s black budget, and is the architect of the world’s monetary system (IMF, World Bank, etc). ESF financing (through the OSS and then the CIA) built up the worldwide propaganda network which has so badly distorted history today (including erasing awareness of its existence from popular consciousness). It has been directly involved in virtually every major US fraud/scandal since its creation in 1934: the London gold pool, the Kennedy assassinations, Iran-Contra, CIA drug trafficking, HIV, and worse…
So while nursing that New Year’s Day hangover, take some time and watch this series of videos. If nothing else, even if they are merely the extended ramblings of some person that one can quickly dismiss as just the latest fringe lunatic, they do present an alterantive reality to what so many may be accustomed to. After all at the end of the day imagination, the ability to think outside the box, and to see patterns where previously there were none, is the greatest threat to the falling and declining status quo by far.
by CalculatedRisk on 12/27/2011 02:55:00 PM
The Department of Transportation (DOT) reported:
• Travel on all roads and streets changed by -2.3% (-6.0 billion vehicle miles) for October 2011 as compared with October 2010.
• Travel for the month is estimated to be 254.0 billion vehicle miles.
• Cumulative Travel for 2011 changed by -1.4% (-36.0 billion vehicle miles).
The following graph shows the rolling 12 month total vehicle miles driven.
In the early ’80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.
Currently miles driven has been below the previous peak for 47 months – so this is a new record for longest period below the previous peak – and still counting! And not just moving sideways … the rolling 12 months is declining.
The second graph shows the year-over-year change from the same month in the previous year.
This decline is probably due to high gasoline prices and the sluggish economy. Maybe habits are changing …
Things sure have changed in the past 30 years…
transcript (full version can be found here):
At Christmas time, every home takes on a special beauty, a special warmth, and that’s certainly true of the White House, where so many famous Americans have spent their Christmases over the years. This fine old home, the people’s house, has seen so much, been so much a part of all our lives and history. It’s been humbling and inspiring for Nancy and me to be spending our first Christmas in this place.
We’ve lived here as your tenants for almost a year now, and what a year it’s been. As a people we’ve been through quite a lot — moments of joy, of tragedy, and of real achievement — moments that I believe have brought us all closer together. G. K. Chesterton once said that the world would never starve for wonders, but only for the want of wonder.
At this special time of year, we all renew our sense of wonder in recalling the story of the first Christmas in Bethlehem, nearly 2,000 year ago.
Some celebrate Christmas as the birthday of a great and good philosopher and teacher. Others of us believe in the divinity of the child born in Bethlehem, that he was and is the promised Prince of Peace. Yes, we’ve questioned why he who could perform miracles chose to come among us as a helpless babe, but maybe that was his first miracle, his first great lesson that we should learn to care for one another.
Tonight, in millions of American homes, the glow of the Christmas tree is a reflection of the love Jesus taught us. Like the shepherds and wise men of that first Christmas, we Americans have always tried to follow a higher light, a star, if you will. At lonely campfire vigils along the frontier, in the darkest days of the Great Depression, through war and peace, the twin beacons of faith and freedom have brightened the American sky. At times our footsteps may have faltered, but trusting in God’s help, we’ve never lost our way.
Just across the way from the White House stand the two great emblems of the holiday season: a Menorah, symbolizing the Jewish festival of Hanukkah, and the National Christmas Tree, a beautiful towering blue spruce from Pennsylvania. Like the National Christmas Tree, our country is a living, growing thing planted in rich American soil. Only our devoted care can bring it to full flower. So, let this holiday season be for us a time of rededication.
Christmas means so much because of one special child. But Christmas also reminds us that all children are special, that they are gifts from God, gifts beyond price that mean more than any presents money can buy. In their love and laughter, in our hopes for their future lies the true meaning of Christmas.
So, in a spirit of gratitude for what we’ve been able to achieve together over the past year and looking forward to all that we hope to achieve together in the years ahead, Nancy and I want to wish you all the best of holiday seasons. As Charles Dickens, whom I quoted a few moments ago, said so well in “A Christmas Carol,” “God bless us, every one.”
Note: The President spoke at 9 p.m. from the Oval Office at the White House. The address was broadcast live on nationwide radio and television.
by Tyler Durden
While the world is watching Europe and the US for signs of imminent decoupling, and now has added China to its insolvency focus list, things in Japan, which is “fine” courtesy of a self-destruct autopilot, are just getting plain ridiculous. As we reported earlier this year, Japan’s marketable public debt, already the largest in the world at $11.2 trillion compared to America’s $10 trillion (of course this assumes the whole SSN sleight of hand is funded, which it isn’t), is due to surpass ¥1 quadrillion (sounds like Germany in the early 1920’s and millards) any month now (aka the exponential phase). And that’s just the beginning. As Bloomberg reports, “Bond sales to the market will climb to a record 149.7 trillion yen ($1.9 trillion), while the national budget’s reliance on debt for funding will rise to an unprecedented 49 percent in the year starting April 1, Japan’s government said Dec. 24. The government said it plans to sell 44.2 trillion yen of new bonds to fund 90.3 trillion yen of spending in next fiscal year’s budget. It estimates that tax revenue will total 42.3 trillion yen in fiscal 2012, meaning that new bond sales will exceed tax revenue for a fourth year.” In other words, in a world increasingly disconnected form any sort of reality, very soon no taxes at all will be needed: after all each and every government (or uber-union in teh EU’s case, once the imploding Eurozone turns to the final Deus Ex – a fiscal protectorate issuing joining Eurobonds) will simply fund all its cash needs by printing its own money (again, see “The Death of Money”…Germany 1922). Naturally, anyone daring to suggest that this is beyond idiotic will be given an MMT 101 manual and/or incarcerated for grand treason. And any last voices of sanity will be promptly muted: “I think the reliance on bonds to compile budgets is reaching its limit,” Japanese Finance Minister Jun Azumi said Dec. 24, after the announcement of the budget plan. Oh please, as if there is any alternative. Because Japan, just like the US, relies on the Primary Dealer grand repo Ponzi (anyone who still hasn’t read the following presentation from Citi which explains the grand shadow ponzi inexquisite detail, without any academic BS, is strongly urged to do so immediately) scheme to keep the lie afloat: “There is no sign that Japan’s outstanding debt will be reduced,” said Shinji Nomura, chief debt strategist in Tokyo at SMBC Nikko Securities Inc., one of the 25 primary dealers obliged to bid at government-debt sales. “Japan’s lawmakers aren’t serious enough. Europe’s debt crisis isn’t a fire on the other side of the river.” End result: near record low interest rates: “Japan’s benchmark bond yield is set to end the year below 1 percent, the second-lowest among developed bond markets, as the nation’s current-account surplus makes it a haven from Europe’s financial crisis.” So somehow a “current account” surplus makes unprecedented ponziness ok. But yes, Shinji is absolutely right: neither Japan’s, nor anyone else’s public debt will ever be reduced as at this point the best holders can hope for is the debt to keep rolling, albeit at ever lower rates due to the exponential rise in gross notional, where even the smallest uptick in interest rates will bring the whole house of cards tumbling down. In other news, and to all the neo-Keynesians out there, we post the following thought experiment: according to the head priest economic growth derives from debt issuance. And since apparently every country (yes, yes, that has its own currency) can issue infinite amounts of debt, why doesn’t the US and Japan (and the EU post Eurobonds), simply announce it will monetize, aka print, an infinite amount of debt tomorrow? Shouldn’t that lead to global GDP promptly rising by infinity %? Or is there an actual problem with this hypothetical scenario which takes current debt trends to their ludicrous extreme. As for Japan, more from Bloomberg: The cost of insuring Japan’s bonds against default climbed to the highest in 2 1/2 months last week. Five-year credit- default swaps tied to government bonds rose to 143 basis points on Dec. 20, the highest level since Oct. 5, according to CMA prices. The swaps were 142 basis points on Dec. 22. CMA is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Total debt issuance, including securities to replace maturing debt and so-called zaito bonds sold for government agencies, will increase by 4.6 trillion yen to a record 174.2 trillion yen, the Ministry of Finance said Dec. 24. Japan’s benchmark 10-year bond yield was unchanged at 0.97 percent on Dec. 22 as a 0.8 percent drop in the Nikkei 225 Stock Average supported demand for debt. The Ministry of Finance said it will expand each monthly auction of debt maturing in 10 and 20 years by 100 billion yen in 2012 from the original plan for this year. The government in November increased sales of two- and five-year debt by 100 billion yen at each auction after Prime Minister Yoshihiko Noda approved a 12.1 trillion yen third extra budget to fund earthquake rebuilding “The government is increasing issuance of long-term and super-long-term bonds because it wants to borrow for a long period while interest rates are still low,” said Naomi Hasegawa, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. The nation’s economic expansion will probably slow after annualized 5.6 percent growth in the three months ended September fueled by demand related to the March 11 earthquake. The median estimate of 11 economists surveyed by Bloomberg News is for growth of 0.42 percent this quarter. Of the 10 polled this month, five predicted GDP will shrink. Still, maybe some are finally awaking to the insanity…
By Detlev Schlichter of The Cobden Center
The Nightmare After Christmas
The pathetic state of the global financial system was again on display this week. Stocks around the world go up when a major central bank pumps money into the financial system. They go down when the flow of money slows and when the intoxicating influence of the latest money injection wears off. Can anybody really take this seriously?
On Tuesday, the prospect of another gigantic cash infusion from the ECB’s printing press into Europe’s banking sector, which is in large part terminally ill but institutionally protected from dying, was enough to trigger the established Pavlovian reflexes among portfolio managers and traders.
None of this has anything to do with capitalism properly understood. None of this has anything to do with efficient capital allocation, with channelling savings into productive capital, or with evaluating entrepreneurship and rewarding innovation. This is the make-believe, get-rich-quick (or, increasingly, pretend-you-are-still-rich) world of state-managed fiat-money-socialism. The free market is dead. We just pretend it is still alive.
There are, of course those who are still under the illusion that this can go on forever. Or even that what we need is some shock-and-awe Über-money injection that will finally put an end to all that unhelpful worrying about excessive debt levels and overstretched balance sheets. Let’s print ourselves a merry little recovery.
How did Mr. Bernanke, the United States’ money-printer-in-chief put it in 2002? “Under a paper-money system, adetermined government can always generate higher spending…” (Italics mine.)
Well, I think governments and central banks will get even more determined in 2012. And it is going to end in a proper disaster.
Lender of all resorts
Last week in one of their articles on the euro-mess, the Wall Street Journal Europe repeated a widely shared myth about the ECB: “With Germany’s backing, the ECB has so far refused to become a lender of last resort, …” This is, of course, nonsense. Even the laziest of 2011 year-end reviews will show that the ECB is precisely that: A committed funder of states and banks. Like all other central banks, the ECB has one overriding objective: to create a constant flow of new fiat money and thus cheap credit to an overstretched banking sector and an out-of-control welfare state that can no longer be funded by the private sector. That is what the ECB’s role is. The ECB is lender of last resort, first resort, and soon every resort.
Let’s look at the facts. The ECB started 2011 with record low policy rates. In the spring it thought it appropriate to consider an exit strategy. The ECB conducted a number of moderate rate hikes that have by now all been reversed. By the beginning of 2012 the ECB’s policy rates are again where they were at the beginning of 2011, at record low levels.
So why was the springtime attempt at “rate normalization” aborted? Because of deflationary risks? Hardly. Inflation is at 3 percent and thus not only higher than at the start of the year but also above the ECB’s official target.
The reason was simply this: states and banks needed a lender of last resort. The private market had lost confidence in the ability (willingness?) of certain euro-zone governments to ever repay their massive and constantly growing debt load. Certain states were thus cut off from cheap funding. The resulting re-pricing of sovereign bonds hit the banks and made it more challenging for them to finance their excessive balance sheets with money from their usual sources, not least U.S. money market funds.
So, in true lender-of-last resort fashion, the ECB had to conduct a U-turn and put those printing presses into high gear to fund states and banks at more convenient rates. While in a free market, lending rates are the result of the bargaining between lenders and borrowers, in the state-managed fiat money system, politicians and bureaucrats define what constitutes “sustainable” and “appropriate” interest rates for states and banks. The central bank has to deliver.
The ECB has not only helped with lower rates. Its balance sheet has expanded over the year by at least €490 billion, and is thus 24% larger than at the start of the year. This does not even include this week’s cash binge. The ECB is funding ever more European banks and is accepting weaker collateral against its loans. Many of these banks would be bust by now were it not for the constant subsidy of cheap and unlimited ECB credit. If that does not define a lender of last resort, what does?
And as I pointed out recently, the ECB’s self-imposed limit of €20 billion in weekly government bond purchases (an exercise in market manipulation and subsidization of spendthrift governments but shamelessly masked as an operation to allow for smooth transmission of monetary policy) is hardly a severe restriction. It would allow the ECB to expand its balance sheet by another €1 trillion a year. (The ECB is presently keeping its bond purchases well below €20 billion per week.)
Deflation? What deflation?
It is noteworthy that there still seems to be a widespread belief that all this money-printing will not lead to higher inflation because of the offsetting deflationary forces emanating from private bank deleveraging and fiscal austerity.
This is an argument I came across a lot when I had the chance in recent weeks to present the ideas behind my book to investors and hedge fund managers in London, Edinburgh and Milan. Indeed, even some of the people who share my outlook about the endgame of the fiat money system do believe that we could go through a period of falling prices first, at least for certain financial assets and real estate, before central bankers open the flood-gates completely and implement the type of no holds barred policy I mentioned above. Then, and only then will we see a dramatic rise in inflation expectations, a rise in money velocity and a sharp rise in official inflation readings.
Maybe. But I don’t think so. I consider it more likely that we go straight to higher inflation.
The deleveraging in the banking sector is the equivalent of austerity in the public sector: it is an idea. A promise. The reflationary policy of the central bank is a fact. And that policy actively works against private bank deleveraging and public sector debt reduction.
Consider this: The present credit crisis started in 2007. Yet, none of the major economies registered deflation. All are experiencing inflation, often above target levels and often rising. In the euro-area, over the past twelve months, the official inflation rate increased from 2 percent to 3 percent.
From the start of 2011 to the beginning of this month, the U.S. Federal Reserve boosted the monetary base by USD 560 billion, or 27 percent. So far this year, M1 increased by 17.5 percent and M2 by 9.5 percent.
Below is the so-called “true money supply” for the U.S. calculated by the Mises Institute.
As the Mises-Institute’s Doug French pointed out, total assets held by the six biggest banks in the U.S. increased by 39% over the past 5 years. Maybe this is not surprising given that in our brave new world of limitless fiat money, credit contraction is strictly verboten.
In the UK the official inflation reading is at around 5 percent, but nevertheless in October the Bank of England embarked on another round of “quantitative easing”. It has so far expanded its balance sheet by another £50 billion in not even three months, which constitutes balance sheet growth of about 20 percent.
What we have experienced in the UK in 2011 provides a good forecast in my view for the entire Western world for 2012: rising unemployment, weak or no growth, failure of the government to rein in spending, growing public debt, further expansion of the central bank’s balance sheet, rising inflation.
Death of a safe haven
And what about Switzerland? Here the central bank expanded its balance sheet by 40 percent over just the first three quarters of the year, and almost tripled the monetary base over the same period of time. Most of this even occurred before the 6th of September, the day on which Mr. Hildebrand, the President of the Swiss National Bank, told the world and his fellow Swiss countrymen and women that the whole safe-haven idea was rubbish and that Switzerland was now joining the global fiat money race to the bottom.
Deflation has become the bogeyman of the policy establishment. It must be avoided at all cost! Of course for most of us regular folks deflation would simply mean a tendency toward lower prices. It would mean that the capacity of the capitalist economy to increase the productivity of labour through the accumulation of capital and to thus make things more affordable over time (a true measure of rising general wealth) would accurately be reflected in falling nominal prices. The purchasing power of money would increase over time. This, however, would require a form of hard and apolitical money. Instead we are constantly told that our economy needs never-ending monetary debasement in order to function properly. We are constantly told to fear nothing more than deflation, which can only be averted by a determined government and a determined central bank. And the never-ending supply of new fiat money.
Appropriately, there is no talk of exit strategies any longer.
Given the size of the already accumulated imbalances I think a stop to this madness of fiat money creation would be painful at first but hugely beneficial in the long run. I am the last to say that no risk of a very painful deflationary correction exists. But a correction is now unavoidable in any case, and every other policy option will make the endgame only worse. Even if I am wrong on the near-term outlook on inflation and even if all this money-printing does not lead to higher inflation readings imminently, it will still be a hugely disruptive policy. Money injections obstruct the dissolution of imbalances and invariably add new imbalances to the economy, including new debt and capital misallocations, that will make even more aggressive money printing necessary in the future.
The nationalization of money and credit
Herein lies a fundamental contradiction in our present system: The desire for constant inflation and constant credit expansion requires that the banks be shielded from the effects of their own business errors. Allowing capitalism’s most efficient regulators, profit and loss, to do the regulating, would mean that banks could face the risk of bankruptcy – this is, of course, the ultimate disciplinary force in capitalism. This could then lead to balance sheet correction and thus periods of deflation. Ergo, banks cannot be capitalist enterprises at full risk of bankruptcy as long as constant credit growth and inflation are the overriding policy goals. The constant growth of the banking sector must be guaranteed by the state through the unlimited provision of bank reserves from a lender-of-last resort central bank.
That banks get ever bigger, that they routinely hand out multi-million dollar bonuses, and that they frequently get bailed out, is not a result of the greed of the bankers – a stupid explanation anyway, only satisfactory to the intellectually challenged and perennially envious – but is integral to the fiat money system.
Banking under state protection ultimately means banking under state control. In the end it means state banking. And this is where we are going.
Last week the Federal Reserve and the Bank of England announced plans to tighten the control over the balance sheet management and the risk-taking of private banks. This is just the beginning, believe me. The nationalization of money and credit will intensify in 2012 and beyond. More regulation, more restriction, more control. Not only in defence of the bankrupt banks but also the bankrupt state. We will see curbs on trading, short-selling restrictions and various forms of capital controls.
A system of state fiat money is incompatible with capitalism. As the end of the present fiat money system is fast approaching the political class and the policy bureaucracy will try and defend it with everything at their disposal. For the foreseeable future, capitalism will, sadly, be the loser.
The conclusion from everything we have seen in 2011 is unquestionably that the global monetary system is on thin ice. Whether the house of cards will come tumbling down in 2012 nobody can say. When concerns about the fundability of the state and the soundness of fiat money, fully justified albeit still strangely subdued, finally lead to demands for higher risk premiums, upward pressure on interest rates will build. This will threaten the overextended credit edifice and will probably be countered with more aggressive central bank intervention. That is when it will get really interesting.
We live in dangerous times. Stay safe and enjoy the holidays.
In the meantime, the debasement of paper money continues.
Three years ago, Congress balked at the mere thought of giving Hank Paulson’s (so lovingly portrayed in Andrew Ross Sorkin’s straight to HBO Too Big To Fail) proposed TARP, which came in an “exhaustive” 3 page term sheet with limited bailout powers however with virtually unlimited waivers and supervision, and voted it down leading to one of the biggest market collapses in history. Curiously, a more careful look through Europe’s €500 billion (oddly enough almost the same size as America’s $700 billion TARP) European Stability Mechanism or ESM, reveals that in preparing the terms and conditions of the ESM, Europe may have laid precisely the same Easter Egg that Paulson did with TARP, but failed. Because at its core, the ESM is like a TARP… on steroids. It is a potentially unlimited liquidity conduit (only contingent on how much cash Germany wants to allocate to it – which in turn means how much cash Germany is willing to let the ECB print), with no supervisory checks and balances embedded, and even worse with no explicit or implicit liability clauses – in essence it is a carte blanche for its owners to do as they see fit without any form of regulation. As the following brief but must watch video explains, the ESM “is an organization that can sue us, but is immune from any forms of prosecution and whose managers enjoy the same immunity; there are no independent reviewers and no existing laws apply; governments can not take action against it? Europe’s national budgets in the hands of one single unelected intergovernmental organization? Is that the future of Europe? Is that the new EU? A Europe devoid of sovereign democracies?” Ironically even America’s feeble and corrupt Congress stopped a version of TARP that demanded far less from the taxpaying citizens. Yet somehow, Europe has completely let this one slip by. Is it simply to continue the illusion of the insolvent Walfare State for a continent habituated by zombifying socialism, or is Europe by now just too afraid and too tired to say anything against its eurocrat class? One thing is certain: when the people voluntarily give up on democracy, out of sheer laziness or any other reason, the historical outcomes are always all too tragic.
As first reported here, two weeks ago European banks saw the amount of USD-loans from the Fed, via the ECB’s revised swap line, surge to over $50 billion – a total first hit in the aftermath of the Bear Stearns failure prompting us to ask “When is Lehman coming?” However, according to little noted prepared remarks by Anthony Sanders in his Friday testimony to the Congress Oversight Committee, “What the Euro Crisis Means for Taxpayers and the U.S. Economy, Pt. 1”, we may have been optimistic, because the end result will be not when is Lehman coming, but when are the next two Lehmans coming, as according to Sanders, the relaunch of the Fed’s swaps program may “get to the $1 trillion level, or perhaps even higher.” As a reference, FX swap line usage peaked at $583 billion in the Lehman aftermath (see chart). Needless to say, this estimate is rather ironic because as Bloomberg’s Bradely Keoun reports, “Fed Chairman Ben S. Bernanke yesterday told a closed-door gathering of Republican senators that the Fed won’t provide more aid to European banks beyond the swap lines and the discount window — another Fed program that provides emergency funds to U.S. banks, including U.S. branches of foreign banks.” Well, between a trillion plus in FX swap lines, and a surge in discount window usage which only Zero Hedge has noted so far, there really is nothing else that the Fed can possibly do, as these actions along amount to a QE equivalent liquidity injection, only denominated in US Dollars. Aside of course to shower Europe with dollars from the ChairsatanCopter. Then again, before this is all over, we are certain thatparadollardop will be part of the vernacular.
Historical ECB swap line usage with the Fed, and projected assuming $1+ trillion in use. Just to put it all into perspective.
For all those lamenting the ECB’s lack of willingness to print, fear not: the almighty Chairsatan has vowed to valiantly take his place when needed. As in 2 weeks ago. From Bloomberg:
European financial companies led by Royal Bank of Scotland Plc were borrowing about $538 billion directly from the Fed when the central bank’s emergency loans to all banks peaked at $1.2 trillion on December 2008, according to a Bloomberg News examination of data released by the Fed under last year’s Dodd- Frank Act and earlier this year under court-upheld Freedom of Information Act requests.
The Fed hasn’t provided any estimates of how large the swap lines might get, said David Skidmore, a Fed spokesman. He declined to elaborate.
“To get above $600 billion wouldn’t be a stretch,” said Desmond Lachman, a former International Monetary Fund deputy director who’s now a resident fellow at the American Enterprise Institute, a conservative public-policy center in Washington. “You’re talking about a European banking system that is huge in relation to that of the United States.”
Josh Rosner, a banking analyst with New York-based Graham Fisher & Co., said the Fed’s swap lines may end up helping Europe support banks that might not deserve emergency loans.
“As a result of this commitment of financial support, we’re now supporting undemocratic approaches implemented largely by authorities who have demonstrated an ongoing inability to either recognize the scope and scale of the problems or come to a consensus on the proper approach,” Rosner said.
The ultimate size of the swap lines is “unknowable at this point,” he said.
For those wondering what all this means, we remind you that there was a roughly $6.5 trillion synthetic (duration mismatch) USD short as of 4 years ago, as we reported at the time. That short has gotten substantially larger following a 4 year regime of the USD as a funding currency courtesy of ZIRP. Which means that any time the liquidity shortage threatens to collapse the system, the first thing to go stratospheric will be the USD as the global financial system scrambles to cover its short. It also means that anything the Fe and/or ECB can do from a pure printing standpoint will be peanuts compared to the utter carnage unless the dollar short is not preserved. Which naturally means that it is up to the Fed to continue drowning the world in either nominal dollars, or swapped ones, such as under the form of a USD-EUR swap, which is nothing but a forward operations. In essence, with the FX swap lines, the Fed engages in the ultimate currency warfare tool: it sells dollars to the entities most needy. And it does so, because if it doesn’t, said needy entities will implode, and the hollow financial dominoes will topple, leading to a mess that not even infinite synthetic or real printing of binary of paper dollars, euros, or anything else will do to fix.
Which is why all those wondering if gold should be bought now or the second after the ECB starts printing, we have one piece of advice: just look at the chart above. It says all one needs to know.
Lastly, since the Sanders testimony is worth a read in and of itself, we recreate it below. Some of the choice selections:
The Eurozone is teetering on collapse and it has been decades in the making. The cause of their problems is 1) excessive government spending leading to 2) excessive government debt coupled with 3) slow GDP growth.
If we look at Household and Financial Debt in addition to Government Debt, the UK’s Debt to GDP ratio exceeds 900%. Japan is over 600% and Europe is almost 500% Debt to GDP. The U.S. is over 300%. In summary, Euro, Japan and the U.S. are drowning in debt. And a recent article from economists at the ECB that finds:
The European Union will unify, break up or downsize. But regardless of what option they choose, they still have too much spending and debt relative to the ability to pay for it: GDP growth. But additional debt is not the answer. It is the problem.
The obvious solution is austerity (reduction in government spending). But making loans to the European Central Bank or individual countries doesn’t solve the underlying structural problems; it only makes the Debt to GDP problem even worse. It is simply a short-term solution and actually encourages the Eurozone to delay making the hard decisions.
Ben Bernanke and his Fed mates’ secret letterhead: “destroying capitalism from within.”
After four years of disastrously wrong policies, let’s declare stubborn, hubris-soaked wrongheadedness a virtue and saint Ben Bernanke and his Federal Reserve mates. If we had to distill down the Fed Chairman and the Federal Reserve’s policies since the wheels came off the Fed’s “shadow banking” system of fraud, collusion, embezzlement and free-floating leverage, we’d have to start with a systems-analysis perspective.
Any system which separates risk from results (gain/loss) is doomed to implode, as the lack of feedback from the real world (also known as consequences) enables the self-reinforcing feedback known as “moral hazard”: losses by those who took the risk to reap a gain are made good by those who did not take the risk and who do not stand to gain from the risk they are covering.
In this case, the mortgage origination and packaging “industry” and the investment banks’ origination and marketing of fraudulent-from-inception derivatives “industry” took the risks to reap outsized gains from the financialization of mortgages and other debt instruments via leverage, commodifying debt and arcane derivatives, all of which were sold as “low-risk.”
Capitalism’s primary characteristic is that capital is put at risk for a gain/loss. If risk is off-loaded onto the Fed’s bottomless balance sheet and the taxpayer via government-funded bailouts and guarantees, then capital is not actually at risk. Thus what we have isn’t capitalism, but cartel crony-capitalism, a phony version of the real thing which guarantees private banking profits and socializes banking losses.
The Fed was recently revealed as having arranged billions in private gain via secretly backstopping the banks with $7.7 trillion. This highlights Bernanke and his buds’ second catastrophically wrong policy, that of systemic opacity.
The acme of open markets is transparency. Without transparency, markets are not free or open, they are manipulated— both to hide those who are benefitting from the destruction of transparency (monopolies, cartels, fiefdoms, kleptocracies, oligarchies, etc.) and to manipulate the market as part of a permanent propaganda campaign to “manage perceptions:” the market’s up, everything’s dandy.
Bernanke and his faithful banking-sector lackeys have destroyed transparency at every turn, refusing an audit (an audit smacks of—sniff—democracy—how distasteful), masking the $7.7 trillion in backstopping, and hiding the toxicity of the Fed balance sheet, which is loaded with over $1 trillion in distressed mortgage securities that the Fed lovingly took off the bankrupt balance sheets of its craven masters, the banks.
In other words, the Fed has massively rewarded the reckless and rescued the incompetent from the consequences of their actions. If that isn’t the perfection of wrongheadedness, what is?
Then there’s the disastrously destructive ZIRP—zero interest rate policy. The Fed’s idea here is childishly simple, and childishly ignorant: if we lower interest rates to zero, then everyone who is over-leveraged and over-indebted will be able to borrow more, but for less interest, and that will buy the system time to magically heal itself.
The Fed cannot dare grasp that “healing” in capitalism means writing off uncollectable debt and sending insolvent lenders and debtors to bankruptcy court. Capitalism would quickly dispense with their cronies in the banking sector, and so capitalism must be destroyed. That is the Fed’s raison-d’etre: destroying capitalism from within. Lenin would be envious.
ZIRP has myriad pernicious consequences. Let’s say you have some capital that you want to apply such that it earns a fair return. If interest rates are near-zero, then a fair return has been rendered impossible by Fed policy.
The Fed leaves you only two choices: either put your capital into “risk-on” assets that are inherently risk-laden, or loan the capital out at low rates in an opaque market and hope you’ll actually get the principal back.
Imagine being in charge of issuing mortgages which weren’t guaranteed by the Federal government agencies of Fannie Mae, Freddie Mac and FHA—that is, imagine you actually lived and worked in a capitalist system, instead of a kleptocratic crony-capital haven.
You might hesitate to loan out large sums of money (jumbo mortgages) in a market where the risk of a decline in the asset (real estate) is obvious but official manipulation means you can only receive a very paltry return on the capital you’re putting at risk.
Since the market isn’t able to price real estate, risk or credit transparently, then prudent investors would be forced to shun the market: how can you invest wisely when assets, debt and risk can’t be priced by the market?
Prudent lenders would withdraw from such a rigged, risky market, which is precisely what has happened. Literally 99% of the mortgage market is now guaranteed by the Federal fiefdoms, all of which are losing tens of billions of dollars and require monumental taxpayer bailouts to keep underwriting the banking sectors’ private profits.
Private mortgage lending has simply vanished, and no wonder: if you can’t price assets, risk or debt, then only the reckless would enter the market, and even they would only do so if the Fed guaranteed the profits would be theirs to keep but losses could be transferred to the Fed or taxpayers.
The only way to restore trust and clear the market of uncollectable debt is to let the market transparently price, risk and credit—precisely what the Fed’s policies are designed to stop. The Fed’s knees are chafed from kow-towing to their banker masters, and worshipping the “magic” of their Keynesian Cargo Cult and Lenin (“destroying capitalism from within” should be stenciled on the Fed letterhead).
Separate risk from gain, obliterate transparency and choke the market with zero interest rates, and you’ve not only destroyed capitalism, you’ve also destroyed the economy by rewarding the most venal, corrupt, fraudulent and capital-destroying players while stranding the prudent on an island of opacity where the true price of assets, credit and risk cannot be discovered.