1) … Seigniorage, that is moneyness, has failed, causing banks, savings and loans, stocks and bonds to fall lower, commencing the mother of all bear financial markets to commence.
March 1, 2010 is a day that will live in financial infamy as it confirmed the that the seigniorage of the Milton Friedman Free To Choose Currency Regime, which was based upon Quantitative Easing and Quantitative Easing 2, failed on February 22, 2011, when the distressed securities taken in by the Federal Reserve under its TARP Facility traded lower, as is seen in the Fidelity mutual fund FAGIX trading lower from 9.87 and world stocks, ACWI, turning lower from 49.24.
On March 1, 2011, seigniorage continued to fail, as is seen in FAGIX, continuing to fail, which induced the banks, KBE, to trade 2.1% lower and world stocks, ACWI, to trade 1.4% lower.
We live in a bank centric and also an oil centric world. The world’s leading banker Ben Bernanke, in a semiannual report to Congress, told politicians that commodity price inflation, and oil prices more specifically, could pose a threat to economic growth and price stability if sustained at high levels, while at the same time reassuring markets and politicians that inflation remained low and expectations stable according to Forbes Blog.
Leading the Banks lower were the institutions which rose in value the most during the last two years under Ben Bernanke’s expanding seigniorage. These included Fifth Third Bancorp, FITB, Huntington Bankshares, HBAN, Regional Financial, RF. Bank of America, BAC, Citigroup, C, Wells Fargo, WFC and Sun Trust Banks, STI.
The contraction of seigniorage, that is moneyness, is the root cause of the failure of stock markets worldwide, VT, -1.7%.
The contraction of seigniorage seen in the fall of the distressed securities mutual fund FAGIX means the beginning of the end of credit as it has traditionally been known.
The world did not witness debt deflation on March 1, 2011, as much as it witnessed inflation destruction, which Urban Dictionary defines as the fall in investment value that accompanies derisking and deleveraging out of investments that were formerly inflated by money flows to, and carry trade investing in, high interest paying financial institutions, profitable natural resource companies, and high growth companies. Companies falling massively to inflation destruction included.
Bruce Krasting reports “Senator Shelby asked Bernanke to explain how he came to the $600b QE2 program. The answer came at minute 32 of this C-SPAN clip. Ben explained that he felt that a monetary ease equivalent to a 75 BP reduction in the Fed Funds rate was in order to avoid deflation. He equated $150-200 billion of QE as being equivalent to a 25BP reduction in short term rates. The justification for QE all along has been that monetary policy is range bound by zero interest rates. QE brings us below “0” in equivalent policy.” The sum of QE 1, QE lite (the top off of QE1) and QE2 is $2.35 trillion. Using Bernanke’s formula you get a range of 4% to 5% as the approximate interest rate consequence of QE. (2.35/.15 or 2.35/.2) That is an extraordinary number. The Fed’ ZIRP policy set interest rates at zero. QE has brought that to -4.5% (average) based on Ben’s numbers.”
Today, February 2, 2010, the US Savings And Loans, the US Dollar, US Treasuries, and Bonds traded lower as the seigniorage of quantitative easing continued to exhaust.
Yahoo Finance reports that the Savings & Loans, traded 2.1% lower; Hudson City Bancorp, HCBK, fell 9.0%. Insurance companies, KIE, traded 1.9% lower.
The US Dollar, $USD, traded lower to 76.67; more dollar weakness likely mean higher oil, USO, DBC, and BNO, UCO, prices as well as higher gasoline, UGA, prices.
The 30 Year US Treasuries, EDV, and the 10 Year US Government Notes, TLT, traded lower with both commencing an Elliott Wave 3of 3 Down, as bond vigilantes called the interest rate on the 30 Year US Government Bond, $TYX, and the interest rate on the 10 Year US Government Note, $TNX, higher as Ben Bernanke’s QE 2 constitutes monetization of debt, which debases the US currency, the US Dollar.
Bonds, BND, traded lower in an Elliott Wave 3 Down which started March 1, 2001 from a fall on February 28, 2011 at a price of 80.13. A run of bonds has commenced.
Bonds are experiencing debt deflation. Debt deflation is the future. Debt deflation is the contraction and crisis that follows credit expansion. One of the most famous quotations of Austrian economist Ludwig von Mises is from page 572 of Human Action: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”
Charts suggest that these bonds have finished cresting up into an Elliott Wave 2 High, and are entering an Elliott Wave 3 Down: Corporate Bonds, LQD, Corporate Long Term Bonds, BLV, Municipal Bonds, MUB, California Municipal Bonds, CMF, Pimco MINT, Zeroes, ZROZ, Tips, TIP, Mortgage Backed Bonds, MBB, 3 to 7 Year US Government Notes, IEI, Build America Bonds, BAB, Long Duration Build America Bonds, BABS, 7 to 10 Year US Government Bonds, IEF, ProShares Ultra 20 Year Treasury, UBT.
Junk Bond, JNK, manifested a spinning top, at a price of 40.43 just under its recent high of 40.46. The weekly chart of junk bonds, JNK Weekly, shows a rise from 21 to 40 since the beginning of QE2.
The moneyness for the great recovery came from the Fed Chairman’s willingness to become banker of the world, and to take in distressed and junk securities from financial institutions world wide, as well as his commitment to “go all in” with a trade out of every last US Treasury owned by the Fed, as well as to integrate US banks into the Fed Bank, creating a unified central bank and lending bank behemoth financial institution. The operating principle was one of great collectivism, that is one for all and all for one, with the result that profits were privatized to the bankers, and losses were socialized to the people of America.
The world is passing has passed through an inflection point: the world has passed from the Age of Leverage and into the Age of Deleveraging with the exhaustion of Quantitative Easing and with the failure of yen carry trade investing, as seen in the failure of the Optimized Carry ETN, ICI, on the very day that QE 2 was announced.
The Age of Leverage was characterised by debt expansion, credit liquidity, stability, economic growth and expansion and prosperity … The Age of Deleveraging is characterised by inflation destruction, debt deflation, credit ill-liquidity, instability, economic contraction and austerity.
One impact of the failure of seigniorage and inflation destruction, and debt deflation will be that in the age of deleveraging people will simply not have the financial where-with-all to buy homes. Renting, that is leasing of homes, will be a privilege extending by banks to a select group of individuals.
The old political and economic paradigm supporting seigniorage, and ponzi economics, was neoliberalism, specifically the neoliberal Milton Friedman Free To Choose floating currency regime, which has been based upon US Treasuries, and most recently QE 1 with its TARP Facility, in which money good US Treasuries were traded out for distressed securities like those held in Fidelity Mutual Fund FAGIX, with most of the banks placing the Treasuries in Excess Reserve, as well as QE 2, where Ben Bernanke used his authority to print money out of thin air and buy US Treasuries.
The old political and economic paradigm failed February 22, 2011, as seigniorage failed with the downturn in distressed securities, like those held in FAGIX, which caused the stock market, ACWI, to turn lower. Neoliberalism is a dead man walking; it is a bankrupt, burned out and zombie economic and political paradigm that has turned toxic and cannot sustain investment or growth.
2) … A new political and economic paradigm, that being rule of the sovereigns, will emerge out of a global financial collapse.
A new political and economic paradigm, that being rule of the sovereigns, will emerge out of Götterdämmerung, an investment flameout, where a Chancellor, that is a Sovereign, and a Banker, a Seignior, will arise and govern through global corporatism. National leaders will waive national sovereignty and announce Framework Agreements. These Agreements will appoint stakeholders to oversee regional economic governance. The two leading Sovereigns will provide a new seigniorage, that is a new moneyness, with austerity and democratic deficit for all. The word, will and the way of the sovereigns will be law replacing constitutional as well as historical rule of law.
A example of a Framework Agreement is the one provided On February 4, 2011, on The Prime Minister of Canada website that being The Declaration by the Prime Minister of Canada and the President of the United States of America of a framework agreement for Perimeter Security and Economic Competitiveness.
And also on February 4, 2011, The Prime Minister of Canada website released the the announcement of another framework agreement establishing The Bilateral Regulatory Cooperation Council, RCC.
The Canadian Civil Liberties Association relates that on February 4th, 2011, Canada and the US issued the “Declaration on a Shared Vision for Perimeter Security and Economic Competitiveness”. The Declaration commits both countries to create a North American Security Perimeter – where borders will be kept “open” to legitimate travelers and trade, and “closed” to criminals and “terrorist elements.” Four key areas will be pursued: (1) addressing threats early, (2) economic growth and jobs, (3) integrated cross-border law enforcement, and (4) critical infrastructure and cyber-security. Prime Minister Harper stated that “shared information, joint planning, compatible procedures and inspection technology will all be key tools”. Economic gains are supposed to be realized by removing regulatory barriers, harmonizing rules and reducing border congestion for manufacturers.
Maya Jackson Randall of Dow Jones Newswires reported on October 2, 2010 that in testimony before Congress, “Mr Bernanke waded into the international debate over the fate of the US dollar, pledging to do his part to avoid what he sees as a longer-term risk to the US dollar’s status as the world’s predominant reserve currency.”
Yet such a statement is contrary to the fact that the QE 2, which commenced in November 2010, with its printing of money to purchase US Treasuries constitutes monetization of debt, which has debased the US Dollar, caused commodity prices such as Oil, USO, Gasoline, UGA, Gold, GLD, and Silver, SLV, to soar; and at the same time caused Airline, FAA, US automobile parts manufacturers, such as WABCO Holdings, WBC, Tenneco Automotive, TEN, and TRW Automotive, TRW, Coal Producers, KOL, Emerging Market Stock Markets, EEM, such as the Phillippines, EPHE, to tumble.
As QE 2 was announced Chinese Finance Vice Minister Zhu Guangyao expressed his dismay regarding the Fed’s new quantitative easing scheme stating: “As a major reserve currency issuer, for the United States to launch a second round of quantitative easing at this time, we feel that it did not recognize its responsibility to stabilize global markets and did not think about the impact of excessive liquidity on emerging markets.”
And German Finance Minister Wolfgang Schäuble, who has called the current Fed policy clueless, said that the results of QE 1 have been horrendous: “They have already pumped an endless amount of money into the economy via taking on extremely high public debt and through a Fed policy that has already pumped a lot of money into the economy. The results are horrendous.”
The Wall Street Journal reports that the U.S. government will have to come up with 4.2 trillion dollars over the next year.
What happens when China, Japan, Russia and the major oil producers in the Middle East decide that they are not going to buy any more U.S. debt? and/or the currency traders more actively sell the US Dollar, $USD?
If the rest of the world quits lending money to the U.S. government, our leaders will be faced with three options. The U.S. government could start trying to operate within a balanced budget (which will crash the economy), or interest rates on U.S. government debt could be raised until people would be willing to invest in Treasuries again (which will crash U.S. government finances and the economy), or the Federal Reserve could just start QE 3 monetizing more of the debt (which will rapidly devastate the Dollar and crash the entire world financial system).
3) … Suggested reading:
Jérôme E. Roos in Roar Magazine article The Age of Austerity, February 18, 2011 relates: Europe is in crisis. The Age of Austerity has begun and the old political rules are being re-written. Where are we headed in the coming months and what can we do to overcome the two greatest challenges of our time? Over the next two months, Breakthrough Europe will be addressing these pertinent questions in a series of analyses that aims to break new ground in the debate on Europe’s future.
Zheng Xinli, Vice Chairman of the China Center for International Economic Exchanges, CCIEE, in Beijing Review article The Financial Tsunami: Its Origins and Prevention, November 24, 2010 related: “The major reserve currency issuer in the world, has been misusing its sovereign credit for a long time and implementing a twin deficit policy to maintain its domestic over-consumption and government over-spending, which paved the way for the financial tsunami.
Moreover, American credit rating agencies covered up credit risk and misguided international capital flow, which led to the fall of the last defensive wall against financial risk.
Market economy is based on credit, and economic globalization has made sovereign credit an important part of a nation's competitiveness and economic strength. Good sovereign credit provides significant impetus for economic growth by reducing the financing cost for governments and enterprises, and also by attracting more foreign capital.
On the contrary, misuse of sovereign credit, especially by the world's major reserve currency issuer, is doomed to incur a domestic and global economic catastrophe as such an action will always harm other countries' wealth and create financial risk.
Since the Bretton Woods system collapsed in the 1970s, currency issuance has been decoupled from gold reserves. As the world's major reserve currency, the U.S. dollar has found its base on U.S. sovereign credit. This has enabled the U.S. to shift its debt burden to other countries by way of dollar depreciation. Between 1971 and 2010, the dollar depreciated by about 97.2 percent against gold, causing huge losses for those countries holding dollars as their reserve currency. It did not take long to see the disappearance of dollar securities in the stock market during the crisis.
This phenomenon shows that the impact on financial security of the world's major reserve currency issuer can go beyond borders and spread to every single U.S. dollar asset holder including residents, enterprises and governments. Therefore, it is vitally necessary and reasonable to create international regulations on the financial operations of the world's major reserve currency issuer. It is fully feasible for international financial institutions to undertake such task.”
Barry Grey in WSWS.org article G20 summit dominated by specter of currency, trade wars, November 11, 2010 related: “On Monday, World Bank President Robert Zoellick stunned governments and central bankers by proposing that the G20 consider a radical revamping of the world currency system. He suggested that the role of the dollar as the supreme reserve and trading currency be ended and that it be supplanted by a new system involving the dollar, the euro, the yen and the Chinese renminbi.
The near-zero interest rate policy of the US Federal Reserve has flooded financial markets with cheap dollars, resulting in a staggering decline in the value of the dollar on world currency markets. The dollar has fallen by 13 percent against the Japanese yen so far this year. Just since last June, it has dropped 18 percent versus the euro. Weighed against a basket of currencies, the dollar is down 8 percent since late August.
The starkest expression of the erosion of confidence in the dollar and the existing currency system is the explosive rise in the price of gold. This week, gold futures hit an all-time high of over $1,420 an ounce. The precious metal has risen 28 percent this year.
The precipitous fall in the dollar is fueling a general surge in commodity prices, including copper, oil, corn and other foodstuffs.
On Wednesday, Zoellick warned that the G20 had to take seriously the soaring price of gold as a warning of a deepening crisis in global economic relations. “I do think there are tensions in the system,” he said, “and if not properly managed those tensions risk an increase in protectionism.”
Chinese Vice-Finance Minister Zhu Guangyao at a briefing Monday said, “As a major reserve currency issuer, for the United States to launch a second round of quantitative easing at this time, we feel that it did not recognize its responsibility to stabilize global markets and did not think about the impact of excessive liquidity on emerging markets.”
A leading Chinese newspaper warned that the US actions were a form of currency manipulation that could lead to a new round of currency wars and even global economic collapse.
In an unvarnished act of retaliation against the Fed’s action, China’s leading state-endorsed rating agency on Tuesday downgraded the US credit rating. The agency cited the Federal Reserve’s decision and warned of Washington’s “deteriorating debt repayment capability” and “the serious defects in the United States economic development and management model,” which it predicted would lead to “fundamentally lowering the national solvency.”
4) In today’s news
Gulf region stock prices, MES, traded 2% lower today as Ambrose Evans Pritchard of the Telegraph reports Saudi Arabia Contagion Triggers Gulf Rout Fears of sectarian uprisings in Bahrain and Saudi Arabia have set off the first serious wave of investor flight from the Gulf, compounding market turmoil as civil war in Libya pushes Brent crude over $116 a barrel.
Zahra Hankir of Bloomberg reports Dubai Stocks Slump to 7-Year Low. Middle East shares fell sending Dubai’s benchmark index to the lowest in almost seven years, as concern political unrest may spread to Saudi Arabia, the Arab world’s largest economy, sparked demand for safer assets. Saudi Arabia’s Tadawul All Share Index slumped 3.9 percent to close at the lowest since April 2009 at 3:30 p.m in Riyadh. The DFM General Index declined 3.5 percent to 1,374.43, the lowest level since June 2004. The gauge has lost 15 percent since Tunisia’s Zine El Abidine Ben Ali was ousted in January. Emaar Properties PJSC retreated to the lowest since 2009 and Dubai Financial Market PJSC slumped 4.9 percent. Investors are shunning assets in the Middle East and North Africa as the political turmoil, which started in Tunisia more than two months ago, expanded to Oman, Bahrain, Yemen, Libya and Iran. Websites have called for a nationwide Saudi “Day of Rage” on March 11 and March 20, Human Rights Watch said in a statement on its website on Feb. 28. “A lot of the selling has been from onshore, local and regional investors; the speed of the decline tells you it’s pure panic,” said Dubai-based Ibrahim Masood, who helps manage about $400 million at Mashreqbank PSC. Saudi Arabia’s benchmark stock index plunged the most in more than two years yesterday on concern disturbances may extend to the kingdom, the biggest supplier in the Organization of Petroleum Exporting Countries. The measure has tumbled 20 percent in the past 13 days, the longest losing streak since 1996. About 271 million shares changed hands, the most since May, according to data compiled by Bloomberg. Saudi nationals accounted for about 80 percent of stock purchases in February, according to the exchange’s website. “There are fears political risk may spread,” to Saudi Arabia, said Mohammed Ali Yasin, chief investment officer at Abu Dhabi-based financial services company CAPM Investments PJSC. Credit-default swaps on Saudi Arabia are the worst performing sovereign contracts this year, even though the kingdom has no debt to insure. Swaps almost doubled in two months to a more than 19-month high of 143 basis points from 75 at the start of 2011, according to CMA. The Bloomberg GCC 200 Index of Persian Gulf stocks dropped 3.3 percent today, bringing declines this year to 15 percent. (Hat tip to Gary of Between The Hedges)
Steve Matthews and Caroline Salas of Bloomberg Business Week reports Fed's Treasury Purchases 'Monetizing Debt,' Hoenig Says. Federal Reserve Bank of Kansas City President Thomas Hoenig said the central bank is “monetizing debt” with its purchases of U.S. Treasuries, a program that he says may spur inflation. “Yes, we are monetizing debt,” Hoenig said today in a speech in New York. “You buy bonds and you monetize debt. Right now, a lot of that is going into excess reserves so it is not having an immediate effect on inflation. It will initiate inflationary impulses. It takes time.” Philadelphia Fed President Charles Plosser, Richmond Fed President Jeffrey Lacker and St. Louis’s James Bullard have urged a review of the purchases in light of a strengthening economy and concern over future inflation. The central bank should raise the target federal funds rate to 1 percent from near zero rather than ease during the current economic recovery, Hoenig said, reiterating comments from last year. “You really need to get off of zero, in my opinion,” Hoenig said. “I would think of moving back to 1 percent, and then I would pause. Let the market settle out” and then move to a higher rate, possibly 2 percent. The Kansas City Fed leader also urged breaking up the largest banks, which he said have a lower cost of funds because of an implied government safety net. He would restore the barrier between commercial and investment banking. “I think this is a good idea as they are so large they cannot be allowed to fail,” Hoenig said. Hoenig also said standards for bank capital need to be raised further, and the Basel Committee on Banking Supervision’s overhaul of standards may not go far enough in reducing leverage. (Hat Tip to Gary of Between The Hedges)
NTD Television reports Debt Plagues Portuguese Banks: Fernando Ulrich is CEO of Portuguese bank BPI. Times are hard for all of the country's lenders, as the pressure of the country's debt means the banks are being shut out of funding markets.