Report on money as of December 26, 2011
Introduction: The reproduction of bad money will end in diktat, as illegitimacy produces mongrels, not hybrids. David Knox Baxter writes of The Road Not Taken. One road leads to the serfdom and dependence on government promises, the other to individual freedom and unlimited potential. Along one road, greater national and individual sovereignty and liberty is a required sacrifice offered to the deity of the state and its various temples of centralized control. And Paul Craig Roberts writes its a Road To War And Economic Collapse.
Cheap money comes with costs such as inflation destruction, economic stagnation, employment migration, loss of debt sovereignty, deleveraging into depression, derisking out of risky debt and carry trades, devolution into dictatorship and world wars. News reports today communicate that a global Eurasia War is coming soon to the Middle East and will be centered in Syria and Iran.
Cheap money comes by currency debasement.
Cheap money is fathered by central banks, profligate nations, state governments and municipalities. These fathers beget more fathers who bet more cheap credit. Cheap credit produces bad money. Cheap credit paves what F. A. Hayek called The Road To Serfdom.
Alan Greenspan’s credit liquidity policies and Ben Bernanke’s ZIRP monetary policy have been the greatest liberating forces of all time: the US Federal Reserve policy of cheap credit and a falling US Dollar, set investors free. The interest rates in the US have been close to zero, so investors borrowed that money and invested it in stock markets and commodities across the globe.
And this last week, cheap credit from Mario Draghi resurrected the European Financials, EUFN, and copper mining stocks, COPX. Credit easing policies, QE1, QE2, and now, coordinated central bank dollar FX Swaps, and the ECB’s LTRO, have goosed up stocks but constitutes global debt monetization, which eventually will destabilize all nations. Some of this most recent credit easing made its way into the US stock markets, creating a grand finale sector rotation in consumer staples such as Kimberly Clark, KMB, despite the recently announced diminished profit prospects for next year. Another beneficiary of this tulip money was Procter & Gamble, PG, which sent consumer staples, XLP, to a new high. One of greatest beneficiaries of US central bank easing and now ECB credit easing, have been the preferred shares, producing a steady wealth gain, as is seen in the chart of Claymore Preferred Securities, FFC, which rose 2% this last week.
Doug Noland reports on terrific monetary expansion that has occurred through coordinated US and central bank operations. Global central bank “international reserve assets” (excluding gold), as tallied by Bloomberg, were up $1.256 TN y-o-y, or 13.9% to $10.279 TN. Over two years, reserves were $2.658 TN higher, for 35% growth. M2 (narrow) “money” supply jumped $32.3bn to a record $9.672 TN. “Narrow money” has expanded at a 9.9% pace y-t-d. And Mr. Noland relates William Launder of the WSJ reports “Use of the European Central Bank’s overnight deposit facility reached a new record high for the year, suggesting recent measures by central banks and policy makers still aren’t enough to restore confidence in inter-bank lending markets. Banks deposited €346.99 billion ($453.38bn) in the overnight deposit facility, up from €264.97 billion a day earlier and a previous high for the year of €346.36 billion, reached earlier this month. The high level reflects ongoing distrust in inter-bank lending markets, where banks prefer using the ECB facility as a safe haven for excess funds rather than lending them to other banks. And Mr. Noland relates that Tony Barrett of Bloomberg reports “A measure of European Central Bank leverage may grow from a record 30 times, raising the risk of a widening in sovereign bond spreads unless governments commit to a detailed rescue plan for members, Bloomberg Industries said. The central bank’s total assets have risen to 2.46 trillion euros ($3.2 trillion), driving the ratio to capital and reserves above levels reached during the 2008 global financial crisis.”
Under leadership of wall street wizards, Neoliberalism’s inflationism benefited European and Argentine democracies. But, the global government finance bubble has burst, and the seigniorage of fiat money is collapsing, reflected in the ratio of world stocks relative to world government bonds, ACWI:BWX, trading lower once again. Deleveraging and derisking is seen in material stocks relative to basic materials, IYM:USCI, and XLB:DBC, turning lower. The failure of growth is seen in today’s strong fall in export leader South Korea, EWY, SKOR, turning lower and in the ratio of Japanese large shares relative to their small cap peers, EWJ:JSC, turning lower,
Under Neoauthoritarianism’s destructionism, technocratic governors and emergency financial managers will enforce austerity and debt servitude. Neoliberalism featured wildcat governance, a Doug Noland term, But Neoauthoritarianism features wild cat governance, where leaders bite, rip, and tear one another, and only the most fierce, rises to be top dog.
Murray Rothbard reported that the fiat monetary system began on August 15, 1971,
The death of fiat money, that is the death of fiat currencies, began in August 2011, as the US Dollar, $USD, began to rise from 73.50. This was immediately after investors sold out of stocks in July 2011, when they became aware that a debt union had formed in the Euro zone. Then in August, they sold heavily again, when Agela Merkel and Nicolas Sarkozy called for a true European economic government, and when Herman van Rompuy called for a sovereignty union.
Out of sovereign armageddon, that is a credit bust and financial system breakdown, leaders will meet in summits to announce regional framework agreements, cede sovereignty to a Federal Europe, establish a fiscal union, provide a committee for fiscal sovereignty, announce austerity measures, institute structural reforms, and impose debt servitude. A EU wide coup d etat is underway. Those living in the EU are no longer citizens of sovereign nations, but rather residents living in a region of global governance, as called for the 1974 Clarion Call of the Club of Rome for regional global governance.
Throughout history, destiny has provided a series of kings and a progression of kingdoms to rule mankind. Freedom and Free Enterprise, the Libertarian dream, has come only recently and for a brief period, that is from the end of the Revolutionary War to the beginning of the Civil War. Fate appointed kings have included Nebuchadnezzar ruling Babylon; Cyrus and Cyrus and Darius ruling Merdo Persia; Charlemagne ruling Rome; Tony Blair ruling Great Britain, and George Bush, The Decider, ruling America with Unilateral Authority. Fate is pushing the political and economic power of the two iron legs of global hegemony into the hands of ten kings who will come to rule, each in his own regional power base. With this distribution of power to regions, we see the rising of the Ten Toed Kingdom of regional global governance. The coming President of the EU will be one knowledgeable with the scheme of framework agreements.
Michael Hudson provides a history of governments and currencies and asks Debt And Democracy: Has The Link Been Broken? Book V of Aristotle’s Politics describes the eternal transition of oligarchies making themselves into hereditary aristocracies – which end up being overthrown by tyrants or develop internal rivalries as some families decide to “take the multitude into their camp” and usher in democracy, within which an oligarchy emerges once again, followed by aristocracy, democracy, and so on throughout history.
Debt has been the main dynamic driving these shifts – always with new twists and turns. It polarizes wealth to create a creditor class, whose oligarchic rule is ended as new leaders (“tyrants” to Aristotle) win popular support by cancelling the debts and redistributing property or taking its usufruct for the state.
Since the Renaissance, however, bankers have shifted their political support to democracies. This did not reflect egalitarian or liberal political convictions as such, but rather a desire for better security for their loans. As James Steuart explained in 1767, royal borrowings remained private affairs rather than truly public debts. For a sovereign’s debts to become binding upon the entire nation, elected representatives had to enact the taxes to pay their interest charges.
This is turning international finance into a new mode of warfare. Its objective is the same as military conquest in times past: to appropriate land and mineral resources, communal infrastructure and extract tribute. In response, democracies are demanding referendums over whether to pay creditors by selling off the public domain and raising taxes to impose unemployment, falling wages and economic depression. The alternative is to write down debts or even annul them, and to re-assert regulatory control over the financial sector.
The fact that the main Near Eastern creditors were the palace, temples and their collectors made it politically easy to cancel the debts. It always is easy to annul debts owed to oneself. even Roman emperors burned the tax records to prevent a crisis. But it was much harder to cancel debts owed to private creditors as the practice of charging interest spread westward to Mediterranean chiefdoms after about 750 BC. Instead of enabling families to bridge gaps between income and outgo, debt became the major lever of land expropriation, polarizing communities between creditor oligarchies and indebted clients. In Judah, the prophet Isaiah (5:8-9) decried foreclosing creditors who “add house to house and join field to field till no space is left and you live alone in the land.” Creditor power and stable growth rarely have gone together. Most personal debts in this classical period were the product of small amounts of money lent to individuals living on the edge of subsistence and who could not make ends meet. Forfeiture of land and assets – and personal liberty – forced debtors into bondage that became irreversible. By the 7th century BC, “tyrants” (popular leaders) emerged to overthrow the aristocracies in Corinth and other wealthy Greek cities, gaining support by cancelling the debts. In a less tyrannical manner, Solon founded the Athenian democracy in 594 BC by banning debt bondage.
But oligarchies re-emerged and called in Rome when Sparta’s kings Agis, Cleomenes and their successor Nabis sought to cancel debts late in the third century BC. They were killed and their supporters driven out. It has been a political constant of history since antiquity that creditor interests opposed both popular democracy and royal power able to limit the financial conquest of society and an almost autonomous dynamic turning the economic surplus into interest-bearing debt claims for payment.
When the Gracchi brothers and their followers tried to reform the credit laws in 133 BC, the dominant Senatorial class acted with violence, killing them and inaugurating a century of Social War, resolved by the ascension of Augustus as emperor in 29 BC.
Matters were more bloody abroad. Aristotle did not mention empire building as part of his political schema, but foreign conquest always has been a major factor in imposing debts, and war debts have been the major cause of public debt in modern times. Antiquity’s harshest debt levy was by Rome, whose creditors spread out to plague Asia Minor, its most prosperous province. The rule of law all but disappeared when publican creditors arrived. Mithridates of Pontus led three popular revolts, and local populations in Ephesus and other cities rose up and killed a reported 80,000 Romans in 88 BC. The Roman army retaliated, and Sulla imposed war tribute of 20,000 talents in 84 BC. Charges for back interest multiplied this sum six-fold by 70 BC. Among Rome’s leading historians, Livy, Plutarch and Diodorus blamed the fall of the Republic on creditor intransigence in waging the century-long Social War marked by political murder from 133 to 29 BC. Populist leaders sought to gain a following by advocating debt cancellations (e.g., the Catiline conspiracy in 63-62 BC). They were killed. By the second century AD about a quarter of the population was reduced to bondage. By the fifth century Rome’s economy collapsed, stripped of money. Subsistence life reverted to the countryside as a dark Age descended.
When banking recovered after the Crusades looted Byzantium and infused silver and gold to review Western European commerce, Christian opposition to charging interest was overcome by the combination of prestigious lenders (the Knights Templars and Hospitallers providing credit during the Crusades) and their major clients – kings, at first to pay the Church and increasingly to wage war. But royal debts went bad when kings died. The Bardi and Peruzzi went bankrupt in 1345 when Edward III repudiated his war debts. Banking families lost more on loans to the Habsburg and Bourbon despots on the thrones of Spain, Austria and France.
Matters changed with the Dutch democracy, seeking to win and secure its liberty from Habsburg Spain. The fact that their parliament was to contract permanent public debts on behalf of the state enabled the Low Countries to raise loans to employ mercenaries in an epoch when money and credit were the sinews of war. Access to credit “was accordingly their most powerful weapon in the struggle for their freedom,” notes Ehrenberg: “Anyone who gave credit to a prince knew that the repayment of the debt depended only on his debtor’s capacity and will to pay. The case was very different for the cities, which had power as overlords, but were also corporations, associations of individuals held in common bond. according to the generally accepted law each individual burgher was liable for the debts of the city both with his person and his property.”
The financial achievement of parliamentary government was thus to establish debts that were not merely the personal obligations of princes, but were truly public and binding regardless of who occupied the throne. This is why the first two democratic nations, the Netherlands and Britain after its 1688 revolution, developed the most active capital markets and proceeded to become leading military powers. what is ironic is that it was the need for war financing that promoted democracy, forming a symbiotic trinity between war making, credit and parliamentary democracy in an epoch when money was still the sinews of war.
At this time “the legal position of the King qua borrower was obscure, and it was still doubtful whether his creditors had any remedy against him in case of default.” The more despotic Spain, Austria and France became, the greater the difficulty they found in financing their military adventures. By the end of the eighteenth century Austria was left “without credit, and consequently without much debt” the least credit-worthy and worst armed country in Europe (as Steuart 1767:373 noted), fully dependent on British subsidies and loan guarantees by the time of the Napoleonic Wars.
While the nineteenth century’s democratic reforms reduced the power of landed aristocracies to control parliaments, bankers moved flexibly to achieve a symbiotic relationship with nearly every form of government. In France, followers of Saint-Simon promoted the idea of banks acting like mutual funds, extending credit against equity shares in profit. The German state made an alliance with large banking and heavy industry. Marx wrote optimistically about how socialism would make finance productive rather than parasitic. In the United States, regulation of public utilities went hand in hand with guaranteed returns. In China, Sun-Yat-Sen wrote in 1922: “I intend to make all the national industries of China into a Great Trust owned by the Chinese people, and financed with international capital for mutual benefit.”
World War I saw the United States replace Britain as the major creditor nation, and by the end of World War II it had cornered some 80 percent of the world’s monetary gold. Its diplomats shaped the IMF and World Bank along creditor-oriented lines that financed trade dependency, mainly on the United States. Loans to finance trade and payments deficits were subject to “conditionalities” that shifted economic planning to client oligarchies and military dictatorships. The democratic response to resulting austerity plans squeezing out debt service was unable to go much beyond “IMF riots,” until Argentina rejected its foreign debt.
A similar creditor-oriented austerity is now being imposed on Europe by the European Central Bank (ECB) and EU bureaucracy. Ostensibly social democratic governments have been directed to save the banks rather than reviving economic growth and employment. Losses on bad bank loans and speculations are taken onto the public balance sheet while scaling back public spending and even selling off infrastructure. The response of taxpayers stuck with the resulting debt has been to mount popular protests starting in Iceland and Latvia in January 2009, and more widespread demonstrations in Greece and Spain this autumn to protest their governments’ refusal to hold referendums on these fateful bailouts of foreign bondholders.
Every economy is planned. This traditionally has been the function of government. Relinquishing this role under the slogan of “free markets” leaves it in the hands of banks. yet the planning privilege of credit creation and allocation turns out to be even more centralized than that of elected public officials. And to make matters worse, the financial time frame is short-term hit-and-run, ending up as asset stripping. By seeking their own gains, the banks tend to destroy the economy. The surplus ends up being consumed by interest and other financial charges, leaving no revenue for new capital investment or basic social spending.
This is why relinquishing policy control to a creditor class rarely has gone together with economic growth and rising living standards. The tendency for debts to grow faster than the population’s ability to pay has been a basic constant throughout all recorded history. Debts mount up exponentially, absorbing the surplus and reducing much of the population to the equivalent of debt peonage. To restore economic balance, antiquity’s cry for debt cancellation sought what the Bronze Age Near East achieved by royal fiat: to cancel the overgrowth of debts.
In more modern times, democracies have urged a strong state to tax rentier income and wealth, and when called for, to write down debts. This is done most readily when the state itself creates money and credit. It is done least easily when banks translate their gains into political power. when banks are permitted to be self-regulating and given veto power over government regulators, the economy is distorted to permit creditors to indulge in the speculative gambles and outright fraud that have marked the past decade. The fall of the Roman Empire demonstrates what happens when creditor demands are unchecked. Under these conditions the alternative to government planning and regulation of the financial sector becomes a road to debt peonage.
Democracy involves subordinating financial dynamics to serve economic balance and growth – and taxing rentier income or keeping basic monopolies in the public domain. Untaxing or privatizing property income “frees” it to be pledged to the banks, to be capitalized into larger loans. Financed by debt leveraging, asset-price inflation increases rentier wealth while indebting the economy at large. The economy shrinks, falling into negative equity.
The financial sector has gained sufficient influence to use such emergencies as an opportunity to convince governments that that the economy will collapse they it do not “save the banks.” In practice this means consolidating their control over policy, which they use in ways that further polarize economies. The basic model is what occurred in ancient Rome, moving from democracy to oligarchy. In fact, giving priority to bankers and leaving economic planning to be dictated by the EU ECB and IMF threatens to strip the nation-state of the power to coin or print money and levy taxes.
The resulting conflict is pitting financial interests against national self-determination. The idea of an independent central bank being “the hallmark of democracy” is a euphemism for relinquishing the most important policy decision – the ability to create money and credit – to the financial sector. rather than leaving the policy choice to popular referendums, the rescue of banks organized by the EU and ECB now represents the largest category of rising national debt. The private bank debts taken onto government balance sheets in Ireland and Greece have been turned into taxpayer obligations.
The same is true for America’s $13 trillion added since September 2008 (including $5.3 trillion in Fannie Mae and Freddie Mac bad mortgages taken onto the government’s balance sheet, and $2 trillion of Federal Reserve “cash-for-trash” swaps).
This is being dictated by financial proxies euphemized as technocrats. Designated by creditor lobbyists, their role is to calculate just how much unemployment and depression is needed to squeeze out a surplus to pay creditors for debts now on the books. what makes this calculation self-defeating is the fact that economic shrinkage – debt deflation – makes the debt burden even more unpayable.
Neither banks nor public authorities (or mainstream academics, for that matter) calculated the economy’s realistic ability to pay – that is, to pay without shrinking the economy. through their media and think tanks, they have convinced populations that the way to get rich most rapidly is to borrow money to buy real estate, stocks and bonds rising in price – being inflated by bank credit – and to reverse the past century’s progressive taxation of wealth.
To put matters bluntly, the result has been junk economics. Its aim is to disable public checks and balances, shifting planning power into the hands of high finance on the claim that this is more efficient than public regulation. Government planning and taxation is accused of being “the road to serfdom,” as if “free markets” controlled by bankers given leeway to act recklessly is not planned by special interests in ways that are oligarchic, not democratic. Governments are told to pay bailout debts taken on not to defend countries in military warfare as in times past, but to benefit the wealthiest layer of the population by shifting its losses onto taxpayers.
The failure to take the wishes of voters into consideration leaves the resulting national debts on shaky ground politically and even legally. Debts imposed by fiat, by governments or foreign financial agencies in the face of strong popular opposition may be as tenuous as those of the Habsburgs and other despots in past epochs. Lacking popular validation, they may die with the regime that contracted them. New governments may act democratically to subordinate the banking and financial sector to serve the economy, not the other way around.
At the very least, they may seek to pay by re-introducing progressive taxation of wealth and income, shifting the fiscal burden onto rentier wealth and property. Re-regulation of banking and providing a public option for credit and banking services would renew the social democratic program that seemed well underway a century ago.
Iceland and Argentina are most recent examples, but one may look back to the moratorium on Inter-Ally arms debts and German reparations in 1931.A basic mathematical as well as political principle is at work: Debts that can’t be paid, won’t be. 1.James Steuart, Principles of Political Oeconomy (1767), p. 353.2. Richard Ehrenberg, Capital and Finance in the Age of the Renaissance (1928):44f., 33.3. Charles Wilson, England’s Apprenticeship: 1603-1763 (London: 1965):89.4. Sun Yat-Sen, The International Development of China (1922):231ff.
This last week, Leveraged Buyouts, PSP, Junk Bonds, JNK, Municipal Bonds, MUB, California Municipal Bonds, CMF, Michigan Municipal Bonds, MIW, rose. The Flattner ETF, FLAT, turned lower and the Steepner ETF, STPP, made what is a likely plummeting bottom, as the 10 30 US Sovereign Debt Yield Curve $TNX:$TYX, steepened, 2%, signaling the beginning of the end of US debt sovereignty and US Hegemony, that has accompanied the Inflationism, that came with the Banker Regime of Neoliberalism. The last remnant of the Milton Friedman Free To Choose Age floating currency regime of leverage, is now history, as the maximum safehaven value of US Treasuries appears to have been achieved.
A sell signal developed in US Treasuries and in corporate bonds: the longer out debt LTPZ, TMF, ZROZ, EDV, TLT, BLV -- all turned lower more than their shorter duration counterparts. Mortgage Backed Bonds, MBB, turned down this week. The Finviz chart of Bonds, BND, LAG, AGG, all show topping out characteristics this week, signaling that Peak Credit has been achieved. Deflationism has come to bonds. Risk has turned the spigot of investment liquidity completely off.
Currency debasement has created “bad money”. Doug Noland writes in Financial Arbitrage Capitalism After 10 Years Bill Gross penned a discerning op-ed for this past Monday’s Financial Times, “The Ugly Side of Ultra-Cheap Money.” Never before had the possibilities for Credit creation, and resulting fees and speculative profits, been so unfettered and incentivized. That is, as long as asset prices continue to inflate. Over time, this resulted in “money” and Credit becoming dangerously and increasingly detached from real economic wealth and wealth-producing capacity .“Gresham’s law needs a corollary. Not only does ‘bad money drive out good,’ but ‘cheap’ money may as well,” began Mr. Gross’s FT writing. I would strongly argue that this deleterious process of bad “money” driving out the relatively better commenced decades ago – and then proceeded to accelerate momentously during the nineties. Over the past decade, both U.S. household and federal debt more than doubled, as consumption boomed and deindustrialization gathered momentum. GSE assets tripled to $6.7 TN. Hedge fund assets quadrupled to surpass $2.0 TN. The global over-the-counter (OTC) derivatives market ballooned from about $100 TN to exceed $700 TN. Global central bank balance sheets ballooned uncontrollably. “Bad money” took the world by storm.
Inevitably, a point would be reached where the quality of the underlying mountain of Credit obligations would prove incompatible with highly leveraged speculative positions and deeply maladjusted economic structures. Global fiscal and monetary policymakers have worked inexhaustibly to bolster increasingly vulnerable debt structures, through the unprecedented issuance of sovereign debt and government guarantees; by imposing ultra-low interest rates; and by massive purchase, (monetization) of marketable debt instruments. And especially post-2008, this fragile structure (and associated mania) has been buttressed by the perception that policymakers retained the necessary tools to ensure the situation remained under their control. From Mr. Gross: “Conceptually, when the financial system can no longer find outlets for the credit it creates, then it de-levers.” True enough. I would add that a system will find it increasingly challenging to find “outlets for Credit” once premises behind, and confidence in, the mania in Credit instruments begins to break down.
Soon, not by any human action, but rather by fate, the curtains will open, and The Sovereign, and his banking partner, The Seignior, will step onto the world’s stage. In a credit exhausted and currency devalued world, the people will come to place their faith in the word will and way of these two; they will give their full allegiance to their diktat.
Monetary policy has privatized profits for the bankers and socialized losses to the public. Protesilaos Stavrou writes The policies that have been implemented so far in the Eurozone (and beyond) have largely benefited private banks at the expense of taxpayer money. The narrative from 2008 up until today, has been one of “generous” taxpayers bailing out reckless bankers, at the expense of greater debts, higher future taxes, self-defeating austerity, high unemployment and increasing inflation.
Prior to the start of the systemic crisis of the euro in 2010, private European banks were the recipients of masses of taxpayer money, to prevent them from collapsing due to their over-leverage (too much debt relative to equity) that made them unsustainable. That was the first round of direct bailouts, or of state-injected "liquidity" that was supposedly aiming to take state money, offer it to banks, who their selves would lend it out to the real economy - a plausible theory, only it never works that way, since no bank would lend out all that money when it could cover its capital gaps with no real cost and when the recession was creating uncertainty (instead they used that money to buy sovereign bonds that would pay back with interest!).
The second round of bailouts was of an indirect character. Insolvent states were bailed out not thanks to "solidarity" and "partnership" of the rest Europeans, but because of the exposure of certain major banks in these countries that would again lead to the dilemma of either direct bailouts or bank failures. Since direct bailouts for a second time within a few years would have been politically impossible, it was better to hide behind the "profligate" states, bail them out, so they could their selves pay back their creditors, who were those private banks.
Ever since 2008 the basic principles of capitalism, i.e. the profitable stay in business, the others go bankrupt and leave, have been violated time and again, leading to the creation of zombie institutions, distortions in the capital structure and huge black holes that absorb liquidity, retarding growth.
Similar with debt monetization by the ECB. Apart from the political discussion on whether a supranational entity such as the ECB should engage in national affairs and whether that would undermine its independence; the practice of buying sovereign bonds has never been a way of solving the underlying issues. At best it postpones a solution to the future, while the debt will probably increase, the economy will continue to under-perform and inflation will start increasing eating in the purchasing power of individuals effectively reducing even further the growth prospects. All this just to make sure that creditors in present time do not have to suffer from any debt restructuring. Again why prevent defaults or partial defaults, with policies that cause moral hazard, create false incentives, distort the capital structure and sustain the malady?
As already mentioned it yet remains unclear how will bankers will be served this time. On December 9 a European summit is taking place aiming, as did the previous ones, at a "comprehensive solution" to the systemic crisis of the euro. The discussion so far, which seems to prepare the ground for what will be decided is completely detached from such a solution. Instead it follows, just like the previous summits the same failing approach to the whole issue, one that has done much more harm than good and for which European citizens will be paying for long after this crisis ends. The malinvestment of these years of the crisis will bear unpleasant results in the future as Europe will not easily be able to achieve real growth, robust to a range of shocks.
Stefan Kaiser of Spiegel describes the bank funding crisis that banks face in 2012 and which communicates that the European banks are insolvent. ECB President Mario Draghi told a committee of the European Parliament that Europe's banks faced major dangers in the coming months. "The pressure that bond markets will be experiencing is really very, very significant if not unprecedented," Draghi said.
It will be a tough year for banks. In 2012 overall they will have to pay back €725 billion ($953 billion) in debt, of which €280 billion will fall due in the first quarter alone. They will have to borrow fresh money to service this debt, but it's almost impossible for them to raise that money in the private market. Most of them have large holdings of European government bonds on their balance sheets, so they don't have the mutual trust necessary to lend each other large sums of money.
"The interbank market is pretty shut," said Dieter Hein, a finance expert at Fairesearch, an independent research company for institutional investors, banks and brokers. "Virtually no one outside is lending any money to euro-zone banks any more."
Damian Reece of the Telegraph writes Draghi has had to ignore any sense of moral hazard and agree to fund weak banks at the expense of strong. He has opened a quantitative easing (money printing) exercise of enormous proportions. Weak banks unable to fund themselves on the open market are now hooked on cheap ECB money
James Richkards and Azizonomics explains The Problem With Debt Based Money is that it results in zombification of banks and the monetary system. Any monetary system that is fundamentally destabilised by deflation is probably not going to be viable in the long run. In a fiat monetary system the government can always create inflation to raise aggregate demand, though. Complaining about the dangers of debt-deflation in a fiat system trivialises the true dangers of debt deflation in a sound-money system, where the government can’t just devalue in the name of stimulus.
Don’t mistake being able to expand the monetary base as being able to expand the money supply. They are not the same thing. If they were, we would have had hyperinflation a long time ago, as would have Japan in the 1990s. Most obviously, the money supply (M2) is defined by lending by Primary Dealers, up to a reserve requirement.
But to understand what the money supply is, we have to use the definition that the mega-scale financial corporations use, and not the blinkered one central banks use.
The shadow banking sector does not use money in the traditional sense very much. They create their own monetary equivalents through securitisation and hypothecation. While in most countries hypothecation has a “reserve requirement” — in the US this is 130% of collateral — but some parts of the global (and almost borderless) financial system — for example, London do not have such reserve requirements. So, through huge shadow-banking credit creation we get a massive boom. Is it the Fed that has printed this money? No, it’s financial corporations and primary dealers. To understand QE, we must understand that it was a reaction to deleveraging (and thereby contraction of the money supply and thus debt deflation) in the shadow banking sector. QE is the Fed trying to expand the money supply with traditional money to the level that existed previous to the bust with securitised monetary equivalents.
Ultimately though, the problem the Fed has failed to see is that the boom was so ridiculous in nature, and is based around a system so deeply and dangerously interconnected that its destruction by debt deflation is entirely nature. Furthermore, sustaining high net debt to GDP levels is dangerous, because we know a) that this impinges on organic growth, and b) that creating inflation (the only debt erasure tool I see Krugman, Yglesias & DeLong suggesting) isn’t proven effective at combating high debt-to-GDP. I have not yet seen any economist address these problems (suspension of market mechanisms, debt-driven stagnation) — what I refer to as “zombification” — satisfactorily in defense of economic interventionism
Charlie Fell writes Gold To Glitter In 2012. The historical record demonstrates that gold performs equally well, if not better, in the presence of a destructive debt deflation. The logic is easy to understand. Individuals scramble for liquidity and flee financial assets during deflations, but the deteriorating credit quality of currency issuers and the resulting loss of confidence, mean that gold is typically preferred to paper currency as a hoarding vehicle, simply because the precious metal is no-one’s liability and always pays off. In essence, gold is an effective insurance policy against a black swan event such as debt deflation.
It is important to appreciate that the precious metal does not require a black swan event in order to perform well. The gold market thrives on uncertainty, something that the equity markets abhor and, typically attracts investors during periods of increased risk aversion. It is said that the only thing that rises during bouts of market turbulence is correlations but, the historical record demonstrates that gold’s correlation with stock prices turns decidedly negative when equity markets stumble. In other words, the precious metal acts as an effective portfolio diversifier and helps to mitigate losses in uncertain times.
The precious metal also serves as a viable currency alternative, which means that it competes directly with the world’s major currencies. Since gold is a non-interest bearing asset, its relative attractiveness is determined by the return available on short-term government debt instruments in each of the major currencies. As the real interest rate falls, the opportunity cost of holding gold decreases and consequently its relative appeal rises. Near-zero interest rates across the developed world combined with quantitative easing programmes that place downward pressure on the associated currencies, means that the hurdle for gold has seldom been so low.
The gold price has come under pressure in recent weeks, which has seen the stale bulls declare an end to the precious metal’s spectacular run. A closer examination of the facts however, reveals that gold is likely to glitter in 2012 and beyond.
Robert Wenzel writes China Bans Gold Exchanges. Here's another indication that the price inflation in China is much greater than the official reports of around 4.0%. Gold exchanges in China outside of two in Shanghai have been banned, according to a statement from the the People's Bank of China, the Ministry of Public Security and other regulators. This is a clear sign of panic among government officials. Chinese people were protecting themselves against the inflation by buying gold. Until this order, gold exchanges operated throughout China. "No local authority, institution or individual is allowed to set up gold exchanges," said the notice dated December 20. The statement also said that the Shanghai Gold Exchange and the Shanghai Futures Exchange are enough to meet domestic investor demand for spot gold and futures trading. The PBOC said it would lead a team to insure that gold exchanges will be closed, banks will stop providing clearing services to them; and some people will be put under police investigation for possible irregularities at exchanges.
Conclusion: Beginning in July through August 2011, we have been seeing currencies sink -- fiat money is dying. Insolvent banks cannot sustain growth and insolvent sovereigns cannot sustain order. The coordinated central bank effort of providing US Dollar FX Swaps and the ECB LTRO facility of taking in distressed securities, makes credit cheap, and creates “bad money”. The only “money good” in the age of deleveraging will be diktat and gold bullion; these will be the sole forms of sovereign wealth. The death of fiat money is giving rise to the ten toed kingdom of regional global governance, as well as the rise to the Sovereign, and his banking partner, The Seignior.