Posts Tagged ‘bank reserves’

I’m telling you again… (your pension and insurance contributions)

November 9, 2009

As I have written in several previous posts, the most recent report issued by the Bank of International Settlements (the banks’ bank) identified in excess of $500 Trillion Dollars in financial obligations (derivatives) worldwide.  These obligations are supported by a global economy that at one point was worth in the region of US$50 Trillion and is now dropping very fast.

So, global GDP is dropping fast but obligations worth easily 10x world GDP are still outstanding at the original value.

Who, you may ask is at the center of this web of derivatives?

Concentrated, in fact, among a mere handful of financial-services giants. About 80% of the derivative assets and liabilities carried on the balance sheets of 100 companies reviewed by Fitch were held by five banks: JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley. Those five banks also account for more than 96% of the companies’ exposure to credit derivatives.

The Fitch study concerned specifically the US market. However, other than the fact that the US economy makes up 70% of global GDP, I can guarantee that other major banks world wide are into derivatives up to their neck and in a deflationary environment, those obligations are going to come due sooner or later.

The problem of course, is that when the obligations are triggered, the asset base of companies will be greatly reduced in value making servicing those obligations next to impossible.

This is the reason governments in the West have shoveled untold billions into banks coffers.

The more astute observers amongst you will realize that our governments have shoveled “billions” into banks but the obligations run into the “trillions”.

This is where a bit of slight of hand comes to the rescue of government.

Government is supporting the banks in two major ways. On one hand, governments have appropriated public funds and given them to the banks. This was the visible part of government support and the officially sanctioned extent of the involvement of government. On the other hand, governments are allowing banks to disregard a swathe of accounting rules the application of which would render them immediately bankrupt. As banks are allowed to appear solvent, they also retain their investment grade rating.

And here is the slight of hand.

As solvent entities with investment grade rating, banks attract a large portion of institutional money like pension and insurance funds. Thus, the money you think you are paying towards your pension or life insurance for example, is invested by your fund manager in the shares of banks.

Thus, the government shoveled tax payers billions into the coffers of banks and then enabled the banks to attract billions more of taxpayers’ money.

Finding out that governments are also doing secret deals with banks is par for the course. We have a $500 Trillion problem on our hands that we are trying to solve with a few dozen Billions.

Accumulating gold bullion is looking every day better.

Old twist on an old trick

August 27, 2009

This is damning news if ever anything was. Once again and with little difference over the past few months our “leaders” are coming up with “solutions” that are nothing but a transfer of wealth.

Ever since finance and the economy began to unravel, subsequent administrations have enacted programs with names that are supposed to give the public the impression that government is there to help. And so it is with the Make Home Affordable Program.

From the article:

Under the $75 billion program, called Making Home Affordable, lenders are eligible for taxpayer subsidies to lower the mortgage payments of distressed borrowers.

Do note that the program aims to “lower mortgage payments” as opposed to lowering the value of the mortgage to reflect the new lower value of real estate assets. Essentially, the borrower is still on the hook for the full value of the mortgage; what this program aims to do is to stretch out the agony of the borrower and compensating banks for keeping these suckers on their books longer than the original plan.

And note the following from the article:

Mortgage lenders and servicers have been reluctant to participate in foreclosure prevention programs despite their role in creating the subprime debacle. Intense pressure from Congress and the White House hasn’t worked, either,” the report said. “The stick has not been effective, so the Obama administration is offering a carrot — billions of dollars in incentive payments to lenders and loan servicers to encourage them to participate.”

The reason lenders have been reluctant to participate in the program is because real estate assets are impaired. They are impaired today and are impaired for the next decade possibly longer. So lenders have nothing to gain from keeping underwater borrowers on their books longer than the original contract knowing full well that most of them will default anyway. Once the asset you borrowed against is underwater, it makes little sense to stretch out the payment plan.

But, Emperor Obama has dictated that now we are going to give money to banks to induce them to stretch out payment plans.

As I remarked in previous months, all solutions are geared towards making whole select industrial and banking interests. There is very little in these programs for the borrower or society at large. Quite the contrary. All this government appropriation of funds will be taxed out of our incomes thus reducing our spending power for years to come.

Must read – Karl Denninger

August 20, 2009

And here is proof of government complicity in illegal and criminal deception.

Excellent reading today

August 11, 2009

Some outstanding essays from Gary Shilling via John Mauldin and from Dave Rosenberg via Mike Shedlock.

First Gary Shilling (GS):

It is a long read packed with insightful information and graphs that are really worth your time. Not withstanding his conclusion and the dynamics that lead him to it, that I tend to wholeheartedly agree with, in my opinion GS too fails to explain the how and why of the dynamics.

For exmaple, in the opening paragraph, GS correctly identifies the problem when he says: “Beyond the current recession, the worst since the 1930s, lies years of slow growth…” . However, GS does not explain how and why we’ve had slow growth for many years. Because to be correct, we’ve had slow “real” growth. But other than real growth, GDP has been chugging along at an average of 4% yoy at a nominal rate. Hence the question I ask in many of my essays. That is, in a service economy that is composed of 70% consumption, how much real wealth is created in a 4% yoy progression? The answer of course is to be found in the quantity of inflation that is induced into the system. Considering that inflation as measured by the growth of credit and money supply has been progressing at an average 10% yoy (with peaks at 20%), it is immediately evident that there has been little “real” wealth generated. However, even identifying the cause of weak “real” growth does not explain why that should have been so. And the answer to this question, of course, is to be found in the choice of monetary system. A choice, I might add, that is arbitrary and unilateral and has never been submitted to the people for ratification. So, by completely disregarding the monetary system, GS still falls for many popular myths on which more later.

Also, although he identifies increased government regulation as a drag on the economy, in reading the paragraph I cannot help but get the feeling that GS may agree with some of the proposed regulation. However, other than forcing derivatives on an exchange, I strongly disagree that any increased regulation might help preventing anything. We do have strong regulation but enshrined in the Fiat monetary logic is the necessity to disregard practices that are initially border line legal but that, as the inflationary dynamic develops, become down right illegal and criminal – (SIVs, off balance sheet entities, mark to model accounting … ). Once again; the fiat monetary logic conforms to the law of diminishing returns. Therefore you always need greater degrees of inflation in order to bring about the same GDP expansion. Once the inflationary logic goes beyond its half way point, fraud is virtually guaranteed by necessity and aided and abetted by government.

Somewhere in the essay GS also believes in the “savings glut” claptrap. There is no such thing of course. What there is instead, is a fiat monetary system that is predicated on inflation and is inherently exponential in nature. Thus inducing ever greater quantities of inflation in the system results in the logical transition from a manufacturing economy to a service economy which, by necessity, becomes an economy based on imports and consumption. That being the case, inflation (as measured by money supply and credit) is exchanged for goods and services overseas. So, the savings glut would not exist if it weren’t for excessive inflation of the global reserve currency: i.e. the US Dollar.

Somewhere in the essay, GS also says that “bankers fear inflation”. To which I can only say: right! Inflation is the conditio-sine-qua-non of the fiat monetary system. Bankers’ only way to make money is to generate inflation. In the absence of inflation, banks would have to create far less credit and money thereby limiting profits. In a fiat monetary system the authority that is charged with creating money does so and charges interest. In the particular case of the USA, the Federal Reserve creates the money and gives it to the Treasury and charges interest in the process. Thus, every Dollar bill that leaves the Fed is devalued by that much. The less intuitive ramification of this monetary system is that debt can never be repaid. That’s because if you rustled up all the coins and $ bills in circulation and gave them back to the Fed, you would still owe them interest on the last bill that was created and delivered. Thus, a fiat monetary system can only survive in an inflationary environment. Absent inflation, the fiat monetary system implodes and with it so do governments.

Also, in chart 9, GS seems to think of inflation in terms of prices. Prices of course are a function of inflation; they are the manifestation of inflation but are not the cause.

Towards the end of the essay, GS states that he sees local government and state spending increasing at 5% and says that as tax revenue dwindles at state level, the money will have to come from Washington. Of course, if you’ve read any of my essays, you will know that there is very little difference between individuals, corporations, local government, state government or, indeed, the Federal Government. That is, when bankruptcy overwhelms individuals and corporations, it will progressively overwhelm local, state and Federal Governments too. So, we may want increased spending from our governments but in a situation of global bankruptcy and rising interest rates, governments will have a hard time borrowing even more than what they already have. Not only that, but how much more production capacity can we really absorb world wide? I mean, considering that industrial capacity utilization has been steadily declining over the years thereby progressively eroding pricing power, why should we create even more of it now?

I have to run now and will polish and add to my comments at a later date. For the time being do read the two essays from Gary Shilling and Dave Rosenberg because they are really worth it.

Dave Rosenberg essay via Mike Shedlock

Debt Deflation the Reason Why Government Economic Stimulus is Doomed to Fail

July 15, 2009

… and here is the mathematical proof for the more nerdy amongst you…

This is a secular change we are living. During the next decade, people will have to get accustomed to an entirely different environment socially as well as economically. Deflation will truly make most people believe they now live in a a topsy-turvy world”… including such luminaries as Warrent Buffet whose portfolio is entirely geared towards continued inflation. Regarding Mr. Buffet, unless he should change his portfolio mix, I think he is in for quite a surprise over the next few years.

Geithner: Improvements coming faster than expected

July 15, 2009

Truth or wishful thinking? I don’t know, I am only posting this crock of shit so that I may refer back to it a year from now


“In the United States, the rate of decline in economic activity has slowed, business and consumer confidence has started to improve, housing markets have begun to stabilize, the cost of credit has fallen significantly and credit markets are opening up,” Geithner said in remarks prepared for delivery in Jeddah, Saudi Arabia.”

If I may be so bold, that is entirely Mr. Geithner’s opinion. The key word here being “opinion” as it most definitely is not fact as attested by a housing market that is still declining (as is commercial real estate I might add); the cost of credit default swaps is widening and, at any rate, the cost of mortgages has moved up significantly in the past three months which, I might add, is contrary to what Geithner and Bernanke wish; and as a direct consequence of the latter, credit markets have most certainly NOT opened up.

But he is Geithner and I am me. He certainly carries a lot more weight than I do.

Time will tell

If pictures are worth a thousand words, let me try this…

July 6, 2009

Thirty years of manipulating interest rates lower looks like this…

FRED Graph
As you lower interest rates, this is what you get… textbook…

FRED Graph
As you manipulate interest rates lower, you goose inflation thus peop0le not only spend their savings but they will also take on debt. Textbook Keynes.

Graph: Household Financial Obligations as a percent of Disposable Personal Income

As people take on more debt, their spending power is multiplied. Thus, as Steve Keen eloquently demonstrates in The Cavaliers of Credit, money supply must follow suit. Steve keen shows that money supply follows credit creation and not the other way around. In a debt based economy, that would be fairly intuitive.

FRED Graph

So, we’ve manipulated interest rates to unimaginable low levels, thereby depleting people’s savings and simultaneously encouraging individuals to increase their spending by taking on debt, thereby fostering an increase in money supply. Accelerating debt levels and money supply is what inflation is all about. The chart above shows that we’ve been expanding the money base at an average of 10% year on year.


So, what did we get for all the priming of inflation over the same period of time? This is what we got for our efforts…

FRED Graph
We’ve lowered interest rates, we’ve forced people to spend all their savings, we’ve forced people to go into debt at an ever quickening pace thus making people spend money they did not have, we’ve pumped the money supply at rates that on average were double the rate of GDP expansion and through it all, we’ve been able to push GDP progression at the dizzying speed of… drum roll…  5% year on year… barely….

To summarize, over a period of 30 years, on a year-on-year basis, we’ve put in a financial effort that is on average at least twice as great as the GDP progression we have fostered (NB – the financial effort is actually much greater than what I am illustrating because although my GDP figures take into account government spending, the debt figures do not take into account government borrowing… but you get the point… )
If that does not make you go: “WTF!!” then here is something that should finally make your Penny drop. Here is the kicker!!! This is what entire swathes of politicians and economists have failed to notice over the past thirty years…

Graph: M1 Money Multiplier

That there chart above, can be thought of as the efficiency of money or how many times each new unit of currency contributes to the expansion of the economy (because each coin or Dollar bill is used more than once in its life time so each unit of currency has a “multiplier” effect on the overall economy). That is, how much does each new unit of currency contribute to the expansion of the economy. What the graph above attests to is the exponential nature of the inflationary dynamic. The graph above attests to that pesky characteristic of inflation better described by the law of diminishing returns. In other words, it shows how you always need more inflation in order to bring about the same or greater rate of expansion of GDP. That is because as a government willingly adopts a fiat monetary system, then inflation is the implicit conditio-sine-qua-non of the existence of the system and the state. But as you encourage inflation artificially into a system, you decrease the value of the currency thereby bringing about higher prices.

Today the efficiency of money has fallen below 1. That means that “money” as contemplated by accepted Keynesian theory, has lost its multiplier effect.
So, having disregarded the efficiency of money for the best part of thirty years, politicians and economists are hell bent on doing more of the same only MUCH more in an attempt to bring about a modicum of GDP expansion.

What, you may ask, is our leaders’ solution?
Our leaders seem to think that if we create even more money than we already have and give all this new money to the banks as we already have, suddenly people will once again rush out to borrow this money to spend.

Here is the rub.

The price of risk insurance on financial instruments is still rising. The velocity of money is still below one. The savings rate has jumped higher than at any time in recent history telling you that people no longer wish to spend.

I would have thought this was your proverbial “writing on the wall” writ large.
Looks like I am wrong.
For more on the inflationary dynamic, you can read this post and many others on my blog.

Deflation it is… Ellen Brown’s Web of Debt..

June 21, 2009

A previously (to me) unknown analyst/researcher.

As is also pointed out by Steve Keen in his brilliant essay “The Cavaliers of Credit“, Ms Brown concurs that it is banks that front run money creation through securitization of debt boosted by the magic of fractional reserve banking. The Fed merely follows suit. But now, the securitizaton market is broken so an essential component of the credit creation machine is absent. Thus, whatever money the Fed may be creating through debt monetization the amount is dwarfed by the amount of outstanding credit that now must be either paid off or written off.

[California is] less than 50 days away from a meltdown of State government

June 11, 2009

As stated here (bottom of essay), California will be the preview to what is about to happen globally.

What is important to understand here is that the evolution of economic dynamics is not linear but, rather, exponential. Once California goes, the dynamic will accelerate markedly. California is one of the five largest economies in the world. THE WORLD folks. The implosion of California will leave a gaping hole in budgets everywhere. Fasten your seat belts.

Mike Shedlock digs out this official report:

My prediction stands. 15% average official unemployment across the board in Western industrialized countries by the end of 2009. That will put us at real unemployment of anything from 25% to 30%. That’s a whole bunch of angry, hungry, probably homeless people with a lot of time on their hands to ponder who to blame. And let me tell you that the political and corporate scandals that have broken out so far and those that are about to be revealed, are really going to piss off a whole bunch of citizens everywhere.

Unless someone, somewhere should be able to re-start inflation at anything approaching the rate of the period 2004/2007, we are in for a world war.

BBC’s Hard Talk with Steve Sakur

June 7, 2009

Hard Talk today was hosting Nobel prize winner for economics Paul Krugman.

It was an unusually wishy washy interview. Paul Krugman is a strange fish at the best of times. He does occasionally say things I agree with but today he was way out in left field both on things he said but, mostly, on the things he did not stay.

Right off the bat, PK started the interview with a howler; he said that 92% of the US economy was sound and it was being dragged down by the 2% that was unsound. If we agree that the “unsound” part of the economy that is jeopardizing the stability of the entire world economic and financial system stems from the finance industry, then we agree that, apparently, PK believes the finance industry contribution to US GDP is only 2% of the $14Trillion US economy… which makes me wonder how this guy passed Arithmetic 101 let alone how he won a Nobel prize.

I wasn’t going to do this but… for fuck’s sake… even if we assume that PK might be slightly off on his assertion and lets assume that the finance industry contributes 4% to US GDP (twice as much as PK thinks) then I have to ask. Why did we just hand the banks, insurance companies and mortgage institutions (to name but a few) cash and loan guarantees upwards of $4Trillion Dollars??? If PK is right, and finance only contributes $280Billion to the US economy, we’ve just given money to these folks worth upwards of 10 times what they contribute to GDP.

That big-ass honker having been uttered, PK’s performance did not improve at any time during the interview.

When prompted by SK as to how quickly banks have turned around and are now so healthy that they have been able to raise funds from the public once again, PK nodded in agreement and stated that he too had been surprised by the swift recovery. At no time did PK mentioned the suspension of mark to market rules as well as the unwillingness of the authorities to enforce recognition of off-balance sheet items. So, the fact that the authorities once again chose to not enforce those accounting rules that induced instability in the financial system in the first place, apparently is now a sign of health and stability in the system.

When questioned on the desirability to support GM, PK wished to appear unconvinced of the logic but went ahead to say that, nonetheless, buying time for a troubled company during a time of crisis might help it re-emerge healthy at the other end. So, PK thinks that a company that has been losing money on every single item they manufactured and sold for the past decade can, suddenly, be protected, coddled, financed and will magically reemerge at some point profitable. Quite apart from the fact of excess industrial capacity, it is unclear what is PK’s position on the fact that by supporting GM, the government is taking market share away from, say, Ford…. and Ford employees…

Towards the end of the interview PK denied to answer but implied and suggested that the US administration is considering another stimulus plan of about $500Billion.

What a waste. What a circus.