Forum Replies Created
September 24, 2012 at 8:45 am in reply to: You're Dreaming If You Think The Euro Crisis Is Resolved #5750
The Soviet Union re-emerges … in Western Europe, this time. Who would have guessed? It’s too bad, Sovietism failed its first go-round and for the same reasons this version is failing right now: nobody would lend to USSR when that country was desperate. Nobody will lend to it now.
The US orchestrated a credit embargo on the USSR, which crashed when the West wouldn’t lend after crop insufficiencies and a decline in Soviet export oil price. The US and its closest allies know all about embargoing credit: they have done it before … Southeast Asia, Latin America, Africa.
The Soviets pursued industrialization, the Europeans are desperate to prop up their current rotting version. There is really no difference between the two sovereign ‘concepts’. It is likely the Moscow version had more drunks in high places than the Brussels variety but this is hard to tell.
Catalan independence is overstated: the Catalans want the euro, they want to be members of the European Union. All the Europeans want the euro, they cannot afford (imported) petroleum without it. Without the euro and petroleum there are no wonderful cars, which nobody can imagine a life without. The whole world is throwing everything they can into the furnace for the sake of the wonderful cars.
Which Saudi prince would accept a Catalan peseta? “Give us dollars!” the Saudi’s would demand … “or else!”
Of course, the Europeans should simply dollarize their economies like the Ecuadorans and Panamanians have done. They would have all the benefits of the euro without any of the hassles … nothing would get worse and the credit embargo would be maneuvered around. The IMF is simply a proxy for the US Treasury, one kind of IOU would be swapped for another. There would be no need for political integration, bureaucracy, neo-nazi parties or anything else. Monetary policy would be the simple matter of managing foreign exchange flows… Because there is a credit embargo the Europeans … a dollarization strategy would make life more complex/difficult for the tycoons who have decided to steal Europe’s oil consumption.
Yes, Sherlock Holmes, that is what the credit game is all about. America has fought two wars for oil and a number of others in the shadows, hell hath no fury like a pickup truck owner with an empty tank. Robbing the exhausted, effete Euro-trash by denying the Eurobankers and their government clients their credit ‘fix’ is too easy, like stealing candy from a baby.
This isn’t about Greece or even Germany.
The basic ideas of modernity and industrialization — the fashions that these ideas represent — have burned themselves out.
Punish Greece, why bother? Greece could be annihilated with nuclear weapons, every Greek survivor put to death, the ground poisoned with salt and plowed under, all these things and more: Europe and the rest of the world would still be flat broke.
The world has taken on massive debts in order to destroy the capital it needs to survive.
This is why imposed austerity doesn’t work, it’s redundant. Greece is becoming Eritrea or Yemen all by itself … by way of its precious automobiles. These monstrous things the Greeks have sacrificed their futures for, including those of their descendents out to twenty generations and more.
The human race may not survive ‘the Great Waste’.
Make no mistake about it: Greece cannot ever repay its debts. Germany cannot possible hope to repay Greece’s debts, not just SFV’s say-so but actions of the Germans themselves.
If repayment of Greek debts could end the European crisis and Germany could repay them repayment would have been done already. If industrialization could repay its own debts it would have done so, there would be no debts.
For Greece to repay debts insists that Germany at some point must also repay: this is also impossible! The US could not hope to repay Germany’s debts. No country can repay finance level debts, both GDP and GDP growth are borrowed, no country can gain a surplus that is something real.
Countries can only borrow at favorable rates of interest relative to other countries and play the spread/hope to refinance at a real discount.
All this borrowing is for lifestyle: fashion, chic, outre, avant garde … hip, flip, coquettish, whorish, demonic, gay! Lexus is nice, Ferrari is nicer. Pass that joint/champagne.
The resources gone are gone forever, those $20 barrels of crude will never return, they circle in the atmosphere waiting to visit Odin’s vengeance upon the fools who dared to waste them for nothing at all … for a handful of greater fools to get rich.
How tragic …
Coercion takes many forms, it is part of a government tool kit. Forced/paid sterilization is unpleasant but it works and the alternative is unmentionable cost of uncontrolled population expansion … then, collapse.
Coercion is China’s ‘one child’ policy that punishes people who evade it and have more than one child. The one-child policy is unpleasant. It enrages people in the West but it works and is preferable to the West’s hypocrisy and denial. Part of the one-child policy is forced abortions and sex-determined abortions. The outcome of this unhappy policy is declining birthrates in China … this is the return on policy initiated 20 years ago.
The secondary return is the percentage of China’s current wealth that is accountable to diminished population pressure. Unborn persons cannot consume capital which is then available for other — more remunerative — purposes. Supporting billions in permanent slums at the edge of destitution is not useful allocation of capital.
Better to pay young girls not to have children while giving them the means to avoid conception. Pay one billion (+/-) young girls US$1,000 per year not to have children: US$20 trillion ($1 trillion x 20 years) and old age will do the heavy lifting. The funds would remain in the economies and the payoff would be substantial in real terms at the end of the 20 year period due to capital preservation. The West/Wall Street could make the investment without any difficulty. Instead, governments simply pass the buck and wait for that invisible fist to have its sport with the human race.
Girls that would need the extra US$1,000 are the same girls with the highest birthrates and the lowest earning power.
Certainly you must know that these girls are never going to get rich enough on their own and do quickly enough to give them consumerist choices about their fertility. There are simply not enough resources available, too many fertile young girls, not enough time. Girls reproduce much faster than they can be enriched, in doing so they defeat themselves and their children (along with everyone else).
Paying girls not to have babies is also coercion but events are now outrunning the ability of managers to respond to them. It’s time to get serious or else …
India’s biggest problem isn’t nuclear weapons or not enough electricity but too many people.
The country needs to cut its population by any method that comes to hand including coerced sterilization. Otherwise, the population will be cut by other means including war, starvation and disease … coercion disguised. Perhaps not tomorrow but soon: the current drought continued for another decade is all that is required.
Cut the population of machines as well, get rid of the energy-sucking, space-wasting cars. Otherwise, what is underway in finance- and energy markets will remove the cars by other means.
You have to wonder how people will cope when it really gets bad.
When all the conveniences vanish, when Europeans live like Pakistanis and Pakistanis live like dogs.
BTW, the image from Dreamslayer artworks is so wrong it’s laughable. The only way to see the Manhattan Bridge behind the Brooklyn Bridge as seen in the painting is to stand on the waterfront in Brooklyn and look north. Needless to say, the Empire State Building is in Manhattan, across the river about 4 miles from the two bridges.
If you stand where the Empire State Building is looking toward Manhattan- and Brooklyn bridges the former is in ‘front’ of the latter and neither can be seen … they are around a bend in the East River.
It’s as bad as having Yankee Stadium in Queens or the Eiffel Tower in Copenhagen.
Funny, governments like those of Stockton, California and Cyprus … are proving unaffordable. Perhaps it’s time to redefine government …
There is too much thinking on the idea of management as if this situation we find ourselves in is a matter of the head and policy, of bad software in the computer up in the office at the top floor of a high building. Adjusting the head, reprogramming the computer will ‘solve’ the problem and everyone can get back to ‘doing business’.
The problems are in the basement, in the foundation, they are structural cracks that are growing. There is decreasing capital, we cannibalize capital, we burn it up for nothing. It’s no longer a matter of adjustments so that we can consume capital more rapidly. It’s a matter of hanging on to what we have and learning to get by without using it, without bringing the entire enterprise down around our heads.
Say what you will about management in Europe and elsewhere, underway is conservation by other means.
It’s no longer an option. It’s the future.
Hard to take any message seriously when they bury it in academic jargon behind a pay wall:
What exactly are the authors trying to say? Is the problem important or is it secondary to remarks about the Olympics?
I doubt Ashvin paid $32 to read the actual paper rather, he quoted the university summary.
This a problem w/ the peak oil folks as well: too jargonisitic and too much preaching to a well-heeled choir that has other interests (why they are well-heeled in the first place).
If there is a serious problem, you yell ‘Fire’ in a crowded theater rather than whispering in the direction of a person in car driving past!
End of Mr. Draghi, except for manipulating the stock markets there is nothing more for him to do.
He can recycle old loans and pretend they have become new loans. He can cut interest rates but the real rate is always unaffordably high.
Whatever ‘Mr. Draggy’ does will make matters worse. Just as a battle of ideas cannot be won with bullets, an energy/resource shortage cannot be solved by offering more loans to people who are too broke to borrow … so they can buy more energy/resources they cannot afford to waste.
Without knowing for sure, it seems the Spanish young people have decided to wait for their luxury jobs to arrive. Nothing is mentioned of Spanish who work with their hands, the Spanish who have no car(s). It seems the youngsters are locked into the past along with their contemporaries in the US and elsewhere.
Nothing is mentioned about those who simply squat in vacant buildings or ‘scrap them out’ for material they can sell.
Nothing is mentioned about the Spanish who have decided to get a grip on themselves and deal with real, survival-related problems rather than waiting for Santa Claus to climb down the chimney. Those consumer illusions still loom large in that metaphysical rear-view mirror … but certainly not for everyone.
Nothing is mentioned of the €3 or 4 trillion Spain needs to ‘get back on its feet’, the funds that have flowed to Germany for useless luxury cars, to Wall Street for ‘replacement credit’, to the Middle East for more fuel for the now-useless German luxury cars, to Germany, France and the UK for more useless military hardware; trillions more for infrastructure ‘improvements’ to make Spain more like Norwalk, Connecticut or Redlands, California.
The Spanish have gotten screwed by an idea just like the rest of us.
To defend nature in the future will require guns and killing. Nothing else seems to do. Killing = killing, the human way of doing business.
Funny how everything is justified by adding a money sign in front of the lies.
Iceland is energy independent (she imports petroleum but exports electricity in the form of refined aluminum).
Argentina (default a few years ago) is energy exporter.
PIIGS are all import dependent (Italy produces about 10% of current consumption). France and Germany are as import dependent as Greece. Without the euro, the Europeans lack to means to obtain petroleum.
Europe is held hostage to Wall Street, dependent on external credit. Finance’s credit embargo allows Europe’s consumption to be exported elsewhere (US). Cutting Europe’s consumption from 15 mbpd to 5 million barrels per day is the same as finding a new Saudi Arabia.
The Europeans? Who cares …!
Just a few notes:
The problem with finance isn’t interest per se as it can be borrowed along with the principal (and always is). Where the problems lie:
– Loans are extended in one form while repayment is demanded in another form.
Loan are extended as ‘fiat loans’: spreadsheet- or ledger entries @ no cost to the lender. Repayment is demanded in circulating money which cannot be had under certain circumstances. All loans are bets as to whether circulating money can be obtained for the lender by the clever/hard working borrower as the loan matures. This is our crisis to some degree: the large amounts of no-cost claims against decreasing amounts of circulating money which is hoarded as fast as it is created.
– Ledger entry lending is a fraud: fiat claims with no possible fiat repayment only fiat re-financing at increased cost to the borrower.
– The purpose of poor people is to validate money: unlike the wealthy, the poor will die willingly to gain money or certainly die without it: this gives money a character ordinary goods do not possess.
– Industrialization is credit dependent: repudiation of debts = de-industrialization. Debt = wealth, removing one removes the other. There are reasons why both debtors and creditors do not wish to see the debts vanish. The wealthy man borrows his wealth and puts the burden of repayment upon his customers. If they cannot pay then he himself must return his fortune to the lender or see it vanish into general ruin.
– At the same time, the wealthy man must turn his fiat fortune into circulating money, if his fortune (surplus) is large enough to be one it is too large (too costly) to convert without unraveling the market for circulating money — Steve’s First Law of Economics.July 25, 2012 at 2:40 am in reply to: Super Rich Stash At Least $21 Trillion In Secret Tax Havens #4835
Latched to the fancy past, marching in lock-step to the abyss:
“Super Rich Stash At Least $21 Trillion In Secret Tax Havens”
What are they to buy with it? What will be ‘worth’ anything?
When their world is gone they will be gone with it.
Maybe the gold-as-money arguments are tired, maybe they are ahead of their time. Who knows?
There are good reasons why gold will cost $50 per ounce and equally good reasons for $15,000 per ounce.
One thing to keep in mind is all matters of worth follow predictable pathways: the idea => the acceptance of the idea among a few => the success of these few => widespread acceptance (fad) and great demand for the idea and its lesser variations => the opinion that the idea represents a permanent change of affairs (it’s different this time) => absence of a new ‘market’ for the idea (everyone able to has ‘bought in’) => spurning the idea as a ‘fake’ (it was from the beginning) => race for the exits and ‘market panic’. In the end the idea is obsolete, “What were we thinking?”
The original few with the idea sell their positions and exit during the period of great demand. They move onto something else.
The foregoing is a very well-known market dynamic. Due to the amount of resources available, the idea that represents ‘the worth of modernity’ (and modernity itself) is still expanding. While there are doubts creeping in at the corners, persons not enjoying the chance at modernity’s material blessings are counting the days until their ship comes in (and they can hustle down to the dealership and each buy a shiny new car and drive it on a freeway built at ‘somebody elses’ expense, as seen on TV).
Gold doesn’t fit into this dynamic, it’s a fetish object (currently unemployed). The acceptance of the ‘gold idea’ by the human race has been widespread across almost all cultures: ours is no different. There are golden fetishes found in ancient Egyptian tombs, tombs in hinterlands of Russia, in tombs in Gallic England/Ireland: tons of gold fetishes found then stolen from temples and hoards in the Western Hemisphere, in China, across Europe and into the pre-modern.
Currently we’ve been at a loss to find fetish use for gold which is why the current discussion is taking place. Automobiles have taken gold’s place in the pantheon/hierarchy of (useless, counterproductive) items. Our currency isn’t on a gold standard it is on a BMW or Acura standard. In practical terms our currency and the efforts of policy makers is undermined by the operation of hundreds of millions of cars and the need to fill these monsters with fuel. Right now, the contests is between money representing the fetish or money representing what the fetish needs to operate. This is not a good place for money to be: on one hand money is frivolous, on the other it is too valuable to use.
The ‘idea’ of gold has been around, it has withstood the test of time, it has proven its lack of utility (the idea of gold and the gold itself) over and over. Gold fetishes did not protect the Aztecs and Andean tribal culture from the Spanish or from their diseases. Gold-as-money cannot do any better, it cannot ameliorate the ongoing collapse any more than Ben Bernanke can.
What gold can do better than many other objects is to be a medium of exchange. Humans are loathe to part with it except under stringent circumstances, gold will not be traded for recreational purposes. It is a portable form of energy conservation.
As consumption-recreation vanishes from this world money will become more serious and ‘responsible’. There is a place for gold as there is a place for Picassos: you trade yours for an office building or a drydock.
Gold-to-debt ratios are not as useful as the gold-to-actual-human ratio. There are too many humans, not enough gold, institutions hog most of it. Most humans will do without (and have to). Those without gold can offer their talents in exchange for sustenance or they can offer to behave themselves … for the same thing.
The idea is emerging that those that don’t behave (bankers and politicians) will be led to the chopping block where heads will be separated from their necks. Here is the idea => the acceptance of the idea among a few => the success of these few => widespread acceptance (fad) and great demand for the idea and its lesser variations … etc.
Go for gold and samurai swords.
The Bank of England had already created 325 billion pounds of new money before Thursday’s addition. In doing so, it has successfully driven borrowing costs to all-time lows, yet the UK economy is languishing in recession.
This is because + UK£325 billions or so have vanished into the deflationary abyss without anyone paying the slightest attention. The focus is always upon what the central bank does, nothing at all what takes place elsewhere, like a cheap magician’s trick.
The central bank balance sheet expands b/c the private sector balance sheet contracts a like amount. There are no free lunches, anywhere, even in banking.
UK carries £trillions in debt that would be replaced with fiat currency if it existed, but is replaced with more debt under current circumstances. The central banks in our frightful regime can only fill a hole by digging new ones. In our mental stasis, there is no escaping debt only delaying it and the consequence of default(s).
The Keen reference is to the issue of Treasury fiat (greenbacks) used to retire debt: the extinguishment of both debt and greenback in equal amounts insures there is no inflation.
Inflation is the consequence of unsecured lending (against re-pledged or non-existent collateral) and is the consequence of ordinary business activity. Hyperinflation is currency arbitrage and is usually consequent to wars or other severe social disturbances such as revolutions and military governments. There is an ‘official’ currency and another, black market variety (dollars) or gold.
America has endured inflation … since 1948 there has been continuous inflation: it’s called ‘economic growth’. Currently, the conventional hedges against inflation have broken down. Among these has been the taking on of debt to buy non-financial assets such as real estate.
The thrust of TAE arguments is that shadow banking racketeers using debt derivatives financialized hard asset purchases that had heretofore existed outside the ambit of Wall Street. The associated (and inevitable) breakdown of that financial process is what forms the basis of our current crisis.
While this is partially true, the central issue is the success of the American-style economy which undermines itself. Finance is a part but the entirety is bankrupt, from top to bottom.
Your point about stocks vs. flows is well taken but debt is not a stock in the strictest sense, there is the term (value/risk) and service costs which are integrated to (N)GDP. Debts are a stock in that the rules binding them are rigid. When users/circumstances distort the rules the debts can take on (adverse) flow-like characteristics in a big hurry.
Credit/debt is/can be a pure equilibrium environment, the current thinking points toward ‘frictions’ that effect flows (and would effect credit periodically). I don’t really want to go ‘there’ (economic theory rabbit hole), do you?
Another thing to keep in mind is Axel Leijonhufvud’s intertemporal balance sheet(s). We have debts we can never hope to repay … liabilities we can never meet.
I do recall getting an email message:
I am very pleasant to have the honor of speaking cordially with you. My name is Senhor Aguinaldo Jaime, I was the governor of the Angolan Central Bank from 1999 to 2002…
I have in my possession currently in the amount of US$50,260,000.50 if you would please assist in bringing this sum out of accounts currently held in Angola which was money left to me by my aunt …”
The email went on to ask for my bank account info so he could wire me the funds. My share according to Jaime was $5 million. I didn’t think he was serious, thanks for telling me how wrong I was. :angry:
“Jaime initiated a series of suspicious US$ 50 million transactions with US banks.”
I’m sure he did.
Art Berman has been beating the ‘shale gas as a scam’ drum for years now. He became the subject of a New York Times article last year that caused the establishment much discomfort.
Unlike the gas drillers, Berman’s integrity is impossible to challenge and he has the industry creds:
Gas drillers have been abandoning dry gas plays to seek wet gas (natgas liquids are priced like crude oil). Wildcatters are selling plays to integrated petroleum giants with deep pockets like Exxon.
Complaints about fracking fluids in drinking water are making it difficult for drillers. Fracking requires a lot of water, many plays are in areas with little available water so it has to be imported by pipeline … $$$. Pumping aquifers for fracking water distresses farmers who need it for irrigation while waste injection wells contaminating the same aquifers are causing a backlash against fracking.
The sand needed for fracking is found in Wisconsin: residents are up in arms about unregulated sand mining which is of the ‘strip then skedaddle’ variety, leaving the landscape a mess.
The ‘solution’ to tight oil formations in the Bakken and elsewhere is for companies to drill thousands of low-flow wells. The average well output in Bakken is -100 barrels per day. A conventional well = 50,000 barrels per day. By comparison, the Macondo blowout was 53,000 barrels per day. A hundred barrels or less is stripper well category.
Fracking and horizontal drilling costs $6-7 million per well. Multiplied X thousands of wells, the drilling treadmill never stops. What happens when the credit runs out?
Since Jimmy Carter and his execrable sweater trillions have been spent to subsidize the various ‘waste’ industries, the largest of which — autos and fuel provision itself — cannot pay for themselves. People do not earn by driving but by borrowing. The debts have been paid for by more borrowing and more borrowing still: the debts are now piled to the rafters.
The end of the day see conservation: easy way or hard way. The amounts involved are the same: a large percentage of current use. The difference is the amount of unnecessary pain.
Are we smart enough to make the right choice?
nobody knows what is going to happen in the future, in the long run we are all dead.
That’s the hated Keynes, you know.
Getting from where we are to where it is we need to go isn’t going to be easy, but if we can put a man on the Moon …
Easier and more effective to start getting rid of the consumer goods in your lives: cars, tvs, gadgets, ‘life savers’, RVs, vacation homes, and the debts that go with these things. People believe they can solve problems by going to the store and buying something, what is needed in this world is all the things that cannot be found in any store: character, discipline, restraint, humility.
As for solving anything by ‘direct action’. Not likely to be effective but certainly will cause a lot of unnecessary suffering to third parties. Better to address economic problems with better economics, social problems with better social policies and more justice rather than arbitrary reaction.
Direct action is just another bailout …
Yr not paying attention, RE: the disorder in countries such as Syria and Somalia is the outcome of direct policy actions by the US (primarily) and others; military and foreign affairs agencies.
It’s clear the US public isn’t interested in disorder, most Americans are too old, the young peoples’ employment is held hostage. Even when provoked the younger citizens are uninterested in fighting in the streets.
There is nothing to gain by disorder, only acting out.
When Americans get serious there will be strikes and debt repudiation.
More food for though by excellent superstar Nicole!
What did Yogi Berra say? “Prediction is very hard, especially about the future …”
Best to just look at what is underway now and let the future — and predictions — take care of themselves.
– Funny business in Europe as rates rise during deflation under a hard-currency regime. Europe carries a lot of debt … but they carried the same amount of debt last year and nearly the same the year before. Why a problem now?
– The real currency traps (which is what Nicole is describing) in the US is our stuff. When gas is rationed, the $50,000 SUV is worth $5,000, if that. The furniture, the swimming pools, the vacation houses all are becoming worthless. This is because they are, from the get-go! There is no need to rob peoples’ bank accounts because they are ‘auto-emptied’ for nothing by the account holders themselves.
– Actually restricting banking would be counterproductive because fewer depositors would be able to auto empty their accounts!
– As time passes and failures mount, authority breaks down rather than gets stronger. Perhaps a more effective regime would turn this around, otherwise bribery becomes the way to navigate authorities.
– An effective regime would have less problems with capital flows both to and from. Bank runs underway is foot-vote against the establishment.
– Bank runs are consequence when central banks (appear to) make unsecured loans. When done, there is effectively no lender of last resort … even when the central bank tries hardest to be one!
– Even in Greece there is no sign that civil society has collapsed, however people are more poor than they were a year ago. Americans have agonies about doing without. Poverty by itself is not collapse, it means the absence of consumer goods and wastefulness. What is taking place right now is conservation by other means. The outcome of this process is decreasing utility of the stuff we populate our lives with. These junky items represent a (very large) cash investment. In a way, the US has been throwing its money away since the end of World War II.
– Mad Max isn’t happening so far but Woodstock might not be out of the question …
Sorry, I had to rewrite those two lines because they didn’t make sense:
What the establishment desires above all else is credit expansion not less. Credit is foundational necessity for industrialization, not parasitic upon it.
The advantage of industry is scale and credit concentration (and lower credit cost) and survival during periods of ‘ruinous competition’. We actually don’t need any of these things: getting rid of scale advantages would allow opportunities for individuals to ‘create their own work’. This is different from scale-businesses which are asked to ‘give’ jobs like Christmas presents (offer them as products alongside their ordinary products). As it is, credit allows businesses to afford to fire their workers and buy machines to replace them.
We already know how to do these things but the advantages accrue to the big businesses which lever up from there: the businesses enable big government which in turn enables bigger businesses.
You have to define ‘assets’, most of the world’s arable land is already improperly cultivated, most of the world’s fisheries are over-exploited, most of the world’s forestry resources exhausted, etc. You cannot redistribute a cut forest or ‘buy’ new topsoil for Ukraine. Once a resource is gone, it’s gone.
1. “willingly, voluntarily trade their dollars for a useful physical good”-Let’s do away with legal tender laws, and then see what people willingly use.
If elephants had wings the size of 737s and gate access they could always start an ‘Elephant Airlines’ and offer super-low fares.
2. “Priced in crude oil dollars have real worth”-That is flat out untrue. Under the threat of getting the treatment Saddam got, oil producers accept nothing but dollars. The USA military has real value, not dollars.
Oil producers accept all currencies that trade freely on foreign exchange markets (which means most currencies). Why do you think Dubai was invented? It’s a foreign exchange hub. How about Singapore? How about the euro? The little countries in Europe were tired of being hosed in foreign exchange markets buying d-marks and sterling in order to buy fuel. BTW, there are all sorts of crude producers outside the Middle East. The ‘Saddam destroyed for dollars’ is another ZeroHedge myth.
3. “there are negative real interest rates”-true. That means that inflation is greater than 1.5%, which at 6% is certainly higher than 10 yr treasury yields.
Interest rates are set by credit supply and demand: when there is little effective demand for credit rates plunge. See Irving Fisher ‘Debt Deflation’. Also, steer clear of Shadowstats, which is mostly nonsense.
4. and galloping deflation! “-read your own comment about negative interest rates, lol. If we had deflation, then interest rates would be positive-i.e. 1.5% 10 yr treasury PLUS the rate of deflation.
Sorry to rain on yr parade, low-negative interest rates occur when there is deflation (for various reasons including currency preference). Interest rates are to some degree a lagging indicator as credit is the product of a ‘momentum’ (success-breeds-success) industry.
Credit is cheap at the beginning of credit expansions when there are many potential creditors relative to potential borrowers.
Credit can be cheap (and is now) because there is an absence of borrowers. This is because there are no remunerative investments (only scams).
Currency worth is inflated by deflation … :cheer: Look up Fisher’s ‘money swells’ thesis: swelling money is similar to high real interest rate but is really high real REPAYMENT rate. In other words, a borrower must repay debts with currency that is worth more than it was at the point of the loan. Few will borrow when there is a high real repayment rate even if there is very low nominal interest rate (like now)!
The real problem today on Planet Earth is industrialization itself. It has never offered a return while requiring endless debt to support it. If you have money (credit), what do you spend it on, an industrial ‘good’? What is that worth, really?
Relative worth is the problem, not the form that enables exchange. It’s not the euro or the debt (or the yuan or Treasuries) but rather what these things can be exchanged for.
When the absence of utility is noticed, it becomes useful to buy primary goods (like petroleum) rather than manufactured consumer products. Here petroleum stands in for gold which is simply one primary good versus another.
When petroleum has more utility than the cars that waste it then the dollars become fuel-gainers rather than car gainers. At some point the car business falls apart (as is happening in Europe right under your nose). This then reinforces currency preference: worth more to the holder than it is to the car maker (who is denied the use of the currency).
The problem is at the end of your driveway (not in your safe-deposit box). Our dilemma is been posed as sets of choices/questions: ‘drive a car or live the bourgeois life?’ You can no longer do both. Next choice is ‘drive a car or have a job?’ We keep making the same wrong choice: next (now) is ‘do I drive a car or have something to eat?’ It gets grim from there.
Currency has little to do with this dynamic. This is why most monetary tactics are irrelevant. It’s not the money, rather what the money enables. Money emerges from context: if you create a better way to interact, better forms of money (which is a set of rules) will emerge to support it.
You have to forgive me, I use ‘window economic theory’. I develop my theory by looking out the window and seeing what’s underway outside. I don’t pay much attention to blogs because they are mostly insecure people looking for reinforcement and easy answers. Keep in mind that ALL of the hard-money/metal money strategies were attempted during the 19th century — and found wanting. There are reasons there are no gold standards anywhere in the world, gold cannot support industrial development and (required) credit expansion.
What the establishment desires above all else is credit expansion not less. Credit is foundational necessity for industrialization, not parasitic upon it. People believe that ‘solving’ credit or getting rid of it will ‘save’ industrialization: what is underway is the currency-destruction of credit caused by unaffordably high fuel prices: fuel prices -> unaffordable debt costs -> excessive restructuring costs -> systemic bankruptcies -> fuel shortages and increasing real fuel costs -> de-industrialization and collapse of modernity (Greece, Spain, France, China, Japan … US).
I have a friend of mine who runs a coin shop and he laughs at the ‘gold bugs’. “People buy gold and silver,” he says, “after awhile they want to sell and the only place which will buy the gold and silver is here or another coin shop.” Gold bugs are like alcoholics in a bar, enough of them will keep a coin shop in business, selling and buying the same coins over and over.
I’m sure there are lines of esoteric arguments against this phenomenon but since the dude has been in business for fifty years or so I presume he knows what he’s talking about: ‘Window Economic Theory’.
Because gold is a primary good/natural resource, it will have value (distinct from worth) in any post-industrial regime. However, because post-industrial economies cannot be imagined clearly, what role gold might play in the future is speculation.
During the transition, the issue is what would a gold-holder trade for: a business? A can of beans? A new car?
China is interesting, they have been borrowing against the accounts of their foreign customers for 20 years, with a great narrative of ‘efficient command economy’. China is just a large, poisoned version of Greece (Germany) utterly dependent upon external sources of (borrowed) capital.
Those who can borrow usually have a good ‘growth’ story. Nobody’s has been better than China’s, the businessman’s wet dream.
How vulnerable China is can be seen in Europe: China pretends to be a great power yet they act as if they are penniless.
They cannot rescue the EU with their surplus euros because to do so would constrain Chinese credit … even as doing so would increase Chinese influence.
What is influence worth? China’s choice prices influence: less than zero … which is what China’s euros are really worth. China finds itself in the same state as today’s Italy, which must borrow at a high rate from a bank to subsidize Spain’s bailout(s) of the same bank at a lower rate. All the cash that China holds (along with its citizens) is borrowed cash (China cannot print dollars or euros). So are all those yuans that have been issued against dollars and euros.
The article insists that China firms cannot borrow against their own customers any longer. There are four borrowing levels or ‘tiers’: a firm can borrow on its own account. It can borrow against the accounts of its customers, it can borrow against the public account in form of currency (for instance) and it can borrow against the accounts of overseas trading partners by way of foreign exchange. Firms do some/all of these things: China, Japan and Germany are masters of overseas borrowing and F/X advantage. Now it ends for all of them b/c the overseas customers are bankrupt or not lending for ‘other’ reasons.
For example, the US cannot/will not rescue the EU because the US is indifferent to EU collapse. It can then import all of Europe’s petroleum supply. Where will Greece’s oil supply wind up? Syria’s? Egypt’s? Some of it will disappear due to depletion, the rest is ‘in play’. People say there is no such thing as peak oil while the ordinary operation of the world’s economies and political systems indicates otherwise.
The US is a great power: it lets the Chinese play with a few of its dollars for a little while, like letting a child play with radium. China expansion bailed out thousands of US businessmen who otherwise could not afford to pay their help: it was an energy hedge like the euro and asset price ‘bubbles’.
Those who believe the dollar is worthless confetti might take some time and re-think. Millions of Americans and others willingly, voluntarily trade their dollars for a useful physical good every single day and have done so for decades. Priced in crude oil dollars have real worth. As a consequence… there are negative real interest rates and galloping deflation!
As a consequence there are pointless and useless central bank reflation ‘policies’. The dollar is a hard petro-currency: as hard as gold backed sterling was in 1931. The Chinese need the hard dollars to import fuel, the preference itself prices dollars! As these become scarce the Chinese fall into a world of hurt. Here is dollar-preference, underway in China … and everywhere else in the world including Europe and Iran (!). The strategy is for fuel users to dump whatever they have to gain the (now scarce) dollars. It’s not just currency: dollar debt is also scarce relative to demand as indicated by compressed-negative yields.
That invasion of Iraq is starting to look like it might pay off in the longer run (making Dubya into a genius): Americans will continue to have the gas the waste while the rest of the world burns. No wonder the media is misleading the public about ‘US Energy Independence’ and ‘Bakken!’.
What should the media say? “We stole the fuel from Europe and China and their suppliers, now run out and buy a new car”. Accurate but not very … diplomatic.
Inflation is underway in China, with both dollars and RMB circulating together with dollar preference, privatized FX and parallel loan-shark banking. As long as Americans buy mercury-tainted baby food, dollars will flow into the informal foreign exchanges, ‘street’ yuan will trade at a discount to the official rate. If Chinese savers believe that their last-best chance is to buy dollars at any price on the streets and black markets, they will do so and all Chinese savings will appear for sale at once. There will be hyper-inflation that the Chinese managers will not be able to stop (without ‘cancelling’ the old money and replacing it with something new … like dollars!).
Look for circulating dollars in Europe, too, starting in Greece.
RE, if a bank’s assets are worthless, there is no bank, a restructuring cannot be done.
At issue are (remaining) depositors, what to do with them?
Since the insolvent banks tend to be ‘sinks’ or higher-order lenders which have large amounts of (derivative) bad loans on their books (and massive structured liabilities including those of depositors at other banks) it is very difficult to restructure them. See John Hussman’s “Freight Trains and Steep Curves”.
At issue are local banks’ corresponding relationships with the giant money center banks. The funds in your bank account are re-deposited — swept overnight — into your bank’s account at the giant bank. This means your ‘real’ bank is effectively the giant bank not the local bank you actually use. Your account is a derivative liability of the giant bank.
First of all, most commercial banks (except under extraordinary periods) are not insolvent. They are actually weakened by special treatment given to defunct corresponding banks.
What must be done is separate smaller banks’ deposits from giant bank’s balance sheet.
You have to start with the smaller banks if for no other reason than to find out how much the entire restructuring process is going to cost.
Begin with partially solvent smaller banks that can be restructured by conventional means: Blodget’s approach is very basic ‘Restructuring 101’: converting debt-to-equity and recapitalization. As this is done the derived liabilities at the larger banks can be identified and dealt with. Liabilities can be ‘separated out’ from the giant banks (with an eye to either breaking up the giants or simply closing them down).
The situation is the same in the Eurozone. The banks’ customers are other banks, which are in turn customers of still other banks in a gigantic circle jerk.
Jumping in and busting banks down is no different from letting them simply crash … or bailing them out.
As Margaret Hamilton so famously said, “These things must be done … delicately!”
Try to be brief …
We are all immersed within two powerful dynamics: industrialization and pop culture. These two social dynamics have become co-dependent and mutually reinforcing. The idea is of business commerce as a satisfactory replacement for ______________________ (everything).
Consequently, we have two groups managing our affairs, businessmen and pop artists. We’ve tried other systems which have all failed: totalitarians, emperors, ‘machine-states’, hyper-militarism. Meanwhile, pre-existing systems that functioned more-or-less satisfactorily for centuries have been rendered useless or obsolete: hereditary monarchies, theocratic administrative states and clan- or tribal hierarchies. The latter have proven to be more durable in the face of modernity, rather at the margins where industrial modernity is unable to reach.
Non-systems simply don’t exist. In any vacuum, a system emerges or is imposed from the outside.
That we haven’t blown ourselves up with nuclear weapons indicates we can act outside the dynamics imposed upon us by our systems. It isn’t up for discussion whether we can or cannot adjust our behavior, we have done so and continue to do so right up to this minute.
Industrialization is powerful because it can transform capital in very short periods of time, in ways that other tools cannot. Pop art is powerful because it humanizes the transformations: from man-to-woman (or vice-versa), from star to convict, from heiress to street bum, from street bum to tycoon. Transformation allows for the creation of simple, accessible ‘one size fits all’ myths. The various iterations of ‘doom’ are pop art myths: the transformation of suburban consumer to a ruritanian: the myth is older than the Bible: Exodus.
Of course, there are products you need to buy: gold, guns, freeze-dried food, etc. A successful doomer needs that ‘right kind’ of flannel shirt, the right kind of water filter. The idea of success itself (Horatio Alger story) is a part of the larger pop art myth; of outwitting/outmaneuvering the dim-witted ‘masses’ (and becoming avant garde ‘doomer-hipster’ as the outcome of the process).
Success is that fifteen-ten billionths of a second of fame, however much is ladled out these days.
Pop culture is hegemonic and intolerant. Whatever you encounter in today’s world is a form of advertising or support for business activity. Pop art: the subject of the artist is commerce and money. Included within the categories of art (for sale) are the various forms of spirituality.
A key strategy of pop art is appropriation. Ideas are stolen then reconfigured, given new (commercial) meanings: this is considered ‘artistic license’. Most of the foundational big ideas that were central to ‘America’ have been transformed into hollowed out pop myths, emptied of any real meaning then put on the shelf for ordinary consumption. These include growth, capitalism, morality, education … free markets. You are indeed free to choose Coke or Pepsi, “any color you like as long as it is black”.
Business exists to serve the interests of business owners only: pop art makes this service ‘hip’ and ‘trendy’, offering a cultural Ponzi scheme that rewards shills, motivating others to become shills themselves.
Go anywhere in the world and it is the same, the same TV shows are everywhere, the same products, the same desires, the same dominion of the businessman and the subjugation of everyone and everything to currencies and interest rates in the name of abstract progress.
The fleeting grasp at progress is why people riot in Cairo and London, die in the streets of Benghazi or Homs, why indebted college students battle the cops in New York and Madrid. They want what they have been promised by business, by popular culture and its instruments, TV, internet, movies, ‘celebrities’.
Pop-art itself is nothing more than a fashion, a trend. All trends have their own story arcs, they become exhausted (this is clearly illuminated by pulp-fictitious politics both in the US and elsewhere). At the same time, industrialization has reached the point where it has no more low-cost capital to transform. What now?
Nobody knows, we’ve never had a post-industrial society before. All the ‘old(ish)’ models are unworkable. The pre-industrial models have been forgotten or are proto-industrial and counterproductive. This is the ‘why’ behind the ‘industrialize or live in caves’ meme. We cannot see what the future holds because the pop art myths that served business interests so well for so long — ‘democracy’, flying cars and hand-held medical scanners — have been too successful. They leave behind scorched earth and a few rusty relics.
I see people groping for something outside of popular culture, finding/forming new and more useful sets of myths, something outside of ‘getting rich easily’ or ‘spending the night in the drunk tank with Lindsay Lohan’. The alternative is new uses for the older myths: ‘getting rich by conserving energy’ or inventing new ways to live that are more fun that watching others live on television.
The new regime? We’ll see …
One thing to keep in mind about ‘proper’ bank restructuring (Blodget): it assumes that the impaired assets represent a small fraction of total ledger assets.
Most finance assets in 2012 are loans to leverage other loans which themselves are loans leveraged against still more loans. When first-order loans go bad the failure leverages across all the lower order loans.
The outcome is rapidly expanding impairment across the entire asset-side of top-tier finance businesses. Instead of a modest percentage of bad loans equal to bank equity-plus-some-bondholders, all loans are bad or (rapidly) becoming so. Asset collapse crushes all liabilities including depositors.
When depositors recognize their risk they ‘run’ which amplifies the impairment on the asset side.
This is why establishment hesitates to restructure. Once begun, the danger is of cascading failures as marginal effect of (accurately) repricing impaired assets reprices all of them. Damned if you do restructure (damned if you don’t).
Finance businesses must continually make new loans in order to finance existing loans, when the lending process slows or stops the lower order loans cannot be retired or serviced. As people are discovering, once on the debt treadmill there is no stepping off.
Plus, industry is entirely debt dependent: no debt, no industry.
The banks that are kept alive with the zombie money …
No solvent counterparty so the scheme is bankrupt from the get-go. It’s not really a scheme but an ironic expression of institutionalized cynicism.
I keep waiting for the establishment to acknowledge that the entire modern idea is bankrupt … as sooner or later it must. We are children unwilling to accept that our childish craftiness has exhausted itself. No more toys, no more living outside of means.
We have ‘getting back to means’ confronting ‘betting back to means’.
… The smart-money insiders have suspected all along what is/has been underway.
There is no credible lender remaining in Europe. All loans made are bad loans: there is effectively no collateral so any loans made from this point forward by ECB of the national central banks are unsecured. What this means is there is no real lender of last resort … and bank runs.
People are removing their euros from banks: the act of removing the euros erodes their worth. Enough removed and there is no euro. Left in the accounts and there are effectively no euros.
The answer to every question posed before 2008 was ‘jump in the car’. The answer to every question now is ‘no euros’.
The Europeans have brought this upon themselves by not closing insolvent banks and restructuring. Now, the countries themselves are insolvent and there is no entity able to provide capital. Who is going to make a good loan?
It is too late for the sovereigns themselves to issue currency as the collateral is simply more empty promises. The stage after bankruptcy and ruin is not ‘Iceland 2.0’ for these energy deadbeats, it is complete collapse. Not even dictatorship can save them.
The European inter-temporal balance sheet is a mess. On the resource balance sheet, there is nothing but expanding liabilities as resources are ‘used’. Meanwhile, the asset side of the socio-economic balance sheet is eroded. A trillion barrels of fuel gone and a half-trillion tons of coal have produced nothing of lasting value, just some used cars and smog.May 29, 2012 at 8:35 am in reply to: Mammon is Hungry: Husband's Suicide One Day, Wells Fargo to Evict Wife The Next #3608
Interesting tale(s) of woe.
What retrieved the situation was learning I could save hundreds on car insurance by switching to Progressive!
Give thanks to God, Google, Warren Buffett and Automatic Earth.
After being confronted with that critique, a few of the Freegold people implied that they agreed with most of what Keen/Minsky have to say, but thought the debt deflation theory was incomplete, in terms of how central authorities can make sure the Mother of All Deflations never really takes off.
First of all, Fisher implies the (offhand) reflation strategy without going further. Leijonhufvud doesn’t offer any strategies at all! (Why should he?) However, (Free)gold folks’ awareness of nuanced (sensible) economic arguments never seems to emerge from their arguments. It seems to me that the monetary gold arguments were all made — and settled — by Wicksell and Bagehot a hundred and ten or so years ago.
Part of the problem is the absence of conventional ‘solutions’. Our dilemma lies within the inter-temporal balance sheet beyond the reach of monetary policy.
Almost no (as in zero) conventional economist makes reference to energy or resource inputs. Herman Daly equates money capital with resources (and Charlie Hall and Robert Costanza) but equilibrium economics is built around unlimited substitution. This is a dead end.
A conceptual problem is that we are at the beginning of post-industrialism. Nobody can figure out what ‘Post Industrial Society’ is going to look like or how it will function. Some think virtual reality (Kurzweil), others think ‘hunter-gatherer’ (J. Hansen) and still others a steam-punk version of modern Detroit (Greer). Human extinction is not out of the question: how does modern industrial economics factor all of these different possibilities and others beside?
Brand X economist: “Don’t blame me!”
In this context, the gold-money argument presumes a specific post-modern industrial economic society that functions/trades a specific way … a society that has conveniently forgotten Bagehot (and have never bothered to look up Wicksell). This is argument in a vacuum: not a real argument at all.
What does come next? Hard to say but the constant will be ‘less’.
Economic populism running amok …
Read this and that:
There are better arguments out there already …
The question in China was the choice between currency arbitrage/dollar preference and hyperinflation or collapsing credit and deflation. China has a lot of dollars loose on the streets …
China also has a massive debt overhang. Deflation pushes short rates down to zero while dollar preference and plunging fuel prices (caused by/resulting from) dollar preference amplify … what exactly? Confusion and disorder.
China looks to be the world’s biggest accounting control fraud: outcome? Chaos.
I have to plead guilty, one and the same.
I appreciate the compliment, thanks.
A few days after Fisher issued his ‘permanently high plateau’ essay in 1929 the stock market crashed. Fisher, like many others working in finance was ruined.
Instead of mourning, denying or doubling down, Fisher took the time to figure out what happened and why he was wrong. The result was his 1933 analysis of debt deflation. Basically, repayment of debts annihilates both the debt and the currency used for repayment, the money supply shrinks. This dynamic increases money worth which in turn amplifies the scarcity of circulating currency as well as the unit worth of debts. In real terms, both debts and money “swell”: repayment/deleveraging is a self-reinforcing cycle whereby the expanding burden of debts leads to general insolvency.
This represents balance sheet mechanics and can be countered by restating debts so the money supply does not shrink: (Fisher) This means unlatching currency from fixed gold parity and reflation.
Taking place right now is energy deflation which is similar to the debt variety. Reduction in the demand for petroleum has an excessive reducing effect on supply. This occurs regardless of whether the demand is voluntary or not: when demand slows, the ability to afford high-cost ‘new fuels’ slows faster in a self-amplifying vicious cycle. The reason is because the cheaper varieties of petroleum have been exhausted: users cannot ‘switch’ to them. As more companies and countries fail, their failure reduces further the ability to pay for the expensive forms of petroleum. As the too-expensive fuels are ‘shut in’ there are shortages which cause more failures which effects supply further. At some point there are the advertised ‘massive reserves’ just out of reach, that nobody can afford to buy.
One country steals consumption allotments from other nations by refusing to lend to them or by waging disruptive semi-war. It’s a SUV-eats pickup truck world out there.
At issue here is whether anyone (fool) will trade gold or some other perpetual resource for crude. At the end of the day, the trader doing so has neither gold nor petroleum, only smog and a bunch of used cars.
The gold people insist on a ‘perfect system’ that is a facial contradiction: that gold will guarantee currency restraint at the same time it allows industrial wasters to live beyond their means. Life-beyond-means cannot occur if gold ‘does its job’ and effects currency restraint. For this reason monetary gold is always rejected! The purpose of debt-money is to finance waste profits. At the same time, gold restraint cannot finance conservation. What’s it good for?
Keep in mind, what is underway right under everyone’s nose is energy conservation by other means. We are just at the beginning of this process which is certain to increase in effect as time passes.
As with all deflations, there is no asset ‘hedge’ against it: gold and other assets are supported in price by (dollar) debt taken on to bid for- and buy it. As credit is stripped there is less to support prices.
A related issue is the hold that debt has on society. If debt maintains its hold, all the gold in the universe won’t satisfy it (debt expands faster than gold is extracted). Therefore, gold must remain in the shadows outside the reach of creditors. If the hold of debt is broken, there is no advantage to holding gold over other assets (as debt sets the price of gold along with everything else).
Because debt is useful — conservation must be financed — well, you can figure out the rest for yourselves.
Ironic is that the loudest arguments for gold come from those who have so little of it.
FOFOA is another garden-variety gold bug.
This is nothing more than his personal opinion dressed up w/ some Carlos Castaneda-esque gibberish. Until he redefines ‘wealth’ beyond the reach of industrial convention he isn’t worth the time it takes to write about him.
On the ideological level, federation is defective because it is patently unfair.
On the practical level it provides a tool like a hammer, that the current alternative is structurally incapable of providing. Federation — with or without any attendant organizing meme — allows the EU components to offer risk free securities. This would shelter the individual states from speculative attacks on their currencies (that all coincidentally are called ‘the euro’).
Federation cannot build an empire because the resources to do so have already been spewed out of the world’s tailpipes.
By providing the risk-free security, Europe can compete with the US for capital instead of helplessly watching it flow overseas.
If the Europeans are unwilling or incapable of federation (which to me seems the easiest and most comprehensive approach at the least cost) then the other alternative is for individual EU sovereigns’ treasuries to simply issue fiat euros as Lincoln’s Treasury issued greenback dollars.
I suspect this approach would be far more destabilizing than federation. After all, the introduction of greenbacks accompanied the US civil war (not that one caused the other, of course). Government issue would undermine the existing finance system, the ongoing lending strike on the part of finance would accelerate with uncertain consequences.
Most likely is EU states will issue their own native non-euro currencies at par w/ euros. This would be bank-financed debt money not fiat issue. Debt money would not scare the horses (but will amplify capital flight). There are many other complications with this including immediate loss of GDP/currency parity will vanish instantly. One reason: the need for hard currency to buy fuel not only from producers but on the street. Local currency will be increasingly discounted as the hard currency becomes scarcer and drains to oil producers. At the same time, the increasing/self-amplifying shortage of hard currency in ALL the states will mean a sharply diminished flow of petroleum to them. This means more business failures, less credit and fewer dollars/euros/whatever$ available to be spent for fuel.
Here is ‘energy-deflation’ much like Fisher’s debt-deflation. Regardless of the diminishing nominal price of fuel, the real price is always unaffordable.
It is possible that energy deflation is underway right now. If it is you better prepare yourself.
If Greece issues fiat it goes up against the establishment. The debt money system has advantage of organizational power. Greece issues and all the other EU countries will line up against it (until they are forced to issue themselves). If Greece issued drachmas, the EU finance will counterfeit drachmas and flood Greece with them.
If the system breaks down while ‘money-transition’ is underway there is zero capital available to start over. If EU carries on as current, the system will break down and there will be zero capital available to start over: this is the time that needs to be bought.
I like Vandan Shiva, but all redistribution arguments need to be thought through. The current system is troubled because it has succeeded, not because it has failed. It is indeed succeeding right now, we humans are dissatisfied with outcomes.
The trend is away from redistribution, in fact redistribution is guaranteed to fail. The ‘masses’ of India, Syria or Egypt will never have flat screens or Acuras, the more violent they become the farther away these things go. As Dick Vodra told me a few months ago, “US energy policy is the Patriot Act”.
We will have conservation.
The alternative is conservation will be driven down our throats by the force of events.
If we choose conservation we have control over our own destiny. Getting rid of the cars — by fiat — would be inconvenient. Our cars are fun toys … they don’t pay for themselves by way of their use. Not only that, their use does not pay for the fuel, either. We have had to borrow for fifty years to afford them. Our toys themselves have bankrupted us, not the means by which the toys have been allocated.
We can live without the cars and the crap that goes with them, because they are child’s toys and because they cannot pay their own way. If we choose ‘door number 2’ and conservation is imposed, our going broke (and giving up the cars anyway) will be the least of our concerns. We cede control to ‘Ma Nature’: we are one crop failure away from going from 7 billions to 2 billions, in the blink of an eye.
@Ashvin: By focusing only on the energy issues, you are ignoring the inherent functions of wealth extraction and oppression embedded in the system of capitalism itself (granted, its fossil fuel industrial nature must be considered, but not exclusively) …
I haven’t ignored anything of the kind, I’ve simply observed a hierarchy that exists but few desire to acknowledge.
Given zero-debt and benign, paternal democracies, the world would still be bankrupt at the point of complete ruin. It is entirely built around burning stuff for fun: we have too little left to burn. Finance is simply an enabler of resource waste: it has succeeded only too well.
There is a relatively successful federation and a collapsing pseudo federation. Which is preferable under current conditions?
The US version is defective but right now is the tallest mast on the sinking ship. The US states are indeed having many problems and are subordinate (to some degree) to the center however Montana is not being arbitraged against Louisiana, nor is Pennsylvania being denied funding because Harrisburg cannot repay businesses in Washington State. Greece is ruined by German financiers for no reason … well, there is a reason:
Europe’s petroleum consumption is being exported to the United States: an advantage of the federation over the alternative. There is reason why gas prices here and crude prices elsewhere have declined: Spain is going bankrupt. You think I don’t give the crooks enough opprobrium? My god man, the system robbery is much bigger than you think:
– Federation is not a panacea but it is better than what is underway. It buys some precious time. What to do with it is another issue all together.
Just a few random thoughts:
– What AEP half-proposes is a federation. Why not? I’m sure the people of Arkansas are grateful to be amalgamated with Virginia, New Jersey and other ‘wealthy’ states. What Arkansas has ceded is the ability to conduct independent foreign- and defense policies. The remaining policy options either parallel other states or the central government.
– Federation has real advantages: Florida is not required to buy submarines from Connecticut, Californians need not indenture themselves to buy cars from Alabama on credit @ bankrupting terms. All the states gain without advantage being taken.
– The US can create currency by simply issuing it, the country can never be bankrupted by firms withholding dollars. Period. The EU cannot do this, there is no EU treasury.
– The EU cannot offer a risk-free lending product that can compete with the US Treasury security. Ironically, such securities are endorsed here on TAE! Europe is negligent. It has willfully abandoned a multi-hundred TRILLION dollar market. WTF???
– The EU management cannot lend in the event finance refuses to do so. The absence of the structure to make that ultimate bid is bankrupting the various EU states now. On purpose? Perhaps, but the current crop of finance specs is certainly taking advantage. By simply refusing to lend … Greece, Spain, Ireland … next, France then Germany are ruined as credit disappears. All EU states are dependent upon outside/exogenous sources of credit.
– So is China, btw …
– AEP does not understand central banking. The Bank of Japan has tried to generate inflation for 20 years by way of various easing programs including (ongoing) QE and has failed miserably. The CB cannot create new money and as deflation/deleveraging carries on available assets to buy/lend against disappear.
– Federating is a stop-gap measure regardless of its effectiveness.
– All the crises are taking place at the same time and are interrelated. Ours is an energy crisis first. We have lived beyond our energy means for four centuries, now the bills are due both in energy and credit terms. Because ‘money’ is not a natural resource it can be offered in quantities exceedingly large but only to put the energy house in order and nothing more.
– What credit can buy is conservation. There is no technical exit from energy-resource bankruptcy, only a slower rate of ruin.
– Europe is in the process of becoming car-free. Why? B/c cars do not pay for themselves or for the fuel that is wasted by their use. Call this ‘conservation by other means’. Our market economy is re-pricing inputs, it is at the same time repricing credit used to obtain the now-expensive inputs. The market is pricing non-remunerative activities beyond affordability. This process is ‘energy deflation’, much like debt-deflation (Fisher). Whatever the price of energy is at any given time, it is too expensive to be simply spent.
The world has been able to ‘go off’ gold or break currency pegs and end debt arbitrage and deleveraging. To end the energy version we must go off petroleum. This going off process is underway in Europe right now, under everyone’s noses. When the post-petroleum economy finds blessed equilibrium all EU states will have access to what resources exist within their precious sovereign boundaries: within those of Greece, those of France, those of UK, etc.
The problem is not so much at the government office but at the end of your driveway.
What to do?
– Federate in form if not in substance: put a computer in an office in Brussels and institute a Europe-wide fuel import fee. Petrol would be taxed to price petrol @ fifteen euros per liter. The fiscal entity would issue new bonds to replace those issued by states including Germany’s. This would solve both the funding crisis as well as work on the energy variety. The motorists would hate but the cars are going regardless.
What Greece (and others) can do:
– Individual state treasury issue new euros into circulation,
– Declare a borrowing moratorium. Once in a hole stop digging.
– Perform a forensic analysis of exiting debts (Alexis Tsipras has promised to do this if he can form a government). Repudiate odious- fraudulently obtained and dead money debts.)
– Repudiate all debts taken on to finance energy consumption and bankrupt all such lenders. Where’s the liability, babe? Floating in the atmosphere: let them repossess CO2!
– Use new euros to retire govt debt as it comes due (blowing up banking at the same time.)
– Use new euros to put Greek citizens back to work: how many shops have closed? How many pensioners are destitute?
– Austerity for government agencies and wealthy.
– NOTE: Brussels will counterfeit euros and try to flood Greece with them: let them try! This ‘fake money’ can be used to retire debts not repudiated. Excess euros can be swapped for debt by Greek central bank: a euro shortage can be met by Greek central bank selling debt it has in its portfolio.
– Greece bans private automobiles and imposes 100% import fee on petroleum/products.
– Prepare for a ‘Nato occupation’.
I apologize for being confusing, it’s a bad habit. Let’s try another tack:
At issue is secured and unsecured lending. If you make a deposit of $10,000 you are making an unsecured loan to your bank. Mr. Bank can turn around and lend this money ten or more times. this is infamous ‘fractional lending’. From $10k your deposit becomes $90k of loans, only $10k or which is secured (by your deposit). In effect you have indirectly created $80k in new money or 8x your deposit you inflationist you!
And you blame Bernanke! Horrors!
A central bank cannot make unsecured loans and still remain a central bank. The two kinds of banks are assembled differently, for one thing CBs don’t have a conventional capital structure. Since they aren’t profit-making enterprises, capital in the conventional sense is not required. They have almost no capital: the ECB has €50bn in capital against a €4tn in liabilities. However, their assets and liabilities always match on paper, the books are always balanced.
New money is not the source of credit but its excess over collateral.
What matters is the face amounts not market worth which is simply an opinion. Even implied leverage would destroy a central bank because it lacks adequate capital, if this were to be an issue the Central Bank would be just another (large) commercial bank.
If CBs make unsecured loans they are instantly PERCEIVED as being insolvent. Quote from Bagehot:
Just so, an immense system of credit, founded on the Bank of England as its pivot and its basis, now exists. The English people, and foreigners too, trust it implicitly. Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone.
Assets fly to the CBs when the market panics and are worthless on the markets. CBs exist to validate the worth of assets and to provide liquidity while doing so.
Assume for instance you are a bank and hold a $10m bond, you’ve lent to some industry such as real estate. For one reason or another real estate bonds are worth less with the passage of time. Bonds have lost enough so that other banks like yours have become insolvent. Capital and deposits are fleeing. You must jettison assets and shrink your balance sheet. You have a choice: the market prices your bond at fifty cents. The Fed will lend $10m against your bond. Quick: what will you do?
What the Fed won’t do is offer you $100m for your bond. It will offer $10m or a little less for a haircut. It will offer par and no more. Whether the market says the bond is worth fifty cents or not is irrelevant, the face amount is the limit of what the central bank will lend. It can create new money only if it lends above what the collateral is worth.
What this means is the central bank is collateral constrained. It cannot lend more than the face amount of collateral it takes in exchange for credit. If the Fed lends $3 trillion it has $3 trillion on its balance sheet. Instead of being a ‘bank’ it is more like a pawn shop.
The CB can issue credit but it must have collateral.
If the Fed says the collateral is worth fifty five cents there is no point to having a Fed.
If the Fed says the collateral is worth $100 billion the markets will know the Fed is lying and ignore it. If the Fed was to leverage your collateral the other banks dealing with the Fed would ask why they cannot leverage their collateral as well. The Fed would have to decide which collateral was marginable and which is not. Unlike commercial banks, there is no underwriting department at the Fed to determine whether prospects of this or that business venture are as advertised. It simply accepts instruments face worth in exchange for credit in the same amounts.
Commercial banks have underwriting departments, rating agencies, risk management sections and analysts. There are also thousands of banks who can make granular judgments about trillion$$ in unsecured loans. (Most of these judgments are bad, BTW.)
Being collateral constrained the CB cannot create new money it is impossible as what goes out is equal to what comes in. Only commercial banks offering unsecured loans create new money.
What confuses is the offhand use of the term ‘central bank buying’. If you sell your car to me for $1000 then buy it back in a year for the same $1000 it is the same as you borrowing $1000 and offering the car as collateral.
I have been annoyed by the Fed’s open ended lending against collateral such as during QE 1. However, there were good policy reasons for doing so (retrieving bad mortgage paper from the Chinese). The Fed will hold the collateral to maturity whence the loans will be retired and credit extinguished. But there was indeed collateral accepted in this and all other cases including all open market operations and QE.
The point is not the mechanics of the process but that Central Banks do not create anything new. When their balance sheets expand it is because private sector balance sheets contract an equal or greater amount. (This is always left off those ZeroHedge charts, btw!)
Think of the Fed and other central banks as pawn shops. They will lend you the five hundred dollars, but you have to let them hold onto your $2,000 Rolex watch. And they won’t lend you the $50,000 against that watch.