Tag Archives: Central banks

Our Financial Buffers Are Thinning, by Charles Hugh Smith

The 2008 financial crisis almost sunk the global financial system, and the backup systems to prevent meltdown are weaker now than they were then. From Charles Hugh Smith at oftwominds.com:

The fragility of our financial buffers will only be revealed when they fail in the next crisis.
While buffer has a specific meaning in chemistry, I am using the word in the broad sense of a reserve resource that absorbs the initial destructive impacts of crises or system overloads. Marshland along a sea coast is a buffer against destructive storm waves, for example.
A savings account acts as a buffer against financial drawdowns or losses of income that would otherwise quickly cascade into a full-blown crisis.
Redundancy of resources can act as a buffer. If an airline maintains an aircraft in reserve, this reserve plane acts as a buffer against the disruption to the airline’s scheduled flights should one of its aircraft be unexpectedly removed from service by a mechanical failure. The reserve aircraft can replace the plane that was withdrawn from service with minimal disruption.
Stockpiles act as buffers against supply disruptions. A storage tank of oil buffers a refinery against any delay in its incoming shipments of crude oil. Supplies of food and water buffer against severe natural disasters that disrupt regional water service and food deliveries.
Credit can act as a financial buffer against unexpectedly high expenses or declines in revenue. If a tire on our vehicle goes flat during a road trip and we only have a few dollars cash, a credit card buffers the disruption by funding the replacement tire and labor.
But over-using credit can end up thinning our financial buffers. If someone starts using their credit card not as an emergency buffer but to augment their cash income–in effect, acting as if the borrowed money was a pay raise rather than a loan–their credit line diminishes to near-zero and when they actually need credit for an emergency, it’s no longer available.
A key feature of buffers is that it’s difficult for observers to tell if they’ve been thinned to the point where they can no longer stave off disruption. Outside observers can’t tell if the oil storage tank is full or empty, or if an individual’s credit card is maxed out or has a completely untapped credit line.
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Has Super Mario Met His Match? by Don Quijones

Anybody who thinks central bankers don’t dole out tips to favored financial insiders—mostly at investment banks that give central bankers huge speakers’ fees and lucrative jobs after they leave central banking—has led a sheltered life indeed. From Don Quijones at wolfstreet.com:

Cozy relations between central bankers and financial firms get unwanted attention.

ECB President Mario Draghi wields more power than just about any other public official in Europe, perhaps even including Angela Merkel. The organization he heads not only controls the monetary policy levers of the entire Eurozone, it also supervises the region’s 130 biggest banks. As we’ve seen in recent weeks, it even has the power to decide which of Europe’s struggling banks get to live and which don’t.

Yet it is answerable to virtually no one. Until now.

Emily O‘Reilly, the EU Ombudsman, an arbiter for the public’s complaints about EU-institutions, has just sent Draghi a letter asking him to explain his role in the potentially compromising Group of Thirty (G30) and how he makes sure that he does not divulge insider information or runs into conflicts of interest. The tenor, tone and direction of O’Reilly’s inquiries make it clear that she means business.

The Washington-based G30 was founded in the late seventies at the initiative of the Rockefeller Foundation, which also provided start-up funding for the organization. Its current membershipreads like a Who’s Who of the world of global finance. It includes current and former central bankers, many of whom now work or worked in the past for major financial corporations, such as:

  • Mario Draghi (ECB, Bank of Italy, Goldman Sachs)
  • Ben Bernanke (former Chairman of the Federal Reserve)
  • William Dudley (New York Fed, Goldman Sachs)
  • Timothy Geithner (Warburg Pincus, former US Treasury Secretary, New York Fed)
  • Mark Carney (Bank of England, Bank of Canada, Goldman Sachs)
  • Axel Weber (UBS, ECB, Bundesbank)
  • Haruhiko Kuroda (Bank of Japan)
  • Christian Noyer (Bank for International Settlements, Bank of France)
  • Jaime Caruana (Bank for International Settlements)
  • Jacob Frenkel (JP Morgan Chase, Bank of Israel)
  • Philipp Hildebrand (BlackRock, Swiss National Bank)

To continue reading: Has Super Mario Met His Match?

If We Don’t Change the Way Money Is Created, Rising Inequality and Social Disorder Are Inevitable, by Charles Hugh Smith

Charles Hugh Smith points out some of the many problems that render central banking unsustainable. From Smith at oftwominds.com:

Centrally issued money optimizes inequality, monopoly, cronyism, stagnation and systemic instability.
Everyone who wants to reduce wealth and income inequality with more regulations and taxes is missing the key dynamic: central banks’ monopoly on creating and issuing money widens wealth inequality, as those with access to newly issued money can always outbid the rest of us to buy the engines of wealth creation.
History informs us that rising wealth and income inequality generate social disorder.
Access to low-cost credit issued by central banks creates financial and political power. Those with access to low-cost credit have a monopoly as valuable as the one to create money.
Compare the limited power of an individual with cash and the enormous power of unlimited cheap credit.
Let’s say an individual has saved $100,000 in cash. He keeps the money in the bank, which pays him less than 1% interest. Rather than earn this low rate, he decides to loan the cash to an individual who wants to buy a rental home at 4% interest.
There’s a tradeoff to earn this higher rate of interest: the saver has to accept the risk that the borrower might default on the loan, and that the home will not be worth the $100,000 the borrower owes.
The bank, on the other hand, can perform magic with the $100,000 they obtain from the central bank. The bank can issue 19 times this amount in new loans—in effect, creating $1,900,000 in new money out of thin air.
This is the magic of fractional reserve lending. The bank is only required to hold a small percentage of outstanding loans as reserves against losses. If the reserve requirement is 5%, the bank can issue $1,900,000 in new loans based on the $100,000 in cash: the bank holds assets of $2,000,000, of which 5% ($100,000) is held in cash reserves.

How Debt-Asset Bubbles Implode: The Supernova Model of Financial Collapse, by Charles Hugh Smith

When debt expands at a greater rate than underlying economic growth, and all real assets become collateral, eventually something has to give. It’s never pretty. From Charles Hugh Smith at oftwominds.com:

Gravity eventually overpowers financial fakery.

When debt-asset bubbles expand at rates far above the expansion of earnings and real-world productive wealth, their collapse is inevitable. The Supernova model of financial collapse is one way to understand this.
As I noted yesterday in Will the Crazy Global Debt Bubble Ever End?, I’ve used the Supernova analogy for years, but didn’t properly explain why it illuminates the dynamics of financial bubbles imploding.
According to Wikipedia, “A supernova is an astronomical event that occurs during the last stellar evolutionary stages of a massive star’s life, whose dramatic and catastrophic destruction is marked by one final titanic explosion.”
A key feature of a pre-supernova super-massive star is its rapid expansion. As the star consumes its available fuel via nuclear fusion, the star’s outer layer expands. Once there is no longer enough fuel/fusion to resist the force of gravity, the star implodes as gravity takes over.
This collapse ejects much of the outer layers of the star in an event of unprecedented violence.
The financial analogy is easy to see: when rapidly expanding debt consumes a critical threshold of earnings (fuel), the equivalent of gravity (default, inability to service the enormous debt) triggers the collapse of the entire debt/leverage-dependent financial system.
As I explained yesterday, if earnings stagnate or decline while debt races higher, eventually earnings are insufficient to service the debt and default is inevitable. The other problem that arises as more and more of earned income goes to debt service is that there is less and less disposable income left to support consumer spending–the lifeblood of economies worldwide.

You Are Not An Investor, by Raúl Ilargi Meijer

Investment requires markets, and Raúl Ilargi Meijer argues that financial markets, controlled by central banks, no longer function as markets. From Meijer at theautomaticearth.com:

You are not an investor. One can only be an investor in functioning markets. There have been no functioning markets since at least 2008, and probably much longer. That’s when central banks started purchasing financial assets, for real, which means that is also the point when price discovery died. And without price discovery no market can function.

You are therefore not an investor. Perhaps you are a cheat, perhaps you are a chump, but you are not an investor. If we continue to use terms like ‘investor’ and ‘markets’ for what we see today, we would need to invent new terms for what these words once meant. Because they surely are not the same thing. Even as there are plenty people who would like you to believe they are, because it serves their purposes.

Central banks have become bubble machines, and that is the only function they have left. You could perhaps get away with saying that the dot-com bubble, maybe even the US housing bubble, were not created by central banks, but you can’t do that for the everything bubble of today.

The central banks blow their bubbles in order to allow banks and other financial institutions to first of all not crumble, and second of all even make sizeable profits. They have two instruments to blow their bubbles with, which are used in tandem.

The first one is asset purchases, which props up the prices for these assets, through artificial demand. The second is (ultra-) low interest rates, which allows for more parties -that is, you and mom and pop- to buy more assets, another form of artificial demand.

The most important central bank-created bubble is in housing, if only because it facilitates bubbles in stocks and bonds. Home prices in many places in the world have grown much higher than either economic growth or homebuyers’ wages justify.

To continue reading: You Are Not An Investor

 

You Will Be Poor, by Robert Gore

valuewalk.com

valuewalk.com

There has been a progression through each iteration of monetary theft. A trial balloon launches, usually from academia, which proposes an “innovation” contrary to reigning practice and orthodoxy. A curmudgeonly minority reject it; the majority, securing their places on the intellectual fashion forefront, excoriate the old and after a suitable time for faux consideration and discussion, embrace the new.

The public, insufficiently appreciative of the arcane language, abstruse reasoning, and self-evident erudition and brilliance of the experts, sometimes presents an obstacle. It was hostile towards the US’s first foray into monetary theft: central banking. The anti-central bank contingent won battles for 137 years, but lost the war in 1913. J.P. Morgan and cronies laid the intellectual groundwork: conferences, scholarly papers, legislative proposals, and a Greek chorus of the day’s one-percenters singing at the top of their lungs that America needed to join the civilized world and establish its own central bank.

If you understand the main purpose of central banks, then notwithstanding obfuscatory “Fedspeak,” endless media drivel, and academics’ Greek-letter-laden equations, you know all you need to know about these larcenous institutions. They exist to make it easier for governments to steal, and everything else is window dressing. Gold is finite and requires real resources to find, mine, and mint; central banks’ fiat debt can be produced in infinite quantities at virtually zero cost and exchanged for the government’s fiat debt.

Substitute central bank “notes” for gold and the resources available to the government expand dramatically. It can, in conjunction with the central bank, conjure its own money. Couple a central bank with 1913’s other “innovation”—the income tax—and lovers of government had the wherewithal for their fondest dreams, one of which was American empire. World War I, the US’s first involvement in Europe’s wars, followed close after 1913’s depredations, notwithstanding President Wilson’s vow to stay out in his 1916 reelection campaign.

Franklin Roosevelt and Richard Nixon completed the switch from a gold-backed currency to fiat debt. After Nixon slammed shut the gold window in August, 1971, there have been no legal constraints (aside from the farcical debt ceiling) on either the creation of government debt or Federal Reserve purchases of that debt. The only constraints are political and those policy makers and central bank bureaucrats impose upon themselves, in other words none.

Whatever jolt debt monetization once might have given the economy has disappeared since the economy reached debt saturation before the last financial crisis. The increasing debt burden is slowing rather than promoting economic growth, and will soon, if it has not already, stop and reverse it. Elevation of financial asset and real estate prices (aka “bubble blowing”) supposedly promotes wealth effects that trickle down to the broader economy. The claim was dubious when first made during the housing bubble. Rising wealth inequality since then has revealed its absurdity. Whatever debt-based speculative “wealth” has been created has gone mostly to the financially well-connected who can borrow at negligible rates.

Quantitative easing was an application from central banking’s conventional tool kit—debt monetization—although its magnitude and global scale were unprecedented. More recent central bank “innovations”—zero and negative interest rates (ZIRP and NIRP) and now, proposed bans on cash—amount to outright theft. It is doubtful that even proponents believe their own transparently phony rationalizations for these measures. ZIRP and NIRP destroy the return on saving while rewarding debtors. And who are the world’s biggest debtors? Profligate governments, who are financing their unsustainable improvidence at history’s lowest interest rates and picking the pockets of individuals, companies, pension funds, insurance companies, and other entities that must generate a reasonable safe current return to meet future liabilities.

Proposed bans on cash, or even active discouragement of its use, are the next milestone in governmental larceny. Once all “money” (a misnomer, it’s really debt; there has been no “real money” in the global financial system since 1971) is forced into the banking system, it doesn’t take much imagination or foresight to see what comes next. The civil liberties’ implications of the government keeping track of everyone’s money and how it’s spent are of course ominous. However, the main reason the government wants financial assets confined to the banking and financial system is so that it can purloin them. Once bank accounts, brokerage accounts, insurance accounts, pension funds, and other easy-to monitor repositories of financial assets become the only stores of value, the government can partially or wholly nationalize—steal—assets and perhaps the repositories themselves.

At every juncture, the government runs into the self-defeating consequences of its policies, ongoing larceny threatens future larceny. Increase debt, taxes, and regulation enough and the economy collapses, putting a dent in government’s revenues. Nobody worries about grandpa and grandma eating cat food because ZIRP and NIRP deprive them of retirement income, but when those policies threaten the solvency of the insurance industry and pension funds and the government may be called upon to bail them out, it’s cause for concern. Any future moves by central banks to raise interest rates will be driven by that unacknowledged concern.

The financial system as a whole is heavily leveraged, its liabilities are many times its equity. Economic collapse would wipe out financial system equity, as it did in 2008, whether deposits are forced to stay in the system or not. The government has no equity to wipe out. Forced to stay, deposits will be expropriated by the government for its benefit or the benefit of the financial repositories (so-called bail-ins). That’s obviously only a one-time expedient that will temporarily forestall, but not prevent, ultimate insolvency for either the government or the financial system.

Governments can outlaw or seize any asset, including cash, precious metals, real estate, chattels, overseas accounts, or intellectual property. In its desperate rapacity nothing is off the table. For individuals, reducing deposits within the financial system and converting them to precious metals or cash while ownership is still legal makes some sense. However, outlawing the former has the weight of Roosevelt’s 1933 precedent, and outlawing the latter is under consideration, so their value as mediums of exchange may be set in the black markets that will inevitably arise as the government continues to expand its destructive domination of the economy.

Absent the kind of collective, preemptive measures described in “Revolution in America” to leverage the government and financial system’s indebtedness, bankrupting them before they bankrupt us, your assets are sitting ducks. If inertia, wishful thinking, the “you go first” problem, and fear of legal consequences prevent the revolutionary initiative, the government will still give up the ghost…but not before it makes you poor.

The sole capital that is 100 percent safe is intellectual capital: what you know. They can’t nationalize self-reliance and your self may be the only one on which you can rely. If you have not already started, expanding your knowledge of skills useful in a time of collapse and chaos would be well-advised.

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SET DURING THE INDUSTRIAL REVOLUTION?

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The Coming War of Central Banks, by Charles Hugh Smith

Whoever wins in the global foreign exchange management battle, someone else loses. From Charles Hugh Smith at oftwominds.com:

Welcome to a currency war in which victory depends on your perspective.

History has shifted, and we’re leaving the era of central bank convergence and entering the era of central bank divergence, i.e. open conflict. In the good old days circa 2009-2014, central banks acted in concert to flood the global banking system with easy low-cost credit and push the U.S. dollar down, effectively boosting China (whose currency the RMB/yuan is pegged to the USD), commodities, emerging markets and global risk appetite.

That convergence trade blew up in mid-2014, and the global central banks have been unable to reverse history. In a mere seven months, the U.S. dollar soared from 80 to 100 on the USD Index (DXY), a gain of 25%–an enormous move in foreign exchange markets in which gains and losses are typically registered in 100ths of a percent.

This reversal blew up all the positive trades engineered by central banks: suddenly the yuan soared along with the dollar, crushing China’s competitiveness and capital flows; commodities tanked destroying the exports, currencies and economies of commodity-dependent nations; carry trades in which financiers borrowed cheap USD to invest in high-yielding emerging markets blew up as currency losses negated the higher returns, and global risk appetite vanished like mist in the Sahara.

The net result of this reversal is global markets have struggled since mid-2015, when the headwinds of the stronger dollar finally hit the global economy with full force.

In one last gasp of unified policy convergence, G20 nations agreed to crush the USD again in early March 2016, to save China from the consequences of a stronger yuan and the commodity markets (and lenders who over-extended loans to commodity producers.

To continue reading: The Coming War of Central Banks