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This is a commentary which should never have needed to be written. What is euphemistically called “fractional-reserve banking” is obvious fraud, and obvious crime. By its very definition; it transforms the banking sector of an economy into a leveraged Ponzi-scheme, and as with all Ponzi-schemes, there is no possible “happy ending” here.

Mathematically-based principles are often illustrated best through use of an extreme, numerical example. We have no need to construct any hypothetical extremes, however, when we already have real-life insanity, in our current monetary/regulatory framework.

Here it is important to note that in order to conceal the fraud, crime, and insanity of our present system to the greatest degree possible, the bankers hide their dirty deeds within their own convoluted jargon. Thus presenting “fractional-reserve banking” to readers requires some brief investment of time in definition of terms, starting with this term, itself.

Fractional-reserve banking evolved literally based upon the temptation of all bankers to perpetrate fraud. Empirically it has always been observed, down through the centuries, that under normal circumstances, only a tiny percentage of depositors will come to claim their cash/wealth at any one time. Thus the temptation is for bankers to “lend” more funds than they actually possess, i.e. they are “lending” what does not even exist: “fractional-reserve banking” – the ultimate euphemism of banking and fraud.

It goes without saying that anyone or any entity which endeavours to “lend” something which does not exist is perpetrating fraud. But before examining this inherent fraud more closely, it is important to back-up, and look at the Law. Note that even when banks “lend” the money which they actually do hold on deposit (as trustees for the depositors) that this is already wholly/totally illegal. It is the crime known as “conversion”.

…click on the above link to read the rest of the article…

If We Don’t Change the Way Money Is Created and Distributed, Rising Inequality Will Trigger Social Disorder

November 13, 2015

If We Don’t Change the Way Money Is Created and Distributed, Rising Inequality Will Trigger Social Disorder

Centrally issued money optimizes inequality, monopoly, cronyism, stagnation, low social mobility and systemic instability.

If we don’t change the way money is created and distributed, wealth inequality will widen to the point of social disorder.

Everyone who wants to reduce wealth inequality with more regulations and taxes is missing the key dynamic: the monopoly on creating and issuing money necessarily 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.

Control of money issuance and access to low-cost credit create 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.

…click on the above link to read the rest of the article…

Vladimir Putin Speaks Honestly

November 2, 2015

Vladimir Putin Speaks Honestly

Russia’s president is a refreshing contrast to the liars who inhabit Western governments and Western media. The agenda of the Russian government is peace and international cooperation under the rule of law. Washington’s agenda is hegemony.

President Putin endeavors to lead the world to peace, while the neoconservatives who control Washington’s foreign policy try to drive the world to war. Contrast the crazed statements that flow from Washington comparing President Putin to Hitler, suggesting his assassination, and calling for shooting down Russian military aircraft with President Putin’s appeal that Washington abandon its hegemonic agenda and submit to international law and international cooperation. As President Putin has emphasized, for Washington “international cooperation” means submission to Washington’s will.

President Putin repeatedly states that governments must govern in accord with the people and not function as a decree-issuing body in accord with interest groups disrespectful of the people.
Throughout the West we see the increasingly unresponsive behavior of government. In the United States careful studies conclude that, despite elections, the American people have essentially zero input into the policies decided in Washington. In Greece, the government is coerced to impose on the Greek people policies dictated by large German banks supported by the German and EU governments. In Portugal, the socialists who won the election were told by the conservative president that they would not be permitted to form a government. In the UK, a senior military official stated that the military would not permit Jeremy Corbyn to form a Labour government should the Labour Party win the election. The United States government threatens the governments of Venezuela, Ecuador, Bolivia, and Argentina for representing the interests of the voters who put them in office instead of Washington’s interests. The United States government has destroyed American civil liberty with its unconstitutional mass surveillance, indefinite detention without charges, and murder of US citizens without due process of law. Dissent itself is in the process of being criminalized.

…click on the above link to read the rest of the article…

WAR ON CASH: Banks to start charging for cash deposits

November 1, 2015

WAR ON CASH: Banks to start charging for cash deposits

Few could have envisioned it even just a few years ago, but it’s happening now, and on an ever-widening scale. More big U.S. banks are shunning cash, because the banking system has become so dependent on other “assets” that large cash deposits actually pose a threat to their financial health, according to The Wall Street Journal.

State Street Corporation, a Boston-based institution that manages assets for institutional investors, has, for the first time, begun charging some customers for making large cash deposits, according to people familiar with the development.

And the largest U.S. bank in terms of assets — JP Morgan Chase & Co. — has dramatically cut “unwanted” deposits to the tune of $150 billion this year alone, in part by charging customers fees.

What gives? What kind of world do we live in when banks no longer want cash?

As the WSJ reported:

“The developments underscore a deepening conflict over cash. Many businesses have large sums on hand and opportunities to profitably invest it appear scarce. But banks don’t want certain kinds of cash either, judging it costly to keep, and some are imposing fees after jawboning customers to move it.”

As usual, the problem originated largely in Washington, D.C.

Criminalizing cash?

The paper said the banks’ actions are being driven by low interest rates (set by the Fed) that eat into profits, as well as “regulations adopted since the financial crisis to gird banks against funding disruptions,” adding in a separate report that a number of large financial institutions have become more dependent on buying and selling stocks, bonds and commodities like oil.

The latest round of fees for large deposits stems from regulators’ deeming them risky. They are sometimes dubbed hot-money deposits that analysts believe is likely to flee quickly in a crisis (think runs on Greek banks recently, which the government eventually curbed).

…click on the above link to read the rest of the article…

The Yield Curve and GDP – a causal relationship?

October 31, 2015

The Yield Curve and GDP – a causal relationship?

One of the most reliable indicators of an imminent recession through recent history has been the yield curve. Whenever longer dated rates falls below shorter dated ones, a recession is not far off. Some would even say that yield curve inversion, or backwardation, help cause the economic contraction.

To understand how this can be we first need to understand what GDP really is. Contrary to popular belief, GDP only has an indirect relation to material prosperity. Broken down to its core component, GDP is simply a measure of money spent on goods and services during a specified period, usually a year or a quarter.

However, since money itself is a very fleeting concept we need to dig deeper to fully understand the relation between the slope of the yield curve and GDP. The core of money is its function as the generally accepted medium of exchange, but today that is much more than the cash in your wallet. For example, the base money, provided by the central bank, consist of currency in circulation and banks reserves held at the central bank.

From these central bank reserves the commercial banking system can leverage up, through fractional reserve lending practice, several times over. It is important to note that broader money supply measures, such as M2, is merely a reflection of banks leverage on top of base money. As a bank makes a loan to a borrower the bank creates fund which can be used as means of payments to whatever the borrower wants to spend the newly acquired money on. Obviously, these money claims will in turn create new deposits, which can be used to create new loanable funds and so on ad infinitum.

…click on the above link to read the rest of the article…

Can the Fed Print Money?

October 28, 2015

Can the Fed Print Money?

Every morning is the dawn of a new error – Anonymous

It Can and it Does

In light of the upcoming October Fed (non-)decision, we want to briefly revisit a subject that still appears to be causing some confusion. We most recently encountered this confusion again in a quarterly update by the Hoisington Investment Management Company. To be sure, we very often, if not to say almost always, have tended to agree with the economic conclusions of Lacy Hunt and Van Hoisington since we have first come across their work (we may arrive at these conclusions in a somewhat different manner, but the conclusions as such are usually not much different).

2015-10-27_213416 Money from nothing and chicks for free – how the Fed does it.
Image credit: dreamstime

US true money supply TMS-2: this broad aggregate contains all the items that can be properly defined as money – click to enlarge.

In their third quarter update we have come across one sentence that we believe requires comment, as we have seen similar things asserted elsewhere and we believe it is important to be 100% clear on the topic. In addition to the assertion we want to challenge, which is highlighted below, we also quote the preceding paragraph, because it serves to elucidate a few additional conceptual problems.

“Despite the unprecedented increase in the Federal Reserve’s balance sheet, growth in M2 over the first nine months of this year fell below its average rate of growth over the past 115 years, a time when the growth in the monetary base was stable and quite modest. In addition, velocity of money, which is an equal partner to money in determining nominal GDP, has moved even further outside the Fed’s control. The drop in velocity to a six decade low is consistent with a misallocation of capital and an increase in debt used for either unproductive or counterproductive purposes.

…click on the above link to read the rest of the article…

What’s up with the global economy, and where do we go from here?

October 27, 2015

What’s up with the global economy, and where do we go from here?

A deflationary spiral, such as is now becoming evident globally, acts as a natural poison.

It now appears that the grand yearly addition to total human wealth, the global GNP, is no longer growing. If so, this means the world is headed toward a global deflationary spiral, a contraction in the global economy similar in nature to the trade slump that spread globally during the era of the Great Depression.

There really is no other explanation but a global trade slump that can account for the steep decline in the prices of basic essential commodities like oil and copper, and also the decreased demand for shipping capacity reflected in the Baltic Dry Index.

The troubled Chinese economy, its reduced demand for commodities, the devaluation of its currency to try to capture more trade, and the Chinese support for a new trade alliance in competition with the new U.S./Japanese TPP alliance — all these are symptoms that indicate that aggregate global buying power has stalled out. That means that investment capital is unable to find new profitable investments in the global marketplace, which is very bad news for finance capitalism as a global system.

At this point let me refer readers to Gail Tverberg and her blog, Our Finite World, which focuses on the key interactions between energy and economics. In fact we now see just the sort of troubled global economy that we might anticipate from a world that peaked in production of historically cheap conventional oil almost a decade ago in 2006. Tverberg is able to explain the global economic situation so clearly, so convincingly, and so persistently that she has attracted a huge popular economic following. One of her recent posts drew over a thousand reader responses; “Low Oil Prices – Why Worry?.”

…click on the above link to read the rest of the article…

Schadenfreude – How the US Is Helping China Create a New Financial Order

October 26, 2015

Schadenfreude – How the US Is Helping China Create a New Financial Order

Schadenfreude - How the US Is Helping China Create a New Financial Order

Here we have an image of a Chinese banknote, featuring Chairman Mao, followed by a seemingly incongruous German word – schadenfreude. Is there an error here?

Happily, no. We’ll begin with the word, schadenfreude, which means “harm-joy.” It’s used to express an occurrence that’s destructive, yet brings about happiness.

This would seem to be a conflict in terms, but, looked at a bit more deeply, it could be said that the killing of an enemy may mean that peace will soon prevail – and so the event brings happiness. Or, another analogy: the bulldozing of an old structure may mean that a new one – a better one – will soon be under construction.

And that’s the case here. The world’s most powerful (and most oppressive) political/economic power structure has begun to go under the bulldozer. Its replacement will hopefully be a better one.

The Brussels SWIFT system is currently the largest economic settlement system in the world. Almost all financial transfers are made possible through this system. As such, those who control SWIFT have the power to threaten financial institutions and sovereign nations that, if they don’t do as they’re told, can be denied access to the system.

The controllers of SWIFT have been far from fair in making these judgements. Much of their agenda has been provided by the Organisation for Economic Co-operation and Development (OECD), a cabal made up of many of the world’s most powerful nations, but primarily Europe and the US. The US is the heavy here and they’ve used their power to create FATCA, a means of applying draconian economic pressures on their own citizens. In doing so, they’ve also succeeded in creating a global shakedown racket aimed at financial institutions. If a bank anywhere in the world is found to have a US citizen as a client and the bank fails to regulate that client sufficiently, the bank itself is “held up” – the US imposes a massive fine on the bank.

…click on the above link to read the rest of the article…

Indians Urged To Give Up Their “Idle Gold” For The Good Of The Nation

October 26, 2015

Indians Urged To Give Up Their “Idle Gold” For The Good Of The Nation

One month ago, when reviewing India’s ploy to monetize the thousands of tons of gold held by the broader population through the issuance of “gold-backed bonds” (which would need to offer a rate of interest greater than inflation to be attractive but they won’t), we asked if this is “the start of India’s gold confiscation.”

As a reminder, as part of the plan, Indians would be allowed to “deposit their jewelry or bars with banks and earn interest, while the banks will be free to sell the gold to jewelers, thereby boosting supply. The deposits can be for a period of one year to 15 years with the interest on short-term commitments to be decided by the banks and those on long-term deposits by the government in consultation with the central bank.”

The sovereign gold bonds are aimed at people buying the precious metal as an investment. The securities may help shift a part of the estimated 300 metric tons a year investment demand, the government said in a separate statement. The bonds will be issued in denominations of 5 grams, 10 grams, 50 grams and 100 grams for a term of five years to seven years with a rate of interest to be calculated on the value of the metal at the time of investment, it said.

When stripped of its pompous rhetoric, what India is offering is simple: a gold-for-paper exchange, which however in a culture where gold has been the definition of money for centuries, would likely be a non-starter from the beginning. One look at the chart below showing Indian gold demands is sufficient to show just how ingrained in the Indian psyche gold hasbecome.

However, as we said a month ago, just because it is doomed from the beginning, at least in its current iteration, does not mean it won’t be tried (see: Abenomics)… or adjusted. Because this proposal was nothing short of the initial shot across the gold confiscation bow. Here is what else we said:

…click on the above link to read the rest of the article…

Something Happened

October 26, 2015

Something Happened

Ben Bernanke’s memoir is out and the chatter about it inevitably turns to the sickening moments in September 2008 when “the world economy came very close to collapse.” Easy to say, but how many people know what that means? It’s every bit as opaque as the operations of the Federal Reserve itself.

There were many ugly facets to the problem but they all boiled down to global insolvency — too many promises to pay that could not be met. The promises, of course, were quite hollow. They accumulated over the decades-long process, largely self-organized and emergent, of the so-called global economy arranging itself. All the financial arrangements depended on trust and good faith, especially of the authorities who managed the world’s “reserve currency,” the US dollar.

By the fall of 2008, it was clear that these authorities, in particular the US Federal Reserve, had failed spectacularly in regulating the operations of capital markets. With events such as the collapse of Lehman and the rescue of Fannie Mae and Freddie Mac, it also became clear that much of the collateral ostensibly backing up the US banking system was worthless, especially instruments based on mortgages. Hence, the trust and good faith vested in the issuer of the world’s reserve currency was revealed as worthless.

The great triumph of Ben Bernanke was to engineer a fix that rendered trust and good faith irrelevant. That was largely accomplished, in concert with the executive branch of the government, by failing to prosecute banking crime, in particular the issuance of fraudulent securities built out of worthless mortgages. In effect, Mr. Bernanke (and Barack Obama’s Department of Justice), decided that the rule of law was no longer needed for the system to operate. In fact, the rule of law only hampered it.

…click on the above link to read the rest of the article…

Iceland’s Bankers Face 74 Years in Prison While US Banks Profit After Your Bailout

October 24, 2015

Iceland’s Bankers Face 74 Years in Prison While US Banks Profit After Your Bailout

You could ice skate in Hell sooner than see the United States follow in Iceland’s footsteps with this move: the 26th banker was just sentenced to prison for a combined 74 years between them — each of them jailed for their roles in the 2008 economic collapse.

Five top bankers from Iceland’s two largest banks — Landsbankinn and Kaupþing — were found guilty of embezzlement, market manipulation, and breach of fiduciary duties. Though the country’s maximum penalty for financial crimes currently stands at six years, the Supreme Court is currently hearing arguments to extend the limit. Most of those convicted have so far been sentenced to between two and five years.

Do those sentences sound light to you? Perhaps. Until you consider the curious method of punishment the U.S. employed for its thieving bankers.

While Iceland allowed its government to take total financial control when the 2008 crisis took hold, American bankers — in likely the only ~~bail~~ handout given to criminals of mass destruction — received $700 billion in Troubled Asset Relief Program (TARP) funds.

Thank you, ~~Congress~~ American taxpayer.

Iceland certainly didn’t make it through the crisis unscathed. It repaid the IMF (the final $332 million owed was paid in full, ahead of schedule, earlier this month) and other lenders for funds needed to prevent a complete financial meltdown nearly eight years ago. Icelandic bankers are still being held to task for their illegal market legerdemain that nearly brought down the financial planet.

In contrast, not one banker in America has ever (nor will ever?) be held responsible for their criminal acts. Instead, essentially in addition to the $700 billion windfall — Big Banks are now raking in over $160 billion in profit every year.

Iceland’s president, Olafur Ragnar Grimmson, described how his country not only weathered the storm, but has been labeled the first European country to fully recover from the crisis:

…click on the above link to read the rest of the article…

Here’s What Happens When Central Banks Go Broke

October 24, 2015

Here’s What Happens When Central Banks Go Broke

On Friday, in “Is Mario Draghi About To Go Full-Kuroda? RBS Says ECB Could Buy Stocks,” we took a closer look at what the ECB’s options are when it comes to implementing further easing measures come December.

As a reminder, Mario Draghi telegraphed either another depo rate cut, an expansion of PSPP, or both at Thursday’s ECB presser and now the market is keen to analyze the situation and determine not only what Goldman’s man in Europe is most likely to announce, but what the implications of his announcement are likely to be.

To be sure, further cuts to the depo rate will simply trigger a chain reaction whereby the Riksbank and the SNB will be forced to respond in kind, lest they should lose ground in the global currency war on the way to seeing their inflation targets threatened. This raises the spectre that NIRP may soon come to household deposits, something which, despite the proliferation of negative rates, hasn’t yet occurred.

As for the expansion of PSPP, we looked at a variety of options courtesy of RBS’ Alberto Gallo who notes that Draghi could end up buying corporate bonds, munis, equities, and even individual bank loans before it’s over. Here’s how we summed it up yesterday:

In the end, all that will happen is the EMU’s neighbors will be forced further into NIRP and the ECB will end up with a nightmarish balance sheet full of stocks, corporate credit, munis, and God only knows what kind of loans purchased from banks, and all of which will have been bought at or near the top. That sets up the possibility that central banks could end up being forced to operate from a negative equity position. In other words: it sets up the possibility that they’ll technically go broke.

There’s been no shortage of coverage over the past several years regarding the idea that central banks can effectively go bankrupt.

…click on the above link to read the rest of the article…

Why Is Wealth/Income Inequality Soaring?

October 23, 2015

Why Is Wealth/Income Inequality Soaring?

If conventional labor and finance capital have lost their scarcity value, then the era in which financialization reaped big profits is ending.

Why is wealth/income inequality soaring? The easy answer is of course the infinite greed of Wall Street fat-cats and the politicos they buy/own.

But greed can’t be the only factor, for greed is hardly unknown in the bottom 90% as it is in the top .1%. The only difference between the guy who took out a liar loan to buy a house he couldn’t afford so he could flip it for a fat profit and the mortgage broker who instructed him on how to scam the system and the crooked banker dumping toxic mortgage-backed securities on the Widows and Orphans Fund of Norway is the scale of the scam.

The difference isn’t greed, it’s the ability to avoid the consequences or have the taxpayers eat the losses, i.e. moral hazard. The bottom 90%er with the liar loan mortgage and the flip-this-house strategy eventually suffered the consequences when Housing Bubble 1.0 blew up in spectacular fashion.

Moral hazard describes the difference between decisions made by those with skin in the game, i.e. those who will absorb the losses from their bets that go south, and those who’ve transferred the risks and losses to others.

The too-big-to-fail banks that bought political protection simply shifted the losses to taxpayers. Then the Federal Reserve helpfully paid banks for deposits at the Fed while reducing the amount banks had to pay on depositors’ savings to bear-zero, effectively rewarding the banks with free money for ripping off the taxpayers.

America’s financialized cartel-state system institutionalizes moral hazard. This is one cause of rising inequality, as the super-wealthy are immunized by their purchase of political influence.

The top .1%’s share of the pie has been rising in the era of financialization and institutionalized moral hazard, everyone else’s share has declined:

…click on the above link to read the rest of the article…

The Trouble With Financial Bubbles

October 20, 2015

The Trouble With Financial Bubbles

Very soon after the magnitude of the 2008 financial crisis became clear, a lively debate began about whether central banks and regulators could – and should – have done more to head it off. The traditional view, notably shared by former US Federal Reserve Chairman Alan Greenspan, is that any attempt to prick financial bubbles in advance is doomed to failure. The most central banks can do is to clean up the mess.

Bubble-pricking may indeed choke off growth unnecessarily – and at high social cost. But there is a counter-argument. Economists at the Bank for International Settlements (BIS) have maintained that the costs of the crisis were so large, and the cleanup so long, that we should surely now look for ways to act pre-emptively when we again see a dangerous build-up of liquidity and credit.

Hence the fierce (albeit arcane and polite) dispute between the two sides at the International Monetary Fund’s recent meeting in Lima, Peru. For the literary-minded, it was reminiscent of Jonathan Swift’s Gulliver’s Travels. Gulliver finds himself caught in a war between two tribes, one of which believes that a boiled egg should always be opened at the narrow end, while the other is fervent in its view that a spoon fits better into the bigger, rounded end.

It is fair to say that the debate has moved on a little since 2008. Most important, macroprudential regulation has been added to policymakers’ toolkit: simply put, it makes sense to vary banks’ capital requirements according to the financial cycle. When credit expansion is rapid, it may be appropriate to increase banks’ capital requirements as a hedge against the heightened risk of a subsequent contraction. This increase would be above what microprudential supervision – assessing the risks to individual institutions – might dictate. In this way, the new Basel rules allow for requiring banks to maintain a so-called countercyclical buffer of extra capital.

Read more at https://www.project-syndicate.org/commentary/central-bankers-financial-stability-debate-by-howard-davies-2015-10#fXsDH7ISW0ku2b5s.99

Leaving the Eye of the Hurricane

October 12, 2015

Leaving the Eye of the Hurricane

In the early 2000’s, there were those economists and investors who believed that the U.S. was headed for an economic fall – that the repeal of the Glass-Steagall Act in 1999 would allow the financial institutions to enter into widespread reckless loan practices that would lead to a housing crash. And that that crash would lead to a stock market crash that would herald in The Great Unravelling – The Greater Depression.

Most of us who made these predictions hypothesized that the initial collapse would be significant, but not severe – that the governments of the world would come to the rescue with bailout programmes that would stave off the symptoms of the problem, but would do nothing to cure the disease itself – that of massive debt.

We suggested that there would be a false recovery, resulting in the easing of symptoms. There would be repeated claims by both governments and the media that “recovery is nigh.” However, underneath all the folderol, the disease would worsen considerably, eventually reaching the point at which the patient (the economy) could not be saved. At some point, public confidence in the leaders’ abilities to resuscitate the body would fade. This would be triggered by some event or events, such as a crash in the stock or bond market, a dumping of debt back into the U.S. by creditor nations, debt default by Greece or some other nation, commodity price spikes, backlash from sanctioned nations, the imposition of protective tariffs – any one of a dozen possible triggers would do the trick. From that point on, each of the other triggers would eventually occur, as toppling dominoes, fulfilling the prediction of Depression.

Only in this latter period would the dreaded “D-word” be acknowledged by the governments and media.

…click on the above link to read the rest of the article…

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