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The Return Of Crisis

February 9, 2016

The Return Of Crisis

Suddenly banks everywhere are in deep, deep trouble
Financial markets the world over are increasingly chaotic; either retreating or plunging. Our view remains that there’s a gigantic market crash in the coming future — one that has possibly started now.

Our reason for expecting a market crash is simple: Bubbles always burst.

Bubbles arise when asset prices inflate above what underlying incomes can sustain. Centuries ago, the Dutch woke up one morning and discovered that tulips were simply just flowers after all. But today, the public has yet to wake up to the mathematical reality that over $200 trillion in debt and perhaps another $500 trillion of un(der)funded liabilities really cannot ever be paid back under current terms. However, this fact is dawning within the minds of more and more critical thinkers with each passing day.

In order for these obligations to be reset to a reality-based level, something has to give. The central banks have tried to modify the phrase “under current terms” by debasing the currency these obligations are written in via inflation. Try as they have, though, they’ve been unable to create the sort of “goldilocks” low-level inflation that would slowly sublimate that massive pile of debt into something more manageable.

Wide-spread inflation has not happened. Why not? Because they’ve failed to note that plan of handing all of their newly printed money to a very wealthy elite — while a socially popular thing to do among the cocktail party set — simply has concentrated the inflation to the sorts of assets the monied set buys: private jets, penthouse apartments, fine art, large gemstones, etc. So yes, their efforts produced price inflation; just of the wrong sort.

Even worse, all the central banks have really accomplished is to assure that when the deflation monster finally arrives it will be gigantic, highly damaging and possibly uncontrollable.

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

Opinion: The banking system faces an existential threat — and it’s not bitcoin

January 5, 2016

A movement in Europe would require banks to fully back deposits

John Michael Wright
In 1666, King Charles II put control of the money supply into private hands. The privatization of the money-creation process gave birth to the system we use today.
Christmas did not offer much good cheer to the world’s bankers, who have received a sustained kicking since the financial crisis erupted in 2008.

In the latest blow, Switzerland announced that it would hold a referendum on a radical proposal that would strip commercial banks of the ability to create money, depriving them of a great deal of their profit-making capabilities. If the Swiss proposal catches on around the world, it could shred core business assumptions that have underpinned the banking model over the past three centuries.

From Babylon to central bank

The earliest banks we know of, in ancient Babylon, were temples that doubled as repositories where one could store wealth. At some point, the guardians of the stored treasure realized they could put this accumulated wealth to work, and banks accordingly began to lend capital. Borrowers would pay interest on what they borrowed, and this interest would ultimately find its way back to the lenders after the banks had taken a cut. The banks became trusted intermediaries that brought lender and borrower together and ensured neither would be cheated. Paper money emerged after people found it was easier to buy things using deposit slips from their bank than carrying gold around.

The next evolution happened when bankers realized that since depositors almost never simultaneously withdrew all their funds, banks could lend more capital than had been deposited. This allowed banks to “create” money in the sense that bankers could issue loans not necessarily backed up by hard deposits.

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

Will 2016 Bring Another 2008-Type Crash? Pt. 1

January 2, 2016

Will 2016 Bring Another 2008-Type Crash? Pt. 1

The world is lurching towards another Crash.

Japan, which has been ground zero for Keynesian insanity, is back in technical recession. This comes after the Bank of Japan launched the single largest QE program in history: a QE program equal to 25% of GDP launched in April 2013.

This program bought an uptick in economic growth for just six months before Japan’s GDP growth rolled over again. Similarly, an expansion of QE in October 2014 pulled Japan back from the brink, but GDP growth collapsed again soon after, plunging the country into technical recession earlier this year.

japan-gdp-growth

Japan is completely insolvent. The country has no choice but to continue to implement QE or else it will go crash in a matter of months. However, with the Bank of Japan already monetizing ALL of the country’s debt issuance, the question arises, “just what else can it buy?”

We’ll find out in 2016. But Japan is now officially in the End Game from Central Banking.

Europe is not far behind.

The ECB has cut interest rates to negative, cut them further into negative, launched a QE program, and then cut interest rates even further into negative while extending its QE program.

EU GDP growth has flat-lined at barely positive.

european-union-gdp-growth

But the economy is having serious difficulty fending off deflation.

When your ENTIRE banking system is leveraged by 26 to 1, as is Europe’s, even a 4% drop in asset values renders the system insolvent. Without significant inflation, the EU’s banking system will crash.

european-union-inflation-rate-1

ECB President Draghi better have more in his bazooka that what he’s fired so far, or the EU’s $46 trillion banking system will crash. However, as is the case with the Bank of Japan, the ECB is facing a shortage of viable assets to buy.

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

Chapter 5: Economists and the Banking System, Part 2: Adam Smith, Some Early Americans, and Friedrich List

October 8, 2015

Chapter 5: Economists and the Banking System, Part 2: Adam Smith, Some Early Americans, and Friedrich List

This chapter is about economics in transition. Economics means literally ‘housekeeping’ and most early writers on economics (roughly speaking before Adam Smith, 1723-90) treated it that way. They worried about a nation’s solvency, whether fairness generally prevailed in economic dealings, and whether the vulnerable were sufficiently protected against the powerful. By the end of this chapter, however, nationalist economics is promoting a ‘war of extermination’ between nations; and ‘institutions of credit’ – i.e. banks – have become economic weapons in the hands of national elites, for use both at home and abroad.

Economists before Adam Smith noticed that huge quantities of credit, based on very few assets, were passing as money, enabling real property to be purchased by people who had done nothing to gain it besides speculate or fund the speculations of others.[i] The ‘financial revolution’ was inevitably accompanied by a social revolution: the old landed gentry were being bought out and displaced by speculators in finance.[ii] Some economists were concerned about the effects on society generally, of such people gaining political and financial power.[iii] ‘Every little scoundrel gets a new estate’ commented Charles Davenant in 1701.

In 1707, there occurred one of those momentous turning-points in history which no one much remarks on. The nature of the event probably explains why it is so obscure: debt became a legally-recognised commodity. Not exactly a bit of history to thrill the imagination, and yet it changed the world, transforming how money could be made and leading by slow process to the situation today, when financial operators own most of the world’s wealth.

 

– See more at: http://www.cobdencentre.org/2015/10/chapter-5-economists-and-the-banking-system-part-2-adam-smith-some-early-americans-and-friedrich-list/#sthash.zN59Wvw7.dpuf

Bubbles Always Burst: the Education of an Economist

September 28, 2015

Bubbles Always Burst: the Education of an Economist

I did not set out to be an economist. In college at the University of Chicago I never took a course in economics or went anywhere near its business school. My interest lay in music and the history of culture. When I left for New York City in 1961, it was to work in publishing along these lines. I had worked served as an assistant to Jerry Kaplan at the Free Press in Chicago, and thought of setting out on my own when the Hungarian literary critic George Lukacs assigned me the English-language rights to his writings. Then, in 1962 when Leon Trotsky’s widow, Natalia Sedova died, Max Shachtman, executor of her estate, assigned me the rights to Trotsky’s writings and archive. But I was unable to interest any house in backing their publication. My future turned out not to lie in publishing other peoples’ work.

My life already had changed abruptly in a single evening. My best friend from Chicago had urged that I look up Terence McCarthy, the father of one of his schoolmates. Terence was a former economist for General Electric and also the author of the “Forgash Plan.” Named for Florida Senator Morris Forgash, it proposed a World Bank for Economic Acceleration with an alternative policy to the existing World Bank – lending in domestic currency for land reform and greater self-sufficiency in food instead of plantation export crops.

My first evening’s visit with him transfixed me with two ideas that have become my life’s work. First was his almost poetic description of the flow of funds through the economic system. He explained why most financial crises historically occurred in the autumn when the crops were moved. Shifts in the Midwestern water level or climatic disruptions in other countries caused periodic droughts, which led to crop failures and drains on the banking system, forcing banks to call in their loans.

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

 

This Is Actually Going To Happen Next Year

September 13, 2015

This Is Actually Going To Happen Next Year

The intellectual groundwork is being laid for the next stage of the Money Bubble, and it’s going to be epic. Here are excerpts from two articles that appeared over the weekend (and which should be read in their entirety). Both deal with Japan, which went all-in on debt monetization, lost badly, and now needs a new plan.

The first is from a University of Michigan economics professor:

Japan should be trying out a next-generation monetary policy

Japan is wasting its time trying to raise inflation.

Japan may succeed at bringing annual inflation up to 2%; indeed, it has made some real progress toward that goal. But suppose Japan succeeds in getting inflation up to 2%; would that be enough? The US economy has struggled mightily despite the fact that it went into the Great Recession with a 2% annual rate of core inflation. Japan could try to target an even higher rate of inflation, as Blanchard, Ball and Krugman recommend, or Japan could leave behind quantitative easing and higher inflation targets to make the leap to next-generation monetary policy.

The key to next-generation monetary policy is to cut interest rates directly instead of trying to supercharge a zero interest rate by raising inflation. Of course, cutting interest rates below zero pushes them into negative territory. But Switzerland, Denmark, Sweden and the euro zone have already shown that can be done. There is a widespread myth that cutting interest rates much deeper than -0.75% would inevitably cause people and firms to do an end run around those negative interest rates by taking their money out of the banking system as paper currency. Not so!

It is easy to neuter cash taken out of the bank as a way to defeat negative interest rates simply by removing the guarantee that the Bank of Japan will take that cash back at face value. 

 

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

 

 

 

Europe’s Banks – Insolvent Zombies

September 9, 2015

Europe’s Banks – Insolvent Zombies

The Walking Dead

Now that Europe’s fractionally reserved banking system has been regulated into complete inertia, it is a good time to assess the current bottom line, so to speak. We should mention here that there are essentially two ways of dealing with the banking system. One is to introduce an unhampered free market banking system based on strong property rights and nothing else. Such a system would work best if it were based on sound money, i.e., a market-chosen medium of exchange. The regulations governing such a system would fit on a napkin.

zombie bank2

Image credit: Warner Bros, processing fmh

1-EuroStoxx Bank IndexThe Euro-Stoxx bank index, weekly, over the past 10 years. Recently the index has been unable to overcome resistance in the 160-162 area. The bust and the reaction of the authorities to the bust has made zombies out of Europe’s big banks – click to enlarge.

The other way is to construct what we have now: a banking cartel administered and backstopped by a central bank, based on fiat money the supply of which can be expanded at will and involving continual violations of property rights. Fractional reserve banking represents a violation of property rights, because it is based on the assumption that two or more persons can have a legally valid claim on the same originally deposited sum of money (for an extensive backgrounder on this, see our series on FR banking – part 1, part 2 and part 3). This legal fiction is very convenient for the banks and the State, but it sooner or later renders the banking system inherently insolvent (a de facto, but not a de iure insolvency).

Given this system’s inherent insolvency, the regulations governing it obviously won’t fit on a napkin. Instead they fill several volumes the size of telephone directories and keep growing like weeds.

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

 

 

 

The Economic Depression In Greece Deepens As Tsipras Prepares To Deliver ‘The Great No’

June 18, 2015

The Economic Depression In Greece Deepens As Tsipras Prepares To Deliver ‘The Great No’

No Cards - Public DomainAs Greece plunges even deeper into economic chaos, Greek Prime Minister Alexis Tsipras says that his government is prepared to respond to the demands of the EU and the IMF with “the great no” and that his party will accept responsibility for whatever consequences follow.  Despite years of intervention from the rest of Europe, Greece is a bigger economic mess today than ever.  Greek GDP has shrunk by 26 percent since 2008, the national debt to GDP ratio in Greece is up to a staggering 175 percent, and the unemployment rate is up above 25 percent.  Greek stocks are crashing and Greek bond yields are shooting into the stratosphere.  Meanwhile, the banking system is essentially on life support at this point.  400 million euros were pulled out of Greek banks on Monday alone.  No matter what happens in the coming days, many believe that it is now only a matter of time before capital controls like we saw in Cyprus are imposed.

Over the past several months, there have been endless high level meetings over in Europe regarding this Greek crisis, but none of them have fixed anything.  And even Jeroen Dijsselbloem admits that the odds of anything being accomplished during the meeting of eurozone finance ministers on Thursday is “very small”…

Some officials believe Thursday’s meeting of eurozone finance ministers will be perhaps the last chance to stop Greece sliding into default and towards leaving the euro.

However the president of the so-called Eurogroup, Jeroen Dijsselbloem, said the chance of an accord was “very small”.

And it is certainly not just Dijsselbloem that feels this way.  At this point pretty much everyone is resigned to the fact that there is not going to be a deal any time soon.  The following comes from Reuters…

 

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

The Banking System Can’t Lend Out Reserves, But a Bank Can – Ludwig von Mises Institute Canada

December 28, 2014

The Banking System Can’t Lend Out Reserves, But a Bank Can – Ludwig von Mises Institute Canada.

This post will seem simple to some, but I want to correct a slight confusion I’ve seen over the last several years in the economics blogosphere. (I was motivated to write because of an exchange with Nick Freiling, who loves the Austrian School but thought I had made a basic mistake in a recent piece I wrote about the Federal Reserve’s policies.) Specifically, Freiling and many others have challenged the standard claim that commercial banks lend out reserves when they make loans to customers. The critics argue that since the public will generally end up depositing their checks with their own respective banks, the granting of loans will merely rearrange which banks hold certain levels of reserves, but the banking system as a whole can’t “lend them out” because there would be nowhere for them to go. Hence, the critics allege, the talk of the Fed (say) raising the interest rate that it pays on reserves in order to discourage lending is nonsense; in Freiling’s words, there is (allegedly) no tradeoff between loans and reserves.

This argument from the critics is wrong. It rests on a confusion between micro-incentives and system-wide outcomes. In particular, the interest rate that the Fed pays on reserves can most definitely affect the willingness of commercial banks to make loans on the margin.

Before jumping directly into the issue, let me start with an analogy with actual currency held in people’s wallets or purses. (I see Nick Rowe thought of the same analogy last summer.) Forget about banks. Suppose there are $100 billion in actual currency in the economy, held by a population of 100 million people, and that this is the only money that these people use. That means on average each person holds $1,000 in currency.

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

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