Archives of August 2011
The Monetary Tsunami Is Coming
In his speech at Jackson Hole, Wyoming, on August 26, 2011, the Fed chairman disappointed most pundits. He did not promise another massive infusion of fake money, i.e., QE3. I suspect that a strengthening in bank lending is an important factor behind the Fed’s decision to postpone the pushing of more money into the economy.
The yearly rate of growth of our measure for banks’ inflationary credit jumped to 8.2 percent so far in August from 4.3 percent in July. A visible strengthening in commercial bank inflationary credit, i.e., credit “out of thin air,” will provide the “necessary” monetary stimulus. This means that the massive amount of money pumped by the Fed since 2008 (over $2 trillion) is starting to be funneled into to the economy by the banks. Read more»
A Conspiracy of Counterfeiters
“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
“Lenin was certainly right,” John Maynard Keynes continued in his 1919 classic, “The Economic Consequences of the Peace.”
“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” Read more»
“Why S&P downgraded the US credit rating.”
A Friend Provides his answer:
• U.S. Tax revenue: $2,170,000,000,000
• Fed budget: $3,820,000,000,000
• New debt: $ 1,650,000,000,000
• National debt: $14,271,000,000,000
• Recent budget cut: $ 38,500,000,000
Now let’s remove 8 zeros and pretend it’s a household budget.
• Annual family income: $21,700
• Money the family spent: $38,200
• New debt on the credit card: $16,500
• Outstanding balance on the credit card: $142,710
• Total budget cuts: $385
On the Brink of Inflationary Disaster
Ever since Ben Bernanke began his massive infusions of money into the financial system, many analysts (including me) have been worried about the severe weakening of the dollar if and when the fractional-reserve-banking system magnified the initial injections severalfold.
Although the trend could reverse, data from the past two months suggest that the inflationary big one may be upon us.
Keeping the Genie in the Bottle
To understand the potential problem, we need to review some basic facts. Back in the fall of 2008, when Lehman collapsed and the entire financial system appeared in jeopardy, the Fed began bailing out investment banks through massive asset purchases and extraordinary lending operations. These activities rescued the major banks that would otherwise have gone bankrupt, by taking bad assets off their books (at inflated prices) and by propping up the new “market” price of the assets remaining on their books.
When the Fed buys an asset, it writes a check on itself. This action creates new electronic reserves in the banking system. For example, if the Fed buys $10 million in mortgage-backed securities from Joe Smith, then Smith will deposit the check in his own checking account. His bank will credit Joe Smith’s checking balance by $10 million, but at the same time the bank’s account with the Fed itself will rise by $10 million too. Read more»
Doug Noland’s Credit Bubble Bulletin
August 24 – Bloomberg (Jim Brunsden): “Regulators said they might not have enough information to assess the threat over-the-counter derivatives pose to the financial system. Shortfalls in available data may undermine attempts to use so-called trade repositories as a tool to improve market oversight, the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions said… The lack of details on the value of trades ‘presents a potential gap in the data that authorities may require to fulfill’ their mandates, the organizations said… The value of outstanding OTC derivatives was about $601 trillion at the end of last year…”
August 25 – Bloomberg (David Yong and Yumi Teso): “A dollar-supply crunch in Europe is creating a shortage in Asia’s financial centers, pushing up the cost of obtaining the greenback through the swap market. …Singapore’s five-year basis swap and Hong Kong’s one-year contract dropped to the lowest since at least 1999 this month, which means parties paying for the U.S. Currency must accept a discount to benchmark interbank rates for their local currency…. ‘European banks are having difficulties with their dollar funding and that has spread to Asia, but it isn’t yet as bad as in 2008,’ said Tetsuo Yoshikoshi, a senior economist at Sumitomo Mitsui Banking…”
Valuable Insight from Jackson Hole
KC Fed Bank Pres Hoenig: “…[T]he market is valuable not because it’s the smartest in the world, but because it’s the harshest. It captures mistakes and punishes and forces a correction. It’s when you then interfere with that that you allow the path to go off longer and the correction to be more severe and harder on people.”
I’ve been an outspoken critic of Federal Reserve policymaking. Yet I do have great respect for Federal Reserve Bank of Kansas City President Tom Hoenig, soon to retire after a 20-year tenure at the helm of the Kansas City Fed and almost 40 years of service at the Federal Reserve. Dr. Hoenig is a statesman in an age where they are in too short supply. It is my hope that, as a private citizen, he will become more outspoken. I thought CNBC’s Steve Liesman did an outstanding job interviewing Dr. Hoenig in Jackson Hole. I have excerpted from the CNBC transcript of this insightful chat: Read more»
First in Line for New Money
The world of high finance was still in full flight in February 2007. The cracks in the mortgage market had not yet begun to show and Stephen Schwarzman’s Blackstone Group had just completed its $39 billion purchase of Equity Office Properties in what was the largest leveraged buyout ever.
There was plenty to celebrate, so Schwarzman threw himself a party for his 60th birthday, a 3 million dollar affair for 350 of the billionaire’s closest friends, including Barbara Walters, CNBC money honey Maria Bartiromo, the Donald, Cardinal Edward Egan, and former New York governor George Pataki.
It was lobster, filet mignon, and baked Alaska for everyone, washed down with expensive vino, with comedian Martin Short as emcee. Composer-pianist Marvin Hamlisch played a number from A Chorus Line. Patti LaBelle sang a song written for the birthday boy, and Rod Stewart sang a medley of his hits, reportedly for a fee of a million dollars. Read more»
The Greatest Trade of All Time
On its way to becoming the world’s greatest superpower, the United States pulled off some truly remarkable trades.
Two notable transactions come to mind and were both outstanding bargains.
- The Louisiana Purchase (purchased from the French)
- Alaska (purchased from the Russians)
For a mere $15 million, America instantly doubled its size with the 1803 purchase of the Louisiana territory. Sixty-four years later, oil- and mineral-rich Alaska was obtained for a paltry $7.2 million. Even adjusting for inflation, the combined value of these deals in today’s dollars would be very small.
However, these two transactions pale in comparison to the greatest trade of all time, one which remains ongoing. This particular trade has allowed the US to exchange more than $8 trillion worth of paper for an unbelievably enormous amount of real goods and services over 36 straight years. Read more»
Wall Street Aristocracy Got $1.2 Trillion in Fed’s Secret Loans
“…Access to Fed backup support “’leads you to subject yourself to greater risks,’” Herring said. “’If it’s not there, you’re not going to take the risks that would put you in trouble and require you to have access to that kind of funding..’.”
Citigroup Inc. (C) and Bank of America Corp. (BAC) were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits.
By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret. Read more»
China Researcher: US May Be On Its Way To Default On Debt
The U.S. may be on its way to default on its debt despite the U.S. government’s ability to print more money, a Chinese think tank researcher said Monday.
There is no guarantee for sovereign debt, which increases the risks the lenders face, said Wang Tianlong, a researcher at the China Center for International Economic Exchanges, a think tank supervised by the country’s economic planner, adding that the issuer could be more careless in using the loans.
In the short term, the U.S. doesn’t have much ability to reduce its deficit, Wang said in an opinion piece published in Securities Times. He added that the U.S. lacks the political system to guarantee that it will not default on its debt.
There is also no way to punish the issuer country if it falsifies its accounting and there is no way to restructure the issuer either, Wang said.
Wang’s comments come after the U.S. Vice President Joe Biden said Sunday the U.S. “never will default” on its government debt and reassured Beijing that Chinese investments in the U.S. are safe.