Never in Doubt
What has never been in doubt in my mind is that thin-air money printing and the bailing out of banks and financial institutions would be tried and tried again. The alternative is unthinkable to those in power, because it involves living within one's means and letting those who took the risks eat the losses.
Here we are at the tail end of a forty-year credit bubble in which everybody participated (although China and India were late to the event), and nobody wants that party to end. It is simply so much easier to borrow, spend, and kick the can down the road.
As noted here repeatedly, we have an exponential credit system that, by extension, gives us an exponential money system. Until and unless the credit markets can be coerced back onto an exponential trajectory, nothing will work quite right, to the point that systemic financial collapse is a distinct possibility.
Given the possibility of collapse of our debt/money system, nobody in power has even the slightest wish to test out those odds, and so they will opt to print, print, print.
Just yesterday the UK opted for another round of printing, but look how they applied it:
£100bn plan for UK economy
Jun 14, 2012
George Osborne on Thursday night announced plans for a £100bn support programme for the British economy, as he battened down the hatches for a worsening eurozone debt storm”.
The chancellor told a City audience that he was working with Sir Mervyn King, the Bank of England governor, to “deploy new firepower” amid fears that turmoil in the eurozone could lead to a severe credit crunch and higher interest rates in Britain.
At the heart of the package is a BoE “funding for lending” scheme to cut bank funding costs in exchange for lending commitments.
The Treasury claims the programme, designed to address the rising costs of loans and mortgages, could support an estimated £80bn in new loans.
Of note here is the fact that all new official efforts to "support the economy" are really, at their heart, little more than attempts to prop up the institutions that themselves are the machinery of an exponential debt system. In the case of the UK, they are dedicating new firepower towards encouraging the creation of new loans. Once you understand the exponential debt system, you understand why getting the loan machinery back in high gear is a (if not the) top priority for the powers that be.
Oddly, even at this late stage in the story and with the UK well known to be already over-saddled with an extraordinary amount of loans, the best the UK leadership can imagine is to create easier conditions for more loans. What we have here is a failure of imagination.
When the European Central Bank (ECB) gave 130 billion euros to Greece, that money never actually went to Greece. Instead it went from the ECB to a set of special custodial accounts and then straight to banks located somewhere besides Greece.
At some point, with a touch of imagination like that offered by Steve Keen in a recent podcast with me, the idea will arise that, instead of giving money to the very same institutions that failed so badly in the first place, perhaps the money should be given to the people and companies that actually form the productive core of the economy. Think of it as a 'trickle out' program where the banks will get their hands on the funds soon enough; it's just that the money would have a chance to perform some useful economic functions before it wandered helplessly into the vast wasteland of money destruction that modern banks have become.
All eyes are now on the Greek elections, where the outcome will determine whether Greece accedes to the demands of the international bankers and suffers through punishing austerity (mathematically assured to fail, by the way), or leaps off into the unknown by abandoning the euro and stiffing their past creditors.
ECB on standby for Greek election fallout
Jun 15, 2012
The European Central Bank is on standby to keep banks flush with liquidity if Greece creates fresh financial market turmoil, its president has indicated, joining a global chorus of central bankers pledging support ahead of Sunday’s elections.
Mario Draghi’s comments on Friday followed the announcement by the UK’s central bank of plans to pump £100bn into the ailing British economy, hinting at a coordinated strategy by the world’s top central bankers.
“The ECB has the crucial role of providing liquidity to sound bank counterparties in return for adequate collateral. This is what we have done throughout the crisis ... and this is what we will continue to do,” Mr Draghi said.
Eurozone central banks “will continue to supply liquidity to solvent banks where needed,” he added, without giving details.
The main issue here, as always, is that one cannot fix a problem rooted in insolvency with liquidity. Yet, insanely, the various monetary authorities of the world keep trying that tactic over and over, hoping for a different outcome.
The bottom line remains the simple fact that somebody is going to have to take enormous losses. Period. The battle line is easy to define; either the banks take the losses or the citizens (a broader definition than 'taxpayers' as not everyone is a taxpayer, but everyone pays the cost of debased money). Which will it be? That is the question.
The situation is serious enough that planning is underway to just lock Europe down financially, and possibly even physically.
Euro zone discussed capital controls if Greek exits euro
Jun 11, 2012
(Reuters) - European finance officials have discussed limiting the size of withdrawals from ATM machines, imposing border checks and introducing euro zone capital controls as a worst-case scenario should Athens decide to leave the euro.
EU officials have told Reuters the ideas are part of a range of contingency plans. They emphasized that the discussions were merely about being prepared for any eventuality rather than planning for something they expect to happen - no one Reuters has spoken to expects Greece to leave the single currency area.
These discussions have been in that vein, with the specific aim of limiting a bank run or capital flight.
As well as limiting cash withdrawals and imposing capital controls, they have discussed the possibility of suspending the Schengen agreement, which allows for visa-free travel among 26 countries, including most of the European Union.
""Contingency planning is underway for a scenario under which Greece leaves,"" one of the sources, who has been involved in the conference calls, said. ""Limited cash withdrawals from ATMs and limited movement of capital have been considered and analyzed.""
Another source confirmed the discussions, including that the suspension of Schengen was among the options raised.
""These are not political discussions, these are discussions among finance experts who need to be prepared for any eventuality,"" the second source said. ""It is sensible planning, that is all, planning for the worst-case scenario.""
The above statements are why I do not wholeheartedly advise people to stash the bulk of their wealth outside of their home country. The prospect of capital controls is just too high. While your money may be safe in another country, it could also be out of reach for a critical period of time.
As gripping as the Greek situation is, Spain is far more problematic due to its size and just how broke its banking system really is:
The EU Smiled While Spain’s Banks Cooked the Books
Jun 14, 2012
What’s now obvious is that Spain’s banks weren’t reporting all of their losses when they should have, dynamically or otherwise. One of the catalysts for last weekend’s bailout request was the decision last month by the Bankia (BKIA) group, Spain’s third-largest lender, to restate its 2011 results to show a 3.3 billion-euro ($4.2 billion) loss rather than a 40.9 million-euro profit.
Looking back, we probably should have known Spain’s banks would end up this way, and that their reported financial results bore no relation to reality.
Dynamic provisioning is a euphemism for an old balance- sheet trick called cookie-jar accounting. The point of the technique is to understate past profits and shift them into later periods, so that companies can mask volatility and bury future losses. Spain’s banks began using the method in 2000 because their regulator, the Bank of Spain, required them to.
Oh. When your central bank is requiring you to cook your books, then there's plenty of blame to go around. The banks themselves still bear most of the responsibility, because they lent furiously into an outrageous property bubble without even the slightest concern for the risks or potential losses. But for the Bank of Spain to require them to then mask their losses using accounting tricks certainly makes it hard to whip up much bailout sympathy.
In Spain, the predicament has multiple inputs. The banking system is insolvent and saddled with bad loans, the economy is in recession, adding to unemployment and harpooning tax receipts, and the Spanish government is saddled with too much debt, the cost of which is rising to dangerous levels:
Spanish Borrowing Costs Touch 7 Percent
Jun 14, 2012
PARIS — European leaders were facing increasing pressure on Thursday to respond to the euro crisis, as Spanish 10-year bond yields hit the 7 percent level that has served to trigger full international bailouts of other euro zone members, and Italian borrowing costs rose sharply at a debt auction.
Spain’s borrowing costs soared after Moody’s Investors Service downgraded the country’s bond rating late Wednesday, with the yield on the 10-year bond touching 7 percent for the first time in the euro era. In Rome, the national Treasury sold 4.5 billion euros, or $5.6 billion, of debt, including three-year bonds maturing priced to yield 5.30 percent, up from the 3.91 percent it paid to move similar securities last month.
Higher borrowing costs threaten the $125 billion “bailout lite” Madrid worked out with European officials to recapitalize its banking sector, as that deal was contingent on Spain being able to continue tapping the bond market for its regular financing needs. For both Spain and Italy, rising yields endanger hopes that the countries will be able to overcome their problems without full bailouts, because high interest rates make refinancing unsustainably expensive.
The rising yields are a dangerous development. And given just how important it is that these yields do not rise, I would have to say that the situation is now pretty much out of control. That is, everything that can be tried to contain yields almost certainly has been tried, including private phone calls and arm-twisting between political and banking elites. The reason is simple enough: Past a certain level of interest there is no chance of recovery.
In the meantime, the world equity markets jump around on each new rumor and official pronouncement, as if they were bookies handicapping the timing and size of the next round(s) of liquidity measures and thin-air money printing.
I continue to avoid the stock and bond markets, preferring cash and precious metals exposure at this time. I am content to wait for the next coordinated rounds of quantitative easing (QE) to be announced before I deploy my cash reserves to things that I need and want, with the remainder going into gold and silver.
In the meantime, my garden is doing really well, the grapevines are taking off here in their third year, the rains are now falling with regularity, and the bugs and beetles are almost nonexistent, possibly decimated by the unusually warm winter or the April without any rain.
In closing, it has never been a matter of doubt for me that central banks and politicians would try everything within their power short of actually correctly diagnosing the predicament and doing the right things. At some point we'll have to own up to the fact that one simply cannot grow one's debt exponentially forever and that the system itself is therefore flawed. Hastening the demise of the system is the fact that politicians the world over are enabled by central banks in their desire to increase their spending at a faster rate than the economy.
So continue with your own efforts towards sensible planning.
Your faithful information scout,