MONETARY DERAILMENT (Part 2 of 2)
THE THIRD PHASE
With the crisis evolving towards the next stage, both the states and the banks will be among those in need to be rescued. This time, the “rescuers” will be investors as well as depositors, young and old – who up till now have never come to realize that their money is nowhere more “vulnerable”, as it is in bank accounts. And as the saying goes, “the only money that is secured is that lying in our pockets”.
Of course taxpayers will participate in this rescue – as they have done in all rescues so far. And according to many, pension funds are going to be the biggest rescue funders in this crisis – and likewise the countries of the North, which “have their hands tied” because of their loans to the ECB, their participation in the stimulus packages and because of their bank’s exposure to risky funding practices in deficit economies. To substantiate these conclusions, we have the following:
Given the on-going currency war between the West and Asia, as well as the energy war, the central banks of the “triad” (US, Europe, Japan), seem to be collaborating in secrecy – adopting a common policy of printing new money.
This policy is linked to the effort of maintaining the interest rates at near zero levels, but also to the continuous (manipulated) decline in the value of gold – so that Russia or China cannot adopt the gold standard and terrified depositors and investors won’t use it as a refuge.
At the same time, the case of a possible “financial repression*” is secretly being studied – i.e. the obligation of citizens to finance their country’s national debt by purchasing national bonds with a zero coupon / interest rate (*further explanation at the end of the article)
These common policies will undoubtedly “chain” the countries of the West together – into a wider zone of intercommunicating vessels, identical to the Euro-zone. In particular, in much the same way Euro-zone members are trapped in the Euro (not having the ability to adopt national currencies anymore), the countries of the West are going to be trapped in a common monetary policy agreement – since unfortunately, it (the West) has not any other way to defend itself against Asia and other emerging economies.
If out of this collaboration a common currency emerges or if the rates will be based on a basket of currencies, consisting of dollars, yen, euros, francs, etc., is something definitely taken under consideration – with the preservation of the Euro considered to be a certainty, despite the dominating belief among European citizens of the contrary (except Germans).
ONE WAYS AND DEADLOCKS
Continuing, amid all these developments, the international financial casino tries to move to where the money costs as little as possible – which, combined with the fact that “speculation” is conducted with borrowed “leveraged” money, as well as with the “revival” of the problems created by structured financial products in the U.S., generates an additional source of fire.
In this context, the massive increase in the quantity of money (printing by central banks), along with low interest rates, leads international investors to put that money in the stock markets – leading all indexes to ever new record highs, levels that cannot be justified under any circumstances by the extremely adverse conditions (unemployment, recession, etc.), which prevail in the real economy.
So essentially the massive printing of new money (much like a cortisone injection, with the help of which the patient eases his pain, while at the same time signing his death sentence), at first caused inflation in assets – but was “offset” by the reduced amount of money, which was produced by commercial banks (money actually not produced, since banks narrowed lending), creating conditions for a credit crunch in the real economy.
For example, the M3 money supply in Europe, which includes the money generated by the ECB and the money generated by commercial banks, increased (on a per month basis) by 1.1% in 2011 – compared with 2010. For comparison, in 2007, before the crisis, the M3 money supply was increasing by 11.2%, compared with 2010 – which means that in reality less money is being supplied, compared with previous years.
Of course, this situation would be reversed rapidly, if the confidence in the markets would be restored – in which case commercial banks, together with central banks, would start producing money. In this case (i.e. if the West would return to normal growth rates), if the central banks did not manage to absorb the excess liquidity in time, then enormous inflation would be unavoidable – something that in most cases causes huge social unrest and riots, since the market value of money would decline rapidly.
In any case, the absorption of excess liquidity by central banks is an extremely difficult process – comparable to toothpaste, which is difficult to be suctioned back in (if not impossible), once out of the tube.
The impression thus created today, is that of a “snowball system”, which is dangerously reaching its limits – a condition that will inevitably lead to a major financial crash, the size of which will be equal to the enormous rise in values that preceded it.
If now, the central banks increase interest rates in an effort to dampen inflationary pressures, then many commercial banks will face the risk of bankruptcy – because they will be forced to pay higher interest rates. Many deficit and/or indebted countries will face bankruptcy as well – including the U.S. which of course do not go bankrupt, since the country pays its debts in dollars, but it will nevertheless bog down to a painful chaos, similar to bankruptcy.
On the other hand, if central banks would choose to absorb liquidity by selling bonds**, investors would massively abandon the bond markets. In this case, many countries would be forced to go bankrupt. (**further explanation at the end of the article)
Finally, if markets panic, realizing the inability of central banks to act rationally, chaotic withdrawals would take place – creating conditions of deflation, which would in turn cause values of existing assets to decline rapidly. Conditions therefore, that would cause states and banks to go bankrupt.
Based on these conditions and after the monetary derailment of the West, that allows for almost no maneuvering, what seems to be accepted by many countries as the only solution is for citizens to pay the price, through: increasing tax rates, “special contributions” of taxpayers, confiscation of assets, deposit “haircuts”, declarations of war on tax havens etc.
The above practices, will have to continue till the point in time where the deterministic collapse will be the least destructive – provided of course that there will be no preceding mass exodus of capital from the West, towards other directions.
In conclusion, five years after the outbreak of the crisis, the central banks of the West, adopting an exaggerated monetary policy unique in its history, created many concurrent speculative bubbles – in the stock, commodities, government bond and bank loan markets.
All these markets are inextricably linked – through the “money printing machine” of the U.S., Europe, as well as that of the Japanese central bank. Only the Fed, together with the BoJ (Bank of Japan), are “feeding” the global market with 160 Billion new dollars every month – thus creating the biggest bubble of all time.
In financial markets, the bubble can easily be observed, from the average yield of speculative long-term corporate bonds (Barclays high yield index) in dollars, which dropped below 5% – a significantly lower rate, compared with the most recent speculative exaggeration that took place before the crisis in 2008.
At the same time, the U.S. have entered a recessional route – a judgment based on the price of copper (considered to be a safe index for denoting the country’s growth), which dropped by almost 20% since the beginning of the year. Simultaneously, the real income of American workers narrowed by 5.8% in the first quarter of 2013 (on an annual basis, without transfers), compared to the previous quarter – which means that the economy of the superpower, which is by 70% based on consumption, will not escape a slowdown.
Furthermore, the stocks of the S&P stock index are believed to be trading-negotiated at prices up to 50% above their real value – a rather frightening rate. Added to that, the net assets of 93% of American households fell by 4% (average) between 2009 and 2011 – while for the remaining 7%, the net assets increased by 28%.
Given therefore, that the biggest problem of the U.S., which is the unbalanced distribution of income, is worsening despite the Fed’s efforts and with disappointing data also coming from Europe’s major front, unemployment, it seems that Americans are once more at risk of losing their jobs by the millions.
In the case of a new major recession in the U.S. however, let alone the possibility of a looming deflation in southern Europe (depression), which would most probably lead the North into a recession, the central banks of the West would be heading towards dangerous, unknown paths – leaving them with no choice but to amortize a great deal of their assets.
With zero primary rates, as well as with bloated balance sheets (both the Fed and the ECB are nearing 4 trillion dollars), filled with assets of dubious value, the capabilities of central banks to continue supporting current policies are extremely limited – while the time the crisis will finally break out is rapidly closing.
At the same time, the citizens of the West, although manipulated in various ways, even with “fake” statistics, do not seem to be willing to suffer even greater sacrifices – either directly (wage cuts, tax increases, further narrowing of the social state), or indirectly (financial repression).
Also, more and more are starting to blame the Euro for the crisis and the adopted austerity policy imposed on them – a condition, that can no longer exclude the possibility of the Euro to collapse (if that is the case, let’s hope at least that it will happen without endangering peace and democracy), especially since we constantly hear about “Plan B’s”.
In any case, the observed combination of hyperinflation in the financial economy, together with a recession and deflation in the real economy, especially in Europe (EU statistics), assisted by the liquidity trap in which many states have found their selves in, may prove fatal.
For example, in Italy most businesses borrow only at “punitive” rates – so they indirectly suffer from unfair competition between Italian and German companies. At the same time, the rescue of banks by the state is impossible, because of country’s high debt levels, close to 130% of its GDP – a situation that makes it even more difficult to provide loans to the real economy, ultimately leading the country to a recession and towards suicide or to a “heroic exit” from the Euro.
Although it has meant red alarm for quite some time now, it seems that the “emergency exit” has still not been found – unless a decision for radical changes will take effect, before civil wars or bloody revolutions start bursting out.
Changes , like for example the “rationalization” (or dissolution) of the central bank system, the settlement of debts of the West (public, business and private), controlled inflation, Eurobonds, a new monetary system, with borrowed money covered 100% by deposits, as well as a “new deal” – much like it happened in the 2nd World War (Bretton Woods).
*Note 1: The term “financial repression”, is defined as the manipulation of interest rates in financial markets on behalf of the government, with the help of its respective central bank – so that savers and investors suffer losses, to the benefit of the state.
For example, if the central bank adopts a low primary interest rate policy, then individual depositors would not be able to demand higher interest rates from banks, even if inflation is higher – because banks (due to low primary interest rates) could finance their operations at low rates from central banks and fill the market with low interest rate loans (increase in money supply).
According to economists E. Shaw and R. McKinnon, the term generally refers to government market regulation measures, with the use of which part of privately owned assets are being transferred to the state. Both Reinhart and Sbrancia have set out specific characteristics of a “financial repression”, which they describe as being the following:
(a) Interest rates on sovereign debt may not exceed a ceiling,
(b) Existing banks become state owned, while the establishment of new banks is prevented.
(c) Central Banks are obliged to buy government bonds of their country or to keep them as capital reserves.
(d) A control on capital movements is imposed.
Obviously, some of these measures have already been imposed, directly or indirectly, in some countries – and it is not unlikely that they will be implemented all together by states in the future, if no solution to the debt crisis can eventually be found.
** Note 2: When the Fed wants to increase the money supply in the market, it buys bonds from banks, giving them freshly printed dollars – i.e. new money, created from nowhere. In this case, due to the high demand for those bonds (demand from the Fed), prices are rising and the Fed makes an entry in its Balance sheet that shows a profit.
On the contrary, when the Fed wishes to decrease the money supply, it sells bonds to banks and it collects money – which it then destroys (back to nowhere). Because of the large supply of these bonds though, prices drop and the Fed records a loss in its Balance sheet – thereby reducing or completely losing its funds.