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Quantifying The IMF's Ability To Bail Out The World

Tyler Durden's picture





 

Today is D-Day for Europe, and soon, the world. Shortly, the IMF will take its historic place as the cash cop of last resort, a post traditionally reserved for the Federal Reserve, which incidentally was rumored to have activated its FX currency swaps with European banks last week (whether or not that is true will be disclosed by next week's H.4.1). This action will open a floodgate of consequences, as every semi-bankrupt country forces itself into a spending frenzy to guarantee that it is truly bankruptcy, no ifs about it, and qualifies for IMF (and thus 20% US) aid. And at that point the politics of a US-funded world bailout really will come to the fore. Because while the Fed bailing out America is one thing due to the Fed's untouchable and unsupervisable status, the IMF, as a corporation, does not share the same "above the law" privileges. And in an election year, with Americans slowly realizing that the fate of the world is truly in their hands, and their tax money is being involuntarily taken away from them as we speak yet again, ahead of midterm elections, all bets are off. For those interested in the actual mechanics of the IMF rescue mechanisms available, as well as some of the political implications likely to follow, here is an overview via Bank Of Countrywide Lynch.

 


 

IMF Lending Capacity (Jeffrey Rosenberg )

The IMF has nearly $250 bn in lending capacity currently available. To lend beyond that, the IMF needs consent of participants representing 80 percent of total credit arrangements in their backstop lending facility – the New Arrangements to Borrow (NAB). While legislative approval is not required in some countries, it is required in others. In either case, it would be a politically sensitive issue in any non-European country to support the peripheral European countries, especially if this comes on heels of Germany rejecting the aid proposals for Greece next week.

The IMF primarily funds itself through payments of quotas from member countries based on their relative sizes in the world economy. Currently, these quotas total SDR 217 billion (SDR or special drawing rights, is an international reserve asset created by the IMF and is based on a basket of four currencies), or $328 billion. Additionally, the IMF supplements  quota subscriptions through two credit arrangements between the IMF and a group of member countries – New Arrangements to Borrow (NAB) and General Arrangements to Borrow (GAB). The GAB enables the IMF to borrow  from participant countries, or their central banks, under certain circumstances at marketrelated interest rates.The NAB is used as a credit facility intended to backstop quota resources, and was recently approved to be expanded to nearly $550 billion from 38 participants, up from $50 billion and 26 participants earlier. Until the expansion goes into effect, the additional lending amounts are available as bilateral agreements, which would eventually be folded into the multilateral (According to a recent IMF conference call, since the NAB is a multilateral loan framework, the IMF usually draws upon it on a proportionate basis to member commitments) expanded NAB.

In reality, the amount the IMF has readily available for new lending is primarily determined by the one-year forward commitment capacity (though this figure is not a rigid maximum). The amount equals usable resources, including unused amounts under loan and note purchase agreements, plus projected loan repayments over the subsequent twelve months, less the resources that have already been committed under existing lending arrangements, less a prudential balance (The prudential balance is an amount set aside to safeguard members’ quotas and claims, also taking into consideration potential erosion of the IMF’s resource base. The prudential balance is set at 20% of member’s quotas used and any amounts activated under NAB and GAB). Currently, the one-year forward capacity stands at SDR 165 billion, or $248 billion.

Spreading the Political Risk Beyond Europe

The lack of a ready liquidity support mechanism for sovereigns in Europe highlights the importance of the IMF in the Greek bailout. Absent the ability or willingness of member states to extend bilateral loans to Greece, the IMF would
be the only support available, in our view. While its current facilities are of sufficient size, the much larger NAB facilities both are not yet operational and in our view require significant political support to execute. Given that the US represents nearly 20% of the total IMF lending capacity (both current and NAB), the failure of Europe to agree to support Greece would shift that political debate to the US and elsewhere.

Until an actual EU/IMF/Greece agreement has been reached and approved in all relevant countries – including by the parliament in some - uncertainty remains elevated in financial markets. Bear Stearns, Lehman Brothers, and AIG all faced shorter time lines at the end of their crises. The abbreviated time line in financial crises stems from the instability of funding. In the case of Greece, that instability may come from what is otherwise regarded as a source of funding stability – deposits. Under normal circumstances, government guarantee schemes generally support stable deposit bases but these are clearly not ordinary circumstances. This week the risk of restructuring – a Greek sovereign default – roiled financial markets.

Whether this concern spreads to depositors in domestic Greek banks will determine whether time will have finally run out on an EU brokered liquidity bailout. Absent that, the IMF stands as the only viable source of funds to avoid further spillover to systemic risk, in our view. And while they currently have enough capacity to fulfill this role, they would likely need to tap the NAB to enable them to support the broader periphery of Europe’s financing needs in a worst case scenario. Such an outcome would test the NAB and the political willingness of a much broader group of countries to support the fiscal deficit challenges of Europe.

 

 


The Bank Run

 

Much has been said over the ongoing Greek bank run by depositors. Some (RBS) did not believe us. They are now stuck holding bonds about 20% lower from where they could have sold them had they listened to us instead of mocking us. But that seems to be a recurring theme. We harbor no ill will toward the nationalized and failed banking institution. Yet, once again we are reminded that once a cascade of events is in motion, depositors, no matter what the level of assurances, simply refuse to keep their money in a banking system in troble. And while Greece is now done, and reliant on the ECB to collateralize its junk-rated sovereign debt, the spotlight now shifts to Spain, Portugal and Italy: are deposit redemptions in those 3 countries approaching the level seen in Greece? Stay tune and find out. In the meantime, as the TimesOnline reports, Europe has, too late, discovered that by the time the liquidity cascade begins, it is far too late.

Central bankers are also working on a separate scheme to stop Greek banks from succumbing to a run on their funds.

The European Central Bank plans to introduce a new emergency liquidity scheme as part of the wider bailout of the country, said sources close to the talks.

Greek banks have suffered a huge outflow of corporate deposits in recent weeks, reducing their financial strength, according to senior bankers.

The scheme would allow the banks to post junk-rated Greek government bonds as collateral in exchange for emergency loans. It will require a change in the European Central Bank's rules: at present it allows only government bonds with a high credit rating to be used in its emergency lending facilities.

 

 


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Sun, 05/02/2010 - 05:38 | Link to Comment doggings
doggings's picture

The scheme would allow the banks to post junk-rated Greek government bonds as collateral in exchange for emergency loans. It will require a change in the European Central Bank's rules: at present it allows only government bonds with a high credit rating to be used in its emergency lending facilities.

well it worked for the US banks with the FED taking toxic junk in exchange for unlimited backup, why not the rest of the world? it's all just pretend and meaningless numbers anyway.

http://www.theonion.com/articles/us-economy-grinds-to-halt-as-nation-rea...

Tue, 05/04/2010 - 01:41 | Link to Comment Adam Neira
Adam Neira's picture

There is a limit to the amount of bailouts and stimulus packages that can be granted on the international stage. An important relationship exists between liquidity and confidence. All human beings have the drive to self actualise under the right circumstances. All behaviour is a result of mindset and setting however...

Sun, 05/02/2010 - 05:49 | Link to Comment ToNYC
ToNYC's picture

The Germans will cut loose Angela Merkel before she falls for this FEd-induced Shock Doctrine play. She isn't about to employ Hank Paulson's imaginary bazooka. Greece will realize its survival in the EU by self-financing in a mark-to-market  actuarial haircut in real time of future obligations  or they can sell their state treasures at auction. The remaining  SPIIGs need to see this one play out or Game Over.

Sun, 05/02/2010 - 09:38 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

If Germany nonetheless proceeds to fund the Grecian bailout, you will know who is in charge, and it's won't be Merkel or for that matter the German body politic - it will be the banks, just as the American voters were powerless to prevent the $700B bailout here (just the downpayment actually, the real cost is in the trillions of $USDs and the clock still running furiously).

Sun, 05/02/2010 - 05:53 | Link to Comment doggings
doggings's picture

sell their state treasures at auction.

me and a couple of pals would be interested in Paros if it's going cheap enough.

Sun, 05/02/2010 - 07:28 | Link to Comment ambrosiac
ambrosiac's picture

 

Define "cheap enough".

 

A friend owns property on Paros, wants to build but is stuck due to refusing to pay bribes to the zoning board for the necessary permits.

 

Now redefine "cheap enough"  :))

Sun, 05/02/2010 - 05:59 | Link to Comment AnAnonymous
AnAnonymous's picture

A misguided effort. First thing I did when crisis started to kick  was to check mineral assets reserves all around the world.

Answer: collapse not for this time.

Largely enough to keep the scheme going on.

The IMF is not limited in its access to money. The money is limited in what it might buy.

Just a matter of emitting new credits. The IMF can carry out that in a trice. On the other side,  largely enough assets are left throughout the world to bail out the 'whole ' world (or more exactly, get one part of the world to bail out the other part)

Sun, 05/02/2010 - 07:06 | Link to Comment Observer
Observer's picture

good point

Sun, 05/02/2010 - 08:08 | Link to Comment Mercury
Mercury's picture

I guess we'll soon find out when TBTF is overwhelmed by Too Big To Bail.

For now, TB or not TB, that is the question.

Sun, 05/02/2010 - 06:57 | Link to Comment plocequ1
plocequ1's picture

Good, I hope it works. I cant wait for my 90% tax increase. Besides, I love Feta Cheese.

Sun, 05/02/2010 - 07:04 | Link to Comment Observer
Observer's picture

my comment below

Sun, 05/02/2010 - 07:04 | Link to Comment Observer
Observer's picture

The IMF funds come from the 'rich' states who use it usually to control the 'not so rich' and 'poor' states anyway. all very 'rich' coming from countries whose central banks accpet any junk as 'collateral'. the countries in trouble should create their own bailout anyway by printing money and temper it by instituting price and capital controls till production catches up with excess money supply and stick the finger at the IMF. otherwise they are on the 'road to ruin'

Sun, 05/02/2010 - 07:11 | Link to Comment jkruffin
jkruffin's picture

Greeks should just stop working at all now, if this bailout package goes through.   Tax increases and wage cuts in one swoop.  I bet non of the top officials get hit like that.  It is always the less wealthy folks flipping the bill.   I think Greeks need to make a stand here and refuse.

Sun, 05/02/2010 - 07:29 | Link to Comment Broker NotBroke
Broker NotBroke's picture

The bankrupt paying the bankrupt. Can't we just let it crash already? Everyone is going to default eventually. If we let it crash now, we may have a chance at a decent life sometime within our lifetime. If things keep going, our grandchildren will lament the futures of their grandchildren.

 

Let the world eat itself for a spell.

Sun, 05/02/2010 - 10:31 | Link to Comment lesterbegood
lesterbegood's picture

Perhaps the world will open its mouth wide for us...

Sun, 05/02/2010 - 07:44 | Link to Comment exportbank
exportbank's picture

In a fractional banking system doesn't the 500 Billion at the IMF become 40 trillion in available loans? (80 to 1 leverage like Citi) seems like enough to fix most problems. We live in a fraudulent finance world that needs reality but unfortunately that reality would involve the death of every bank, pension, FDIC and government. Reality is too nasty to allow. You want your 401K to "sort of" be worth something, you want your saving to remain so the only cure seem to be inflation and since that's already running at 9% (I know they tell you it's 2%) we're on the way. See shadowstats for real inflation data.

Sun, 05/02/2010 - 07:46 | Link to Comment LeBalance
LeBalance's picture

General question(s):

Are Grecian creditors (those holding its debt, etc.) first in line to trade their toxic assets in for the IMF and ECB "loan" funds?  If so, does Greece ever actually see these funds that it is borrowing OR do these funds just "heal" its Debt/GDP ratio and allow it to turn over a new leaf?  In turning over this new leaf, Greece would then need to run its economy in a responsible fashion (cough Keynes cough) in order to realise the ability to sell new debt (cough usury couch same boat as before cough).  But does anyone believe that Greece (cough defaulting every 1 out of 2 years since independence cough) will do this? (Only the CB gang again?  Those naughty world twisters!)

Hmmmm.....

Sun, 05/02/2010 - 08:09 | Link to Comment Duuude
Duuude's picture

It's a merry merry go-round. Ya just gotta see the diagram in tha link.

The numbers quickly mount. Ireland is heavily indebted to Germany and Britain. The exposure of German banks to Spanish debt totals $238 billion, according to the Bank for International Settlements, while French banks hold another $220 billion. And Italy, whose finances are perennially shaky, is owed $31 billion by Spain and owes France $511 billion, or nearly 20 percent of the French gross domestic product.

“This is not a bailout of Greece,” said Eric Fine, who manages Van Eck G-175 Strategies, a hedge fund specializing in currencies and emerging market debt. “This is a bailout of the euro system.”

Solutions are also not easily forthcoming. “In the end, we’re all saying we don’t know how to deal with it,” said Dirk Hoffmann-Becking, a bank analyst with Alliance Bernstein in London. “We don’t know how the channels work, or where the problems will pop up next.”

 

http://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html?...

Sun, 05/02/2010 - 08:23 | Link to Comment LeBalance
LeBalance's picture

Thanks, Duuude.

I am well aware of the fictional nature of countries and that a more realistic picture would be closer to (Power Elite)(Their Banks)(Country Construct)(citizens) as the PE do "legally" own everything.  I am just trying to build up in my mind the ethno-centric picture and how the functionally illiterate citizen might feel about this part of the grand shit storm.

Sun, 05/02/2010 - 09:35 | Link to Comment snowball777
snowball777's picture

Their pentagram is upside down.

 

Sun, 05/02/2010 - 07:54 | Link to Comment kaiserhoff
kaiserhoff's picture

New GDP numbers are out, but the lefties aren't dancing around the May pole.  We "grew" at 3.5 % but over half was inventory build, the rest was consumer spending as in tax refunds and selling the family silverware.  If you think I'm kidding you need to get out more.  This country is bleeding out.

Note to Ben and Timmy.  If you've got a plan B, this might be a good time.  This dog won't hunt.  Unemployment is building.  There's a tsunami of foreclosures coming, and oh yeah, Europe and the states are about to implode.  Just thought you should know. 

Our last president was famous for his loyalty.  Commiebama, not so much.  I hear it's cold in Siberia.  You might want to pack some wool socks.  Have a nice day;).

Sun, 05/02/2010 - 09:42 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

All correct, but Obama is no worse, and no better than anyone before him.  POTUS is not in charge, and has little real power to accomplish anything. You are witnessing the Janitorial Presidency.

Sun, 05/02/2010 - 11:29 | Link to Comment kaiserhoff
kaiserhoff's picture

Where are the free market Democrats?

First principles:  the falacy of equivocation is to treat unequal things as equal.

Wed, 05/05/2010 - 17:49 | Link to Comment RockyRacoon
RockyRacoon's picture

There are no "free market" anybodys.  There are no free markets...period.

Sun, 05/02/2010 - 08:09 | Link to Comment youngandhealthy
youngandhealthy's picture

ZH is whining about USA's 20% quota of SDRs (in fact it is 17%) and its obligations to bail-out all other countries that has been cheating. I can tell you that EU has higher aggregated SDR quota than the USA and in the case of Greece, EU will top with at least another €35Bn. We live in a globalised world both on the asset and the liability side.

Sun, 05/02/2010 - 08:33 | Link to Comment jm
jm's picture

Why should a US or German or ANY taxpayer be involved in this?

The issue is between too generous a set of creditors and a debtor nation in dire straights.

It's not whining to tell the pathetic to get their pants on and walk like men.  Bailout creeps need to learn some toughness from Latvians.

Sun, 05/02/2010 - 08:48 | Link to Comment AnAnonymous
AnAnonymous's picture

Tax payers are only involved in later terms.

 

Why people keep focusing on this point and acting like current tax payer was involved?

 

Sun, 05/02/2010 - 11:34 | Link to Comment Rogerwilco
Rogerwilco's picture

@youngandhealthy

How is Katy vanden Heuvel doing these days? You two must have had a nice conversation at yesterday's May Day festival.

Go spread your wealth around, I'll decide what to do with mine.

Sun, 05/02/2010 - 19:01 | Link to Comment akak
akak's picture

"We live in a globalised world both on the asset and the liability side."

So, "from each according to their assets, to each according to their debt", eh, is that it?

Fuck you and your neo-Marxist attitude that lays claims for the profligacy of the short-sighted against the wealth of the responsible and/or the innocent.

Mon, 05/03/2010 - 04:27 | Link to Comment youngandhealthy
youngandhealthy's picture

Jeeez...calm down Limbaugh...

Sun, 05/02/2010 - 08:18 | Link to Comment ZackAttack
ZackAttack's picture

Why does any sovereign bond yield any more than any other, then?

Sun, 05/02/2010 - 08:27 | Link to Comment doggings
doggings's picture

@ Ambrosiac.. heh, I reckon a couple of kilos of Gold for the island would be a fair deal?

not that cheap, but I could justify paying that much.

Sun, 05/02/2010 - 09:04 | Link to Comment doublethink
doublethink's picture

 

Quote of the Day

 

“We will have make sacrifices that will be difficult but necessary…but at the end of my term in office Greece will be reborn.”     --G-Pap

 

http://www.ft.com/cms/s/0/08a87e4e-55c4-11df-b835-00144feab49a.html

 

Sun, 05/02/2010 - 09:10 | Link to Comment Miramanee
Miramanee's picture

RE: "...And at that point the politics of a US-funded world bailout really will come to the fore. Because while the Fed bailing out America is one thing due to the Fed's untouchable and unsupervisable status, the IMF, as a corporation, does not share the same "above the law" privileges. And in an election year, with Americans slowly realizing that the fate of the world is truly in their hands, and their tax money is being involuntarily taken away from them as we speak yet again, ahead of midterm elections, all bets are off..."

Tyler, I have a differing opinion here. The American public's tax money has nothing to do with this deal. The FED (and Treasury) can tweak the IMF's and ECB's reserve accounts upward---by trillions if they so choose---without ANY tax implications for the American public. At least from an operational standpoint this is true. Tax dollars are NOT necessary for the computer operators at the FED to add 1's and 0's to the reserve accounts of the ECB. The only rationale for raising taxes is for the government to see if the dollar still holds value. Tax increases, increases respected and adhered to by the public, means that the dollar remains viable because people need dollars to pay said taxes. If, or when, the people come to REFUSE to honor their tax liabilities, then AND ONLY THEN do the operational issues at the FED become mitigated.

Sun, 05/02/2010 - 09:45 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

"The American public's tax money has nothing to do with this deal."

That is of no interest to the folks in charge, who view these assets as their's to deploy irrespective of our opinion on the matter. Our bailout was no different on our shores - it benefited only the banks and the very wealthy, and had nothing to do with the best interests of the American taxpayer. We can only stand back and watch. 

Sun, 05/02/2010 - 10:01 | Link to Comment Miramanee
Miramanee's picture

@ NED Zep:

The point is NOT that ALL of this crap benefits the wealthy and super-wealthy. That's tautological silliness, with all due respect. The POINT is that taxes and the FED's operational abilities under a system of irredeemable floating currency are mutually exclusive issues. To make the assertion that American taxpayers will bear the brunt of our bailout of the Eurozone states or of the IMF is incorrect. Additions to the RESERVE ACCOUNTS at the FED are made irrespective of changes in tax policy. Heck, the Obama team could theoretically CUT taxes, and the FED (and Treasury) could still 'infuse' trillions MORE into ECB and IMF accounts at the FED.

The issue viz taxes has to do with the eventuality that Americans, who watch all of the goings on with regard to American bailout of EVERY BANK and EVERY INSTITUTION and EVERY NATION---and who themselves watch their standard of living collapse and their unemployment benefits evaporate, etc.---these Americans may come to eventually say "screw it all", and en masse refuse to service their tax bills. When THAT happens, IF that happens...then we're talking implosion of the dollar---and of the global economy.

Sun, 05/02/2010 - 10:47 | Link to Comment Implicit simplicit
Implicit simplicit's picture

The continual creation of US dollars whether here or abroad would eventually induce  a "hidden" tax" in the long run by creating inflation. Ultimeately, this is the problem with creating fiat currencey with no backing in an economy that is not growing.

Sun, 05/02/2010 - 11:05 | Link to Comment Miramanee
Miramanee's picture

@ I.S.

Agreed, but with a caveat. Yes, this is "a" big potential problem. And, while I am more in the deflationary camp (viz massive private debt-deflation and deleveraging), I DO see inflationary pressures as being problematic over the mid-term.

HOWEVER...inflation would have to serve as the precursor to a citizen-based tax revolt. It is the citizens refusal (or inability) to pay taxes that would makes the dollar worthless, not the inflationary forces of current monetary policy.

Sun, 05/02/2010 - 11:55 | Link to Comment Bam_Man
Bam_Man's picture

You are IMHO partially correct. Under such abuse, the US dollar would lose most of its status as "money". While still useful as a means to settle tax liabilities, its utility as a universal medium of exchange would be greatly impaired. The price of oil and gold would absolutely reflect this, and are indeed already beginning to.

Sun, 05/02/2010 - 12:16 | Link to Comment Implicit simplicit
Implicit simplicit's picture

What's the od saying: infation in things you need and deflation in discretionary, or something like that. Bottom line creating money from nothing,  and chicks for free can't be a good thing for the economy. Well maybe not the chicks for free part.

The bottom 40% don't pay much income taxes, and this group are finding more ways to not pay other taxes as the economy slumps for them. Its a bifurcated economy where the top earners are doing ok but the bottom getting slammed. A lot more people working under the table and using bartering to make ends meet. Can't blame them. Not just a form of protest against the present system, but a means of survival.

Sun, 05/02/2010 - 12:20 | Link to Comment AnAnonymous
AnAnonymous's picture

Front-running inflation or waiting for the real inflation to pop in (you know, not the scrap people describe to be inflation, money chasing more goods djajdaj... but when mass production is no longer big enough to drown speculative efforts)

No matter what, the USD (or any other currency) is bound to buy less as goods are to become less numerous.

Once again, it sounds finer to buy when there are plenty on the table, meaning being fluid and freely emitted credits are a best than waiting for times when there is much less on the table.

 

But some people like so much to depict themselves  like victims they dont seem able to admit this point.

Sun, 05/02/2010 - 14:06 | Link to Comment Implicit simplicit
Implicit simplicit's picture

You could see the opposite effect in real estate. Plenty of supply, low interest rates, and thus supposedly, discounted homes. However,  after the bond yields rise in response to the diminished dollar, mortgage rates will increase, but houses will fall further in price. This diconnect between inflationary interst rates and lower house prices  happens because the banks will still need to qualify pieople for loans, thus house prices fall when interest rates rise. The opposite of what brokers and bankers tel lyou.

Mon, 05/03/2010 - 05:10 | Link to Comment AnAnonymous
AnAnonymous's picture

And?

The sub-prime stuff was a clever trick to reroute resources towards the US to allow homes building.

The money paid now is the price that the US public can afford.

The US pumped it its home market in order to direct the prroduction towards its territory. 240k$ houses, an offer only possible in the US and a direct consequence of the high quality general environment in the US which has a price.

Reality: same houses are sold 80k$, many other places in the world to compete for this range of prices. Worst: in the US, 80k$ do not cover for labour costs. Making it impossible to build these houses in the US.

The subprime 'crisis' was a clever way to snatch resources that could not have been used in the US.

Houses are in the US. Nowhere else. Good for the US.

Maybe time to stop playing victims?

Sun, 05/02/2010 - 10:59 | Link to Comment Madcow
Madcow's picture

The asymptotes will have their way with the fiat masters.

There's no way of preventing a deflationary (hyper-inflationary) economic collapse. There can't be 'reform' until the current system fails.

Citizens of the West will quit paying taxes because 1) they won't have any money to pay taxes; and 2) the lucky few with remaining incomes will come to realize that "government" is really just a bunch of gangsters, thieves and parasites.  People tend to lose their enthusiasm for cooperating with the "State" when the "State" is revealed as a massive criminal enterprise. 

 

 

 

Sun, 05/02/2010 - 11:13 | Link to Comment Miramanee
Miramanee's picture

@ Madcow

A tad hyperbolic...but, I guess that is your right considering your name.

I happen to think that it will take a very VERY long time before the American government, and the fiat dollar, hit the skids due to a tax revolution. Remember, before the government allowed such conditions to evolve, they would create a federally-funded job system, in which any unemployed man or woman could earn $8-10/hour doing any of a myriad of government-sponsored things. How about a million people cleaning up the oil from the Gulf Coast beaches!!

My point is cynical, I know. But the government DOES have two things on its side: (1) The ability to create as much money in the near term as it wants to, and (b) the ability to create as many jobs in the near term as it wants to (Can you say, "Census"?) These jobs would mean more taxpayers, more spending, and thus---AT LEAST FOR NOW---the survival of the dollar.

Sun, 05/02/2010 - 13:19 | Link to Comment taraxias
taraxias's picture

Nonsense.

The survival of the dollar is solely depended on the rest of the world's willingness to accept it for oil and other commodities. When these foreign entities realize that the game is being sustained only by more and more printing, the game will be over right there and then.

Sun, 05/02/2010 - 13:51 | Link to Comment Bam_Man
Bam_Man's picture

Precisely. It has been my contention for quite a while that at some point one or more Gulf States will announce that they no longer accept irredeemable fiat dollars as payment for their precious and ever-dwindling oil resources.

This will ultimately be what forces the G20, kicking and screaming, back onto some sort of a (fractional) gold standard.

Sun, 05/02/2010 - 15:12 | Link to Comment Miramanee
Miramanee's picture

@ Bam Man

Why in heaven's name would they do that?!! It would be akin to shooting oneself in the foot with a Howitzer. AS LONG AS THE DOLLAR HAS VALUE, THE GULF STATES WANT THEIR ACCOUNTS AT THE FED STUFFED FULL OF THEM!!!

IMHO, you are ALL missing the key point in these discussions. There is absolutely no reason for foreign entities to swear off dollars, because dollars are still valuable. AND, dollars are valuable because Americans think they need these dollars to pay their taxes.

Taxes as such are not the issue---it is the BELIEF that dollars are needed to PAY said taxes.

Sun, 05/02/2010 - 15:00 | Link to Comment Miramanee
Miramanee's picture

@ Taraxias

You are missing my fundamental point. The rest of the world will continue to accept the dollar as long as the American people accept the dollar. And the American people "voice" their acceptance of the dollar by agreeing that they NEED those dollars to pay taxes. Now...do I think that, at some point, the American people might rebel against a dollar that is being used to 'save the world' from all of its own fraud and malfeasance? Yes I do. But to state that "...When these foreign entities realize that the game is being sustained only by more and more printing, the game will be over right there and then..." puts the horse in front of the cart. The rest of the world already KNOWS that their reserve accounts at the FED are being electronically pumped. They are FINE with that---as long as the American taxpayer continues to believe in HIS need to accrue dollars to pay is taxes.

Sun, 05/02/2010 - 15:41 | Link to Comment Broker NotBroke
Broker NotBroke's picture

Bring it on. Let's see what the "civilised" people's of the world are made of. Set the debt record back to zero.

 

Trust me, everything's gonna be fine.

http://www.youtube.com/watch?v=XkUaV9GZDuk

Sun, 05/02/2010 - 11:16 | Link to Comment ElvisDog
ElvisDog's picture

But simply adding 1's and 0's to account balances would be "crossing the rubicon" and the previously posted Onion article would become reality. There would be an immediate crisis in confidence in the $US and other world currency and then it really would be "game over, man".

Sun, 05/02/2010 - 11:26 | Link to Comment Miramanee
Miramanee's picture

@ Elvis.

No. The FED and Treasury have been adding these digits to reserve accounts for years now. Trillions upon trillions of digital-dollars, through the wizardry of the computer keyboard. Where's the 'crisis of confidence' about which you speak?!

The world NEEDS to believe in the dollar. Without trust in the dollar, it's bye-bye civilization as we know it.

The issue is TAXES. If, when, the world sees that the U.S. taxpayer has decided that he/she no longer needs the dollar to pay his/her tax bill, then it's game over.

Sun, 05/02/2010 - 12:24 | Link to Comment AnAnonymous
AnAnonymous's picture

Ummmm, the world has little to do with it. Dont think the world has the capability to walk out of the current situation if they choose to.

 

People buying dollars buy an access to the commodities world market.

Commodity rich countries cannot leave the deal. Contrarian to the all the major countries'best interest.

 

Nobody cant help them and see as a better option to join the US raiding operation.

 

The US tax payer could stop paying, it would not change the deal.

Sun, 05/02/2010 - 15:05 | Link to Comment Miramanee
Miramanee's picture

@ ANON

Wrong.

You state: "...The US tax payer could stop paying, it would not change the deal..."

This in fact is the crucial issue. Remember, taxes DO NOT represent spendable revenue for the government. Operationally, the government does not NEED tax dollars to spend money. The government spends money by changing the numbers in computerized accounts.

The government NEEDS tax dollars because a taxpaying public is, by definition, a public that believes that their fiat currency has value. If/when the public stops believing this...game over.

Sun, 05/02/2010 - 20:53 | Link to Comment FEDbuster
FEDbuster's picture

With only half paying and about 25% getting kickbacks, the illusion is starting to break down isn't it? 

Plus, we now offer 99 weeks of unemployment sabaticals giving people time to earn some cash income and work on the "honey do" lists.

I think when the world stops believing the game will be over.  It will be time to focus the people with WW3.  As Marc Faber says, "we are all doomed".

Mon, 05/03/2010 - 05:28 | Link to Comment AnAnonymous
AnAnonymous's picture

The USD currency has de facto value. That is not a belief. That is a fact.

How?

Because at the lower end, people 'accept' to yield commodities/goods against the USD.

That's how the newly emitted credits are gaining value. The US does not put counter value in line. The US only rely on the value you can acquire by using the USD.

With USD, can you buy oil? Can you buy arable land? Can you buy mineral assets? Yes to all. Fact. Not a belief. A fact. And that is what many societies around the world buying USD are interested in: getting an access to the world market of resources required for their society to endure.

As long as it remains a fact, the USD has de facto value. No matter what the US public belief (or more exactly dismissal) is.

Kicking the US population out of the equation does not change the deal (it is already partially done and people who do not pay taxes are only pretending when they state they no longer believe in the USD, as they consistently use it to buy what they want)

While kicking out the US population does not change the deal, it will also destroy the illusory belief shared by a sizeable US population segment the US government needs them.

The US government needs less and less its own people, be it to wage wars (a lot of suppletive troops in the world) or to maintain their currency (as long as societies are interested in supporting themselves and as long as the US is established as the middle man between the required resources to support a society and the others societies)

This crisis was extraordinary to underline this issue. How many times did I read US citizens claiming that a USD in their pocket has no value and complaining about sending buckets of USD outside their borders?

In the pocket of a foreigner, a USD can buy everything. In the pocket of a US citizen, it just becomes a worthless piece of paper.

Or the belief the US tax paying money is bailing out the world. It is not.

Sun, 05/02/2010 - 13:27 | Link to Comment Double down
Double down's picture

This is the next place an illusion will be needed.

Sun, 05/02/2010 - 10:08 | Link to Comment viator
viator's picture

The Germans are going to get real tired of this real soon.

Sun, 05/02/2010 - 10:25 | Link to Comment lizzy36
lizzy36's picture

For the Germans isn't this just a bail-out carry trade, with credit risk once again severely mispriced.

Once again absent Germany's check there is merely an agreement to agree.  We are still t-17 days until default. 

Sun, 05/02/2010 - 10:44 | Link to Comment deadparrot
deadparrot's picture

It will require a change in the European Central Bank's rules: at present it allows only government bonds with a high credit rating to be used in its emergency lending facilities.

 

Typical. Governments and their "rules." Someone should come up with a new word to describe rules determined by governments as they are much more likely to be ignored when they become inconvenient.

Sun, 05/02/2010 - 11:07 | Link to Comment Quantum Noise
Quantum Noise's picture

Okay.. so how much are the Germans paying and how much do we pay via IMF?

Sun, 05/02/2010 - 11:19 | Link to Comment vainamoinen
vainamoinen's picture

tax-schmax - this is what I saw in the article:

"once again we are reminded that once a cascade of events is in motion, depositors, no matter what the level of assurances, simply refuse to keep their money in a banking system in trouble."

When the process is moving faster than human ability to consciously perceive it then the process is "out of control". Under these circumstances there is no way to get ahead of the process - humans cannot, due to inherent mental limitations, perceive and process the necessary information fast enough to get control.

A bank run is just one example of the phenomenon of process escalation due to negative feedback and lack of perdeption and control. 

Wars are also extremely susceptible to this phenomenon as Robert McNamara, et al, learned in Viet Nam. He used the term "The Fog of War" to describe the phenomenon. Napolean learned this lesson in his March on Moscow.

It seems to me that the fundamental difference between the deflationist crowd and the inflationist crowd is that the deflationists generally believe the process is/will become uncontrollable and work its way to its "natural" outcome via an uncontrollable deflationary process. The inflationists seem to believe that TPTB have some ability to control the process via their ability to inject liquidity into the process and thus guide it - at least to some degree.

I imagine that the current situation in Europe will cast some light on the issue. Still, getting back to bank runs, I personally don't keep much $ in the banks. For .15%, or whatever they happen to be paying, it's just not worth the risk.

Sun, 05/02/2010 - 18:32 | Link to Comment Tethys
Tethys's picture

Speaking of Napoleon's march, nice visualization by Charles Minard:

http://en.wikipedia.org/wiki/File:Minard.png

 

 

Sun, 05/02/2010 - 12:12 | Link to Comment Wily Wonka
Wily Wonka's picture

Soooo, what time do we gun the spooos higher? 

Sun, 05/02/2010 - 12:45 | Link to Comment doolittlegeorge
doolittlegeorge's picture

This is the best yet for ZH and the article should be read everyday all week as a preamble to each CNBC episode so that at least the poor suckers who have now simply become entertainers can at least talk about a thing called reality.  Now obviousy we are "bailing out a country" and for all you ZH paranoid types "get yer facts straight."  This nation took equity stakes in the banks and basically believed "they'd shake you down and the government would win."  The bailouts were with AIG and GM--and that was it.  Very clever actually since it now allows the government to "start arresting them" of which Goldman will be victim numero uno.  Onto the the meat of this VERY well presented analytic (which is why we all should have a good conspriracy theorist as a friend.)  On this site initially "Greece" was shorthand for "Goldman."  Needless to say THAT was a collossal blunder.  But "where's there smoke there's fire" and contributors here have like Patton "wheeled their Army West" because now they "see the history."  I said immediately when this "story" broke "here's the big one" but now "Greece is dead, long live the Greeks."  In other words "we're bailing out a country which no longer exists" which is not necessarily bad policy when certain "governments" are concerned.  Let us not cry for Greece.  They were going to "kill all you French and British soldiers before your women even have a chance to weep" in World War I and in World War II in the same city sentenced 50,000 Jews to death "with gusto" as they say.  In short God has had enough of the Greeks and now they die.  It's not like the IMF is sending THEM to concentration camps, no?  Now what will come?  Well I've certainly stated my views--but that's not necessarily what I believe should happen--just "talking off the top of my head."  What will happen of course is what happens--and why we need to stay tuned to ZH.  In the meantime "read the ZH story"--because these are all acts of war being committed.  "So far so good" on the bloodshed tally.  But you are feeling both in your personal life and in actions by various governments the "acts of a sovreign."  Do the "ZH" and observe and report.

Sun, 05/02/2010 - 13:39 | Link to Comment taraxias
taraxias's picture

WWhooooa, whatever you are snorting, you better change your supplier, it's some bad shit.

Sun, 05/02/2010 - 12:50 | Link to Comment Double down
Double down's picture

Off topic

I want to say how unbelievably refreshing it is to be a part of this community.  Spending time on this site brings me peace. 

Thanks everyone 

Sun, 05/02/2010 - 20:58 | Link to Comment FEDbuster
FEDbuster's picture

Agreed except for the "peace" part.  I do enjoy the articles and replies.  ZH is the guy holding and watching the canary in the coal mine.

Sun, 05/02/2010 - 13:22 | Link to Comment glenlloyd
glenlloyd's picture

working on a separate scheme

That's exactly what it is, a scheme. We couldn't possibly recognize the unsustainable situation, that would be too honest. Instead we resort to trickery and conniving in order to put off the inevitable

Sun, 05/02/2010 - 13:30 | Link to Comment Tic tock
Tic tock's picture

Once the IMF start bailing countries out, the vox populous becomes quieter.

Sun, 05/02/2010 - 13:56 | Link to Comment CrisisMaven
CrisisMaven's picture

Whether the IMF indirectly or if member states directly raise money through bonds that  needs first to be either "printed" or else taken away from healthy businesses who achieve surplusses by what they're doing. Then it is dumped into areas that are unproductive, at least less productive than where the money originally came from. This can never work, has never worked and will never work. It can at best cover up the sordid state of affairs and make the final breakdown just that much more painful.

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