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Equity Markets, Credit Creation, & The Central Bank's Ultimate Priority
Submitted by Alasdair Macleod via GoldMoney.com,
There is one class of money that is constantly being created and destroyed, and that is bank credit.
Bank credit is created when a bank lends money to a customer; it becomes money because the customer draws down this credit to deposit in other bank accounts and to pay creditors. It is not money that is created by a central bank; it is money that is created out of thin air by commercial banks to lend. Its contraction comes about when it is repaid, or if a customer defaults.
The recent sharp fall in equity markets is leading to two levels of contraction of bank credit. Brokers' loans to speculating investors are being unwound from record levels, notably in China and also in the US where in July they hit an all-time record of $487bn. Then there is the secondary effect, likely to kick in if there are further falls in equity prices, when equities held as loan collateral are liquidated. This is when falling stock prices can be so destructive of bank credit, and as the US economist Irving Fisher warned in 1933, a wider cycle of collateral liquidation can ensue leading to economic depression.
Fear of an escalating debt liquidation cycle is always a major concern for central bankers, so ensuring the secondary effect described above does not occur is their ultimate priority. Macroeconomic policy is centred on ensuring that bank credit grows continually, so since the Lehman crisis any tendency for bank credit to contract has been offset by central banks creating money. The bald fact that equity markets have now lost upside momentum and appear to be at risk of a self-feeding collapse will be viewed by central bankers with increasing alarm.
For this reason many investors believe that a bear market will never be permitted, and the combined weight of central banks, exchange stabilisation funds and sovereign wealth funds will be investing to support the markets. There is some evidence that this is the direction of travel for state intervention anyway, so state-sponsored buying into equity markets is a logical next step.
The risk to this line of reasoning is if the authorities are not yet prepared to intervene in this way. When the S&P 500 Index halved in the aftermath of the last financial crisis, the subsequent recovery appeared to occur without significant US government buying of equities. Instead the US government might continue to rely on more conventional monetary remedies: more quantitative easing, reversing current attempts to raise interest rates, and perhaps attempting to enforce negative interest rates as well. If, in the future, state jawboning accompanying these measures does not stop the bear market from running its course, the next round of quantitative easing will have to be far larger than anything seen so far.
Alternatively, if states by buying equities attempt to kill the bear, it will have to be through massive market intervention, aiming helicopter-distributed money at investors as well as rigging the alternatives to make them relatively less attractive. Either way, the shake-out in equities we have seen so far is a wake-up call for mainstream economists and commentators who believe in the comfort of government statistics, which seem designed to convince us all that economic growth is perpetually on its way.
Since the Lehman crisis, investors have bought into this bullish argument to the exclusion of any likely risk that a bear market will happen. Consequently, considerable amounts of speculative money are committed to the concept of a perpetual state-guaranteed bull market; so if the destructive forces of reality do intervene, the potential for a severe fall in equity prices will be much greater than before.
Meanwhile global bank credit looks like it is already contracting in key markets, such as China, in which case global fundamentals are definitely deteriorating. This being the case, it will take increasing amounts of newly-issued money from the central banks to perpetuate the illusion that markets are rising, and that the economy is still growing, with or without state-directed buying of equities.
This article coms one week before the Fed's September interest rate decision, which might result in a small interest rate rise, but it is time to put the Fed's interest rate dilemma aside and instead think beyond it about the wider economic consequences of the monetary inflation necessary to ensure a perpetual bull market.
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This has already been going on since 2001 at an increasing intensity. The problem is that the longer you keep this going, the more effort you have to put in to maintain effective intervention. Until you cannot keep up and the whole thing comes crashing down. So the longer they tr to maintain the staus quo, the worse it will be when they lose control.
Feedback is a bitch.
Even the fed knows what they're doing is unsustainable. They are now furiously looking for a scapegoat. It has to be China.
Here is the foundation why CB's have taken over markets...and will never be able to relinquish but also never succeed (at least not economically although they may be able to contrive the financial numbers indefinitely).
Demographics Driving Declining Global Oil Consumption, Mounting Debt, & Central Bank Mismanagement
New article makes it plain that demographic peaks and declines of the core populations (15-64yr/olds, nation by nation) are driving declining oil consumption, central bank interest rate cuts, and resultant debt loads. Simply follow the changes to the core populations and everything else makes sense...declining economic activity is offset by interest rate cuts to get a shrinking number of people to take on ever greater debt (leverage) to maintain consumption. But seemingly, this was under the false assumption this was a temporary lull...instead of the secular change it truly is. The article clearly demonstrates the utter foolishness (at best) from central banks that is making what was always an inevitable difficult change as population growth slowed...into a catastrophe.
http://econimica.blogspot.com/2015/09/demographics-driving-declining-global.html
Fractional reserve banking was born of fraud, central banks are just a way of perpetuating the fraud. This is still the best explaination of how we got into this mess that I have read.
Yep, and that's why they hate gold so bad. In the old days we had booms and busts but gold was always there and would sooner or later come out of hiding, now it just disappears into the void from whence it came.....
"and the party goers are too drunk to notice" - Siskel
https://www.youtube.com/watch?v=NHmDQqBOl38
Let me be clear, there is no Fed equity market put. William C. Dudley, NY Fed
Judicious Perspective
A lot of people made a lot of false assumptions, taking advantage of Medicaid / Obamacare to borrow money and keep everyone busy, doing busy work, because Felicia chose to work for a food bank, and now blame her for the aggregate outcome, falling living standards across the board. There is nothing wrong with Felicia or her daughter Grace, which a real economy wouldn’t solve.
I earned four college degrees, and worked for seven different unions, over 25 years, consulting Navy on issues such as this, the effect of financial proliferation on national security. The Court is not sitting in judgment of Felicia; it is sitting in judgment of itself, and the State, which will play out in the bond market and beyond.
In case you haven’t noticed, the nation/states are rapidly gearing up for WWIII, American consumers are the least prepared, and American Leadership is incompetent, not by accident. A tiny fraction of the population provides economic mobility for all the rest. Careful, when you go about hunting the 1%, in a divide and conquer black hole.
The Court and Healthcare Industry rest in a tide pool, in the face of a rising and increasingly turbulent ocean. I passed up several six-figure jobs to be with Felicia at Hospital, obviously for good reason. Dear Sir, you will do well to represent yourself, but thank you for your consideration just the same.
It’s not what you see that matters; it’s what you don’t see that matters, and I live in the world that The People don’t see, until it’s far too late.
Sincerely,
Kevin D. Earick
(filter out the emotion, sort for yourself, and put the quantum statistics to work. Zerohedge has provided more education than the entire school system combined; you can’t say you weren’t given notice.)
bank credit to china has been contracting since fourth quarter last year
I hate to keep saying it, but. The current financial system is failing and will fail because, "money in not meant to be made by charging interest or from investing." Money is suppose to be a reward for working. And by working, I dont mean sitting on the phone collecting bills all day. I mean, "working." Making, repairing or providing things.
When people start making money by not working for it the money supply gets soaked up by nonworkers and the work force dries up.
Making money by charging interest or from investing isn't true capitalism, its corrupt capitalism.
True capitalism and stable capitalism comes when a dollar paid is a dollar worked for, not collected.
Interest and investment are not rewards for "work", otherwise cleaning ladies would have relatively exorbitant incomes. "Interest" in its simplest sense is conditioned by time preference, being willing to pay more to have a good now than in the future. "Investment" is a belief that a specific good can be provided for less cost than others are paying for it, and so has its natural roots in efficiency.
1oz Silver American Eagle €13 @ EurGold
https://www.eurgold.eu/silver/american-eagle-1oz-silver-coin-1-dollar-le...
Just read through Loretta Lynch's most recent interdepartmental memo promising to put the clamp on Wall Street. My favorite piece of fiction was the opening crawl: Fighting corporate fraud and other misconduct is a top priority of the Department of Justice.
http://www.justice.gov/dag/file/769036/download
That ought to clear out quite a few Morgan/Sachs competitors
Yeah, like the head of the Border Patrol saying they are going to stop illegal immigration, the FED claiming their mandate is employment and control of inflation, and the Supreme Court claiming to defend the Constitution.
Hey Loretta? Where is Jon Corzine?
Screw them I'm buying gold and bitcoin.
Obey the oligarchs, who are gods.
The banks ultimate goal is to own all of the wealth and keep everyone else on debt.
So the bottomline is - first comes the rate hike, then the market panics and then the Fed will have an excuse to rescue it with enormous QE unjustified otherwise.
so btfd then? the question is not whther there will be moar. the question is at what level on the s&p does the fed step in?
The ultimate priority of the central banks is to maintain the control of the elites over our whole system. As long as that is intact the elites can take a few knocks to their balance sheet in the short run.
The markets do not exist in their own right, as this article presumes.
They are based on the value of the underlying companies providing real goods and services.
Commodity prices are collapsing because there is little demand for real products.
Keeping markets high, when the economy they are based on has collapsed, is a rather futile exercise.
Hoping for a market crash tomorrow with no CB rescue. Positively negative (and short).
.GOV has to QE. They have no choice. With 220 trillion in unfunded liabilities (which is probably 400 trillion) the quantity of money doesn't yet exist to cover all the obligations. .Gov needs an 'economy' of 800+trillion in total size, from which it'll extract it's tens of trillions, or hundreds of trillions, a year. (Given their track record, it'll be hundreds of trillions in the next decade or two.) The only way to get there are continuous crises that require perpetual bailouts.
.Gov will end up owning lots of assets through pension funds, tax confiscations, and failed businesses that it bails out. It'll do an awful job of running everything and decline will continue. But with selective charting methods (probably using Lotus 123) it'll look just fine.
...but if it saves one child's life....