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Guest Post: The Nightmare After Christmas
By Detlev Schlichter of The Cobden Center
The Nightmare After Christmas
The pathetic state of the global financial system was again on display this week. Stocks around the world go up when a major central bank pumps money into the financial system. They go down when the flow of money slows and when the intoxicating influence of the latest money injection wears off. Can anybody really take this seriously?
On Tuesday, the prospect of another gigantic cash infusion from the ECB’s printing press into Europe’s banking sector, which is in large part terminally ill but institutionally protected from dying, was enough to trigger the established Pavlovian reflexes among portfolio managers and traders.
None of this has anything to do with capitalism properly understood. None of this has anything to do with efficient capital allocation, with channelling savings into productive capital, or with evaluating entrepreneurship and rewarding innovation. This is the make-believe, get-rich-quick (or, increasingly, pretend-you-are-still-rich) world of state-managed fiat-money-socialism. The free market is dead. We just pretend it is still alive.
There are, of course those who are still under the illusion that this can go on forever. Or even that what we need is some shock-and-awe Über-money injection that will finally put an end to all that unhelpful worrying about excessive debt levels and overstretched balance sheets. Let’s print ourselves a merry little recovery.
How did Mr. Bernanke, the United States’ money-printer-in-chief put it in 2002? “Under a paper-money system, a determined government can always generate higher spending…” (Italics mine.)
Well, I think governments and central banks will get even more determined in 2012. And it is going to end in a proper disaster.
Lender of all resorts
Last week in one of their articles on the euro-mess, the Wall Street Journal Europe repeated a widely shared myth about the ECB: “With Germany’s backing, the ECB has so far refused to become a lender of last resort, …” This is, of course, nonsense. Even the laziest of 2011 year-end reviews will show that the ECB is precisely that: A committed funder of states and banks. Like all other central banks, the ECB has one overriding objective: to create a constant flow of new fiat money and thus cheap credit to an overstretched banking sector and an out-of-control welfare state that can no longer be funded by the private sector. That is what the ECB’s role is. The ECB is lender of last resort, first resort, and soon every resort.
Let’s look at the facts. The ECB started 2011 with record low policy rates. In the spring it thought it appropriate to consider an exit strategy. The ECB conducted a number of moderate rate hikes that have by now all been reversed. By the beginning of 2012 the ECB’s policy rates are again where they were at the beginning of 2011, at record low levels.
So why was the springtime attempt at “rate normalization” aborted? Because of deflationary risks? Hardly. Inflation is at 3 percent and thus not only higher than at the start of the year but also above the ECB’s official target.
The reason was simply this: states and banks needed a lender of last resort. The private market had lost confidence in the ability (willingness?) of certain euro-zone governments to ever repay their massive and constantly growing debt load. Certain states were thus cut off from cheap funding. The resulting re-pricing of sovereign bonds hit the banks and made it more challenging for them to finance their excessive balance sheets with money from their usual sources, not least U.S. money market funds.
So, in true lender-of-last resort fashion, the ECB had to conduct a U-turn and put those printing presses into high gear to fund states and banks at more convenient rates. While in a free market, lending rates are the result of the bargaining between lenders and borrowers, in the state-managed fiat money system, politicians and bureaucrats define what constitutes “sustainable” and “appropriate” interest rates for states and banks. The central bank has to deliver.
The ECB has not only helped with lower rates. Its balance sheet has expanded over the year by at least €490 billion, and is thus 24% larger than at the start of the year. This does not even include this week’s cash binge. The ECB is funding ever more European banks and is accepting weaker collateral against its loans. Many of these banks would be bust by now were it not for the constant subsidy of cheap and unlimited ECB credit. If that does not define a lender of last resort, what does?
And as I pointed out recently, the ECB’s self-imposed limit of €20 billion in weekly government bond purchases (an exercise in market manipulation and subsidization of spendthrift governments but shamelessly masked as an operation to allow for smooth transmission of monetary policy) is hardly a severe restriction. It would allow the ECB to expand its balance sheet by another €1 trillion a year. (The ECB is presently keeping its bond purchases well below €20 billion per week.)
Deflation? What deflation?
It is noteworthy that there still seems to be a widespread belief that all this money-printing will not lead to higher inflation because of the offsetting deflationary forces emanating from private bank deleveraging and fiscal austerity.
This is an argument I came across a lot when I had the chance in recent weeks to present the ideas behind my book to investors and hedge fund managers in London, Edinburgh and Milan. Indeed, even some of the people who share my outlook about the endgame of the fiat money system do believe that we could go through a period of falling prices first, at least for certain financial assets and real estate, before central bankers open the flood-gates completely and implement the type of no holds barred policy I mentioned above. Then, and only then will we see a dramatic rise in inflation expectations, a rise in money velocity and a sharp rise in official inflation readings.
Maybe. But I don’t think so. I consider it more likely that we go straight to higher inflation.
The deleveraging in the banking sector is the equivalent of austerity in the public sector: it is an idea. A promise. The reflationary policy of the central bank is a fact. And that policy actively works against private bank deleveraging and public sector debt reduction.
Consider this: The present credit crisis started in 2007. Yet, none of the major economies registered deflation. All are experiencing inflation, often above target levels and often rising. In the euro-area, over the past twelve months, the official inflation rate increased from 2 percent to 3 percent.
From the start of 2011 to the beginning of this month, the U.S. Federal Reserve boosted the monetary base by USD 560 billion, or 27 percent. So far this year, M1 increased by 17.5 percent and M2 by 9.5 percent.
Below is the so-called “true money supply” for the U.S. calculated by the Mises Institute.
As the Mises-Institute’s Doug French pointed out, total assets held by the six biggest banks in the U.S. increased by 39% over the past 5 years. Maybe this is not surprising given that in our brave new world of limitless fiat money, credit contraction is strictly verboten.
In the UK the official inflation reading is at around 5 percent, but nevertheless in October the Bank of England embarked on another round of “quantitative easing”. It has so far expanded its balance sheet by another £50 billion in not even three months, which constitutes balance sheet growth of about 20 percent.
What we have experienced in the UK in 2011 provides a good forecast in my view for the entire Western world for 2012: rising unemployment, weak or no growth, failure of the government to rein in spending, growing public debt, further expansion of the central bank’s balance sheet, rising inflation.
Death of a safe haven
And what about Switzerland? Here the central bank expanded its balance sheet by 40 percent over just the first three quarters of the year, and almost tripled the monetary base over the same period of time. Most of this even occurred before the 6th of September, the day on which Mr. Hildebrand, the President of the Swiss National Bank, told the world and his fellow Swiss countrymen and women that the whole safe-haven idea was rubbish and that Switzerland was now joining the global fiat money race to the bottom.
Deflation has become the bogeyman of the policy establishment. It must be avoided at all cost! Of course for most of us regular folks deflation would simply mean a tendency toward lower prices. It would mean that the capacity of the capitalist economy to increase the productivity of labour through the accumulation of capital and to thus make things more affordable over time (a true measure of rising general wealth) would accurately be reflected in falling nominal prices. The purchasing power of money would increase over time. This, however, would require a form of hard and apolitical money. Instead we are constantly told that our economy needs never-ending monetary debasement in order to function properly. We are constantly told to fear nothing more than deflation, which can only be averted by a determined government and a determined central bank. And the never-ending supply of new fiat money.
Appropriately, there is no talk of exit strategies any longer.
Given the size of the already accumulated imbalances I think a stop to this madness of fiat money creation would be painful at first but hugely beneficial in the long run. I am the last to say that no risk of a very painful deflationary correction exists. But a correction is now unavoidable in any case, and every other policy option will make the endgame only worse. Even if I am wrong on the near-term outlook on inflation and even if all this money-printing does not lead to higher inflation readings imminently, it will still be a hugely disruptive policy. Money injections obstruct the dissolution of imbalances and invariably add new imbalances to the economy, including new debt and capital misallocations, that will make even more aggressive money printing necessary in the future.
The nationalization of money and credit
Herein lies a fundamental contradiction in our present system: The desire for constant inflation and constant credit expansion requires that the banks be shielded from the effects of their own business errors. Allowing capitalism’s most efficient regulators, profit and loss, to do the regulating, would mean that banks could face the risk of bankruptcy – this is, of course, the ultimate disciplinary force in capitalism. This could then lead to balance sheet correction and thus periods of deflation. Ergo, banks cannot be capitalist enterprises at full risk of bankruptcy as long as constant credit growth and inflation are the overriding policy goals. The constant growth of the banking sector must be guaranteed by the state through the unlimited provision of bank reserves from a lender-of-last resort central bank.
That banks get ever bigger, that they routinely hand out multi-million dollar bonuses, and that they frequently get bailed out, is not a result of the greed of the bankers – a stupid explanation anyway, only satisfactory to the intellectually challenged and perennially envious – but is integral to the fiat money system.
Banking under state protection ultimately means banking under state control. In the end it means state banking. And this is where we are going.
Last week the Federal Reserve and the Bank of England announced plans to tighten the control over the balance sheet management and the risk-taking of private banks. This is just the beginning, believe me. The nationalization of money and credit will intensify in 2012 and beyond. More regulation, more restriction, more control. Not only in defence of the bankrupt banks but also the bankrupt state. We will see curbs on trading, short-selling restrictions and various forms of capital controls.
A system of state fiat money is incompatible with capitalism. As the end of the present fiat money system is fast approaching the political class and the policy bureaucracy will try and defend it with everything at their disposal. For the foreseeable future, capitalism will, sadly, be the loser.
The conclusion from everything we have seen in 2011 is unquestionably that the global monetary system is on thin ice. Whether the house of cards will come tumbling down in 2012 nobody can say. When concerns about the fundability of the state and the soundness of fiat money, fully justified albeit still strangely subdued, finally lead to demands for higher risk premiums, upward pressure on interest rates will build. This will threaten the overextended credit edifice and will probably be countered with more aggressive central bank intervention. That is when it will get really interesting.
We live in dangerous times. Stay safe and enjoy the holidays.
In the meantime, the debasement of paper money continues.
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"Why is finance so complex?" - www.interfluidity.com
I dont know how long or far the can will be kicked. But look at the BIS and Fed Gov websites. OTC Derivatives are growing exponitially and fed Res balance sheet is WAY outside of historical norms since 2008. Gov debt is growing at a rediculous rate and any 'austerity' or Gov cost cutting to rein in Gov spending to control debt, will cut GDP and increase unemployement. THE DEPRESSION WILL SHOW ITS UGLY HEAD when food stamps and unemployement checks are cut. Hungry people and riots are what I see in the near future.
OR - increased debt to continue the shit until as crack up boom results in the same thing on a much worse scale. (WW3, dictators, Fema camps, etc, etc, etc)
Crisis of confidence is here and growing. I sold my business and house in the city in '04. Moved, debt free, and I still refuse to play the games. I have not and will not put any money in stocks, bonds, or paper wealth of any discription. I keep in banks only what is needed to pay my few bills. I look for opportunities to purchase useful commodities but I cannot bring myself to open a business or 'invest' in any type of 'potential' money making venture.
I DONT TRUST THIS ECONOMY OR THE CROOKS RUNNING IT !! and I am not alone.
Until I see Corzine in prison for his illegal activity and .Gov actually enforcing the laws - I quit. I've taken my toys and gone home.
@ Quick. I did the same thing in 08. Locked down now. Same philosophy.
These words from the article sum it up very nicely
"A system of state fiat money is incompatible with capitalism. As the end of the present fiat money system is fast approaching the political class and the policy bureaucracy will try and defend it with everything at their disposal. For the foreseeable future, capitalism will, sadly, be the loser."
I'm stealing those words and putting the front and center on my little family web site for all to see and read.
Powerful words!
Schlichter like no other has painted and framed the picture of this world's economic and financial nightmare, "Bernanke’s Apres Moi le Deluge of Chaos and Destruction.”
Anyone who needs a constant reminder of what is going on in the real economy behind the cloud of equity market obfuscation – a place where those are rewarded who don’t do anything - need only hang Schlicter’s word painting of state-managed fiat system on the wall.
These central bankers operate in secret, pretending to be civil servants operating for a country’s benefit. Their state media uses every plausible explanation of what’s happening to put a positive spin on the actions of these “experts” who, in reality, are nothing more than foxes in the hen house.
Oh yeah, one last thing. The best way to predict the future is to create it. Be practical, demand the impossible, Vote Ron Paul 2012.
Deflation? What deflation?
All we have left now are debt bubbles, and debt bubbles are fueled by money printing, not only the textbook definition of inflation, also the real life manifestation in growing central bank balance sheets and higher prices for every needed product & service.
I've been asking the same thing all along, what deflation?
Deflation in housing? No. Falling prices in housig yes. Deflation no.
Deflation in assets held on bank balance sheets? No. Falling values of those assets yes. Delfation no.
Deflation has to do with the money supply relative to GDP. Falling prices and rising prices are a result of deflation (shrinking money supply) or inflation (expanding money supply).
Since all we have left are debt bubbles, beginning in 2001 with housing in America ballooning into a huge debt bubble that popped in 2007, and now the larger and faster growing sovereign debt bubble resulting from collapsing economies and shrkinking tax revenues in the face of ever growing government spending, massive money printing (and ongoing inflation) to feed this ballooning sovereign debt bubble is the future of finance far out as we can see.
... until currencies start collapsing and everybody's savings are wiped out.
Yes, it's the biggest theft of private wealth in human history to keep bankrupt governments and banks operating a while longer.
... until currencies collapse and this massive sovereign debt ponzi scheme blows up.
There's nothing left after that. This is it. The end game for the American and European financial system.
I consider it more likely that we go straight to higher inflation.
how does one go straight to higher inflation when the Rogers agricultural index (rji) is already down 31 percent from its 52 week high, silver down 41 percent, copper down 38 percent, gold down 16 percent, housing prices continue to march lower..............? sorry but this author is the one with his head buried in the sand. deflation is far more powerful than the hyperinflationistas realize.........
Down from what? From when? If we don't stop it will all be free... and then Big Oil goes bellyup. HaHa.
@JR---as i stated, all down from 52 week highs. wheres the inflationary fallout from this alleged ongoing printing and money supply expansion?? not seeing it..................
You could have made the same disingenuous argument in late 2008 as well, yet where are almost ALL commodities, and prices in general, since that point --- or even since their early to mid-2008 highs?
Your "analysis" is woefully short-sighted, hopelessly blinkered, and historically ignorant. It is CURRENCY DEBASEMENT that wins the day, ALWAYS, under the grim fiscal conditions in which Western governments currently find themselves, not some putative and nothing-but-hypothetical appreciating fiat currency --- something for which there is not ONE historical example.
It is instructive to note that deflationary flat-earthers such as yourself NEVER fall back on historical precedents to buttress your arguments --- because you cannot, as those precedents ALL support the fact that governments can and always do debase their (fiat) currencies during periods of (their own) fiscal irresponsibility. And I will repeat the salient point here: ALWAYS.
Oh NO, junked by a deflationary flat-earther!
Karl D, was that you?
... inflationary fallout from this alleged ongoing printing and money supply expansion??
What do you mean "inflationary fallout" from money printing?
Money printing IS inflation, by definition.
You're referring to higher prices from this ongoing money printing, and yes, prices of most things in demand are rising as a result of this ongoing money printing. Been to the grocery store lately? Been to a gas station lately? Paid a utility bill lately?
And no, not all prices are rising. Home prices are dropping in spite of this ongoing money printing, i.e. inflation. Why? Because demand for homes is falling faster and pulling prices down faster than inflation is pushing them up.
We've seen 25% - 30% overall drop in home prices since 2007. If not for "this ongoing money printing", i.e. inflation, home prices would have dropped 50% - 60% since 2007.
Lets see
Silver up over 1000%from its low
Gold up over 500% from its low
What time frame are you using
Just what kind of idiots (and more than one of them too!) would junk this poster for pointing out some obvious and unassailable facts?
Must have been deflationists --- "To the edge of the flat earth or Bust!"
I figure if we could ask the Pope to do the Christian thing and put up the Vatican's gold and investment stash, ask the Queens, Kings, Princes and lesser nobility who are still employed to put up their crown jewels and investments in oil companies and those generous billionaire princes from the middle east for a donation, Europe and therefore the rest of the world will be bailed out.
And the donors could feel good again by having been patriots, leaders and in the cause of the Vatican, life is better living a non materialistc lifestyle. We need these figureheads to set an example for us peons so we will know how to act appropriately if we ever achieve comparable status in this world. :)
Despite all the crooks best effort to hold the house of cards up, it will still be blown away in 2012.
After the MF global scam, for all to see..the truth has been exposed to even the blind.
The seed of descent has been planted back in 08 and it will only grow into more frustration with the corrupted system..it will be to little and to late...with their new rules to flub the masses, it probably will pull in what is left of the blind folks to see how corrupt the system is...nothing short of a world mob rule.
The crooks will be mumbling to themselves once they are lead to the guillotines, should of, could of, would of.
beans, seeds and lead are the new investments now...know thy neighbor.
$1,608 gold is going to seem really cheap in 2012. Don't wait for the crowd buy more now. Thanks to the reader who mentioned comparegoldprices.com. Saved me some money.
ah, the animal spirits at work again
Imagine if banks actually couldn't just roll their debt with ecb
If the ECB decides to maintain a €20billion weekly sovereign bond purchase and continues to expand its balance sheet, what will theoretically happen to the Eurozone's northern economies if these assets become toxic and the ECB embarks on more fiat-money proliferation? How will the Bundesbank respond? I imagine that its difficult to be in the regulators' seat these days.
With the developed world running away from deflationary spirals (in memory of the Great Depression) and unfortunately running to the other end of continuous credit expansion and completely wrong valuation of collateral, I surmise that it is highly challenging to find a modest synergy of policies that will edge the global monetary system away from the current precipice. As always, it is much easier to evaluate the events of 2007-09 from 2011 than to do so within those tumultous years
You make bankers sound like innocent financialists trying to do the right thing.
Of course that view is completely wrong. This whole fiat currency system is designed from the ground up to steal wealth from citizens and give it to greedy governments and bankers.
The only reason they give some of it to greedy governments is they need government cooperation to keep the scam going.
No, it's not about avoiding another Great Depression. That's exactly what we have now, another depression. The Great Depression was crated by bankers and this depression is created by bankers.
Depressions are created to loot citizens even faster, by dropping interest rates and printing mountains of currency under the banner of "fiscal stimulus" and bank bailouts. Dropping interest rates robs citizens of earnings on their savings. Printing mountains of currency debases the currency robbing citizens of their wealth.
This depression is the "last hurrah". USD has been debased down to 2% of its original value. There's not much value left, and that 2% will be wiped out this time around.
I have said in these pages more than a few times before, the average citizen of the US will be banking via Treasury Direct in the foreseeable future, the ultimate disintermediation, because it is the quickest way for TPTB to be able to take their slice of your pie.
is the word "christmas" illegal yet? it will be by 2060!
http://covert.mypressonline.com
http://www.youtube.com/watch?v=xVkkqUaL7K0
Cliff High is warning that we have until the 1st week in March, then it's KABOOM for a long, long time:
http://halfpasthuman.com/destiny.html
http://theeconomiccollapseblog.com/archives/a-very-scary-christmas-and-a...
2012 could be the year the Ameican fiat money system and the European fiat money system die.
Both are so overloaded with debt there could be cascading defaults any time now, setting off that huge QUADrillion dollar CDS hydrogen bomb, obliterating the whole financial system and wiping out governments too.
Bankers are hoping they can avoid this sure-fire systemic catastrophe by printing currency until currencies are worthless. But that's the point. Currencies will become worthless and the whole system will just simply die.
Issue another fiat currency and start over?
Nope, not this time.
Very powerful national governments will have been robbed blind. They won't just sit back and watch Anglo bankers write off the obligation and launch another fiat currency. They will retaliate, starting WWIII, trying to wipe out those Anglo bankers once and for all.
Fiat money when combined with a tax on incomes that includes taxing the nominal change in the value of real assests like land and precious metals is the grandest scheme of theft of private wealth in human history.