Monthly Archives: September 2012

Central Bank Failure …



Ongoing rush of monetization world-wide took a predictable step yesterday as the Fed Chairman announced open-ended lending to mortgage industry. This is on top of ongoing lending to the government (LSAP/Operation Twist) and the promise of ‘unlimited’ lending to banks (by way of governments) in the European Union. On the way is more central bank lending in Japan, UK as well as more stimulus in China and elsewhere.

As was pointed out in the Economic Undertow short-version:

 

Modernity cannibalizes its capital, as such our crisis is irreversible. Conventional marketplace remedies such as debt jubilees/write-offs, re-distribution, bailouts, stimulus, austerity policies, monetary easing, etc. have no effect on outcome other than to worsen conditions. These are efforts to reclaim capital that no longer exists. Consequently, remedies accelerate unraveling process by increasing gross debt (claims against capital) while exposing remaining capital to consumption at higher rates.

Economists insist that capital is symbolic (money) rather than material. Capital = resources (Daly), all industrial money is debt. Abstract money is infinitely reproducible, material inputs are not.

 

The central bankers endeavor to reproduce as much of the abstract ‘money’ as possible, hoping that consumption can grow to ‘normal’ levels. The central banks lend, this is all they can do. Despite talk about ‘tools’, they only have one: making- or not making loans. The banks’ only form of medicine is more of what put the world in the hospital in the first place!

The economies are like a car that cannot start. First one person then another puts the key into the ignition and cranks the engine. New people arrive and say, “I can start the car,” and take their turn with the key. They declare the problem is with the battery or the starter or the engine or the electrical system. Each believes the other simply does not know how to start a car. The gas tank is empty the car will not start regardless of who turns the key. Eventually, the battery fails.

 

Battery Failure = Great Depression

 

Most of the people in the world do not want a second Great Depression. There are also very few who do not acknowledge the possibility/likelihood of another depression taking place. The people will do whatever it takes to forestall it: if this requires believing the establishment’s lies … they will become true believers. They will repeat whatever lies they must to themselves, to their children, they will live the lies until they are submerged by them.

When the central bankers promise the children that they will save them, the children act accordingly … even though the fact of central banks making such promises speaks for itself. When the Fed and the rest are the last line of defense, there really is no last line of defense.

What people don’t understand is the nature of our crisis, it is an energy crisis in drag. High real input prices due to scarcity are stranding trillion$ of infrastructure used to waste resources, (sunk capital investment). There is no coming back from this. When capital resources are gone they are gone forever, wasting infrastructure is worthless junk. The process has arrived at the point when the various actors are beginning to come to understand what ‘forever’ actually represents and that they are confronting it.

The monstrousness of our predicament is almost beyond the ability of the human mind to grasp its scale. We burn up our resources today, there will be no more resources to burn for millions of years. We’re it. Apres moi le deluge!

Central bankers cannot issue value-on-demand. They cannot offer anything other than symbols for value, items that have worth only under circumstances that do not currently exist and cannot again! They cannot print crude oil, topsoil, surface water, they cannot increase waste-carrying capacity, they can add to the assault on these things by way of their lies and the willing credulity of others. They can only make matters worse, the central banks are at odds with themselves.

As far as it goes, the entire world is in the grip of resource deflation, from which there is no escape. Our voracious machines dig the graves of our grandchildren faster and deeper, capital is destroyed more utterly, what remains becomes unaffordably expensive, at some point the costs are bankrupting … see ‘Greece’.

Greece is all of our futures, our children’s futures, our grandchildren if they are very, very lucky and can dodge the consequences of our stupidity and blindness. They will live in small villages, they will till what fertile soil they can find, they will make things by hand they will wish all of us had died before we were born.

 

Loans without end … just not for you!

 

Tens of millions are unemployed worldwide! The solution is to offer loans at near-zero cost to bankers! That will solve the problem … right? Let the Fed Chairman’s friends take they money and run … to Peru!

 

 

Figure 1: This graph of Fed total assets and liabilities from Cleveland Federal Reserve Bank (click on for big). This amount is set to grow by another US$480 billion per year into the foreseeable future. Keep in mind, the central bank balance sheet expands because the private sector balance sheet contracts. Fed credit supplants private credit, it is not added to it. If there is no private sector deficiency there is no need for easing! The end of the day has no net increase in available funds for the public, only balance sheet problems pushed further into the future.

The breakdown of Federal Reserve balance sheet can be seen on the Fed statistical release page. Regardless of what the report says, all assets held outright by the Fed are loans made by them: the purchases of Treasury- or agency bonds are loans to these agencies.

The flow of credit is from the central bank into reserve accounts at the Fed (not circulating currency). Reserves do not appear in the greater world unless there is demand for them in the form of redemptions/depositor withdrawals that exceed the requirements of ordinary, day-to-day business. A good example of this excess depositor demand would be a bank run.

What the central bank has done is guarantee all bank deposits by offering what amounts to unlimited reserves.

It’s not clear guaranteeing deposits is what the Fed Chairman intends to do. Bank runs are underway in Europe, China, Argentina and elsewhere. The reason is there are no effective lenders of last resort, the consequence of central bank over-promising/making unsecured loans. When central banks leverage themselves they become no different from ordinary, commercial banks/shadow lenders who are insolvent because of their unsecured lending. The central bankers promise ‘unlimited’ supplies of liquidity, they cannot possibly deliver it. The central banks are collateral-constrained. There is less good collateral available: collateral is capital, there is a shortage of it: our crisis is the consumption of capital. Adding claims against what little remains is pointless particularly when the form of the claim is accelerated consumption.

The Chairman guarantees bank deposits with the left hand while making the guarantee necessary with the right.

More left hand-right hand: or perhaps left foot-right foot: the central banks place the petroleum industry’s boot on the throat of the world’s economies (click on for big):

 

 

Figure 2: Brent crude continuous front-month contract, chart by TFC Charts: the financing needs of the petroleum extractors is at odds with those of the extractors’ own customers (Guardian):

 

Further quantitative easing in doubt as petrol prices near record high.

Phillip Inman

The Bank of England could be prevented from boosting the economy with another round of QE if inflation rises

Petrol pump prices jumped to 139.7p a litre this weekend, within 3p of the 142.5p record set in the spring, according to figures from the AA.

The cost of diesel also rose as Europe’s major refiners blamed hurricanes in the US and a string of refinery shutdowns for a spike in the cost of crude oil.

A rising oil price will spook the Bank of England, which has relied in its inflation forecasts on a fall in oil prices linked to falling demand across the world. The central bank’s monetary policy committee, which sets interest rates, could be prevented from adding to its £375bn programme of quantitative easing to boost lending in the economy if inflation takes hold, analysts said.

Higher pump prices will also add to concerns that the UK will join continental Europe in a stagflation trap as inflation rises while growth remains flat.

Fears that the economy will remain in recession for the rest of the year were heightened by a report on Monday that found optimism among UK businesses has hit a 20-year low.

 

There is an upper bound to the price of petroleum, where the costs of consumption become unaffordable and demand is constrained. In the US, the price is a little over $4 per gallon of motor gasoline: at this level the entire fuel wasting enterprise becomes unaffordable, including the precious tract house- and office developments, sectors of the economy the central banks are desperate to revive.

 

 

Figure 3: Got gold? (TFC Chartz, click on for big) How about silver? It is hard to see a green light given to Wall Street asset speculators that won’t push up the price of all commodities. Unlike crude oil, which cannot rise in price without self-limiting demand destruction, gold is not strategically important. An ounce of gold can be bid up to a cool million dollars per ounce without effecting the so-called ‘productive’ economy. Gold is a fetish, like a Tiger tank or a Warhol Car Crash: a very high price might reflect uncertainty about the worth of other goods (including currency) but the implied shortage of gold would not materially effect output of necessary goods.

The central banks think only of creating asset price ‘bubbles’, in our ruin of a world there is nothing left.