By Claus Vistesen, on August 22nd, 2011
The Calafia Beach Pundit raises an interesting question in relation to the recent surge in the US money supply which he suggests might be a reflection of a scramble into USD assets. More specifically, the argument would seem to be that a silent run on European banks is in the works as money is moved into perceived safe USD liquid assets.
As this chart of the M2 measure of money supply shows, it has gone on to experience a gigantic surge in the past seven weeks. M2 has risen almost $420 billion since the week of June 13th, on average almost 60 billion per week. To put this in perspective, annual M2 growth has averaged about 6% per year since 1995, and growth at this rate would translate into about $10 billion per week. In other words, M2 normally would have grown by $10 billion a week, but instead has grown six times faster. M2 has never grown this fast in a seven week period for at least the past 50 years. No matter how you look at it, this is a major event.
Where is the growth in M2 coming from? Virtually all of the increase can be traced to savings deposits (up $267 billion) and checking accounts (up $148 billion). Now we know why several large banks have announced they will now begin to charge customers who have over $50 million on deposit—they don’t know what to do with all the money coming in.
Clearly, the theoretical argument is sound here. In a world populated by different paper currencies a surge in liquid deposit assets of the reserve currency in times of crisis reflects preference for liquidity and safety. However, the idea that money is now systematically fleeing Europe is new and disturbing. The news last week that the ECB had to supply 500 million USD to an un-named Eurozone bank has added further to the speculation.
However, there are two problems here. Firstly, as Simon Ward points out, the data does not quite support the idea of capital flight from the Eurozone. Especially, one would have expected the EUR/USD to have reacted strongly on a flight of the Eurozone to USD assets.
Scott Grannis, for example, argues that US money demand has been boosted by massive capital flight from the Eurozone as investors anticipate a break-up of the single currency. The US money supply gain, however, has not, to date, been fully offset by Eurozone weakness – G7 monetary growth, therefore, has risen. Eurozone figures for July, released next week, could conceivably change the story but would need to show a large decline to offset US strength.
The Grannis theory of a huge capital inflow to the US from Europe, in any case, is inconsistent with the stability of the euro / dollar exchange rate in recent weeks.
Of course, someone else could be doing the bid on the EUR/USD (Voldemort?) but more specifically we should also observe a blow out in the Eurozone interbank spreads and while we may still see this in the coming weeks we have not seen anything resembling 2008 levels of panic.
Secondly, Simon Ward points out that even if you adjust for a plausible measure of liquidity preference money growth in the US is still strong which suggests that we cannot linearly equate a spike in the US money supply with capital flight from the Eurozone.
Another point worth considering here is that while the USD certainly must still be considered a safe haven other currencies have taken up this role especially in the wake of the debt ceiling debacle which saw the US lose its triple A rating from S&P. The CBP points out in the comments section;
(…) it’s true that the euro isn’t falling against the dollar, but both are falling against gold, the swiss franc, and the japanese yen. With currencies, everything is relative.
Especially the ascend of the CHF has seen the Swiss National Bank retort to more or less desperate measures to rid its currency of its safe haven status as it deems the Swissie to be severely overvalued.
At the end of the day, the answer must be found in deposit growth in the Eurozone. We have observed for a while how the periphery has been bleeding deposits which logically have been moving to the core (or so I assume). But generally, the total stock of money in the Eurozone has been volatile around a flat trend since 2008 which makes it difficult to interpret spikes and dips in the data. I will be looking closely at Eurozone deposit data next and will report back if I find something interesting.
By Doug Gentry, on April 22nd, 2011
The Federal Deposit Insurance Corporation (FDIC) was created in 1933 as a depression-era effort to restore the public’s faith in banks and banking. The early years of the depression were marked by numerous bank failures and runs on even healthy banks. After taking office President Roosevelt declared a bank holiday to give regulators a chance to identify, close/merge/sell troubled banks and to stop a spiraling panic of depositors hearing about bank failures and running to their own bank to withdraw funds.
In my Principles of Macroeconomics class we have just been talking about money (in particular fiat money) and the importance of trust. As long as economic players trust that money will be valued by others we use it. The same kind of trust is important in banking. Our economy needs banks in order to attract deposits, which then allow borrowers to secure loans and invest or consume.
The FDIC is a type of insurance program for banks. Each bank is required to pay premiums to the FDIC. If that bank fails, then the bank’s depositors are protected and will get up to $250,000 from the FDIC. This protection made wary depositors in 1933 start returning their money to the banks, which in turn helped fuel the recovery.
 On NPR’s Morning Edition this morning, there was an interesting piece about workers hired by the FDIC in 2009 to help with the process of closing failed banks, securing the deposits and paying the depositors, and then selling the remaining assets of the bank. As of now there isn’t a transcript of the piece, but you can listen to it here.
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By Claus Vistesen, on October 15th, 2010
It is not that I don’t enjoy a good old bull/teflon run as much as the next guy but just to provide some form of balance to the current QEasy Money Hymn I almost choked on my oatmeal earlier this week when I loaded up Bloomberg and learned that everything suddenly was fine in the erstwhile whipping boy (alongside Greece) of the Eurozone as the economy apparently has the cash to starve off any foreign bond vigilantes;
(quote Bloomberg)
Ireland expects its 20 billion-euro ($28 billion) cash pile to stave off a Greek-style rescue, as the government taps the funds to avoid paying record rates to borrow. The government canceled next week’s debt auction and another scheduled for November after the yield on 10-year Irish bonds rose to a record 454 basis points above benchmark German bunds. Finance Minister Brian Lenihan has said Ireland is “fully funded” through the middle of 2011. The country has 4.4 billion euros of bonds maturing next year, compared with about 27 billion euros in Greece.
I find this fascinating for a number of reasons. First of all there is root of the problem itself in the form of Anglo Irish Bank which will cost Ireland perhaps up to 30 billion Euros and will be responsible for a fiscal deficit in 2010 to the tune of of an unbelievable 32% of GDP. Naturally, this is expected to be a one-off expense and the whole exercise on cancelling auctions is because Ireland feels that the yields it would be able to borrow for at the moment would not reflect the long term health of the economy.
This makes sense. Why borrow if you don’t have to and especially if you are not happy with the terms put forward by your potential creditor. On this point I am, in principle, on Ireland’s side as it were. But what if costs for bailing out Irish banks are understated? Indeed, what is the real cost of assuming the entire bad loan book of Irish banks with no haircuts to bondholders or no restructuring of any kind? I don’t know, but more importantly; I am not sure the people concerned in Ireland know either. After all, the fact we are now looking at a +30% deficit as % of GDP in 2010 was not part of any of the official rescue manuals I think.
Consequently, let me throw another number at you; 3 % of GDP which is the fiscal deficit targeted for 2014 and which the market is supposed to take as collateral for a lower yield on Irish debt offerings in 2011.
Yet, is this plausible?
Basically, you have a confirmed 32%/GDP deficit today and you are promising to bring this down to 3% in a manner of 3 years. What are your assumptions here? What kind of nominal growth in GDP is build into the model? How will national debt evolve over this period? I am sure the good people at the National Treasury Management Agency are busy calculating just that as I type, but the problem is more profound.
Ireland has basically made the bet that in using its remaining reserves today and thus avoiding going to the market it can bring back its house in order and then return to borrow at that time, but this is circular thinking. The main question is whether Ireland has enough money to bail out its banking system such as it is. Alan McQuaid, quoted by Bloomberg, puts it well;
“They are taking a gamble that the budget will deliver and get spreads down,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. “If that doesn’t happen, maybe you skip a few auctions at the beginning of the year. But at some point, you have to go to the market. If you can’t go to the market, then you have to look at outside aid.”
And Danske is even more sanguine, but then again they would be wouldn’t they as they own National Irish Bank and thus effectively depend on this gamble to succeed (at least in terms of the health of their Irish operations).
“The government has a significant problem” unless yields fall, said Soerensen of Danske Bank, which owns Dublin-based National Irish Bank. “But it isn’t under any immediate pressure to raise cash, and even in the unlikely event that the government had to call upon IMF/EU aid, investors would still get paid. There isn’t going to be a default.”
But I think that we are still missing the main point here. This is not only a question of how dubious it is that Ireland can get its house back in order (and what kind of economic pain it will take) it is also a matter of whether it is in Ireland’s interest to enter the market at all. Essentially, the current interest rates are unpayable for Ireland today but also in the middle of 2011 since this is where, presumably, the full force of fiscal contraction will be put on the Irish economy.
So, my reading of this is that Ireland has now played itself into whatever deal it can broker with the IMF and EU and while I may be persuaded otherwise by a credible fiscal plan it is not the actual promise I will be looking at but the assumptions of debt/gdp and nominal GDP growth which underlies it.
Until then, Ireland can continue to heed the old proverb that cash is king; it sure is … until you run out.
By Ajay Shah, on November 6th, 2009
Jerry Caprio and Ila Patnaik, at two ends of the world, on the same subject.
The UK Special Resolution Regime has excellent documentation on the web.
There is a lot of talk in India about financial stability, where basic ideas are distorted to defend the status quo. Financial stability is, sadly, not interesting to the establishment when achieving it requires undertaking economic reform. One example of this is the problems of closing down failed banks or other financial firms: few things are more important to financial stability than the machinery of the bankruptcy process for financial firms. The best thinking on how to build deposit insurance is found in Chapter 6 of Raghuram Rajan’s report. In the mid 1990s I was member of an RBI committee on reforming deposit insurance. There hasn’t been any movement on this in decades.
By Trace Mayer, on August 28th, 2009
Interview With Jim Willie
An interview with Jim Willie where we discuss the potential of bank failures emanating from the Middle East and rippling throughout the world being the catalyst for the next round of the credit contraction.
TRACE MAYER: Hey this is Trace Mayer and you’re listening to the 50th episode of the RunToGold.com podcast (mp3)and today I’ve got a special guest with me – Jim Willie from GoldenJackass.com. Hi Jim!
JIM WILLIE: Hi, good to be here.
ENEMIES AT THE GATE
TM: Yeah, good to have you with me. I know we communicate every now and then about lot of the very important things. And you have just posted a really important article about five minutes ago. Can you give us a brief overview about what this article is about?
JW: Sure. The article is entitled “U.S. Bank Enemies at the Gate“, I wanted to take off on that wonderful title about the Siege of Stalingrad, but you know there’s a lot of attention, Trace, that US Banks are doing this and interest rates kept low, liquidity is strong and blah, blah, blah. And what they’re missing is that foreigners have their own agenda. They have their own bank failures. They have their own failed construction projects and their own failed-nations if you will, like Spain. I think we may see a threat to the U.S. banking system come from outside. Like for instance Persian Gulf bank failures just span across the United Arab Emirates and Kuwait and Saudi Arabia and before you know it – London and New York, so maybe there is a threat outside and we have got too much attention on the inside.
TM: Yes. Because we are seeing really high inflation rates in many middle eastern countries and they are also engaging in their own type of bailouts and stimulus packages, although they might be named differently. And so you are thinking that we may see perhaps a major bank failure come out of the middle east which will affect one of our large London or New York banks?
JW: Yeah. What I am hearing that the Dubai construction projects with all the pictures of magnificent bridges and unbelievable architecture for high rise buildings may look good but are failing at an unbelievable rate – the construction boom has turned into a magnificent bust and the bailouts have come from Abu Dhabi, the financial center, is like the London of the entire Persian Gulf. So, they are bailing out these construction firms, billions are changing hands, and the currency of choice that is being loaded up on all kinds of balance sheets is Treasury Bonds. So they will start liquidating and they have already begun this and if they continue the liquidation process then we are likely to see more bank failures just from lower values.
And you know, they have to deal with their own reality. They do not have a Plunge Protection Team there, they do not have phony stress tests there, they do not have phony accounting standards board. I go into more details in the article and even more detail in my August Hat Trick Letter member’s only which is a great source of information.
There is a lot of stinking stuff coming down the pipe and if we see some bank failures string across the Persian Gulf then there is no way it does not reach London and New York because they own a lot of bank stocks for the giant U.S. Banks. Now, there is a threat that you are just not catching in the financial networks in the U.S.
FAILED REAL ESTATE
TM: Right. Interest rates regulate production over time. By keeping the interest rates artificially low, we stimulated this huge commercial real estate bubble here in the U.S., but if we think the US commercial real estate bubble is a mess then just look at what has happened in Dubai. They built all this commercial real estate and what underlying economy do they have in Dubai; sand. There is no real underlying economy there to support any of these loans on the bank’s balance sheets.
So now they have built all these giant skyscrapers that are all like white elephants of dehydrating debt in the dessert. There are these huge buildings and they are all completely empty; are they not? Of course we are going see many bank failures coming out of Dubai. Do you think that is going to start impacting the U.S. banks here because like Prince Alwaleed, a big shareholder in Citigroup, for example might want some New York banks to subsidize these failed projects with bailout fund?
JW: Well, I think that could be the sequence that happens and there are a lot of unknowns. There is one particular construction project that I think of all the time when somebody says, “Oh, the big Dubai construction boom”. Well, there is a big property with all kinds of housing and it is laid out from shaped like a big palm tree. If you are looking down from 5,000 feet it is a beautiful, beautiful thing.
What I have heard is that it is entirely empty. It has failed with no income stream. Now, I would like to just to make a quick point here and it is not like their economies are based on processing sand. They have an oil industry and a petro-chemical industry. They make refined gasoline, chemical products, have feed stock, crude oil and natural gas.
Saudi Arabia actually has the most diversified economy in the Persian Gulf. I do not think they make their own pharmaceutical aspirin pills or razor blades or soap but maybe some. But as for other Persian Gulf nation like Kuwait, U.A.E. and Bahrain, they do not have a diversified economy but they do have a petro-chemical industry and that is it. Banks and Petro-chemical.
So, beware of the threat from the back door where you have some bank failures as this is not just a liquidation of Treasury Bonds, I am talking about bank failures – large, large Persian Gulf banks that go bust and as a result there is a vast liquidation that takes place which ripples into New York and London. That is what I think could happen.
TM: Yeah, and then we see the next round of this credit contraction start because, as you know, we had the first shocks last year and we had a little bit of shaking and we saw couple of buildings go down – Lehman Brothers and AIG, but as I have written about in my book The Great Credit Contraction, which you like, is that this is just getting started. And we are seeing the collapse of a multiple centuries old monetary system. We are in for the next round and I would not be surprised if we do see the next shock-waves emanate from the Middle East.
FDIC FAILURE
JW: But we are getting shock-waves that happen from the inside too, Trace. Look at the FDIC today. FDIC came out and says four hundred and sixteen troubled banks, well try a thousand.
TM: Or four thousand!
JW: And their fund is dead, so they raised some fees earlier this year on member banks within the system. But they are going to have to raise it again and the bank industry has said this will reduce earnings and it is going to reduce liquidity which decreases their ability to lend. So, the FDIC itself is going to be a wet blanket on the banking industry even if they appeal to Congress for the increased funds and that is going to cause the insolvency of more banks and add pressure to the U.S. government and the Dollar. So the threat is outside the gate.
The point my article is that we have got many threats inside the economy and I agree with you completely-we are about to the second round of the monetary banking credit crisis. Perhaps September or October, probably September, but there are a lot of factors that point to the next few weeks. The FDIC announcement may be one of those factors. The summer vacation is another, they have to increase the Federal Debt limit beyond $12.1 trillion and look for Congress to come back with an attitude of responsibility when they cannot afford to stop the printing press. So, we a lot of factors coming in right now.
WHAT TO DO
TM: And so, what do people do, obviously my site RunToGold, I like the monetary metals – Gold, Silver, Platinum – what do you suggest people do, to protect themselves and to protect their capital?
JW: Well, on a smaller scale, if you only have a few thousand dollars that you want to protect, and you are not huge saver from the last twenty years from your career then I would suggest getting some gold coins or silver coins. But I would avoid the century old, you know, like the Morgan Silver Dollars. But you do not want to be buying fifty thousand dollar coins. You want bullion coins like the Silver Eagle, Kruggerand, Mable Leafs, Gold Eagles, etc. Get the standard coins because you get a lot more bullion for the price. But I do not think buying $150,000 worth of coins makes too much practical sense. You have to store them.
I believe that GoldMoney as you do, is a fine institutions, and there are others like the BullionVault, etc, but I like GoldMoney because of the way it is run and the payment features that they have.
I recommend buying gold and silver bullion bars whether 1 kilogram, 5 kilograms, 10 kilograms and etc. The real lesson that we are seeing in this credit contraction, economic failure and banks system insolvency is that because for a full generation the money has been been paper and now what survives will be not paper. It will be the metal.
ILLUSORY CURRENCY
TM: Yes. And in most cases, it is not even paper that is the currency supply but just little digits on a hard drive which is even less real than paper. We might even see a rush to the physical paper notes before we see a rush from the physical paper into the physical metal.
JW: The electronic money trade makes not only possible paper counterfeit but electronic counterfeit and where you can have computer programs counterfeiting your bonds, I mean imagine, this is why we have got trillion dollar frauds. One of the points I make in this article is something that Karl Deninger said that we need a new resolution trust corporation. But that is totally of the mark. We are never going to see it because because many properties are tied to different mortgage bonds and the fraud. And you cannot have an RTC if they go and buy a mortgage bond and then they have got to pay it out three times. It will not make any money and so there will not be a new RTC. You are going to have a top down solution with more and more fraud like TARP solutions, etc.
CONCLUSION
TM: Well good interview. I know that we are pretty short on time so I would like to thank you for coming on and sharing a little bit with our RunToGold.com listeners. Once again, you have been listening to Jim Willie of the GoldenJackass.com and thanks Jim.
JW: It has been my pleasure and watch this case that is likely its going to go the Supreme Court where the Federal Reserve is going to defend itself against the Freedom of Information Act. It is going to be the private Wall Street Syndicate versus the People. This will be quite interesting.
TM NOTE: Be sure to pre-order a copy of End The Fed by Ron Paul which debuts on 16 September 2009 and help Raze The Fed. With enough pre-orders it will make its appearance as #1 on Amazon and perhaps be a bestseller on the New York Times list which will cause even more pain for the Federal Reserve and Tim ‘tax cheat’ Geithner regarding House Resolution 1207. He was extremely uncomfortable in his Digg.com interview with the Wall Street Journal.
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By Trace Mayer, on May 5th, 2009
At a Cambridge House Investment Conference I received a question about Bear Stearns. In my answer I alluded to the possible financial benefit of some from its implosion. When pressed I had to explain how credit default swaps worked and then we were out of time. Because the owners of the majority of the financial press have too much money to make from bankruptcies this topic is sparingly covered. But the Financial Times editor let an article wiggle through.
On 6 February 2009 the Kazakhstan Tenge went poof and was devalued by 18% in a single day. The currency has continued falling from 110 to the current 150.60241:FRN$1. The free-flowing credit to Eastern Europe ha stopped gushing months ago. Although BTA, Kazakhstan’s largest bank, was taken over by the government it still serviced its loans. BTA currently has total liabilities to credit institutions of 863,688,000,000 Kazakhstani tenge or about $5.7B. As the Financial Times reports:
“But last week Morgan Stanley and another bank suddenly demanded repayment. BTA was unable to comply, and thus tipped into partial default. That sparked fury among some other creditors and shocked some Kazakhs, who wondered why Morgan Stanley would have taken an action that seemed likely to create losses. One clue to the US bank’s motives, though, can be seen on the official website of the International Swaps and Derivatives Association. One page reveals that just after calling in the loan Morgan Stanley also asked ISDA to start formal proceedings to settle credit default swaps contracts written on BTA.”
CREDIT DEFAULT SWAPS
A credit default swap (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument defaults. In effect, the owner of a credit default swap is short the underlying going concern.
Many of the largest Wall Street banks are heavily involved in the derivative markets with reported notional amounts outstanding as of 31 December 2008 for JP Morgan at $87.4T, Goldman Sachs at $30.2T and the single digit midgets of Bank of America and Citigroup at $38.3T and $31.9T, respectively.
The Financial Times reports, “As a result speculation is rife that Morgan might have deliberately provoked the default of BTA to profit on its CDS, since a default makes the US bank a net winner, not a loser as logic might suggest. Morgan Stanley, for its part, refuses to comment on this speculation (although its officials note that the bank does not generally take active “short” positions in its clients). And I personally have no way of knowing whether Morgan is short or long, since Morgan refuses to disclose details of its CDS holding. Right now more than $700 million BTA CDS contracts are registered with the Depositary Trust & Clearing Corp. in New York.”
This represents about 12.3% of the total liabilities to credit institutions. But later in the article the key point is hit upon: ”But the rub for regulators and investors is that BTA credit risk has not entirely disappeared: Somebody right now is holding the other side of Morgan Stanley’s contracts, and unfortunately there is little way for outsiders to know exactly who. Worse, the presence of those CDS contracts makes it fiendishly hard to work out what the true incentives of any creditors are. In theory, lenders should have an interest in avoiding default. In practice, CDS players do not. The credit world has become a hall of mirrors, where nothing is necessarily as it seems. At best, this makes it very difficult to tell how corporate defaults will affect banks; at worst, it creates the risk of needless value destruction as creditors tip companies into default.”
FAIR VALUE ACCOUNTING AND GEITHNER’S PLAN
Financial companies have used their agents, U.S. lawmakers, to pressure the FASB to relax fair-value accounting rules. The result has been the official endorsement of fair-value lying. Then with the other hand tax evader and Treasury Secretary Timothy Geithner has constructed a framework whereby politically privileged banks with worse than worthless toxic assets sell them for cash at an inflated fair value lying price to a self-funded Special Investment Vehicle (SIV), a similar entity as Enron used, that receives a non-collateralized loan from their government puppets.
HYPOTHETICAL
For the sake of argument and simplicity assume that Bank G loans Company M $1M in either a leveraged buyout or some other type of deal that was common over the past few years when credit flowed freely. Then Bank G purchases a CDS on Company M’s loan for $30,000 from Bank B and the CDS is reinsured by Insurance Company A.
Company M deteriorates because its free cash flow and a little more all goes to service debt and Bank G sells 90% of its loan to Bank J. Because credit risk has increased Company M’s bond now trades in the market for $25,000 and Bank J purchases a CDS from Bank L for the current market price of $60,000 and reinsured by Insurance Company A. Banks B and L go bankrupt, the trader at Bank L who sold Bank J the CDS now either goes to work at Bank J or receives consulting fees and the privileged creditors of Banks B and L, such as subsidiaries of Bank J and G, receive government bailout payments through Insurance Company A.
Company B, while still able to service its debt, does violate some provision of its debt covenant.
First, being friendly competitors Bank G and J decide to both press for default proceedings and then initiate settlement of the CDS they own.
Second, they fund a SIV with $25,000 of cash which borrows another $825,000 from the Bank’s government puppets.
Third, the SIV pays Banks G and J $850,000 of cash for the Company M loan which, while trading for $25,000 in the market is being carried on their balance sheet for $600,000 and consequently results in a $250,000 gain on the income statement for the quarter after having written down a couple quarters ago.
Fourth, Banks G and J receive $2M in bailout funds for the failed CDS contracts.
Fifth, Company M is completely evaporated and thousands of workers lose their jobs.
Total profit for Banks G and J: $2.85M-$1M-$30k-60k=$1.76M. Nice pay for a days work slaughtering and cremating a slight hobbling but otherwise generally healthy going concern.
FINANCIAL WMDs AND FINANCIAL TERRORISTS
As the great credit expansion continued it culminated in hundreds of trillions of dollars worth of derivative instruments. Some of these are registered while many, if not most, are not. These instruments are at the evaporating top of the liquidity pyramid while gold and silver are at the bottom tip.
Just imagine what the GLD ETF Authorized Participants, including Bear Stearns & Co. Inc., Lehman Brothers Inc., Citigroup Global Markets Inc., Merrill Lynch, Goldman Sachs, J.P. Morgan Securities, and Morgan Stanley & Co., will use the language in the prospectus to do.
These derivatives, with their fiendish counter-party risk, infest the balance sheets of almost every publicly traded corporation along with many local, state and national governments. Financial terrorists are greatly incentivized to detonate these financial weapons of mass destruction. Because Wall Street is full of a bunch of sociopaths and because you cannot grow a conscience if you do not have one therefore these sociopaths are very trigger happy.
POTENTIAL REMEDIES
When confronted with these type of financial terrorists society has often had to take powerful measures. For example, when John Law co-opted the French economy and tried to prevent its credit contraction by outlawing the use of gold and silver with the death penalty the French Revolution was sparked.
In the United States of America Section 19 of the Coinage Act of 1792 provided, “That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained, or shall be of less weight or value than the same ought to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, and if any of the said officers or persons shall embezzle any of the metals which shall at any time be committed to their charge for the purpose of being coined, or any of the coins which shall be struck or coined at the said mint, every such officer or person who shall commit any or either of the said offences, shall be deemed guilty of felony, and shall suffer death.”
Under Section 9 of that Act a Dollar is “to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.”
While the USA has 303M people about 2.3M are incarcerated or more than 1 in 100 American adults and it officially executed 59. On the other hand, the police state China has about 1.5M incarcerated adults and officially executed 3,400.
While China has had its problems it has not appeared to have had any serious problems with their domestic banks and derivative instruments. Perhaps a reason is because of how they deal with financial crimes. For example, the New York Times reported that Zheng Xiaoyu, former head of the State Food and Drug Administration in China, admitted to taking bribes to approve untested medicine and he was swiftly executed.
The suiciding of some financial executives, like David Kellermann of Freddie Mac, may help delay bond sales and toll time periods in CDS or other derivative contracts which could benefit certain privileged parties. But perhaps an official return of the death penalty for serious financial crimes would help curb some of the atrocious behavior by these financial terrorists who with premeditation and deliberation design, craft and trigger these financial weapons of mass destruction with absolute reckless disregard for both the individuals, companies, communities and nations which are affected.
CONCLUSION
Because the great credit contraction has begun, capital has started burrowing down the liquidity pyramid to safety and liquidity. Individuals, companies and governments have more leverage than they can sustain.
With the Federal Reserve refusing to comply with Bloomberg’s FOIA request for where trillions of dollars have gone and with JP Morgan, Goldman Sachs, Bank of America and Citigroup all acting like Morgan Stanely and ‘refuse to disclose’ it does beg the questions: What are the next companies to be slaughtered and cremated? How many hundreds of thousands of jobs will be lost as a result? What will the American people do about it?
Disclosures: Long physical gold and silver with no position in GLD, SLV, GS, C, BAC, JPM and MS. No credit default swaps or other similar position in Bear Stearns or Lehman Brothers and neither a job with nor consulting income from JP Morgan or Goldman Sachs.
By Evelyn Black, on October 13th, 2008
For at least a year now, ordinary people in the United States (people the press has been referring to as “Main Street”) have known that the economy was starting to slow down at the same time that prices were rising uncomfortably fast.
Now, some economists are finally starting to admit that, yes, the U.S. probably went into recession somewhere around January of 2008. U.S. economic growth is expected to go officially negative by the end of this year, and this negative growth pattern is expected to continue and worsen throughout most of 2009, if not longer, driven by job losses, a continued drop in factory orders, and falling home prices that still have a long way to fall before the housing market stabilizes.
On October 3, the U.S. Labor Department announced that 159,000 jobs were lost in September, much higher than the expected loss of 100,000 jobs. Orders for durable manufactured goods declined by 4%, almost double the 2.5% figure expected by analysts. Even the service sector flat-lined in September, hovering just barely above the 50 point threshold that signals economic growth.
Although the House of Representatives finally did pass the $700 billion credit market rescue package on  October 3rd, by the time the bill was at last on its way to the White House for the President Bush’s signature, that same credit crisis had already pushed the State of California into a $7 billion budget shortfall, with the real possibility of not being able to meet payroll this month, and the State of New York into a shortfall of $1.6 billion, expected to worsen next year. California may have to turn to the Federal Reserve to borrow if credit isn’t available by the end of October or else face a total shut down of state government.
It is not at all unusual for economists to declare a recession in retrospect or for consumers to feel the recessionary effects before the experts do. This is partly because economists have varying criteria for labeling an economic slowdown recessionary (two consecutive quarters of negative growth is just one rule-of-thumb) and partly because it takes awhile to accumulate enough data to analyze and declare a trend. So often the effects of a recession are felt long before it is formally announced.
However, this time the economic trouble feels like it runs much deeper; and the unease accompanying the acknowledgment of this trouble feels closer to panic. While caution is almost certainly wise at times like these (Why create panic if taking care with words can restore calm?), it is also true that, at every step of this current economic crisis, experts have erred on the side of minimizing the depth of the turn-down. With each new catastrophe, someone important was out in front of cameras declaring that the housing market was bottoming out and the economy was about to turn around. Each catastrophe was expected to be the last. Until the next catastrophe. The phrase “a river in Egypt” springs to mind.
Eventually, the public quit believing the experts. Soon the public ignored the experts entirely, believing instead that positive spin was all that was really available from such persons: the hard truth was to be found instead in the price of milk, the number of overdrafts in a personal checking account, a declining 401(k) balance marked with a red double-digit loss percentage. Let the experts spin until they puked: the truth is that when the money is gone a week before payday arrives, you don’t need an expert to explain that times are getting tough.
By the time Henry Paulson and a seemingly exhausted, sincerely frightened Ben Bernanke went before Congress (was it really only a couple weeks ago?) with their request for $700 billion right now and a prohibition on any oversight or prosecution, it seemed obvious to all that Wall Street’s unending font of optimism had very suddenly run dry. Wall Street seemed to learn what Main Street had known all year in the space of only a few days. How can that be? Lots of people were asking themselves this same question, all at the same time.
All of which brings me to the current situation and the grotesque chasm that seems to have opened up overnight to separate the folks on Wall Street from the folks on Main Street and to separate Main Street from its supposedly representative democracy. To paraphrase the famous line from Cool Hand Luke, what we have here is not just “…a failure to communicate,” but rather a total breakdown in trust.
So what are we looking at here? A recession similar to the recession of the early 90’s with a light at the end of an admittedly dark tunnel? Or are we instead, as New York Times op-ed columnist and economist Paul Krugman says, truly on “The Edge of the Abyss”?
If you ask Wall Street that question today, you may or may not get an answer that spins. There comes a time when all that is left for anyone to do is breathe and pray and cross their fingers.
If you ask Main Street this question today, you will probably get an earful.
It won’t be pretty.
Neither will the year ahead. Or the one after that. Let’s hope our new leadership has a strong spine and a better plan. We’ll all be needing both.
By G.L.C., on October 13th, 2008
The Securities and Exchange Commission (SEC) was set up as a reaction to the stock market crash of 1929 to provide oversight of brokerage firms and protect investors. Last month, Morgan Stanley and Goldman Sachs Group, Inc., filed to become bank holding companies. Now with the sale of Bear Stearns, the bankruptcy of Lehman Brothers Holdings, Inc., and the sale of Merrill Lynch & Co. to Bank of America Corp., the SEC now has no large firms left to oversee.
A recent report by Inspector General David Kotz has concluded that the SEC missed numerous warning signs leading up to the shotgun sale of Bear Stearns Cos. Bear Stearns, one of the most aggressive investment banks, agreed to be sold to J.P. Morgan Chase & Co. According to the report, the SEC failed to require the investment bank to rein in its risk taking. It failed to carry out its mission in its oversight of Bear Stearns. Despite the SEC staff having identified in 2006 precisely the types of risks that evolved into the subprime crisis, the SEC did not exert influence over Bear Stearns to use this experience to add a meltdown of the subprime market to its risk scenarios. There are many who blame the present crisis on years of looser regulations that allowed Wall Street firms to take on greater risks without adequate oversight.
The report details how the SEC made no efforts to require Bear Stearns to reduce its debt or raise money, failed to take steps after identifying numerous shortcomings in Bear Stearns’ risk management of mortgages, and also missed opportunities to push Bear management to address the problems. The report criticized the SEC for allowing internal auditors at Bear Stearns, not external auditors who would presumably be more objective, to perform critical work in reviewing the firm’s risk management. The SEC also did not review Bears Stearns’ strategy for informing investors about its funding plans following the failure of two of its hedge funds in July 2007. The SEC took too long to review Bear Stearns’ 2006 annual report and seek more information from the firm, which would have resulted in Bear disclosing more information about its mortgage portfolio to investors.
The SEC maintains that the failure is a result of the SEC not having enough authority to effectively oversee the banks and that the SEC has already expressed its concerns to Congress. The SEC staff completed its review of Bear Stearns’ 2006 annual report after its collapse.
Another report found that the SEC conducted in-depth reviews for only six of the 146 brokerage firms registered with the agency. The failure to carry out the purpose and goals of the Broker-Dealer Risk Assessment program hinders the SEC’s ability to foresee or respond to weaknesses in the financial markets.
As lawmakers take a second look at financial oversight, these reports could be nails in the coffin for the SEC. The power of the SEC could be dispersed to other agencies, such as the Federal Reserve. These reports document the failure of the SEC to either make its oversight program work or seek authority from Congress so that it could work.
By Evelyn Black, on October 10th, 2008
On October 7, American Express revealed that they will begin limiting their customers’ access to credit based on both where they shop and which bank holds their primary mortgage. While there is nothing in the law that prevents American Express (or any other credit card company) from doing this, the announcement is noteworthy coming from what many assume to be the creme de la creme of unsecured personal credit lines.
The credit crunch is about to hit the consumer pocketbook in a big and personal way, starting with credit card companies looking for ways to limit or freeze personal credit lines. The reasons for the lowered limits are not always obvious, and they may or may not have anything to do with the customer’s financial balance sheet. American Express would not reveal the stores or banks that they considered “risky,” but if you happen to have an association with one of them, however tenuous, look to see your credit limit lowered or arbitrarily frozen very soon.
According to the consulting firm Innovest StrategicValue Advisors, banks will charge off nearly $96 billion in delinquent credit card debit in 2009, nearly twice the amount charged off in 2008. Many customers who very recently had access to home equity lines of credit, business lines of credit, or unsecured bank loans are now seeing these sources dry up due to the credit crunch. As a result, they are leaning on the option of last resort: credit cards. Credit card issuers are falling all over themselves trying to get ahead of the problem.
In a worst case scenario, a good customer (as in, a customer who pays on time and has been doing so for years) could see his or her credit limit arbitrarily lowered and then exceeded before even realizing that had happened. Sometimes, just the interest accruing on a large balance will exceed a lowered credit limit before a customer has any time to do anything about it. Once the limit is exceeded, the credit card issuer can and will hike the interest to 32%, charge over-limit fees, and push the customer even closer to default.
Why would credit card companies do this?
Because credit card companies can’t just close an open line and demand payment in full; what they are doing instead is encouraging customers to transfer their large balances elsewhere. Look for balance transfer fees to jump dramatically as well in coming months (or weeks) as banks and other financial firms look to discourage these balances from hopping aboard their own sinking ships.
According to Carol Kaplan of the American Bankers Association,
(Banks) have suffered a lot of losses and they are doing whatever they can to reduce risk. They have people that work all day and all night who try to come up with new formulas to assess risk.
These risk assessment formulas are getting much stiffer and much more conservative almost overnight. Anyone with a credit card balance that is in excess of 30% of the limit will likely see changes to the limit itself and the rate and fee structure in the very near future, and some analysts are recommending that customers carry a balance of no more that 10% of the limit in order to avoid punitive fees and rate hikes.
What this means for consumers who, since 2006, have had to rely ever more on their credit cards to pay for basic services, food, and taxes is that the last well of credit is about to run dry, leaving them with only their inadequate incomes to cover costs this winter and Christmas season. Add this to the fact that home heating oil and natural gas are expected to increase by double digits this winter and the fact that many people still haven’t paid off last year’s heating bills yet, and you have a recipe for disaster.
The Federal Reserve, Congress, and the U.S. Treasury are still intently focused on simply stabilizing Wall Street right now. The $700 billion bail-out package is looking ever more anemic in the face of a world market crisis, the credit crunch has not abated at all at the interbank level (the LIBOR rate is still rising, and commercial paper is still impossible). Understandably, the systemic cardiac arrest is getting the first response, inadequate though it may be at the moment.
But not too far down the road, the same financial credit stroke is about to hit American households one by one, right at the beginning of winter and the start of a holiday season that promises to be one of the most dismal on record.
Let’s hope something works. Soon.
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