Bernanke’s “stealth bailout” of RBC and other foreign banks.

June 18, 2011 Leave a comment

To follow up on our earlier post about QE2 simply padding the excess reserves of precariously bankrupt financial institutions, I want to call attention to ZeroHedge’s excellent reporting about  QE2 amounting to nothing more than a foreign bank rescue operation.

ZeroHedge rightly identifies European banks on the NY Fed’s list of primary dealers as being main beneficiaries of QE2. Although it is interesting to draw attention to the lone Canadian bank, RBC, in this list, far more interesting are the implications of this “stealth bailout” (which provide ample support to my contention that there will definitely be QE3):

… here is Stone McCarthy’s explanation of what massive reserve sequestering by foreign banks means: “Foreign banks operating in the US often lend reserves to home offices or other banks operating outside the US. These loans do not change the volume of excess reserves in the system, but do support the funding of dollar denominated assets outside the US….Foreign banks operating in the US do not present a large source of C&I, Consumer, or Real Estate Loans. These banks represent about 16% of commercial bank assets, but only about 9% of bank credit. Thus, the concern that excess reserves will quickly fuel lending activities and money growth is probably diminished by the skewing of excess reserve balances towards foreign banks.“

More points of interest:

Furthermore the data above proves beyond a reasonable doubt why there has been no excess lending by US banks to US borrowers: none of the cash ever even made it to US banks! This also resolves the mystery of the broken money multiplier and why the velocity of money has imploded.

…

Instead of repricing the EUR to a fair value, somewhere around parity with the USD, this stealthy fund flow from the US to Europe to the tune of $600 billion has likely resulted in an artificial boost in the european currency to the tune of 2000-3000 pips, keeping it far from its fair value of about 1.1 EURUSD.

…

But implication #4 is by far the most important. Recall that Bill Gross has long been asking where the cash to purchase bonds come the end of QE 2 would come from. Well, the punditry, in its parroting groupthink stupidity (validated by precisely zero actual research), immediately set forth the thesis that there is no problem: after all banks would simply reverse the process of reserve expansion and use the $750 billion in Cash that will be accumulated by the end of QE 2 on June 30 to purchase US Treasurys.

Wrong.

The above data destroys this thesis completely: since the bulk of the reserve induced bank cash has long since departed US shores and is now being used to ratably fill European bank balance sheet voids, and since US banks have benefited precisely not at all from any of the reserves generated by QE 2, there is exactly zero dry powder for the US Primary Dealers to purchase Treasurys starting July 1.

This observation may well be the missing link that justifies the Gross argument, as it puts to rest any speculation that there is any buyer remaining for Treasurys. Alas: the digital cash generated by the Fed’s computers has long since been spent… a few thousand miles east of the US.

Which leads us to implication #5. QE 3 is a certainty. The one thing people focus on during every episode of monetary easing is the change in Fed assets, which courtesy of LSAP means a jump in Treasurys, MBS, Agency paper, or (for the tin foil brigade) ES: the truth is all these are a distraction. The one thing people always forget is the change in Fed liabilities, all of them: currency in circulation, which has barely budged in the past 3 years, and far more importantly- excess reserves, which as this article demonstrates, is the electronic “cash” that goes to needy banks the world over in order to fund this need or that. In fact, it is the need to expand the Fed’s liabilities that is and has always been a driver of monetary stimulus, not the need to boost Fed assets. The latter is, counterintuitively, merely a mathematical aftereffect of matching an asset-for-liability expansion. This means that as banks are about to face yet another risk flaring episode in the next several months, the Fed will need to release another $500-$1000 billion in excess reserves. As to what asset will be used to match this balance sheet expansion, why take your picK; the Fed could buy MBS, Muni bonds, Treasurys, or go Japanese, and purchase ETFs, REITs, or just go ahead and outright buy up every underwater mortgage in the US. This side of the ledger is largely irrelevant, and will serve only two functions: to send the S&P surging, and to send the precious metal complex surging2 as it becomes clear that the dollar is now entirely worthless.

Filed under Banking and Finance, Intervention Tagged with

Carney indulges fantasy about cause of housing bubble

June 18, 2011 Leave a comment

Few things are more aggravating than these central bankers who come out with pabulum-fed bullshit observations about the economy while being treated like the Oracle of Delphi. as if mere words will decidedly shape economic outcomes.

So Mark Carney is warning about housing prices again. He alludes to nothing concerning interest rate policy, which is no surprise, but he does indulge in a fantasy about “greedy speculators and investors” and desperate families driving up prices such that there are “excesses” in some markets. And in this wacky bubble-fueled markets, like Vancouver,  home ownership creates special  “financial vulnerabilities.”

Oh come on. I understand the whole public perception issue, and how Carney cannot admit that he has any role in this housing bubble. Still, Carney’s statements are amazing in the way they must reveal either his ignorance of reality or how he simply pretends not to know. You see, in this world, there are always greedy speculators and investors. Always. By itself, the existence of greedy people does not account for asset bubbles.

No one has ever been able to show with real economic reasoning how greed systematically creates distortions. Neither does greed’s foil, fear, systematically create distortions. Greediness and fear are answers to the question of why people do things, which is an issue for psychology. When we wish to understand economic law, we build upon the fact that people do things as such, rather than why people do things.

What can be shown with economic reasoning is that manipulating the money supply causes interest rates to change. If the central bank expands the money supply, then interest rates will fall and more money will be lent than before. This new money is used to bid up the prices of goods and services, especially capital goods, to higher levels than would otherwise be the case.

Carney probably knows this, and thinks his mighty words alone will help assuage bubble. He does not want to raise interest rates. But the damage has been done. While the BoC’s balance sheet has contracted to pre-crisis levels and been relatively stable for some time now, Canada’s economy was not allowed to rebalance itself in a real recession and therefore myriad distortions remain.

Devastating financial collapse — and a complete implosion of housing prices — still to come, no matter how much Carney warns about distortions. What a fool.

Filed under Banking and Finance, Economics Tagged with

BP’s Statistical Review of World Energy: highlights

June 8, 2011 Leave a comment

BP has put out its latest Statistical Review of World Energy, and it is a pretty good read. Here are a few highlights:

  • Even with an economy half the size of the US, China has surpassed America has the largest consumer of energy, at 20.3% of the world’s share.
    • 2010 saw the largest increase in the world’s consumption of primary energy since 1973, at 5.6%. OECD countries’ consumption grew 3.5%. Non-OECD countries’ consumption grew 7.5% (63% above 2000 levels).
    • China’s energy consumption increased 11.2%.
    • World proved oil reserves for 2010’s numbers would be sufficient to meet 46.2 years of consumption.
    And here are the best charts from the report:

    Reserves-to-production ratios:

    Crude oil prices in real terms:

    World trade movements of crude:

    Basically, we can be assured that oil is going to go a lot higher, barring a deflation, another financial crisis, and the ensuing collapse of commodity prices. And such a collapse could only be temporary, as trend is unmistakable. We need cold fusion or something at this point.

    Filed under Energy, Oil Tagged with

    Smoke and mirrors on interest rates at the Bank of Canada

    June 8, 2011 1 Comment

    For their sixth meeting in a row now, the Bank of Canada has decided to leave interest rates unchanged.

    Some of suggested this latest press release suggests  higher rates ahead, and the stronger dollar that comes with it. I think this is flawed and superficial analysis.

    Let’s consider the press release with the awareness that all central bankers are Keynsian-merchantilists.

    The possibility of greater momentum in household borrowing and spending in Canada represents an upside risk to inflation. On the other hand, the persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.

    So what would curb household borrowing and spending in Canada? Higher interest rates of course. But then that would create a stronger Canadian dollar, which the BoC regards as hazardous because it would hurt exports. To me, this does not suggest higher interest rates from the BoC anytime soon.

    Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn, consistent with achieving the 2 per cent inflation target. Such reduction would need to be carefully considered.

    Now this sounds like they are leaning towards raising interest rates. Or does it? Earlier in the press release, they say the following:

    While underlying inflation is relatively subdued, the Bank expects that high energy prices and changes in provincial indirect taxes will keep total CPI inflation above 3 per cent in the short term. Total CPI inflation is expected to converge with core inflation at 2 per cent by the middle of 2012 as excess supply in the economy is gradually absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored.

    Here is where we get to the “smoke and mirrors.”

    They were just quoted saying they would want to withdraw the monetary stimulus to aim for the 2% inflation target.

    But in this last quoted paragraph, they just said that they expected inflation to hit 2% without raising interesting rates. So … what the heck is this all about? Basically, there is no chance interest rates will be going up any time soon.

    The reality is this — Carney will not allow the Canadian dollar to appreciate too significantly relative to currency of this country’s primary consumer, which is America.

    One must remember that central bankers behind major currencies work together — the key idea is to have major currencies devalue at roughly a steady rate vis-a-vis each other. It is not a counter-example to refer to hyperinflation in Zimbabwe or a like event, because that is a tiny country that means little to the world economy in the grand scheme of things.  The Canadian dollar will not strengthen dramatically against the US dollar, or any other major currency.

    Why not? If you are a central banker, you have two conflicting goals:

    For importers, you want a strong dollar, so that you can buy foreign goods more cheaply.

    If you are an exporter, you favor a weak dollar, so that you can sell more goods to foreigners.

    Exporters have traditionally been a more focused and successful interest group than the mass of faceless importers — the exporters are visible and politically active, but the importers are literally… everyone else. Their influence is spread out like too little peanut butter spread over too much bread. Therefore the tendency is always for a steady level of currency depreciation. For the BoC, that is a 2% inflation target.

    Because of these conflicting agendas, the central bank behind a major currency cannot allow that currency to appreciate or depreciate too significantly relative to any other major currency. It is the classic problem with central planning — how do you decide what the magic number is? The level of depreciation must be just enough to keep everyone happy — or at least minimize their relative unhappiness.

    To take out price distortions, one can consider how all currencies are down significantly from where they were one year ago, in terms of gold. The Canadian dollar is down 12%. So while it has lost purchasing power in terms of gold, it has gained purchasing power relative to the USD, which is down 20% in the last year. The euro and the yen have fared relatively better than the Canadian dollar (down 8% and 11% respectively, in terms of gold), and the American dollar has fared relatively worse. The important point is that they are all down in terms of gold.

    This is to be expected. Although the CDN may rise or fall a bit relative to one major currency or another, depreciation of the Canadian dollar will continue relative to gold until Economic Judgment Day comes and Great Depression II hits us. Economic Judgment Day until the big American banks start to lend, and the Federal Reserve is forced to hike interest rates. Until then, Canadian currency is just another depreciating currency in a world of depreciating currencies.

    Filed under Banking and Finance, CMR Tagged with ,

    Canada Post strike — good time to abolish Canada Post

    June 3, 2011 Leave a comment

    Things are a lot different these days than they were when Canada’s postal monopoly went on strike 14 years ago.

    The Internet dominates interpersonal communication nowadays — a lot of people wouldn’t even notice Canada Post being on strike these days, other than the fact that they’d have less junk in their mail box.

    In this article, we read:

    Canada Post has offered to increase new employee starting salaries to $19 an hour, from the previous $18 rate, in a workforce where hourly wages top out at $26 an hour.

    Canada Post counters that it needs to address labour costs, noting letter-mail business has fallen more than 17% since 2006 due to digital communications — the Internet is chipping away at its business.

    Question — why do letter carriers need to be paid $18 an hour at all??? Why does their maximum wage need to be $26? This is a job that could be done by teenagers for $10 an hour. These teenagers would, at least, probably be able to put the right mail in the right mailbox, unlike your average lazy, contemptuous, and bitter Canada Post worker.

    Why is it considered a right to get subsidized mail delivery to your house? Why shouldn’t you have to pay the appropriate market price? Shouldn’t you have to pay more for mail when you live in Nunuvut than if you live in Toronto? After all, “mail delivery in the big city” is a very different service than “mail delivery to the desolate Canadian tundra with a population of 17 people”! Why should mail delivery to the middle-of-nowhere be subsidized by people who don’t use Canada Post for anything? This is not moral, and it is not economically efficient!

    The whole postal monopoly system is a disgrace. Canada should use the opportunity of this postal strike to abolish Canada Post, which is a complete waste of all resources allocated to it. Then competition should be legalized and the free market can provide real mail service with true market prices.

    Here is a 3-step solution to the Canada Post strike. Only these options are consistent with good economics, good ethics, and not being a complete idiot.

    1) Fire everyone who works for Canada Post at the moment. That way they can get jobs that actually contribute to the economy.

    2) Remove all legal restrictions preventing private firms from providing mail service.

    3) Abolish all regulations on courier services so that such services can be more affordable and more readily available to all consumers.

    ONLY if this solution is adhered to, will Canada have good postal service. Giving Canada Post’s union ANYTHING, be it more vacation hours, better wages, “better working conditions,” is a complete waste, and will produce more of the same garbage we expect from Canada Post.

    We need less Canada Post, not more.

    Filed under CMR, Monopoly Tagged with

    Even ECB crank concedes that core inflation is a lame tool

    June 3, 2011 Leave a comment

    Even a broken clock is right twice a day. Unless it’s a 24-hr digital clock, then it’s only correct once. Which is still better than an ECB crank like Bini Smaghi, who seems to have recently been right for the first time in his life, by disparaging the idea of core inflation (i.e. without food and energy prices) as a good measurement of monetary policy.

    “For central banks around the world, this means that core inflation is no longer a very useful indicator for monetary policy, and should probably be abandoned,” Bini Smaghi said.

    NO WAY. This is actually a shocking statement coming from someone like this. Of course, this would probably present itself as an opportunity for monetary authorities to devise statistical methods that are more arcane and obfuscating, rather than less so. I bet the next inflation measuring tool will be a basket of goods consisting 100% of iPads.

    Filed under Banking and Finance, CMR Tagged with

    Goldman Sachs gets lucky on Libya

    June 3, 2011 Leave a comment

    Goldman Sachs is getting a subpoena from the Manhattan DA about their role in the 2008 financial meltdown. That’s kind of a drag, I guess, but at least they don’t have to sell Gadaffi a piece of their firm.

    Turns out Goldman invested $1.5 billion for Libya’s sovereign wealth fund back in 2008.

    They lost 98% of that money.

    To ameliorate this disaster with pissed off Libyan officials, Goldman offered to sell preferred shares in their firm.

    But now that that Gadaffi is now on the “list of mini-Hitlers for Americans to fight”, Goldman can get out of that deal easily enough.

    You kind of have to admire the sheer self-confidence of Goldman, offering to sell a stake in itself to Libya after losing so much of the country’s money. It’s like a used car dealer offering to let you loan money to the dealership after selling you a lemon.

     

    Filed under Banking and Finance, CMR, Foreign Affairs Tagged with

    As QE2 ends, let us consider where the money went.

    June 2, 2011 1 Comment

    Well QE2 is supposed to be ending soon. Or something. The cranks at the Federal Reserve kind of make things up as they go along. But for now the whole thing can safely be considered a classic disaster, as central planning is wont to produce.

    For the moment, let’s take a moment and consider where the money went. Behold two wonderful graphs:

    ADJUSTED MONETARY BASE

    FRED Graph

     

     

    EXCESS RESERVES

    Graph of Excess Reserves of Depository Institutions

    You can draw your own conclusions here.

    It is obvious that there will be QE3, QE4, QE5… and so on, until either the entire monetary system collapses or until the central banks stop printing money and produce the Great Depression II (aka Greatest Depression).

    Filed under Banking and Finance, CMR Tagged with

    Austrian economics in Mainstream Canadian Newspaper…!

    April 21, 2011 3 Comments

    I thought it was crazy enough to see the Canadian War Street Journal National Post to have a columnist calling out the Bank of Canada for its counterfeiting operations. The influence of Austrian economics hangs over this article like a halo.

    Now shades of the Austrian School are back at National Post.

    Peter Foster comes out citing Austrianism on the topic of monetary growth and inflation leading to malinvestment. Hayek’s name is dropped. Contra Keynesianism, which he calls a systemic failure, producing only debt and inflation and no real economic solutions. This is not too exciting by itself — this Peter Foster guy is nothing special as a commentator, other than his general favor of markets over governments. But the fact that it gets reference in a publication like this is interesting however.

    I discovered Austrian economics in 1998, sort of by accident. You would have never, I mean NEVER seen a reference to Austrian economics in a mainstream paper back then. Austrianism was just … a complete non-issue. Fortunately, Austrian economics has become more mainstream, due in large part to the Mises Institute and Ron Paul’s 2008 presidential campaign in America, and outspoken fellow travelers of the Austrian school on the financial news networks, such as Peter Schiff and Marc Faber.

    The more people discover the Austrian school of economics, the more people will become impervious to the dogmas and deceptions that have made them blind to how the market makes them free and the government enslaves and impoverishes them.

    Filed under CMR, Economics, Mainstream Media Tagged with , , , , , ,

    Bank of Canada — engine of too much debt — warns about too much debt.

    December 10, 2010 Leave a comment

    The Bank of Canada is warning Canadians about too much debt.

    Experience suggests a long period of very low interest rates may be associated with excessive credit creation and undue risk-taking as investors seek higher returns, leading to the underpricing of risk and unsustainable increases in asset prices.

    This is a remarkable statement, really — it reveals that the Bank of Canada’s economists either don’t know economics, or they pretend not to know. The issue should not be about how low interest rates “may” be associated with excessive credit and excessive risk. Rather, there is a direct causal relationship here.

    Mises wrote:

    If there is credit expansion [by the central bank], it must necessarily lower the rate of interest. If the banks are to find borrowers for additional credit, they must lower the rate of interest or lower the credit qualifications of would-be borrowers. Because all those who wanted loans at the previous rate of interest had gotten them, the banks must either offer loans at a lower interest rate or include in the class of businesses to whom loans are granted at the previous rate less-promising businesses, people of lower credit quality.

    This is not rocket science. It is not a complex relationship to understand at all — if interest rates rise, there will be fewer risky loans than there would be otherwise; if interest rates falls, there will be more risky loans than there would be otherwise.

    But if you have a PhD in economics, like our ex-Goldman central planner at the BoC, Mark Carney, you probably are incapable of understanding this, and would say something inane like, “In light of the high level of indebtedness of Canadian households, some caution in banks’ lending to households is warranted.”

    Carney does not realize that lending standards are directly related to the ease with which credit is made available. Talk is cheap. If Carney jacked up interest rates to 10% tomorrow, that would have a dramatic impact on lending standards, much more so than his oracular admonitions about risky lending.

    On the other hand, what would happen if Carney decided the economy was too weak, and he cut interest rates down to zero? Then we can rightly expect that more loans would be made to those businesses and individuals would have been previously deemed unworthy of credit. 

    A lot of Canadians like to think we breezed through the financial crisis without too much pain and suffering — “our banks didn’t need a bailout,” and that we are leading the way out of economic ruin.

    All is not well, however. The mammoth growth of consumer debt in this country, the worst of all OECD countries at about 140% debt-to-asset levels, is a very serious problem . With our housing market still in bubble territory, unemployment relatively low, and implausibly low interest rates, Canadians have been piling on more and more debt.

    It’s so bad, even the banks — you know, the ones making all these questionable loans to Canadians mired in debt — are raising concerns. You have to acknowledge this is a bit rich — but don’t worry big Canadian banks — I am sure you can keep making your risky loans and if (when) things turn ugly, someone will bail you out.

    Filed under Banking and Finance, CMR Tagged with , , , , ,

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