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In a completely expected move, politicians from around the world gathered and made the decision to spend a lot of money that they didn’t have and which doesn’t exist (yet).
I am referring to the recent G20 meeting, where the global crisis was the main topic. As you may know from my past writings, I hold it as a near dead-certainty that national politicians can be counted upon to spend instead of cut and to print instead of tax. It’s just natural to want to take the path of least resistance.
If local politicians had a printing press, they’d print, too. But they don’t, and so they hike fees and taxes on things like roads, gasoline, fishing licenses, and building permits when things get tight.
Printing money out of thin air is inflationary and unfair. It steals from savers and preferentially enriches those at the head of the handout line. It diminishes all the money accumulated from past production and inappropriately reinforces the belief that something can be had for nothing.
So I was more than a little intrigued when I read about the $1.1 trillion pledged by world leaders to the IMF. Where did it come from? Who was donating what? As always, the devil is in the details.
Interestingly, I had to read through more than 18 accounts before I found any details at all, which were meager. I finally located these in a NY Times article:
World Leaders Pledge $1.1 Trillion for Crisis
China is expected to contribute $40 billion. Japan and the European Union each pledged $100 billion. The United States has said it will contribute $100 billion, too, though that requires Congressional approval.
In addition to $500 billion in loans, the Group of 20 approved a one-time issuance of $250 billion in Special Drawing Rights, the synthetic currency of the fund, which will be parceled out to all its 185 members.
As I read it, there are about $250 billion in outright grants, $500 billion in loans, and $250 billion in Special Drawing Rights (SDRs). Given that none of the governments in question, except China, have that kind of money lying around, the $250 billion in grants and $500 billion in loans will have to be printed out of thin air.
More worryingly was the authorization to create $250 billion SDRs out of thin air. Usually described as a “synthetic currency,” they are nothing more than a type money created out of thin air, but one without any particular association to any given country.
Think about that for a minute. SDRs are being printed out of thin air by an institution that does not have any particular taxing power over the productive output of any particular nation.
What does this sort of money mean? What exactly is it?
It operates like central banking super-money and can be used as the primary fuel for massive pyramiding by the recipient bank. Think of it as the primary deposit into a banking system with a minuscule reserve ratio. It can be leveraged hundreds of times by central banks and then thousands of times further once those funds are disbursed into the next tier of the banking system.
For a world that should be mulling over lessons learned about the peril of thin-air money and excessive leverage, the reintroduction of SDRs are like a gigantic, blinking neon sign that reads, “We didn’t learn anything!!”
If we are collecting the fuel for a massive international inflationary bonfire, SDRs are a very dry bundle of sticks.
The chance that this all ends in a year or two with a round of severe and destructive inflation is now quite high, perhaps better than 50%. With any luck, the central banks will continue to try and hide their tracks by selling their gold, meaning you can pick it up at fire-sale prices. Pun intended.
- cmartenson's blog
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Chris:
I have seen the monetary base increase by a large amount since the crisis began with m1 and m2 up by at least 20% and with m0 up by a large amount as well. However, if you look at the chart of the m1 money multplier the whole system has crashed. There arent many loans being made and i dont think many will be made for a while becuase of the massive deleveraging that will happen in the next 2 to 3 years. With household debt being over 15 trillion dollars we still have a long way to go in terms of bank credit writedowns. Losses in the US have totaled 1 trillion dollars so far. With millions losing their jobs and with one or two persons being the breadwinners in the household a job loss is devastating to the overlevered american family. Defaults will continue with student loans, car loans, home equity lines of credit, mortgages, commercial real estate. As such, becuase of all the debt that is being destroyed the fed will not be able to offset debt deflation with his goal of "targeted inflation". Also, becuase the fed keeps kicking the can down the road the deleveraging process is happening much slower than it should. Inflation will come, but only when the money begeins to change hands in a rapid fashion. If, now if defaltionary forces are strong enough to offset bernankes printing press, maybe we could survive a hyperinfaltionary holocaust.
<img src="http://research.stlouisfed.org/fred2/data/MULT_Max_630_378.png">
Money multiplier from the Fed
http://research.stlouisfed.org/fred2/series/MULT
Thanks for all the hard work Chris.
George from LA
Any chance you might do a article on what a popping of the derivative bubble might mean?
The article from yesterday on Global Derivatives from Nathans economic edge talks about how the derivatives market is now over 1 quadrillion dollars and that there are 8 bubbles involved.
The banks JP morgan, Citibank, Bank of america, and Goldman Sachs hold some 200 trillion worth of derivatives.
The 5th derivative bubble that he lists worth 67 trillion is part of another bubble that is collapsing real fast right now. Should I be worrying about this derivative bubble attached? Will it just simply bankrupt a few banks with most of the derivatives cancelled? Any idea of what will happen as the bubbles deflate?
Would be helpful as the money involved here is bigger than the GDP of the world many times over.
Any chance you might do a article on what a popping of the derivative bubble might mean?
The article from yesterday on Global Derivatives from Nathans economic edge talks about how the derivatives market is now over 1 quadrillion dollars and that there are 8 bubbles involved.
The banks JP morgan, Citibank, Bank of america, and Goldman Sachs hold some 200 trillion worth of derivatives.
The 5th derivative bubble that he lists worth 67 trillion is part of another bubble that is collapsing real fast right now. Should I be worrying about this derivative bubble attached? Will it just simply bankrupt a few banks with most of the derivatives cancelled? Any idea of what will happen as the bubbles deflate?
Would be helpful as the money involved here is bigger than the GDP of the world many times over.
Second this point. If we agree past growrh rates and lifestyles are not sustainable. How this conflicts with the Derivative market, and its additional/consequental economic impacts would be enlightening.
Nichoman
"Lord, give me the STRENGTH and WISDOM to see things as they are...not the way I believe they are"
-- Leonardo Da Vinci
"The important thing is not to stop questioning." -- Albert Einstein
I have a question concerning how hyper-inflation in the US would impact other countries. All other things being equal, if the US dollar does completely collapse through inflation does it have any automatic proportional effects on the Euro or Pound?
Thanks
Firejack and Nichoman, the end of this derivatives bubble is endgame stuff. Nobody can predict how it will turn out because it depends entirely on what the federal govt and the Fed do. It's why nobody should pay attention to the media, the govt, Bernanke or anyone else saying not to worry. It's why some people on this site are working to develop sustainable living independent of organizations that rely on financing, which is the entire corporate world and almost any business you can think of. Nobody knows how bad this is going to get. People shouldn't maintain blind hope in their current job, their pension plans, their investments, their checking accounts, their grocery stores, gas stations, the water company, etc. We have quite a while before it gets that bad, but the notional claims out there (derivatives) on all productive activity in the world are basically in the midst of creating an infinite margin call on everything. As long as the government goes along with it, the most highly tiered claims (which are the most politically connected financiers) will get all the wealth and everybody else will lose everything...feudalism.
The government should declare most of the engineered derivatives like CDS void and let the big institutions/investors who own them go broke. That would be extremely painful for a while, but it would end the current parasitic financial empire, which would allow us to start from the bottom-up building a new economy based on local banks, local relationships. But instead the Fed has now stood behind the CDS market by backing AIG (which creates a bias toward corporate bankruptcies as CDS holders would rather see them go broke and receive 100% payment from AIG than renegotiate terms and allow the companies to survive), plus Congress recently gave derivatives holders priority claims in bankruptcy above other stakeholders. Those who understand what's going on here can see the obvious...this isn't just a mistake, or a random policy choice...this is the biggest shakedown in history as DC continues propping up this club of brazen parasites. The problem is, most of the people who really understand what's going on have joined the club...it pays quite well.
holy cow..................................ok jason you got me but it was worth it.
i am havinga really bad day and i did not need to read this
i just spent the entire day in a thing called forward fayetteville with ove 400 believers in the endless smart growth paradigm. i was a voice in the wilderness. prof bartlett was here in the fall but had no impact ..............................obviously
ok i have moved from acceptance back into depression
i will write a more detailed account when i have had a bottle of singlemalt...it has finally gotten weird enough for me.
Not enough oil for the G20 package
Interesting article I ran across.
Strabes: once again, you, sir, have nailed it.
Thanks so much for you contributions to this forum.
Strabes,
I gotta say, that is the single most depressing analysis of our disaster, laughingly called an economy, that I've read so far.
Over shareholders? bond holders? lending institutions? If that's the case, we are in deep do-do. It would be inconceivable if so much that seemed inconceivable hadn't already been done. How did they do that?
wolf
Thanks for that article. It certainly puts things in perspective:
The G20 heads have to know this. That means they are either engaging in magical thinking (a sign of insanity) or they are purposely trying to deceive us. The question to me is, what purpose would be served in deceiving us? Do they think that we will somehow take it better when the inevitable truth dawns if we don't see it coming? Are they profiting in some way by keeping us in the dark? Are they really that venal?