Why Does Fiat Money Seemingly Work?

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Introducing Money

Imagine three men living on a small island. Toni is mining the local salt mine, and apart from him there are Pete the fisherman and Tom the apple grower and their families. They have a barter trading system set up: Toni exchanges his salt for Pete’s fishes and Tom’s apples, who in turn exchange fishes and apples between each other.

One day Pete says: “I have an idea. Instead of fish, I will from now on give you pieces of papyrus with numbers marked on them”. Papyrus grows in great quantities nearby, but has so far not been of practical use to any of the islanders. Pete continues: “One papyrus mark will represent 1 fish or 5 apples or 2 bags of salt (equivalent to current barter exchange rates). This will make it easier for us to trade among ourselves. We won’t have to lug fishes, apples and salt around all the time. Instead, we can simply present the pieces of papyrus to each other for exchange on demand.”

John_Law-Casimir_Balthazar_mg_8450

John Law at a young age – the world’s first Keynesian economist

Painting by Casimir Balthazar

In short, Pete wants to modernize their little island economy by introducing money – and he already has one of those new papyrus notes with him, which he is eager to trade for salt. However, the others would immediately realize that there is a problem: the papyrus per seis not of any value, since none of them have found a use for it as yet. If they were all to agree on using the papyrus as a medium of exchange, its value would rest on a promise alone – Pete’s promise that any papyrus he issues will actually be “backed” by fish, which would make Toni and Tom willing to accept it in exchange for salt and apples.

Since papyrus grows in great abundance on the island, Pete could easily issue money by the bucket load. Both Toni and Tom like Pete, but they can see that the idea of installing him as the island’s papyrus banker would likely tempt him into taking advantage of them. In fact, it is unlikely that any of the islanders would ever propose such an idea.

It is far more likely that they would use another good as a medium for indirect exchange, one for which there is an actual demand (for instance, a rare type of sea-shell that is prized as an ornament and only seldom found on the island). In short, in a free market, only be something that enjoys an already established demand due to its use value would emerge as a medium of exchange. An object widely considered as worthless would never become money in a free market.

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The Are Two Big Problems With Deutsche Bank Failing The Fed’s Stress Test

Submitted by Tyler Durden  –  ZeroHedge

 

There are two big problems with Deutsche Bank failing the Fed’s stress test as the WSJ just reported it would.

This is what the WSJ reported moments ago:

Large European banks including Deutsche Bank AG and Banco Santander SA are likely to fail the U.S. Federal Reserve’s stress test over shortcomings in how they measure and predict potential losses and risks, according to people familiar with the matter. Failing the stress tests would likely subject the U.S. units of Deutsche Bank and Banco Santander to restrictions on paying dividends to their European parent companies or other shareholders.

Why is this an issue?

Well, the first problem is that Deutsche Bank recently passed the ECB stress test with flying colors. Then again, since that was a “test” which not even in its worst-case scenario modeled for deflation (as a reminder, Europe just suffered its record worst deflation in history on par with the Great financial crisis), one can now roundly dismiss any and all current or future analytical, regulatory and executive tasks conducted by the ECB. We will ignore the fact that the world’s biggest bond buying program is currently being undertaken by precisely said clueless central bank. We will also ignore the other fact, that the bank of the former FDIC-head Sheila Bair, Santander – a bank which is currently the biggest subprime auto loan lender – will also fail the stress test: to dwell too much on that particular irony would give us a headache.

The WSJ did provide a token explanation for this particular “oversight” by the ECB:

Deutsche Bank Trust Corp. is expected to be found adequately capitalized by the Fed but will likely receive a warning on qualitative shortcomings, according to people familiar with the matter.

 

Both Deutsche Bank and Santander passed European Central Bank stress tests in October. Those tests focused on whether the banks had enough capital to withstand a two-year recession but didn’t assess such things as governance, risk management, and other more subjective factors like the Fed’s test.

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Wall Street’s Calling The Sheep: Buy The Dip Now, Join The Slaughter Later

Yes, indeed. They bought the dip again, nudging the S&P 500 to another “record close”. This time the magic number was 2097 and its represented a tiny gain of 0.3% from the last record close, which was 2090 on December 29th.

Needless to say, there were a lot of thrills and spills in between. As shown below, the broad market index has been staggering upward like a drunken sailor for the last three months. Just about 90 days ago on November 17, in fact, the S&P 500 hit a then record high of 2073 before plunging on five separate occasions by 3-4% toward the 2000 marker during the interim.

So it all adds up to a 1.2% net gain since mid-November. Call it a 4% annualized rate. The question at hand, therefore, is who in their right mind would want to play on the jagged curves shown below for 4% a year?

Indeed, the sharp dips here pictured are not even half the story. The real risk/reward equation is the prospect of gaining perhaps 4% when buying the dips versus a 30-50% bloodbath when comes the next slaughter.
^SPX Chart

^SPX data by YCharts

The picture above is surely the work of robo-machines and days traders, pivoting sharply and frequently between a narrow corridor of chart points. But that obvious scam does not stop Wall Street from calling the retail sheep, and in that regard they have been more than successful. Continue reading

Extinct—Extincter—Extinctest

Submitted by Dmitry Orlov  –  The ClubOrlov Blog

This blog is dedicated to the idea of presenting the big picture—the biggest possible—of what is going on in the world. The abiding areas of interest that make up the big picture have included the following:

1. The terminal decay and eventual collapse of industrial civilization as the fossil fuels that power it become more and more expensive to produce in the needed quantities, of lower and lower resource quality and net energy and, eventually, in ever-shorter supply.
The first guess by Hubbert that the all-time peak of oil production in the US would be back in the 1970s was accurate, but later prediction of a global peak, followed by a swift collapse, around the year 2000 was rather off, because here we are 15 years later and global oil production has never been higher. Oil prices, which were high for a time, have temporarily moderated. However, zooming in on the oil picture just a little bit, we see that conventional oil production peaked in 2005—just 5 years late—and has been declining ever since, and the shortfall has been made up by oil that is difficult and expensive to get at (deep offshore, fracking) and by things that aren’t exactly oil (tar sands).

The current low prices are not high enough to sustain this new, expensive production for much longer, and the current glut is starting to look like a feast to be followed by famine. The direct cause of this famine will not be energy but debt, but it can still be traced back to energy: a successful, growing industrial economy requires cheapenergy; expensive energy causes it to stop growing and to become mired in debt that can never be repaid. Once the debt bubble pops, there isn’t enough capital to invest in another round of expensive energy production, and terminal decay sets in.

2. The very interesting process of the USA becoming its own nemesis: the USSR 2.0, or, as some are calling, the USSA.

The USA is best characterized as a decomposing corpse of a nation lorded over by a tiny clique of oligarchs who control the herd by wielding Orwellian methods of mind control. So far gone is the populace that most of them think that things are just peachy—there is an economic recovery, don’t you know—but a few of them do realize that they all have lots of personal issues with things like violence, drug and alcohol abuse, and gluttony. But don’t call them a nation of violent, drug-abusing gluttons, because that would be insulting. In any case, you can’t call them anything, because they aren’t listening, for they are too busy fiddling with their electronic life support units to which they have become addicted. Thanks to Facebook and the like they are now so far inside Plato’s cave that even the shadows they see aren’t real: they are computer simulations of shadows of other computer simulations.

The signs of this advanced state of decomposition are now unmistakable everywhere you look, be it education, medicine, culture or the general state of American society, where now fully half the working-age men is impaired in their ability to earn a decent living. But it is now particularly obvious in the endless compounding of errors that is the essence of American foreign policy. Some have started calling it “the empire of chaos,” neglecting to mention the fact that an empire of chaos is by definition ungovernable.

A particularly compelling example of failure is the Islamic Caliphate, which now rules large parts of Syria and Iraq. It was initially organized with American help to topple the Syrian government, but now threatens the stability of Saudi Arabia instead. This problem was made much worse by alienating Russia, which, with its long Central Asian border, is the one major nation that is interested in fighting Islamic extremism. The best the Americans have been able to do against the Caliphate is an expensive and ineffectual bombing campaign. Previous ineffectual and expensive bombing campaigns, such as the one in Cambodia, have produced unintended consequences such as the genocidal regime of Pol Pot, but why bother learning from mistakes when you can endlessly compound them?

Another example is the militarized mayhem and full-blown economic collapse that has engulfed the Ukraine in the wake of American-organized violent overthrow of its last-ever constitutional government a year ago. The destruction of the Ukraine was motivated by Zbigniew Brzezinski’s simplistic calculus that turning the Ukraine into an anti-Russian NATO-occupied zone would effectively thwart Russian imperial ambitions. A major problem with this calculus is that Russia has no imperial ambitions: Russia has all the territory it could ever want, but to develop it it needs peace and free trade. Another slight problem with Zbiggy’s “chessboard” is that Russia does have an overriding concern with protecting the interests of Russians wherever they may live and, for internal political reasons, will always act to protect them, even if such actions are illegal and carry the risk of a larger military conflict. Thus, the American destabilization of the Ukraine has accomplished nothing positive, but did increase the odds of nuclear self-annihilation. But if the USA manages to disappear from the world’s political map without triggering a nuclear holocaust, we will still have a problem, which is that… Continue reading

Professional Bitcoin Mining in China

Submitted by Pater Tenebrarum  –  The Acting Man Blog

A Major Mining Operation

Since recovering from a brief plunge to $150 intraday in January, Bitcoin has moved in a trading range roughly between $210 and $270. Most recently the currency traded around $235. As we will explain further below, at what price Bitcoin changes hands may actually be relevant for the sustainability of its crucial infrastructure backbone. Here is an hourly chart of the action on the Bitstamp exchange over the past 10 trading days:

bit coin, hourly chartBitcoin hourly. Since the low at $150 in January, the crypto-currency has traded in a range between approx. $210 and $270, via bitcoincharts.com, click to enlarge.

This brings us to a very interesting video of a major professional Bitcoin mining operation in China that has recently been brought to our attention. As you can see in this video, the times when people could mine Bitcoins at home with a souped-up graphics card are long gone. These days entire floors of buildings stuffed with computing hardware are needed to “mine” a halfway decent amount of Bitcoins (many smaller private miners nowadays join pools which share the Bitcoin found by communal effort whenever a member of the pool manages to solve a block of the Bitcoin block chain).

The reason why such huge operations are necessary for Bitcoin mining these days is that the complexity of the calculations required to solve the mathematical puzzle that leads to the discovery of new Bitcoins continually increases the more miners are active. Continue reading

Greece, ECB QE or the Franc

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

With Greece relenting on its game of chicken with the Eurozone noose, you have to wonder how much the ELA and the threat of total financial meltdown pushed that direction. From the view of credit markets in Europe, there was an unusual almost confidence in such an outcome from the moment of the election last month. Small wonder when Europe held essentially the trump card:

Some members of the governing council believe that if a solution is not agreed between Greek officials and the Eurogroup by the end of the week, then the ECB could have to review the solvency of Greek banks.

Not only could the ECB kick Greek bonds out of the broader, continental collateral pool, they could make financing for Greek financial firms next to impossible. In other words, there is no economics or even monetary economics at work here; the complexities were entirely political from the start, not that that is any special insight.

In fact, the economics are relatively straightforward, as “solvency” isn’t quite the right word for being used as a political hammer. You can’t be solvent one day and insolvent the next based on decree – either your assets sufficiently cover your liabilities or they don’t. The difference of this new financial system with the ultra-activism of central banks as political tools is that as the “market of last resort” (another of those completely unappreciated alterations to global finance) liquidity has been merged with solvency, and vice versa.

When central banks “control” and manage “markets”, for our own good of course, there is no daylight in which to render objective (as much as possible) verdicts about financial health. There is only conformity or nonconformity, regardless of what is contained in any single balance sheet. That is why European banks can buy up all the PIIGS debt they want without fear of solvency questions, as that former limiting factor is now entirely political. Continue reading

Gold And Russia

Submitted by Alasdair Macleod – FinanceAndEconomics.org

In late November I wrote an article suggesting that it could be in Russia’s interest to put the rouble on a gold exchange standard. The salient points were the Russians could easily make it stick, inflation would be tamed, and importantly Russia would divorce herself from the currency war being waged against her by her NATO enemies. The immediate consequence of such a move would almost certainly drive gold prices higher, if only because bullion banks would be forced to reconsider their short positions, in the knowledge that Russia would probably become a more aggressive buyer to build her reserves.

This move would be very good for Russia, if you understand Austrian economic theory, but would be judged reckless by mainstream macroeconomists. So it is obviously a prerequisite that President Vladimir Putin’s advisers would have to lean strongly towards sound money theories, if they are to advise such a move. Whether or not this is the case we do not know; the only thing we can do is look at the evidence and try to see things from Putin’s point of view.

Putin is an old-fashioned mercantilist, tolerating mild dissent to preserve the appearance of democracy, but ruthless with anyone who gets in his way. He runs Russia like a business, always looking for the commercial advantage in alliances. For this reason he decided some time ago that Russia’s future lay as a dominant partner with China in a Eurasian super-state, and so the Shanghai Cooperation Organisation (SCO) was founded in 2001. It’s a natural: Russia has the resources and China the manufacturing. The SCO will have half the world’s population under its control when India joins, and will heavily influence another billion Asians. Even Turkey, a NATO member and previously an applicant to join the EU, intends to join the SCO instead. Continue reading

Gold Down 1.5% This Week – Massive Complacency Regarding Greece as Geopolitical and Debt Crisis Loom

Submitted by Mark O’Byrne  –  GoldCore

* Greek Bank Runs Accelerate as Possible ‘Grexit’ Looms
* Fatigue with Greek Crisis Breeding Massive Complacency
* Government in Kiev Forced to Take Diplomatic Approach
* Ukraine a Significant Setback for NATO
* Regional War in Eastern Europe Averted for the Moment
* Middle East, Israel and Iran Timebomb Ticking
* India Demand To Rise To 35 – 40 Tonnes This Month
* Gold Oversold – Fundamental and Technical Position Good 

The Greek debt saga continues and financial tragedy seems increasingly likely as the deadlock between Greece and the Eurogroup continues today.

goldcore_bloomberg_chart1_20-02-15

The two sides remain far apart during the Eurogroup meeting in Brussels. The 240 billion euro bank bailout expires at the end of this month and Greece could run out of money by the end of March without new external funds, driving it nearer to the euro zone exit.

There is already quite a lot of chatter about the possibility of another summit should today’s talks end in stalemate.

It has dragged along for so long now that a false sense of security has developed as the situation becomes the “new normal.”

This complacency is unwarranted. The situation will come to a head sooner rather than later.

There are new reports of bank runs in Greece coming into this Bank Holiday weekend. Officials in the Greek banking sector told Greek newspapers that as much as 25 billion euros have been withdrawn from Greek banks since the end of December with outflows surging this week ahead of a bank holiday.

Bank runs continue as Greek depositors rightfully fret regarding bail-ins or a return to the drachma. The prudent money is diversifying their savings so as not to be financially decimated.

Greece officially applied for a six month extension to its loan agreement, Eurogroup chair Jeroen Dijsselbloem said on Twitter of all places yesterday. U.S. Treasury Secretary Jacob J. Lew contacted Greek Finance Minister Yanis Varoufakis yesterday and warned him that failure to strike a compromise would bring further hardship on the country.

Either Greece will acquiesce to EU demands and eventually default anyway, or Greece will exit the Euro and unilaterally default causing unforeseeable consequences or Europe will cave-in which will embolden the anti odious debt factions across the European periphery.

Greece may even avail of a bail-out from the BRICS bank which would bring further geopolitical instability to Europe and further undermine the dollar system. Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

Greece Drops Key Bailout Demands, But Germany Still Objects (AP)
ECB Risks Crippling Political Damage If Greece Forced To Default (AEP)
Varoufakis Meets Euro Partners as Greece Seeks to Avoid Default (Bloomberg)
Has Greece’s ‘Lehman Moment’ Finally Arrived? (CNBC)
Greece’s Request for Loan Extension Is Rejected by Germany (NY Times)
US Urges Greece, Creditors To End Impasse (CNBC)
Meet Europe’s Newest Austerity-Hating Politician (CNBC)
Ukraine: UK and EU ‘Badly Misread’ Russia (BBC)
Two New Papers Say Oversized Finance Sectors Hurt Growth and Innovation (NC)
Saudi King Unleashes Torrent Of Money As Bonuses Flow To The Masses (NY Times)
Supertankers Speed Up as Oil Prices Fall (Bloomberg)
Cyclone Slams Into Northeast Australia (Reuters)
How Rudy Giuliani Marginalized Himself (WaPo)
US and UK Spy Agencies Stole The Secrets Keeping Your Phone Secure (Engadget)
Millions At Risk From Rapid Sea Rise In Swampy Bay of Bengal Islands (AP)
Wrinkle-Smoothing Chocolate To Make A Splash (RT)

Much more here: Debt Rattle February 20 2015 – TheAutomaticEarth.com