How Our Crazy Money System Works

Submitted by William Bonner, Chairman – Bonner & Partners

Squirrelly and Subtle

Yes, we were in London, taking care of business. Now, we’re back in Buenos Aires. We’ve tried medication. We’ve tried prayer. We’ve tried heavy drinking – all in an effort to understand how our crazy money system works. And where it leads.

You’d think it would be easy. It’s just Central Banking 101, no? Well, no. It is squirrelly… and diabolically subtle. We doubt anyone understands it – especially those who are supposed to control it.

The basic unit for the system is a kind of money the world has never had before: the post-1971 fiat dollar. It’s paper money – worth as much as people think it is worth … and managed by people who think it should be worth less as time goes by.

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Photo via Pixabay

 

What a Business!

Who are these people? Who do they work for? You might say they are “public servants.” But that implies they are working on the public’s behalf. Nooooo sireee…

They are employees of a banking cartel that is owned by private banks. These banks have a license to lend money into existence, earning interest on their loans.

It is no surprise that their share of US corporate profits has risen fourfold since President Nixon ended the quasi-gold standard Bretton Woods system. What a business! Their cost of goods sold is next to nothing. A few strokes on a keyboard and millions… billions… heck, trillions… of dollars are created.

As our friend and economist Richard Duncan points out in his book The New Depression, the amount of liquid reserves banks have to hold against their loans is now so small they provide “next to no constraint” on the amount of credit the system can create.

Banks just have to maintain a certain “capital adequacy ratio.” This restricts their lending to a multiple of their equity capital (money provided by their shareholders). Of course, money is valuable only as long as there is not too much of it. The market can absorb a little counterfeited money. But there’s a limit. And that limit has been greatly increased, thanks to:

  1. 1) A worldwide overcapacity of output, financed by previous lending
  2. 2) A huge glut of cheap labor, also largely brought forth by the credit expansion of the last 30 years

Without these unique circumstances, central banks’ irresponsible policies – ZIRP and QE – would probably have caused inflation to rise to the double-digit range already … maybe higher.

Loans vs. bank reserves

Proof of Richard Duncan’s contention: prior to the crisis, a negligible amount of bank reserves “supported” trillions of dollars in outstanding bank credit. QED, reserves actually don’t matter anymore in the “fractionally reserved” system. However, it is still necessary to understand the money multiplier theory in order to fully grasp how the system works – click to enlarge.

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The Echo Boom, Part 1

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Money Supply Growth Surges Across the World

Michael Pollaro has recently updated his global TMS data up to the end of December 2014 (more up-to-date figures aren’t available yet). He delves into far more details than we usually do, and there are a number of things worth mentioning about the most recent data.

First of all, it is worth noting that in the final three months of 2014, and especially in December, money supply growth rates have accelerated sharply on an annualized basis in all three major currency areas (US, euro area, Japan). Here is a summary of the main data points (note, this is monthly growth annualized, quarterly growth annualized and y/y growth):

US: TMS-1: 1 month: 62.1%,   3 month: 21.9%, year-on-year: 8.8%

TMS-2: 1 month: 21.8%,   3 month: 13.8%, year-on-year: 7.8%

Euro Area: TMS: 1 month: 28%,  3 month: 19.6%, year-on-year: 9.3%

M3: 1 month: 15%,  3 month: 9.8%,   year-on-year: 4.7%

ECB credit was rising at a 73% annualized rate in December 2014 – a result of the CBPP3 (covered bond) and ABS purchasing programs and TLTROs, but not yet including the new sovereign QE program

Japan:   TMS: 1 month: 29.1%,  3 month: 13.7%, year-on-year: 4.5%

M3: 1 month: 12.2%, 3 month: 8.0%, year-on-year: 2.8%

As can be seen above, year-on-year growth rates are quite high in the US and the euro area, but not at an exceptional level (yet) compared to previous peaks. It could be that the acceleration in annualized growth rates in the fourth quarter and the month of December has partly to do with seasonal effects, but it seems actually more likely that there is more to it than that.

 全球货币Image credit: Matt Collins

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12 Reasons Why Ritholtz and Many Experts Are Mistaken On Gold

Submitted by Mark O’Byrne  –  GoldCore

 Being involved in the fairly niche business of an international gold brokerage for nearly 12 years now, we find ourselves continuously engaged in conversation with people who demonstrate an incredible lack of understanding of the function of gold and the importance of gold as a DIVERSIFICATION and as a SAFE HAVEN asset.

This lack of understanding is not confined to the public but also prevalent with some financial experts. One example of this is one of the more vocal anti gold experts in recent months – leading Bloomberg columnist Barry Ritholtz.

This lack of understanding results in many investors being very exposed and at risk of financial losses due to their significant over exposure to paper assets and fiat digital currencies and complete lack of any allocation to gold whatsoever.

These experts are highly intelligent people. As are many in the public and yet the concept of diversifying and having an allocation to gold is utterly foreign to them.

The public have little terms of reference except for movies such as Goldfinger and fairytales about Leprechauns and crocks of gold. Indeed, their primary reference point is often jewellery, wedding rings and of course the recent ‘cash for gold’ phenomenon.

They have no understanding of the central role gold plays in macro-economics, geopolitics and of course monetarily.

They have no knowledge of the fact that gold has protected people throughout history from financial and economic crashes and from currency devaluations. The significant body of academic research on gold showing it to be a hedging instrument and a safe haven asset is ignored and unknown.

We find ourselves constantly confronted by the same set of ill-informed opinions on gold.

Many of these misconceptions were encapsulated in a 2013 article by  Barry Ritholtz, with the peculiar title “12 Rules of Goldbuggery”.

Oddly, we happen to agree with a lot of what Ritholtz has to say. There are some – among the diverse range of people online who promote ownership of physical bullion coins and bars – whose enthusiasm for the metal can border on religious zeal. They are a minority.

At the same time we feel that Ritholtz’s article was somewhat disingenuous. It was unbalanced and simplistically denigrates gold ownership – ignoring academic research and indeed history and the experience of recent years – the U.S. and Euro zone debt crisis, Lehman Brothers etc.

The article was very widely disseminated and will have discouraged many investors from allocating to gold in a properly balanced portfolio.

The immediate problem with critiquing the disparaging remarks in “Goldbuggery” is that Ritholtz doesn’t approach his distaste for gold head-on. Instead he puts words in the mouth of apparent “gold bugs”. He therefore avoids making statements he may later regret.

Certainly, some of these views are held by some gold buyers but, in our experience with our clients, they are by no means the mainstream view in the gold community.

It is worth noting that there is no asset-class other than gold where its proponents have their own derogatory classification. We are labelled “gold bugs”, but there are no “stock-roaches” or “preying-bankers.”  Let alone “paper bugs”, “dollar bugs,” “euro bugs” or heaven forfend “banker bugs.”

One has to ask – why the silly name calling regarding gold. Why use a pejorative and derogatory term for those who own physical gold to protect themselves from market turmoil and currency devaluations? It suggests an anti gold agenda or at least anti gold beliefs.

Let us now look at Ritholtz’s Twelve Rules of Goldbuggery. We will look at each of these contentions and deconstruct them one by one. Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

 


Wyland Stanley “J.A. Herzog Pontiac, 17th & Valencia Sts., San Francisco.”  1936

• Yellen Removes Another Obstacle To An Eventual Rate Hike (MarketWatch)
• US Government’s ‘New Rule’ Allows Banks To Completely Make Sh#t Up (Simon Black) 
• Greek Finance Chief: We Want To Regain EU’s Trust (CNBC) 
• Greek Finance Minister’s Full Letter To The Eurogroup (Kathimerini) 
• Greece Has Lost The Gamble But Can Still Come Up Trumps (Guardian) 
• How Addiction To Debt Came Even To China (Martin Wolf) 
• China Readies Measures to Counter Housing Market Slump (Bloomberg) 
• Britain To Send Military Advisers To Ukraine, Announces Cameron (Guardian) 
• UK Military Training In Ukraine: Symbolic Move That Risks Russian Ire (Guardian) 
• IMF Package for Ukraine: Some Pesky Macros (Constantin Gurdgiev) 
• Kiev Cash-For-Gas Fail Could Cost EU Its Supply In 2 Days – Gazprom (RT) 
• East Ukraine Artillery Withdrawal In Focus – As Poroshenko Buys UAE Weapons (RT) 
• Lure of Wall Street Cash Said to Skew Credit Ratings (Bloomberg) 
• Militants, Migrants And The Med: Europe’s Libya Problem (BBC) 
• Lester Brown: ‘Vast Dust Bowls Threaten Tens Of Millions With Hunger’ (Guardian) 
• The Amherst Cauldron: The Donbass in New England (Albert Bates at ClubOrlov) 
• Kick-The-Can Has Morphed Into A Blatant Farce (David Stockman) 
• “Remove From Governments The Ability To Interfere With [Our] Rights” (Snowden) 
• London: A Set Of Improbable Sex Toys Poking Gormlessly Into The Air (Guardian) 

Kick-The-Can Has Morphed Into A Blatant Farce

Kick-the-can has morphed into a blatant farce. Everywhere in the world central banks and financial officialdom are engaging in desperate, juvenile maneuvers to buy time—–amounting to hardly a few weeks at a go. Never before has the debt-saturated, speculation-ridden global casino rested upon such a precarious foundation.

This week, for instance, Janet Yellen will again waste two days of Congressional hearings in forked-tongue equivocations about an absolutely stupid issue. Namely, the exact date when money market interest rates will be permitted to blip upward from the zero bound by even 25 basis points.

But this “lift-off” drama is flat-out surreal. How could it possibly matter whether ZIRP will have been in place by 80 months or 83 months from its inception point way back in December 2008? There is not a single household or business on main street America which will change its behavior in the slightest during the next year regardless of whether the federal funds rate is 5 bps, 30 bps or 130 bps.

The whole Kabuki dance in the Eccles Building is about hand signals to Wall Street carry traders; its a reflection of the desperate fear of our monetary politburo that having inflated for the third time this century the mother of all financial bubbles, they must now keep it going literally one meeting at a time—lest it splatter again and destroy the illusion that an egregious spree of money printing has saved the main street economy.

Likewise, it now transpires that the bruising political war of words between the Germans and the “radical” Greek government has been suspended for another few weeks. And the reason is a pathetic fear that unites the parties despite their irreconcilable substantive policy differences. Namely, that the markets will crater upon even a hint that a real solution is on the table, and that the way to keep the beast at bay is to cover their eyes, kick-the-can and hope something turns up to avert the next crisis a few weeks down the road.

Still, this is getting beyond juvenile. If there were any adults in the room they would focus on quickly shaping a workable Greek default and exist—-not on perpetuating the lie that Greece can ever recover from its debt servitude to the EU superstate and IMF.

Ironically, the fire breathing leftists who have taken over in Athens have compliantly strapped on the poodle collar left behind by the Samaras government. It seems that their game-theory spouting Keynesian financial spokesman, Yanis Varoufakis, also fears a thundering upset in the casino. So the Syriza government stumbles forward——now visibly toting the massive debt imposed on them by the Eurozone and IMF in order to bailout the German, French and Italian banks.

Indeed, in a new variation of the Stockholm syndrome, Syriza has not only embraced the views of its debtor’s prison jailors, but has actually invited them to secretly author their own attestations of subordination.  As Zero Hedge noted about today’s shocking revelations regarding the so-called Varoufakis letter to the Troika, aka “institutions”:

As it turns out, the reason why not only the Troika received an agreed to version of the Greek reform proposals “before midnight on Monday”, but rushed these through with a favorable agreement today, is that, drumroll, the European Commission drafted the entire letter! 

And, no, this isn’t tin foil hat stuff. Here’s the smoking email which reveals that the “first list of comprehensive reform measures” submitted by Greece, which is actually a six-page air ball completely devoid of numbers and specifics, was actually written by one Declan Costello, an apparatchik at the European Commission. Continue reading

Gold Holdings of Eurozone Rise to 10,792 Tonnes – ECB’s “Reserve of Safety” Accumulated

Submitted by Mark O’Byrne  –  GoldCore

The Euro zone raised its gold holdings by 7.437 tonnes to 10,791.885 tonnes in January, International Monetary Fund data released overnight showed.

The rise in gold holdings was small in tonnage terms and in percentage terms  – especially when viewed in the light of the recently launched ECB’s EUR 1 trillion QE monetary experiment.

Nevertheless, the rise in Euro-area gold holdings shows how the ECB continue to view gold as an important monetary asset. Mario Draghi said of gold in October 2013 that gold is a “reserve of safety” that “gives you a value-protection against fluctuations against the dollar.” 

Draghi told an open forum at Harvard’s Kennedy School of Government, why central banks want gold and what value it offers. He said that there were “several reasons” to own gold including “risk diversification”.

The increase in reserves came at a time, January, of rising gold prices amidst the reemergence of the Greek debt crisis.

It may signal that the ECB and Eurozone are set to embark on a gold accumulation programme. More likely, it is simply a way to bolster confidence in the euro due to increasing doubts about the viability of the single currency.

goldcore_bloomberg_chart4_24-02-15

Russia sold a very small amount of gold in January for the first time since March. Russia lowered its reserves to 1,207.7 tons from 1,208.2 tons, ending nine months of consecutive purchases, the IMF data showed.

Russia, the world’s fifth-biggest gold holder, had been adding to its holdings for many years in order to bolster the rouble.

Before last month, Russia had bought at least 18 tons a month since September and more than tripled its holdings since 2005.

Turkey’s gold reserves fell marginally last month along with Mexico and Belarus, the data showed.

Kazakhstan increased gold reserves for the 28th straight month, while Ukraine added to holdings for the first time since August, the data showed. Kazakhstan boosted holdings to about 193.5 metric tons from 191.8 tons a month earlier as Ukraine’s rose to 23.9 tons from 23.6 metric tons.

Kazakhstan’s hoard rose 33 percent in the past year alone and more than doubled in the past three years.

Ukraine’s assets dropped in November to the lowest level since 2005 as its foreign currency reserves contracted and the hryvnia slumped amid the conflict and collapsing economy. There were also concerns that the newly installed government had acquired the gold and moved it offshore, out of Ukraine.

Central banks are some of the largest buyers of gold today – see table above. Central banks have been adding to their gold reserves for the past five years, a reversal from two decades of selling since the late 1980s. They were net buyers in 2014 and are set to be net buyers again 2015.

Governments bought 477.2 tons of gold bullion in 2014, the second-biggest increase in 50 years, and purchases will be at least 400 tons this year, the World Gold Council has estimated.

The smart money will continue to follow the lead of central banks internationally and gradually accumulate gold and dollar, euro or pound cost averaging into an allocated and segregated physical gold position.

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