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Money printing is the only thing keeping the system afloat
Alisdair
MacLeod
RT,
14
October, 2012
Last
Monday GoldMoney published my
article showing the frightening growth in money-quantities for the US
dollar. In that article I stated that the hyperbolic rate of
increase, if the established trend is maintained, is now running at
over $300bn monthly, while the Federal Reserve is officially
expanding money at only $85bn.
The
first thing to note is that the Fed issues money because it deems it
necessary. The hyperbolic trend increase in the quantity of money is
a reflection of this necessity, implying that if the Fed’s money
issuance is at a slower rate than required, then strains will appear
in the financial system. There are a number of reasons behind this
monetary acceleration, not least the need to perpetuate bubbles in
securities markets, but there are three major underlying problems.
Government
spending
Federal
government spending is accelerating, due to rapidly escalating
welfare commitments, not all of which are reflected in the budget.
Demographics,
particularly the retirement of baby-boomers, government-sponsored
healthcare, and unemployment benefits are increasing all the time;
yet the tax base is contracting because of poor economic performance
and tax avoidance. Furthermore, state and municipal finances are
dire.
Economy
The
US economy is overloaded with debt to the point that it no longer
reacts positively to monetary stimulus, and successive government
interventions have led misallocation of economic resources to
accumulate towards crisis levels. The private sector is now teetering
on the edge of an abyss overloaded by both debt and government
intervention.
Commercial
banks
The
banks are cautious about lending to indebted borrowers, and they have
failed to adequately devalue collateral against existing loans. The
result is that with no bank credit being made available to support
renewed buying of assets, asset valuations are constantly on the
verge of collapse. Put another way, banks have backed off from
creating ever-increasing levels of debt to perpetuate the pre-crisis
asset bubble.
One
should not take comfort in attempts to improve asset ratios.
According to the Federal Deposit Insurance Corporation, the ratio of
total assets to risk-adjusted Tier 1 level capital is currently
11.25; but this does not adequately reflect off-balance sheet
activities and non-banking business such as derivatives. The
inclusion of derivatives on US bank balance sheets as a net as
opposed to gross exposure, seriously misstates actual risk.
Banks
therefore face two different problems. An on-paper write-down of
collateral assets of less than 9% wipes out the entire banking
system, with a far lower threshold for many banks. Changes in GAAP
accounting rules over asset valuations in the wake of the Lehman
crisis have allowed them to hide losses, a situation that is still
unresolved and suggests the banking system is already close to the
edge. Furthermore, any failure in the derivative counterparty-chain
threatens to trigger a collapse of the larger banks where derivative
exposure is concentrated.
Conclusion
We
are in the eye of a financial storm, for which the only solution –
other than mass default – is an accelerating supply of money.
Deteriorating financial conditions in either government, banks,
private sector or securities markets are almost certain to trigger a
run on the others. And that is why a far larger figure than QE3’s
$85bn per month may be required to keep the system afloat.
Other
economic news
The
author is the person who famously predicted that in the future, only
the rich will fly.
And indeed, people who watch the following "Airline Death
Spiral" category have been observing the inexorable slow-motion
collapse of the industry and depopulation of regional airports. --
RF.
"The
government did not include the word 'recovery' in its
monthly economic assessment for October, released Friday,
for the first time in six months, and revised downward its
overall assessment of the nation's economy for three
consecutive months."
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