Race to the bottom

  By Mystic | September 14, 2012 - 09:17 |

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Written by: Mystic on September 14, 2012.
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  • Bigcollapso

    The idea that the Fed can obtain their employment target by debauching the USD is not even sane. Hyperinflation, here we come. 

    • Windslice

      Hyperinflation is not coming your way any time soon.

      There are massive deflationary forces afoot which the Bernank is fighting tooth and nail.

      • Bigcollapso

        This is true from one aspect. What is “deflating” is the “assets” from the bubble blowing of the Fed. That is, reality is being revealed after the Feds criminal bubble blowing to increase the revenue of its banks from increasing the housing prices and government debt.
        This really has nothing to do with the real economy that has to keep us all alive. The Fed is destroying the money and the information that this system needs to keep us alive, in order to hide the losses (that occurred years ago) from its bubble blowing.
        There is a small chance that the Fed can do this, that is, they can transfer the losses from the bubble pop into the hands of the working class by inflating away their buying power. If this works, it will leave the middle and working class utterly poor and leave the banksters with everything.
        Buy there will be massive damage to the economic systems that we all need to stay alive, for several reasons. One is that the technical economy is not evolving to handle the physical world that it must operate in, but rather to try to survive this constant inflation of the monetary system, and the ever increasing wealth capture and consumption.
        Another reason that it is unlikely to work is that it by definition holds the monetary system very close to collapse for years or decades as it attempts to inflate away the buying power of the money.
        This means that everyone must behave “normally” to keep the system from collapsing.
        History shows that a “smart” guy or a government will take advantage of that situation and collapse the system for his own gain.

  • Windslice

    All that debt.

    http://www.gfmag.com/tools/global-database/economic-data/11855-total-debt-to-gdp.html#axzz26UhLDvRV
    Oodles and oodles of it.

    But surely that is the system?

    Without all the debt, much of the existing assets would never have been built or manufactured. And debt can only be paid off by the creation of even more debt somewhere in the economy. And as the debt is created by the finance industry, then this tends to suck all the wealth into the banks.

    But I am struggling with the Bernank’s latest scheme for rescuing the economy from, well, itself. The vast bulk of MBS’s are created by Freddie, Ginie, and Fannie. as we know, MBS’s are barrels of mortgages (with the occasional iffy apple) sold into the market. The buyer then receives an income stream from the interest payments.

    So along comes the Bernank buying at will up to half a trillion USD’s worth of this stuff every year for as long as he thinks the economy needs it.

    Right.

    So if you are holding a bunch of MBS’s which are generating a cash stream, why on earth would you sell out to the Bernank for cash, which will give you 0.0% income, unless you have something better to do with the cash? The only reason I can think of is that you know there are a few rotten apples in the bunch and so we’ll sell out on the Bernanke “put”.

    OK, so now you have flogged off the MBS, so what are you going to do with the cash? As there is already a massive pile of cash sitting idly in the FED I suppose that the pile will simply get even bigger. It cannot be lent out, as we have already discussed this issue.

    So where is the transfer mechanism back into the general economy and into the peoples’ pockets so they can go out and spend? I must be missing summat.

    Apropos banking.

    The brain is working overtime again.

    Say we have Bank A which has flogged off all it’s loan book as an MBS to the Bernank. The very simplified balance sheet will look like

    Asset : 5 cash

    Liability : 5 depositors’ accounts

    This bank cannot lend out without expanding the money supply.

    Now the Bank sets up a subsidiary, BAAM. (Bank A  Asset Management).

    Then the cash 5 pile is given to BAAM to manage and Bank A receives a slip of paper as a receipt.

    Now, the cash 5 pile is sitting in BAAM’s account somewhere. Can BAAM start issuing mortgages and slowly move all the cash 5 into new mortgages without creating new deposits and expanding the money supply?

    I think the fallacy of my reasoning lies in transfer of the cash to BAAM and accepting a piece of paper. This has in itself just increased the money supply. Say BAAM keeps the money it manages in a separate deposit account at Bank A.

    After transferring the money to BAAM, the bank’s balance sheet looks like

    Asset:
    Piece of paper 5
    cash 5 (having come back in through the deposit of the cash)

    Liability
    Depositors 5
    BAAM managed money account 5

    Whatever.

    Another thought, the old style Building Societies that the UK used to have before everything became deregulated (maybe derailed is more appropriate). Did they have to collect enough depositors’ deposits to make a loan, or where they also in the “money from nuffin” business?

    • http://overthepeak.com/wordpress/ Mystic

       Thanks for the link …….. it’s a goody~!

      I could not follow your BAAM thing, but I think all banks have always, always, always used fresh air money.
      Building Society or whatever ….. it is the only way to do it.
      (I don’t think there is a `building society accounting system`)

      It is then just a matter of self-control. 

      • Windslice

        Self control. Yep, that’s a good ‘un.

        BTW I’ll soon be off up the hills of the Himalayas for a month or more, so you won’t see me around here until I get back.

        • http://overthepeak.com/wordpress/ Mystic

          Wots the point of goin’ again ………. yer went there last year~!?

          • Windslice

            And the year before that…..

            Sum tings is wurf repeatin’, innit?

            Wot did’ya do wiv da nice snowy hills pic?

            • http://overthepeak.com/wordpress/ Mystic

               There ya go~!

              • Windslice

                Thanks, and here’s one I took in Nepal. Ama Dablam.

                • http://overthepeak.com/wordpress/ Mystic

                   Looks like a bit of a chilly hilly~!

    • Bigcollapso

       Windslice, you are well on the way to understanding the scheme. The one thing that you need to take a a step back and think about is the concept, “Without all the debt, much of the existing assets would never have been built”
      This is a common and incorrect way of thinking.
      Our money is pure fiat. That is, it does not take money to do something in the technical world. In other words everything that has been done could still have been done without the debt. It just that the banks are licensed to be owed perpetual revenue (weath transfers) from the use of the money.
      You can think of it like an odometer that runs on up, whenever you need to use money. This odometer runs faster the more work you do, and the smarter that you are. The larger the number, the larger the future that is owed the financial system.

  • Windslice

    I guess you read AEP on the latest QE

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9542270/Era-of-jobs-targeting-begins-as-Fed-launches-QE3.html

    I have now added “BeveridgeCurve” to my list of economic terms.

    “Yet something is deeply wrong. The percentage of long-term unemployed has surged to 40pc, double previous recessions. The labour participation rate has fallen to a 30-year low of 63.5pc.
    Headline unemployment is 8.1pc – viz 11.3pc in Euroland – but this does not count millions who have dropped out of the system. For the doves this screams “cyclical”, caused by lack of demand. “The loss to the economy is enormous,” said Nobel economist Peter Diamond. “If you leave school and can’t get a job, it hurts for years. You lose earnings for a decade.””
    But then we have a very strange sentence

    “America’s output is now well above its previous peak in late 2007, unlike Japan and most of Europe.”

    Pity there are no figures or anything to support that. AEP is a little lacking here.