The Bank of Japan? Check.
The Reserve Bank of Zimbabwe? Check.
The United States Federal Reserve? Check.
The Bank of England? Check.
The European Central Bank? Check.
The Reserve Bank of Australia? [Silence].
Not yet, reader. Will its time come to openly and brazenly print money?
We know it and the retail banks do it behind closed doors. But it hasn’t yet announced a multi-billion dollar plan to monetise debt obligations. Of course, so far it hasn’t had to because thanks to the “we’re different” mentality, Australians have continued to make sure private sector debt continues to rise.
For instance, according to the Reserve Bank of Australia (RBA), as of March 2010 residential loans by banks stood at $935.2 billion.
That’s compared to a paltry $634 billion when the economy last peaked in October 2007.
In other words, household debt obligations have increased by about 50% over the last two-and-a-half years. An increase which has occurred almost without stopping for breath.
Who needs a central bank bail-out when it’s easier to just convince the population into believing “Australia is different.”
But anyway, back to the European Central Bank and its EUR40 billion bailout… [murmur, murmur] HOW MUCH?!
[Hehem] Right, well, what I should have said is, the European Central Bank and its USD$1 trillion bailout plan. Or to put it another way, $1.1 trillion – more than the annual output of the Australian economy.
Where did the trillion come from? We’re sure this all started off as a EUR40 minor problem. I mean, that was the reason behind the mainstream’s argument about Greece being irrelevant.
OK, we did note over the last couple of weeks that the number had ratcheted up quietly to EUR130 billion. That’s a pretty big number by itself.
But then, whammo! At 3.15am in Frankfurt, the ECB announced to the world – but not to the Europeans because they were all asleep [Shhhh!] – that it was using its “nuclear option” of monetising the debt in order to fight the “wolfpack.”
Yep, that’s right, the free market gets the blame for problems ultimately caused by… that’s right, the politicians, bureaucrats and central bankers. Even though the free market – or ‘wolfpack’ as they call it – had nothing to do with it.
But what are the chances of the ECB’s money printing plans working any better than the money printing strategy of the Fed, the Bank of England and the Reserve Bank of Zimbabwe?
No chance, we’d say.
In fact, it rather reminds us of Mission Gainsborough…
General Melchett: Field Marshall Haig has formulated a brilliant new tactical plan to ensure final victory in the field.
Captain Blackadder: Ah, would this brilliant plan involve us climbing up out of our trenches and walking very slowly towards the enemy sir?
Captain Darling: How could you possibly know that Blackadder? It’s classified information.
Captain Blackadder: It’s the same plan we used last time… And the seventeen times before that.
General Melchett: E-e-exactly! And that is what is so brilliant about it. It will catch the watchful Hun totally off-guard, doing precisely what we’ve done eighteen times before is exactly the last thing they’ll expect us to do this time…
And the Watchful Huns in the markets certainly were caught unawares. Hence the French CAC40 climbing 9% and the Spanish market surging 14%.
The market obviously wasn’t entirely convinced that the ECB would be so stupid to just print a bunch of new cash in order to pay off debts. I mean, it’s obviously the kind of crass thing the Americans would do… but not the Europeans.
And the British with their Anglo-Saxon ways are just as bawdy as the Yanks. But surely the sophisticated French, the sensible Germans, and the, erm, er, Belgians would have a more balanced plan of attack.
It appears not.
In fact, based on the numbers bandied around over the last few weeks it seems to have been more like a central bank version of Deal or No Deal rather than the thoughtful deliberation of supposedly intelligent men.
We can only think that they’ve been frantically opening briefcases with numbers inside. As the ‘Bank’ spun the numbers and offered the magic trillion, the finance ministers leapt with joy, “Voila! Nous etre rich!”
And so today the European printing presses whirr into action.
But wasn’t it nice of them to do all this in the early hours of the European morning. What dedicated public servants they are. And obviously it was so urgent, that they had to release the news before Fritz in Cologne, Francois in Lyon and Giuseppe in Milan had woken from their slumber – “Don’t wake them, they need the sleep, they’ll have to work twice as hard to pay this off! Ha, ha, ha…”
Or maybe they were more eager to rubber-stamp it before Stavros and Effi in Athens had woken up. You remember what happened last time they got mad!
It still startles us how our Keynesian friends can’t grasp how illogical it is to just print money. Look at the number again, it’s the equivalent of $1.1 trillion or greater than the entire yearly output of the Australian economy.
Think of it this way. It will take the European Central Bank about, ooh, a tenth of a second to create the billions of Euros needed.
Yet it will take 10.9 million Australians working an average of 35 hours per week for 52 weeks to produce the same output.
Got that? One-tenth of a second versus one year.
One-tenth of a second versus a combined 19.8 billion hours or 71.4 trillion seconds [Ed note: we just wanted to keep going until we notched up a trillion].
The obvious question is why bother going through all that effort if when push comes to shove the central bankers will just print the money anyway?
Naturally, the reason you have to go through all that effort is because you know there’s something illogical and not right about a bank just creating money from thin air.
You don’t need to be a Doktor der Wirtschaftswissenschaften from the Ludwig-Maximilian-Universität München to work out that even as a short-term measure printing money doesn’t actually solve the initial problem.
All it does is shift the problem. It wipes debt from one bunch of people and plops it onto another bunch.
Because guess what, instead of the Greeks having to come up with a way of repaying their debts or just defaulting, the ECB is just handing over the Euros in exchange for Greek government bonds.
In return, the ECB and European taxpayers get a bunch of crappy Greek debt that no-one else wanted. Well, they would take it on, but only at an 18% interest rate. In fact, so little did anyone want it that the ECB actually has to create the money to buy it.
The issue now is what happens to the billions that will be handed out to the Greeks, Portuguese, and anyone else that needs it? The answer is that the national governments will feed the cash out to their favoured industries and pet projects.
Some will gain by the increased money supply – those that get the new money first, but others will lose out. And because the new money is in effect unearned income, like a handout, it will be wasted and squandered in exactly the same way as any other type of handout.
Not forgetting the moral hazard of having bailed them out once, is it really likely the ECB will tell them to get stuffed if they ask for more? And what about other governments? It can only be a matter of time before they play the “where’s our free money” card.
As we’ve pointed out several times, the most honourable action would have been for the Greeks and other European tin-pot governments to just default on the debt obligations.
There would still be losers of course, we’re not claiming that there wouldn’t. But at least the losers would have been investors. Investors who should always enter into an investment with the risk that they’ll lose money.
Instead, at 3.15am Frankfurt time, the European Central Bank decided it was much more important that they and their political paymasters kept their jobs. The result being that the average German, French and Italian – and every other European – will pay via the devaluation of their savings and their wages.
All just to ensure the governments are saved, central bankers are saved, and bond investors receive back 100 cents on the Euro for their crappy Greek bond investment.
What are the odds that in a year’s time we’ll hear that Goldman Sachs or JP Morgan made a motza from buying cheap Greek debt two weeks ago and then selling it to the ECB this week?
We can see the headline now, “Evil Bankers Profited as Greece Burned.”
The free market will be blamed again, and capitalism will be accused of being out of control. Of course, what the bankers and politicians will conveniently forget is that without the money printing those profits – if they exist, and we’re sure they do – wouldn’t have happened.
The odds on that story making it to the front pages are pretty good we’ll guess.
Cheers,
Kris.
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I’ve been hearing for years, how gold is a dead, lame, relic, inert investment. Those telling me this had clearly a shallow vision and and understanding of the bigger picture. They showed me graphs on their laptops, made complicated explanations of how growth is calculated and that I would retire on amounts of money that today would barely buy me a house. They bragged to me, of their portfolios and how they would be retiring early and “living the good life”.
My humble parents kept it simple.
Only take out debt on something that will help pay the debt off.
Pay that debt off as fast as you can, sacrificing all other “luxuries” until you have paid it off.
Your house is just your home, fill it with love and memories, not junk.
Throw all your efforts and resources into your work or business. It will be THAT which will feed you. What’s the use of spending a fortune on the stable and not feeding the cow. The cow will bring you milk, not a fancy stable.
When you have accumulated excess cash, buy gold for the future.
Above all, be patient. Stop occasionally to smell the roses and contemplate how far you have come. It will revitalise you and keep your mind clear to battle the journey ahead.
Now who of these two made the most sense??
Nick – You asked why JPMC would want to “play” with gold, referring to this newsitem: JPMorgan to store precious metals in Singapore.
I assume that it is a rhetorical question, but it may not be a waste answering it: JPMC is the biggest short in silver on the COMEX. But guess what: It is also the CUSTODIAN of the siver ETF, SLV, meaning that it is supposed to be holding and warehousing physical silver on behalf of SLV investors. This is the incredible but classic case of the fox being the custodian of the henhouse. Now, it seems that the same fox wants to build a similar henhouse to house the chooks of the East.
If this analysis is anywhere near right, then the question translates to: Why would the fox want to be the custodian of the farmer’s hens? The answer to be is pretty obvious, but the qestions that should concern the people and the farmers of the area is whether their chickes are safe with the fox, and whether they should trust the fox’s word that all their chooks are there.
It is the cruelest of jokes, and any dupe that is going to have their PM holdings with the biggest short seller deserves everything that is coming to them.
Gold might correct soon, the run up since mid march has been strong
If I recall this right, GATA estimates that about half of the officially still claimed US gold reserve is in fact gone. They continue to claim all the leased gold, which was borrowed and then sold by the bullion banks as part of the gold suppression scheme over the past decade and a half or so. While techinically, the bullion banks, such as JPMC owe this gold to the people, in reality they are never going to be able to buy it all back, but will either go bust, or will be allowed to settle the debt in cash, probably borrowed for next to nothing from the Fed. Either way, the people lose out. Their gold is gone and they will never see it again. It has been sold, consumed (jewellerey, electronics, etc.), or held in private hands. Puff …. there goes the people’s wealth.
GB…#2..I hope so. It would create another good buying opportunity.
cb @ 33
What forces JP’s to show their cards so to speak? Maybe a mad rush by people wanting physical gold?
PF – I have a question for you. Joye and others have been claiming that dwelling construction has been lagging population growth, and that this is what principally explains property price increases. But Keen’s latest article claims the opposite, except for the past couple of years. What do you make of it all? See here:
“The average number of people living in each dwelling in Australia in the year 2007 was around 2.6 (the black line) – and this figure was higher in earlier years. To keep the ratio of people to dwellings constant, we would need to build a new dwelling for every 2.6 new people. In fact, on average between 1986 and 2009, we’ve been building a new dwelling for every 1.8 new Australian residents. Only in the last couple of years – after the GFC hit – has population grown more rapidly than we’ve added accommodation.”
http://www.businessspectator.com.au/bs.nsf/Article/Lets-bury-the-housing-shortage-myth-pd20100510-5B62B?OpenDocument&src=srch
GB – The way I see it, JPMC is not showing their true hand, which remains hidden. Notwithstanding its bad reputation among those who know better, even the fox has to advertise to the gullible that it is building a brand new, state of the art henhouse, where their chooks will be safe and looked after. The scam works like this:
1. The people of the region wish to own hens as security against a possible famine, but many of them would prefer contracting the custody and care of the chooks to a trusted specialist in this sort of business.
2. The fox claims to be just such a specialist, and sets up henhouses wherever it sees sufficient demand.
3. In fact, the fox makes it very easy for investors in hens, providing them with a purchasing service, so that the customers don’t have to go through the trouble of finding and purchasing the hens they want, but can simply pay the money to the fox, who will buy the requisite number of chooks for them, and then will continue to house them – for a fee, of course.
4. The rub is that, unbeknown to the “owners,” the fox is a supplier of chooks to the local slaughterhouse, plus it is not averse to knocking a few of them for himself, every now and then.
5. Inevitably, rumour gets around, but when questioned, the fox denies any wrongdoing and assures the owners that their chooks are perfectly safe, and in fact so safe that not even they are permitted to enter the henhouse, if, perchance, they should smell a rat and would want to have physical inspection of their chooks.
6. If the owners should persist and become testy with the fox, the fox will simply show them the small print in the contract they had signed, which says that they have no right to enter the henhouse. And if they are still not happy, then the only thing to do is to tell the fox to sell their chooks and get their money back.
7. But the above solution is not a solution for the owners, since they want to own chooks in case of a famine, not to keep paper money in their pillow cases, or worse. So, what is the alternative?
8. They ask the fox to give them their chooks. But the fox now points to another part of the small print, which says that, unless the owners are holding individually tagged chooks with specific serial numbers, which have been specifically allocated to them, then they have no right to take physical delivery of any chooks. They can sell their chooks, but cannot take them home with them, and it is too tough if that is what they counted on for dinner.
9. Worse, when the unthinkable happens, and famine sweeps the region. Those who have taken paper money earlier for their chooks find that nobody is willing to sell them a chicken for the paper money, so they are up the legendary creek.
10. But those who have been complacent and ignored earlier rumours about the fox are still hopeful, and now it is their turn to confront reality: Sorry, says the fox, you have no right to your chickens, but here is your money. No, that will not do. They insist on having their chooks, as paper money is worthless, and they need to eat. That is why they bought the chooks. Alas, the small print is clear. Worse: it says that those without allocated chooks with specific serial numbers, not only have no right to any chooks, but are little more than unsecured creditors to the fox, so that if the fox goes belly up, they will not even get paid in paper money. Bummer … how could they miss that one?!!!
11. But the fox’s problems are not over. The owners of allocated chooks have also turned up with their paper certificates, looking to collect the chooks that have been specifically allocated to them by serial number.
Question 1: Does the fox have the allocated chooks in the henhouse?
I wouls say, it is a punt.
Question 2: Even if the fox happens to have the allocated chooks, now that there is a famine sweeping through the land, will he give up those chooks, or will he instead try to ferret them away?
That, too, I would say, is a punt. The fox is on very good terms with ferrets and the wolves, who will be more than willing to give a helping hand to the fox in exchange for a portion of the remaining hens the fox might try to keep and hide.
And so the matals are off to the races again:
http://www.perthmint.com.au/metalPrices.aspx
Print baby, print. If you are well positioned, these bankers can actually make you rich.
GB – I forgot to mention, I was writing a long response to your question last night, but then the whole thing froze and I had to hit the sack. The essence of it was that uncertainty and volatility in the currency, or prices, or whatever, is bad for the economy and bad for busieness, regardless of which way the line is tilted. I also agreed with you that hyperinflation would be far worse than severe deflation, and expressed the hope that we can avoid both extremes. If you want to pursue this question further, you are more than welcome.
In fact, I just thought of pointing out again the following: China has a lot of USD reserves, which it needs to spend overseas before its value evaporates through the accellerating printing machines. Chances are that they will want to continue to dump as much of that paper over here as they reasonably can, and if so, the resource sector will probably be the primary channel for that moneyflow. Your thought on this, and its implications?
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