Saturday, April 6, 2013

Economic update

The decline continues - with one pretty mind-boggling statement from England.  Here are some worthwhile links to follow.

The MF Global affair, of course, is utterly disgraceful.  Mr. Freeh's final report makes it unequivocally clear that Jon Corzine was personally, primarily and mainly for MF Global's disastrous financial strategies, which led to the company's collapse and the 'hypothecation' (which one might translate in simple English as 'theft') of several hundred million dollars of customers' funds in a desperate attempt to prevent that.  The attempt failed, and customers are still waiting for some of their money.  They may never recover it all.

Mr. Corleone Corzine, of course, has not been charged with any crime, and probably won't be, because he's an 'insider' - cosy with the politicians, administrators and banksters.  He's (so far) got away with his crimes (and I have no doubt whatsoever that they were crimes, both morally and legally - if the laws were strictly and correctly interpreted).  This is one of the most disgusting affairs in the history of US financial markets.  I confidently predict that in future, if someone else is charged with offenses similar to Mr. Corzine's, they'll claim in court that they should not be prosecuted, precisely because he wasn't.  You know something?  They'll be right - and I think any court in its right mind should dismiss charges against them for that reason.  At present there's 'one law for the rich, and one for the poor' in America, with riches being measured in terms of political influence.  Mr. Corzine has it (which also says a great deal about those with whom he has it, when you come to think about it).  Future offenders probably won't be so lucky.

The most astonishing report is the suggestion from Professor Michael Woodward of Columbia University, supported by Lord Turner in England, that central banks' financial obligations - at least some of them - might be written off with the stroke of a pen.  The Telegraph reports:

Columbia Professor Michael Woodford, the world's most closely followed monetary theorist, says it is time to come clean and state openly that bond purchases are forever, and the sooner people understand this the better.

"All this talk of exit strategies is deeply negative," he told a London Business School seminar on the merits of Helicopter money, or "overt monetary financing".

He said the Bank of Japan made the mistake of reversing all its money creation from 2001 to 2006 once it thought the economy was safely out of the woods. But Japan crashed back into deeper deflation as soon the Lehman crisis hit.

"If we are going to scare the horses, let's scare them properly. Let's go further and eliminate government debt on the bloated balance sheet of central banks," he said. This could done with a flick of the fingers. The debt would vanish.

Lord Turner, head of the now defunct Financial Services Authority, made the point more delicately. "We must tell people that if necessary, QE will turn out to be permanent."

The write-off should cover "previous fiscal deficits", the stock of public debt. It should be "post-facto monetary finance".

The policy is elastic, for Lord Turner went on to argue that central banks in the US, Japan and Europe should stand ready to finance current spending as well, if push comes to shove. At least the money would go straight into the veins of the economy, rather than leaking out into asset bubbles.

Today's QE relies on pushing down borrowing costs. It is "creditism". That is a very blunt tool in a deleveraging bust when nobody wants to borrow.

Lord Turner says the current policy has become dangerous, yielding ever less returns, with ever worsening side-effects. It would be better for central banks to put the money into railways, bridges, clean energy, smart grids, or whatever does most to regenerate the economy.

The policy can be "wrapped" in such a way as to preserve central bank independence. The Fed or the Bank of England would decide when enough is enough, or what the proper pace should be, just as they calibrate every tool. That at least is the argument. I merely report it.

Lord Turner knows this breaks the ultimate taboo, and that taboos evolve for sound anthropological reasons, but he invokes the doctrine of the lesser evil. "The danger in this environment is that if we deny ourselves this option, people will find other ways of dealing with deflation, and that would be worse."

A breakdown of the global trading system might be one, armed conquest or Fascism may be others - or all together, as in the 1930s.

. . .

 A great many readers in Britain and the US will be horrified that this helicopter debate is taking place at all, as if the QE virus is mutating into ever more deadly strains.

Bondholders across the world may suspect that Britain, the US and other deadbeat states are engineering a stealth default on sovereign debts, and they may be right in a sense. But they are warned. This is the next shoe to drop in the temples of central banking.

There's more at the link.

I suppose this seemingly incredible (indeed, insane!) suggestion isn't really so incredible after all, in the light of recent events in Cyprus.  After all, in the absence of international investors in US bonds, the Fed has taken it upon itself to buy most of them at Treasury auctions, 'printing money' (i.e. using its policy of quantitative easing) to do so.  I guess the theory is that since one arm of the government is buying US treasuries from another arm of the same government, there's no real problem in simply wiping both entries off the books as if they'd never existed, and carrying on regardless.

The fact that this would nevertheless leave other US bondholders up a creek without a financial paddle, and the US money supply in a grossly inflated state (with all the negative effects that this has already had [and will still have] on our economy), doesn't seem to faze the theorists at all.  Clearly, they've been sitting in their academic ivory towers for so long that the ivory has hardened their intellectual arteries . . .  T(u)sk, t(u)sk!



MrGarabaldi said...

I made the comment more than once how much of that money that was "lost" was diverted to Obama's reelection campaign.I remember reading that before the election of 2012 Obama had over a billion dollars and Corzine had "lost almost a billion dollars" Makes me wonder.....

Anonymous said...

I'd strongly encourage everyone to watch and take heed what Ann Barnhardt is stating in her 8 part youtube video series "The Economy Is Going to Implode". It's a difficult decision to make to take money out of your retirement plan, having to pay penalty and taxes, but is she's right as so many others... What's the cost of having none of your money?

Will Brown said...

I'm not anybody's idea of a financial expert, but I believe this particular theory holds that removal of government bond debt, along with the "money" used to purchase it, allows the percentage of current revenue currently going to bond repayment (debt service) to be applied to current expenses instead.

The damage isn't to the economy as a whole so much as it is to the governments ability to sell bonds in the future (which admittedly does affect the economy generally to some degree). As I understand it, this is proposed as a mechanism whereby government can repudiate it's debt that is essentially owed to itself so as to reduce expenditures relative to GDP. The reduction in bond sales thereafter is supposed to be a feature as it reduces the governments ability to simply continue the cycle quite so easily.

I think I have more faith in the innovative nature of political greed than this theory allows for, but it is an interesting thought experiment on the nature of debt if nothing else.