Fiat Central Banks Down for the Count?
From The Daily Bell
Originally posted Thursday, May 13, 2010
CENTRAL BANKS ARE LOSING CREDIBILITY… WHETHER OR NOT ONE BELIEVES that the €750bn European rescue plan will stabilise financial markets, its consequences for Europe’s economies are surely negative. Indeed, while many cheered the initial rebound in equity markets, the reactions in currency markets on the first trading day after the announcement were a harbinger of these negative consequences: the initial gains of the euro were erased by the end of the trading session. Of course, the bail-out for holders of Greek government debt – and now possibly Spanish and Portuguese government debt – raises familiar problems of moral hazard that will increase risk-taking and encourage irresponsible government policy in the future. The loans and loan guarantees from other countries in Europe do not deal with the simple fact that the Greek government cannot service its debt and will eventually need to restructure it.
“At best the package gives officials some breathing room as they endeavour to reduce deficits and eventually restructure debts, though it is more likely that the adjustment problem will be made worse by being pushed down the road. But most worrisome for the euro, and the likely reason for its remarkable reversal in the currency markets on day one, is the agreement by the European Central Bank to buy the debt of the countries with troublesome debt burdens, just days after it said it would not engage in such purchases. This agreement raises questions about the independence of the ECB, thereby creating political obstacles to the conduct of good monetary policy in the future.” – Financial Times
Because the Bell is perhaps the only publication singularly dedicated to reporting on the power elite’s dominant social themes and how they are promoted and faring, our coverage often veers off from both the mainstream media’s AND that of the alternative press. Additionally, having identified the Internet itself – comprising the world’s second major modern communication’s revolution (the Gutenberg press was the first one) – as a significant obstacle to power elite global centralization plans, we sometimes arrive at conclusions that are not necessarily aligned with either camp.
Our basic take is that the power elite is being challenged as never before. The challengers are the Internet and also the unfortunate (for the elite) arrival of one of the most powerful business-cycle fiat-money unravelings of the past century. Many power elite memes are seemingly in trouble including global warming, EU centralization and, of course, central banking. The elite is fighting back, of course, but gold moves up, economies unravel, the bond market takes its toll and gradually, generally, inexorably, the Masters of the Universe are being forced to cede control of their manifold fear-based promotions to the free-market itself. Oh, the ignominy!
In the above article, we can see the Financial Times – one of the Anglo-American elite’s preeminent mouthpieces – is fairly gloomy about the state of the elite’s public/private central banking dominant social theme. It should be. The article points out what we’ve been pointing out this past week, that the EU euro experiment (and the supposed probity and credibility of its central bank) has all but collapsed during the EU sovereign crisis.
You know, those who are paid to analyze this stuff on the colonial side of the pond should be singing the same song. Over a year ago, in what we would think (with all due modesty) has come to be seen as a prescient article, we declared that the American Federal Reserve as an institution was in far more trouble than people seemed to realize. It’s always fashionable to rail at the Fed (once you understand what it really does) but it seemed even more incomprehensible then, than today, to visualize the all-powerful Fed as an institution under attack.
We sensed something had changed when the Fed sent an entirely incompetent representative up the Hill to take questions regarding TARP, etc. We realized then that the Fed was “out of bullets.” Its top men didn’t know what to do. The Fed was so used to being above the fray that its braintrust had no idea how to launch a PR counteroffensive. We heard recently the Fed finally hired a lobbyist to fight Congressional attacks – a single lobbyist or lobbying firm? This is an outfit that prints up a TRILLION DOLLARS without flinching and they hire one lobbyist or one firm?
You can see the article here: Federal Reserve Cannot Account for US$9 Trillion
Our opinion hasn’t changed. We’ve only grown more convinced. We think the Fed’s situation has grown worse. Now the Fed is going to be subject to an audit – and we’re hearing again from the alternative press that the powers-that-be have “gotten away with it” in that they avoided being wacked by ongoing Congressionally-mandated audits and only ended up with just one. That’s not our take. They HAVE been wacked. And they’ll be wacked again. The Internet is an organic conscious-awakening PROCESS.
You see … the power elite damage control involves reacting to “emergencies” and snuffing out fires – and it did so repeatedly in the 20th century. But that kind of damage control doesn’t work in the 21st century. Douse a subterranean fire smouldering in an anthracite seam and it just flares up again. The Internet is like a coal mine. (Yes, we do feel like coal miners sometimes, although we prefer gold.) And the Fed won’t see off this audit furor with just one go round. In fact, when Fed bankers in a panic try to shred papers or something, it will only be increasing the pressure and setting itself up for more problems. There will then be calls for another audit, etc.
In the 20th century, when Fed bankers decided to shred papers (if they ever bothered), the mainstream press would doubtless have kept dutifully silent. Even had the Fed powers-that-be been caught red-handed hauling incriminating evidence to a dumpster somewhere, the Washington Post would have reported on “house-cleaning” and left it at that. But no more. As we pointed out yesterday, the great victories that the Fed and others central banks are supposedly scoring of late are nothing like the victories of the 20th century. Every maneuver, these days, brings only more scrutiny. Every dodge just frustrates critics more. The public disapproves. It really does.
The Fed and its bankers likely sealed their fate when they began throwing hundreds of billions at various too-big-to-fail financial entities. The very next morning after the passage of TARP, millions of American working-class stiffs got up wondering why they had to scrape by – and why Congress wasn’t shoving some of that free-loot in their direction. It’s been downhill for US powers-that-be and the ludicrous Federal Reserve mercantilist central banking system ever since. And rightly so.
A few years ago Congressman John McCain – who wouldn’t understand monetary policy if it clobbered him upside the head – was babbling about keeping Alan Greenspan around forever (like an Egyptian mummy or something) because Greenspan had proven to be such a darn good central banker. A little later, the Wall Street Journal reported that Greenspan was on the road and collecting a cool million for every hour of his services. We bet he doesn’t get that now. And several years ago, McCain – thankfully – ceased to babble about propping Greenspan up, dead or alive.
So, the Fed is a troubled institution these days. And now the Financial Times itself has pointed out that Western central banking ITSELF is in something of a bad way. The entire central banking meme seems to be foundering. This is a big deal! The alternative press should be all over this. (Not to mention the mainstream press.) The Twilight of Big Banking? … Of course, maybe it’s more dramatic to cover an unstoppable power elite. Also, many in the alternative press tend to cover the RESULTS of power elite actions, and thus are focused on the larger economic unraveling, whereas we are focused directly on the power elite’s unraveling (where it occurs) as well as their successes.
But we are not afraid of pointing out when the power elite is beginning to stumble. The power elite tripped up as regards global warming, which has set back a number of other scarcity memes, including the water-scarcity meme. And the power elite in our opinion is not having a good time of it when it comes to the EU/global financial-centralization meme. The power elite’s core monetary mechanism, the central bank under attack. Where is the elite to turn (other than a war – and that’s been speculated on as well)? Where indeed?
We have written on numerous occasions now that sometimes situations are in fact as they appear. The power elite, in our opinion, did not intend to engineer the disaster that the EU has become. Sure, one can make order out of chaos. But making all of Southern Europe disappear into an irretrievable black hole of debt was not entirely on the agenda, we would venture. The elite tends to like controlled, manageable catastrophes, not unrolling, roiling typhoons. They were pretty uncomfortable during the Depression as we recall – especially in America and Britain.
What has all the recent turmoil gained the elite so far? Its political fellow-travelers just had to announce a trillion-dollar bailout, and looked buffoon-like in the process. The German Chancellor Frau Merkel has likely lost her base of power as a result and the Germans generally are up in arms. So are the Greeks. And likely the Spanish and Portuguese will be next. The EU Central bank has lost tremendous credibility. The euro and even the EU itself, 50-years a-building have come under question. This is progress? This is the plan?
Sometimes, as we have written, a rose is just a rose. And a power elite promotion gone awry is just that. Are banks being bailed out? Is Greece being squeezed? Does the plan include looting Southern Europe and maybe more? Yes, yes … and surely. But we don’t think the power elite planned for this level of blowback anymore than they planned for the time, attendance and location of Bilderberger meetings to be regularly published in advance on the Internet.
We have returned to this subject, and will again, because it is a most important one. One needs to understand the context of 21st century power elite promotions, but one also needs to understand when the elite is being challenged and when its promotions are either struggling or failing. Sure, there’s always a back-up plan or something else to move onto (SDRs? A gold euro?) And generally we don’t think the elite promotions are in terminal trouble at this point, or not yet; but we don’t believe that many of them are so healthy either. They put pants on one leg at a time.
I wouldn’t normally post a feedback comment from an unknown source, but this one is totally prescient. Well done, Clayton, whoever you are! – Aurick
Feedback: Posted by Clayton on May 13, 2010
The debts are the consequences of the deficits. If the deficits are growing faster than the underlying productive capacity of the economy then the carrying cost per unit of additional debt must be lower than the previous carrying cost. If this is not the case, either default must eventually occur or the gap must be monetized. We have had a 30 year bull market in bonds, which has allowed this huge growth of debt to happen. From a Historical perspective, it looks like bonds have or are peaking. Long term yields are unlikely to materially decline from where they are today.
The Central Banks find themselves now at a crossroad. To continue manipulating the carrying cost of the debt downward, they must either monetize the long end of the yield curve, or go for shorter maturities. Given the relative size of the debt to the economy, monetization is very dangerous. But shortening the maturity of issues can increase the market’s volatility. This has an effect on the trading models used in the risk diversification and management activities the big financial houses use. Shortening financing terms makes the markets increasingly subject to exogenous shocks. But even this will only buy a little more time. Finally, the short end of the market will become too congested to effectively function.
Then one day a repeat of August 7th, 2007 will occur, where there is a complete absence of bids. If everyone needs to get to cash, then the lack of cash to get to will become the paramount issue. Claims against cash are not cash, no matter how short their duration. Then the Central Banks will no longer be able to delay the recognition of the losses that their member banks have incurred. Delivering hard copy legal tender will be the first order for that day. Money with lots of zeroes will be coming off the presses. Unless reserve requirement are raised to near 100%, hyperinflation will set in as the Central Bank tries to get ahead of the effects of price rises on the quantity of available cash.
The paradox of excessive money printing leading to a shortage of money will have to be learned all over again. By the time the whole process has wound down, the general population will have had its exchange value destroyed and along with it its ability to express economic demand. Production will decline due to the lack of demand; and the fear (a collapse of demand due to deflation) that the planners thought they could mitigate by repetitive cycles of money printing will have come to pass. The Germans know this first hand. They understand that deficits matter. It is sad to see their enmeshment in the failed thinking of their neighbors.
It is also interesting to note the growing division that you have pointed out, between the German Government and the Banks versus the German People. This is new. How it plays out will determine the future of the ECB. If the ECB falls down, the US Fed will stand tall for a while, but then will have no where to put off the risks in its system. Combining this with the coming upturn in long rates, and you have the 3rd phase of the crisis discussed above. In the end, someone has to pay. Don’t let it be you!