 | | The Daily Reckoning | Thursday, December 1, 2011 |
- Bankers to the world: You want money? You want cash? You got it!
- A new era of global, institutionalized money-laundering,
- Plus, Bill Bonner on insider tips, indefinite detentions and plenty more...
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|  | | | | The End is in the Beginning | | Anticipating a Correction in the Global Monetary System | | |  | | Bill Bonner | Reckoning today from Baltimore, Maryland...
Whoa! The Dow rose almost 500 points yesterday. Whoopee! Hallelujah!
It was like the Second Coming on Wall Street. As if He walked across the East River...and announced it Himself:
“The fix is in.”
But it was not the sacred that spoke yesterday. It was the profane. The world’s central banks, to be precise. They got together. More like a meeting of mobsters than a gathering of the gods. They made it clear.
You want money? You want cash? You want something you can take to the bank? Well, you’ve got it!
“A move by the world’s central banks to lower the cost of borrowing exhilarated investors Wednesday,” the Associated Press reports, “sending the Dow Jones industrial average soaring 490 points and easing fears of a global credit crisis similar to the one that followed the 2008 collapse of Lehman Brothers.”
It was the Dow’s biggest gain since March 2009.
Large US banks were among the top performers, jumping as much as 7 percent. Markets in Europe surged, too, with Germany’s DAX index climbing 5 percent.
Wednesday’s action by the banks of Europe, the US, Britain, Canada, Japan and Switzerland represented an extraordinary coordinated effort.
But amid the market’s excitement, many doubts loomed. Some analysts cautioned that the banks’ move did nothing to provide a permanent fix to the problems facing heavily indebted European nations such as Italy and Greece. It only buys time for political leaders.
“It is a short-term solution,” said Jack Ablin, chief investment officer at Harris Private Bank. “The bottom line on any central bank action is that it papers over the problems, buys time and in some respects takes pressure from politicians... If nothing’s done in a week, this market gain will disappear.”
Banks stocks soared as fears about an imminent disaster in the European financial system ebbed.
But wait.
What has really happened? The central bankers have given out the word that they’ll print up as much money as necessary. So what’s new? Haven’t they been doing that all along? What is lending at zero interest rate? What is buying the government’s debt? What is taking the toxic bonds off the banks and brokerage houses?
What is really new? Not much.
You remember our advice, dear reader? Sell stocks on rallies. Well...what are you waiting for?
And if we were speculators we’d be selling stocks...even stocks we didn’t own. Because we have here an opportunity. The market is rising on hope, not on reality. And today, it might rise a bit more...
..until it finally realizes that there is no really good reason to be so bullish.
Stocks are bits of businesses. And businesses do not make more money just because the central banks print money. If this were not so, a few years ago, Zimbabwe’s companies would have been the most profitable on earth. Under the leadership of Gideon Gono, the central bank of Zimbabwe was printing up trillion-dollar notes and handing them out all over town. Trouble was, you couldn’t even buy a cup of coffee with them. In fact, you couldn’t buy a cup of coffee anyway...the whole economy was in such disarray nobody could get any coffee. Or anything else.
That was at the end. At the beginning money-printing works miracles.
But businesses do not operate in the realm of the mysterious or the sacred. They are remarkably down-to-earth undertakings. They’re real enterprises with real revenues and real expenses. They make money by selling goods and services. And, taken all together, they only make as much money as the economy itself allows. In other words, it’s not possible for all the businesses to do better than the economy that supports them.
So, now we can ask you a question: will the economies of the world’s countries do better, now that the central banks have announced they will print more money?
Or will they do worse?
It’s hard to say. But by our reckoning, the world is in the grip of a major correction. Among the things the correction is likely to correct is the money system...in which central banks have the power to create “money” out of thin air.
Would the correction correct something that didn’t need correction? If central bankers refused to print money there would be no need to correct them, would there? So this latest announcement just confirms what we thought all along.
Printing money is easier than raising taxes. It is also easier than borrowing...especially when lenders get wary. All that stands in the way is the integrity of the central bankers themselves.
Looks like that just gave way...
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| | The Daily Reckoning Presents | | Uncoordinated Coordinated Action | | |  | | Eric Fry | “I don’t care what the other kids are doing,” my mother used to say, “you’re not doing it!... If the other kids jumped off a cliff, would you?”
Until yesterday, I always thought her question was rhetorical. But now I realize the correct answer should have been “Yes.”
All the major central banks of the world jumped off a cliff yesterday...and the European Central Bank (ECB) jumped right after them.
Almost everyone watching the event unfold hailed this “coordinated central bank intervention” as a powerful and courageous step toward “ending the crisis.”
But central bank intervention never ends a crisis; it merely pretends to. When the world’s major central banks jumped off a cliff yesterday into “Hyperinflation Gulch,” they did not begin soaring toward resolution; they began plummeting toward demolition.
A “coordinated action” is not a priori a “constructive action.” Lemmings, too, coordinate their actions. And even if they imagine themselves to be flying when they jump from a cliff, their furry little bodies will nevertheless splatter on a boulder below.
The metaphor is clear, but I will repeat it anyway: The world’s largest central banks are lemmings...and no investor who wishes to save his own furry, little skin should follow their lead...at least not without some kind of golden parachute.
According to yesterday’s official press release:
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.
These central banks have agreed to lower the pricing on the existing temporary US dollar liquidity swap arrangements by 50 basis points...
As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant... These swap lines are authorized through February 1, 2013. So what does it all mean? On the surface, not much. The announcement merely promises to trim half a percentage point off the cost of borrowing dollars from a central bank. In other words, very short- term dollar-denominated credit just became a little bit cheaper.
Big wow!
The overly indebted — perhaps fatally indebted — financial institutions who will avail themselves of this lending facility will be just as indebted tomorrow as they are today. Cheapening credit fixes nothing; it merely enables a broken condition to function for a while longer.
“Effectively, the Fed has reduced the cover charge for alcoholics at the bar, but it has not changed the fact that the people at the bar are alcoholics,” says Dan Greenhaus, the chief global strategist for BTIG. “It has not affected the reason why people were demanding dollars, and that is overall nervousness in the euro zone.”
Despite this grim reality, investors flocked into global stock markets yesterday to buy anything and everything with a ticker symbol. “More people bought stocks than know what a central bank swap line is,” quipped Peter Tchir of TF Market Advisors.
A few people also bought gold and silver yesterday. And some of those folks might actually know what a swap line is...and they might also have identified the most important storyline issuing from yesterday’s central bank announcement: A new phase of monetary destruction is underway. All the kids are doing it. All the largest central banks are committing to printing money in some way, shape or form.
“The fix is in,” as Bill Bonner likes to say.
And even the ECB is in on the fix, despite numerous official pronouncements to the contrary. According to German Chancellor, Angela Merkel, for example, Germany will never allow the ECB to engage in any form of “debt monetization” — aka, money printing. But yesterday’s actions suggest a revision of this hard-line stance may be in the works.
The ECB may not overtly — and by itself — engage in money-printing. But if all the other kids are doing it, that’s different. After all, if all the other kids are debasing their currencies at the same time, is it really currency debasement?
“Central banks are desperate to stop stresses from building in the global banking system,” explains Dan Amoss, editor of the Strategic Short Report. “They are going to ignore the fact that most European banks are insolvent and offer these banks easier and easier access to long-term funding.
“Once the central banks start lending to insolvent banks, there can be no orderly exit. When sovereign defaults occur, there will be an acceleration of money-printing to keep the system propped up.”
[Ed. Note: As it happens, Dan just released his Greek Default report to Agora Financial readers yesterday. In it he details how such a sovereign collapse will likely play out, including the impact it will have on ill-prepared individuals and the opportunities for savvy investors. Read It Here.]
Who knows what’s next? Probably, we can look forward to a new era of clandestine bailouts, backdoor lending facilities with inscrutable acronyms and global monetary game-playing that will look a lot like a massive money-laundering operation.
At this point, some readers may be confused. They may be asking themselves, “How is a swap line the same thing as money-printing?”
Here’s how...The final paragraph of yesterday’s press release says:
US financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to US households and businesses. In other words, if you were to follow these “new” swap lines all the way back into the Fed’s tool shed, you’d find all the same old, trusty tools that have always been there...especially that same old, trusty printing press, and the Fed “is prepared to use these tools as needed to support financial stability and to promote the extension of credit to US households and businesses.”
In other words, the new swap lines that the Fed is providing are both unlimited and open-ended. The Fed’s balance sheet will not limit these lines, “as needed” will. That’s money-printing. In fact, that’s institutionalized money-laundering.
What are unlimited and open-ended swap lines, after all, if not an institutionalized form of “layering” — an activity the Patriot Act specifically defines as “money-laundering”? According to the Act, “layering is the stage of laundering in which the origin and trail of funds introduced into the financial system are hidden by creating layers of transactions.”
Hmmm...let’s see now...if the Federal Reserve prints dollars, then “swaps” those dollars with some foreign bank, that then distributes those dollars to make loans, make new investments, repay credit lines etc. etc. etc., those original “ill-gotten” dollars from the Fed would have flowed through so many layers that no one could ever trace their source back to Ben Bernanke’s printing press.
Perhaps someone should notify the authorities. The Fed is engaged in highly suspicious, un-American activities. We may have a domestic terrorist on our hands...or at least a domestic monetary terrorist.
Bad news for the dollar, good news for gold.
Regards,
Eric Fry,
for The Daily Reckoning
| | | | | Dan Amoss’ Strategic Short Report Presents... |
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But if you don’t act before January 2012, it could be too late!
Click here to learn more.
| | | | | | Bill Bonner with the rest of today’s reckoning from Baltimore, Maryland... | | The Corruption Continues... | | | | | Bill Bonner | Is the Great Correction still underway? Yes it is! The Wall Street Journal reports:
Consumers continued to cut debt levels in the third quarter, largely as they pulled back from the housing market again, the Federal Reserve Bank of New York reported Monday.
For the most recent quarter, overall debt loads for households fell 0.6% from the prior quarter, for a drop of around $60 billion to $11.66 trillion. The bank said mortgage balances recorded on consumer credit reports fell by 1.3%, or $114 billion, while home equity lines increase by 2.3%. The retreat in mortgage borrowings was the primary driver of the overall drop in consumer borrowing. *** Hey, wait. If the central bankers are printing money, why should consumers continue to cut back?
Ah...glad you asked. The central banks are bailing out speculators, bankers, and the feds...not households. The money only reluctantly gets to the consumer level...or not at all.
Instead, the rich get richer...courtesy of a corrupt money system. They get bailed out of their mistakes...and handed a lot of money they don’t deserve.
And the poor? Do they get richer simply because the central banks coddle bondholders? Do the bondholders set up factories and provide middle-skill jobs? Do the speculators invent new industries? Do the insiders set up small businesses and build companies that create new wealth?
Don’t make us laugh, dear reader.
*** No...the system just becomes more corrupt...and more zombified. Here are the insiders at work...the people the central bankers are trying to help. Bloomberg has the story, from Richard Teitelbaum:
Nov. 29 (Bloomberg) — Treasury Secretary Henry Paulson stepped off the elevator into the Third Avenue offices of hedge fund Eton Park Capital Management LP in Manhattan. It was July 21, 2008, and market fears were mounting. Four months earlier, Bear Stearns Cos. had sold itself for just $10 a share to JPMorgan Chase & Co.
Now, amid tumbling home prices and near-record foreclosures, attention was focused on a new source of contagion: Fannie Mae and Freddie Mac, which together had more than $5 trillion in mortgage- backed securities and other debt outstanding, Bloomberg Markets reports in its January issue.
Paulson had been pushing a plan in Congress to open lines of credit to the two struggling firms and to grant authority for the Treasury Department to buy equity in them. Yet he had told reporters on July 13 that the firms must remain shareholder owned and had testified at a Senate hearing two days later that giving the government new power to intervene made actual intervention improbable...
At the Eton Park meeting, he sent a different message, according to a fund manager who attended. Over sandwiches and pasta salad, he delivered that information to a group of men capable of profiting from any disclosure.
Around the conference room table were a dozen or so hedge-fund managers and other Wall Street executives — at least five of them alumni of Goldman Sachs Group Inc., of which Paulson was chief executive officer and chairman from 1999 to 2006. In addition to Eton Park founder Eric Mindich, they included such boldface names as Lone Pine Capital LLC founder Stephen Mandel, Dinakar Singh of TPG- Axon Capital Management LP and Daniel Och of Och-Ziff Capital Management Group LLC.
After a perfunctory discussion of the market turmoil, the fund manager says, the discussion turned to Fannie Mae and Freddie Mac. Paulson said he had erred by not punishing Bear Stearns shareholders more severely. The secretary, then 62, went on to describe a possible scenario for placing Fannie and Freddie into “conservatorship” — a government seizure designed to allow the firms to continue operations despite heavy losses in the mortgage markets.
Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out. So too would the various classes of preferred stock, he said.
The fund manager says he was shocked that Paulson would furnish such specific information — to his mind, leaving little doubt that the Treasury Department would carry out the plan. The managers attending the meeting were thus given a choice opportunity to trade on that information... Yesterday, our colleagues over at The 5-Minute Forecast provided a chilling connection between the former Treasury Secretary’s “insider tip” to his old Goldman buddies and a piece of legislation...
The US Senate is close to passing legislation that would allow the president to use the military to imprison anyone — including US citizens — indefinitely, and without charges. The measure has bipartisan support, sponsored by Republican John McCain and Democrat Carl Levin.
“Combine the recent efforts by John McCain to create a police state with the revelations of Paulson’s corruption (crony capitalism),” writes John Robb at Global Guerrillas, “and you can only conclude that worse is coming.”
Indeed, Robb sees the development of what he calls a “hollow state.”
“The hollow state,” he writes, “has the trappings of a modern nation-state (‘leaders.’ membership in international organizations, regulations, laws and a bureaucracy) but it lacks any of the legitimacy, services and control of its historical counterpart.
“It is merely a shell of a state that serves as a legal conduit and enforcement mechanisms for global financial interests to loot what’s left of the state’s economy. Corruption and violence are its only traits.”
Regards,
Bill Bonner
for The Daily Reckoning
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