Off the keyboard of RE
Recent data brought to light by Zero Hedge shows a significant Credit Contraction in the Shadow Banking sector of the money supply. In his recent Banking Bits & Pieces article on Economic Undertow, Steve from Virginia once again hammers down on the fact that Central Banks don’t really “Print Money”, rather what they do is make loans against some kind of “collateral”.
‘Money printing’ is inaccurate and false: central banks cannot create new money, they are balance sheet constrained. They cannot lend without collateral. They cannot lend above the ‘face price’ of the collateral, which is almost always another loan. What central banks do is shuffle the custody of loans between agents, moving up or down the yield curve in the process. The central bank can offer credit as long as there is ‘good’ collateral offered by the private sector lenders. Without the good collateral — exhausted resources are not useful — the banks cannot lend.
Steve is for the most part of course correct here. The Central Banks do not really create money, it is in fact created in the Private Sector first by Commercial Banks in making Loans to the Biz Community for projects/ideas deemed Worthy enough to hopefully eventually pay off these loans complete with the Interest Charge attached to them. At least that is how it works in the world of Small to Medium Size Biz, not so true in the Grand World of Conduit Biz.
Conduits are Biznesses like the Railroads, the Electric Grid and the Telecommunications Network. In order to build such large scale Conduits, Credit has to be extended on a MASSIVE scale, and only a few people are ever deemed “Credit Worthy” enough to get those kinds of loans. The way they get them is through issuance of Bonds, all underwritten by TBTF Banks the very same people are in control of. As a result, these folks have a virtually unlimited supply of “Capital” to work with to build or create any sort of Network/Conduit they would like to build.
Since the Age of Coal at least, all of these Conduits have been extremely Energy consumptive, and as Steve also often points out, are never truly “productive”, but always subsidized by the further issuance of Credit. In order for people to buy the services that say the Electric Grid or the Telephone network provide, still MORE loans are issued out, more ” Money” created. This money then flows back inward toward the Central Conduit structure, but it really never is enough to pay off all the costs involved and the Interest Charges on the originating loans to build said infrastructure. Thus eventually, all such things as Railroads and the Electric Grid get dumped into the Public Sector as the costs of maintaining them and paying off their debts exceed the cost of the revenue they bring in. By this time of course, those who built them to begin with have extracted as much personal wealth as possible from the venture, and protected themselves from the BK of the company as a whole through the legal construct of the Corporation. His Railroad goes Belly Up, but JP Morgan walks away a few Mega Bucks richer afterward.
In order to keep the whole game rolling along, further loans have to be issued in order for people to continue to buy the Services they have become accustomed to of easy Transportation, easy Communications and Lights that go on at the Flick of a Switch. The Debt Overhang of course becomes ever larger all the time and evermore of this debt gets shifted to the Public Sector which essentially has become DEPENDENT on all these sytems along the way.
See, once Railroads are BUILT, nobody wants to go back to Teamsters and Wagon Trains pulling Freight, once Electric Lights are available, nobody wants to go back to Gas Lights or No Lights. Once the Internet is built, nobody wants to go back to the Telegraph. PROGRESS!
Problem here is of course, all that Progress carried with it endless and ever increasing debt load and energy requirements to maintain. All possible to do as long as the system as a whole was growing and the energy to maintain it all came cheap. Combine increasing cost of accessing energy along with a debt load shovelled onto the Public dime over decades and in fact a couple of Centuries if you go right back to the Railroads, and eventually here you run up against the situation that those in charge of Credit Creation STOP issuing it to just about everybody, except the occassional Bubble Company like Facepalm. Unlike the Railroads though, that Conduit is so patently STUPID it didn’t last 5 minutes in open trade.
So what is likely to occur here with imploding Credit availability at even the HIGHEST levels of the Supranational Corporations and the Nation-States? Sandor, one of the regular Commenters on EU and a Lurking Diner made the following analysis of the situation:
In response to dolph and many others that insist inflation will prevail by pointing to the past, be aware that current conditions do not resemble those of Germany 1929 or the Holy Roman Empire or even Zimbabwe. This kind of reductionist thinking is a symptom of a desire for easy answers aka ‘perceptual flattening’. What Steve is pointing out in this post is that deflation is happening in the shadow banking system, to an extent which is significant and difficult for the central planning authorities to combat. Most money is created by commercial banks through extension of credit. If loans cannot be effectively serviced in aggregate, debt-deflation will happen.
The current policy of monetary LTRO/QE/Twister is basically a giant rollover/duration extension. They are not printing money. They are extending and amplifying duration risk, aka ‘buying time’. Peak credit is tied into peak EROEI. Inflation is no longer a given outcome at an energy extraction ceiling, even if that is the tendency of humans throughout the brief period of modern societies. Predicting the demise of the USD and all fiat currencies is quite fashionable on the fringe blogs, but there does not appear to be enough gold and silver alternatives to go around. Fiat currencies are flawed, but are far more practical than lugging around metal everywhere or bartering for everything. There are further steps that will probably be taken in order to combat the specter of ‘deflation’ including outright USD devaluation (debt restructuring), negative nominal interest rates and/or demurrage currency. These may appear ‘inflationary’ on the surface but are rather symptoms of fighting deflation. They are new monetary medicines to ‘stimulate’ a preference for goods/services over cash in a flagging patient that is already resistant to all the old drugs. Do 80 year old men need Viagara? Is there a point in the life cycle of a nation where it’s OK to consume less?
I suppose the debate comes down to what happens when the doctors reach the end of their rope and all the experimental drugs have been tried. The ‘West’ are at/near quasi-deflation now, and the extreme resistance to it makes it appear that inflation is going to be unleashed in a deluge any day now. But there are relative price limits of energy and food at which the global economy can function at present rates of demand. These limits, and the limits of present technology on the rates of resource extraction effectively govern how much ‘inflation’ will actually happen. Inflation happens when demand expands because more people have an income that supports more consumption and the servicing of debt. These conditions are on life support in the US/Europe/Japan, on the edge of rolling over into negative.
Whether or not and for how long the USD and US/German Bonds are a good (deflation) bet is a policy timing issue. It is important to clarify the discussion going forward to note that this question and the inflation/deflation question are related yet technically distinct. The world has seen a massive and unprecedented inflation/credit expansion from 1947-2008. It’s an open question whether ultra long-term debt restructuring will give rise to massive inflation. When it’s coming from very high levels of aggregate demand like Japan, Europe, US/Canada, it seems unlikely, short of currency devaluation, which amounts to a haircut for the creditors and would only serve as a temporary spur to wages and prices. And while initially nominally inflationary, such a move would only serve to choke off credit further, a deflationary outcome in a monetary system based on debt and interest. Given the instability of human psychology, the political cult that ‘something is better than nothing’, and the precarious balance of resource distribution networks, it seems likely that we will revisit both extremes in the next 12 years.
Again, for the most part I agree with Sandor’s analysis. On the Central Banking level, the CBs are exchanging “Cash for Trash“, accepting a lot of worthless Collateral in exchange for fresh injections of Cash. This provides some liquidity to the TBTF Banks, but they aren’t any more Flush than they were before, and they still have no Credit-Worthy Borrowers to lend to for the most part. So the Money distribution to the society pretty much stops at this very high Wholesale level. Overall this creates deflationary pressure through the system, and it is showing up mostly inside the Shadow Banking system. There is still speculation ongoing in the Commodities markets by the Prop Desks of the TBTF Banks and some Price Inflation there as a result, however medium-long term that cannot hold up as Money Distribution to the End Konsumer continues to be restricted. Restricted how? By AUSTERITY measures of various sorts, which include all sorts of things like Public Payroll cuts, reduced Pensions and Private Sector Bankruptcies.
I also agree with Sandor that the current dynamic will lead to more experiments with money creation, including Demurrage and Currency Devaluation, but at least as far as the latter one is concerned you have to ask “Devaluation with respect to WHAT?” All the major currencies are valued with respect to Each Other, with the Dollar providing the Benchmark Measure as World Reserve Currency. The only thing the Dollar really can devalue against is the Oil it serves as a proxy for, and that is going to happen organically regardless. It might also devalue against Gold if Gold is sought after as a “Safe Haven”, but poor distribution of Gold and Limited Quantities of it make it an unlikely future Currency. So you STILL have Deflationary pressure here regardless of Devaluation and regardless of transition to PMs. None of these techniques makes any more money Circulate in the real economy, which continues to be starved for Cash.
Demurrage Currency and non-debt Money like Greenbacks could put some money back into circulation, but the Distribution Mechanism for them remains a bit Mysterious at this point. In Lincoln’s time, Greenbacks mainly got issued to pay for the War Effort. Hiring Soldiers, paying Arms Dealers, that sort of thing. Without a vast ramping Up of the Military effort here, who would Da Goobermint issue Greenbacks to, and for what?
The system at the moment regardless of the Currency chosen still depends first on the Wholesale Level Money Distributors of the TBTF Banks, and then below them the smaller Commercial Banks which distribute money in the form of Loans to many Biznesses. Here in the FSofA, there really is no alternative Money Distribution system to this. Only if Da Goobermint undertakes a Massive Make-Work project might they do Retail Distribution of Money on the kind of scale required here, and generally speaking the only such Make-Work project Da Goobermint will undertake in such a situation is WAR. A successful War Effort holds the promise that you can extract some Profit from those you defeat in the war if you are successful with it. In the case of WWII, the post-War extraction method was to create a bunch of Debtor Client States to the Industrial Monopoly held mostly at the time in Anglo-Amerikan and Kraut hands, all through the same Banking Interests and families that made the original Bretton Woods Agreements. They got a 70 year long Wealth extraction scheme going with that one in the aftermath of WWII.
What remains quite unclear resultant from the current Spin Down is exactly what type of Wealth extraction scheme might be undertaken to try to pay off the costs of the next Global War for Dominance of the Monetary System? Even Slave Labor cannot pay its own way, much less pay off outstanding debts of the losers of the next Global War, which in reality will be EVERYBODY. Rebuilding all the stuff which gets destroyed THIS TIME with a Marshall Plan just won’t happen, the Cheap Energy to do that with just not is there anymore to do it with ALREADY, and in the aftermath of such a Global War a good deal less will be available. Much energy will be Konsumed just to fight the War, and beyond that much if not most of the infrastructure required to extract such energy will have been DESTROYED.
It’s a Morton’s Fork no matter how you cut it here, nobody can Win, everybody will Lose no matter what. The best you can hope for is to Cut Your Losses. Global Thermonuclear War including the exchange of MIRV equipped ICBMs betwen the major powers which have them is the worst scenario for a rapid destruction, and one can only HOPE that is not undertaken. Next down the list would be a Global Extermination campaign undertaken by the Illuminati to eliminate a significant portion of the population through Biological Warfare/Pestilence Propagation. A Georgia Guidestones type scenario. Further down the List of Bad Outcomes is Global Warfare which though not Thermonuclear everywhere, still so destroys the current infrastructure that we get a Rapid Devolution to Mad Max. Down the list after that one are Global and Independent Civil Wars virtually in all Nation–States, which set Brother Against Brother, and likely end up in the type of Multiple-Orkin Man scenario I see as a high probability outcome. Note that this is FOURTH down the list of Bad Outcomes.
Over on the OTHER SIDE of the the Bell Curve of Probabilities are the GOOD outcomes like a vast new Energy Source is accessed, or En Masse the Societies all over the Globe move quickly toward developing Sustainable Systems which will replace the ones failing now as we speak through “Conservation by Other Means“, a term coined by Steve on Economic Undertow. This basically represents the Economic Triage of entire Societies off the Oil Jones as they are cut off from the Life Blood of Credit with which to buy said Oil. Lowest on my list of Probabilities is that Jesus Christ will descend from Heaven to General the War Effort of Good vs. Evil here, or that Aliens will emerge from Underground Cities to Duke it Out either with each other or J6P.
Outcome Number 4 appears to me to sit in the Central Portion of the Bell Curve as the Highest Probability Outcome.
Large societies become Highly Dependent on Money Manufacturing to run the various complex systems that evolve. In the past, that included large trading networks run by folks like the Babylonians and the Romans as well, all based on the Ag Production of those societies and Conquest of ever larger portions of the surface of the Earth, eliminating competing Hunter-Gatherers along the way. When these systems failed, said societies got overrun by “Barbarians”, basically the “Uncivilized” portion of the population of the Earth still extant out there at the time. The transition to Industrialization took even the basic Ag Society and rendered that one Uneconomic, since of course an Industrialized Farm could produce so much food so much cheaper than the non-Industrialized one. The further systems created to run said society all are even MORE dependent on functioning MONEY than the Ag Society was. In such an Ag based society, even after the failure of the Monetary System, it was possible to revert to Barter for a while until things calmed down, with fairly restricted losses to total population, on the Biblical Percentages of around 25% of Total Population taken out by the Four Horsemen of the Apocalypse.
Revelation 6:8 And I looked, and behold a pale horse: and his name that sat on him was Death, and Hell followed with him. And power was given unto them over the fourth part of the earth, to kill with sword, and with hunger, and with death, and with the beasts of the earth.
The Industrial Society is not so Gifted with the relatively quick transition back to a Barter Economy that the basic Ag Society. is. What is truly “productive” Work has become extremely Abstract in the Industrial Economy. MOST of the population in the IE works in jobs that only are marginally important to survival at best, and almost all of those jobs are dependent on vast Energy consumption as well. Taking a society OFF of the Oil Jones is not much different than going Cold Turkey off of Heroin. It can’t be done without a whole lot of PAIN, and even after experiencing said Pain there is no guarantee you will survive the transition.
For the most Powerful Nation States, none of them will go “Quietly into this Good Night“. All will struggle to maintain some sort of functioning Monetary System, Greenbacks are possible, Demurrage is possible, SDRs issued by the BIS are possible, Hell even Gold is possible here as the Deep Panic really sets in. In my estimation, none of them can work, in the end because of a Fundamental Principle Nature always Obeys in our Frame of Reference, which is that you CANNOT MAKE SOMETHING FROM NOTHING. Whatever the Money is, it must represent Resources which are actually THERE. If the resources relative to the total population base are NOT THERE, no money of any sort can represent them.
There is still Oil out there, and there is still a lot of good arable land as well. However without vast changes in methodology, what is left of the resource base cannot match the population base. I am well aware of other means and methods for Food production, Peter here on the Diner details how Hydroponics can be used for copious food production in the absence of Fossil Fuels. Diner A. Gelbert in his article in the Waste Based Economy series also detailed possibilities for energy production that might be pursued, but the fact is they are NOT being pursued and it is unlikely they will be in anywhere near sufficient time to pick up the slack from Lost Oil Energy production. We had the CHANCE to stop this Runaway Train probably last time in the late 60s to early 70’s with the Back to the Land Movement, but that was undermined and coopted out of existence by vast Debt Expansion.
The only possible result here now is massive CONTRACTION, and no Monetary Policy can stop that, because you CANNOT MAKE SOMETHING FROM NOTHING.