Sunday, January 29, 2012



The key difference between a Central Bank and a normal Bank is the capability to print money.  The euphemistic term is Quantitative Easing “QE” frequently cited by the Ben Bernanke and Sir Mervyn King, generally with a straight face, as though this were the panacea for all our troubles.

Other expressions, such as the bank acting as a “lender of last resort”, also sounds pretty good, almost as though some “Godfather” of the financial  world was deploying small part of its vast resources to back stop to all problems.

This is however like the financial world’s equivalent of the Orwellian “Ministry of Truth” pumping out propaganda and lies.   

The reality is that quantitative easing is creating money out of thin air, and lender of last resort is creating money to lend to financial institutions, to which no-one in their right mind would ever contemplate giving a penny. In addition the only Godfather behind all this is you the taxpayer and your children and grandchildren.

Recent years have seen an unprecedented explosion of “assets” central bank balance sheets. The 2007 pre-crisis combined balance sheets of the major European central banks; Bank of England; Bank of France Bundesbank and Swiss National Bank, totaled approximately USD 550 Billion. Today it has become USD 2,700 Billion, a five times increase in 4 years.

In much simplified terms, central banks main assets are composed of cash in local and foreign currencies, investments in government bonds, loans to financial institutions and holdings of gold and precious metals.

This colossal explosion in the “assets” held by central banks is paid for by money conjured up out of no-where, by an electronic printing machine. You too can do this at home, but that would be considered counterfeiting, and you could go to jail for debasing the currency. Only Central Bankers are allowed to hit the “Control P” button on their PC with impunity.

This expansion is a global phenomenon. In the same period the balance sheets of the Fed; ECB; Bank of Japan and Bank of China have expanded from USD 7,000 Billion to USD 15,000 Billion approximately.

For the lucky Europeans, we are now the proud owners of Greek, Portuguese and other bonds taken off the market because nobody else wanted them. Our central banks have loaned money to illiquid and insolvent banks, which if capitalist market forces had been allowed to work, would have gone bankrupt a long time ago.

Equally, if the investments held by these Central Banks were marked to market all the central banks, whose capital and reserves are minimal compared to their total balance sheets, would be totally wiped out. They are more leveraged than hedge funds, and more bankrupt than Enron or MF Global.

So what solutions do these geniuses of economics and finance have to propose? Why of course more of the same. Like a chorus in unison, from Washington, Mme Lagarde, Sir Mervyn King, Mario Draghi,  like a collection of Globalist Oliver Twists all “want some more”, many, many  trillions more.

The new money will be used to loan to bankrupt banks, which in turn will buy the bonds of bankrupt countries, to keep the system going a bit longer. This will also  ensure that when the collapse comes, the irrecoverable trillions of assets will be on the central banks balance sheet, and the losses will be for the taxpayer, while banks which created the mess will escape.

So let us consider a moment Greece. In order for their bail out to be approved and the ECB; IMF etc to purchase their defaulting bonds, plus the new bonds to be issued, the latest proposed preconditions are, that they pay bondholders creditors first (e.g. before paying old age pensions, the police force, the military and hospital staff).
In addition,  they should cede their fiscal sovereignty and control over sale of state assets; de facto give up their state sovereignty.

In exchange Mr Draghi and Ms Lagarde will hit the “control P” button on their PC for a few seconds, dump the risk relating to this new debt on the Global taxpayer, while the banks get their principal and interest reimbursed in full.

I have said before Greece should default and leave the Euro zone. If ever there was a moment to do so it is now. They should reject banker occupation and bureaucratic dictatorship. They should give a clear lead to other countries, Portugal, Spain, Italy etc. that it is better to suffer and be free than live as multi generational debt slaves. 

No comments:

Post a Comment