Collateral Damage

One of the unintended consequences of a world of floating exchange rates has been the geometric growth of debt. The total amount of debt in the world currently sits at around $300 trillion, which is about three times the global GDP. That seems like an impossibility, but the value of all assets on earth is estimated to be around $300 trillion, which means every bit of potential collateral is pledged to someone, somewhere in some fashion. The world is literally drowning in debt, you could say.

Of course, those are just guesses. Some debt is actually listed as both an asset and a liability. Your mortgage is most likely in some sort of synthetic financial instrument as an asset against which there is some form of debt. Government bonds are used for collateral, as they are often considered the most reliable and trustworthy asset on earth. Banks soak up US debt, for example, because it is worth more to the bank than their cash deposits, as they can quickly package bonds into other financial transactions like repo agreements.

It’s also why the US government has no trouble finding willing lenders, despite having record debt and deficits. Those lenders are holding cash, which is not as valuable to them as the bonds. It’s not just the US government. The Germans also enjoy high demand for their debt. In Europe, the German Bund is the preferred collateral in finance transactions. In fact, it is so valuable, there is a shortage of it. The result is there is always pressure on the European Central Bank to not hold Germans bonds.

It is an important thing to understand about the world of modern finance. It is entirely driven by debt. When company X wants to do a deal, it does not reach into its cash reserves to finance the transaction. Instead, it will pledge an asset in a repurchase agreement. This is where it agrees to sell the asset to another party, but simultaneously agrees to buy it back at some point in the future at a fixed price. This is a modern form of pawning the wife’s wedding ring. The company gets the cash and the lender gets interest.

Of course, no tree grows to the sky, but the modern financial system is counting on debt being the exception.

Down in the depths of Europe’s financial system, a nasty blockage is building. The plumbers at the European Central Bank meet next week to try and fix it.

They may be four days too late. Italy’s referendum could just stretch the system to breaking point before then.

At stake is the health of the 5 trillion-euro ($5.3 trillion) securities lending market, which greases the wheels of all manner of derivative, short-selling and structured transactions. A crunch point has arrived in Europe. The last few days have seen an extreme spike in demand in particular for short-dated German government bonds.

These are among the few securities of high enough quality to be accepted as collateral in repurchase agreements. Cash is no good (well, not for the Bundesbank anyway). These agreements operate like high-quality loans whose proceeds are normally used for activities like financing the purchase of other securities. Without them, a lot of other everyday activities — such as bidding at bond auctions and hedging underwriting risk — could seize up.

The demand spike is from the usual year-end surge in demand for collateral getting pulled forward, and has exacerbated a shortage of securities that count as collateral.

In normal times, firms borrow the securities they need and quickly return them — there’s usually a flood of lending and borrowing going on, and the repo market operates silently in the background of Europe’s financial system.

But the ECB’s drive to jump start the economy has led it to buy up about 20 percent of the market for German bunds and other top-quality securities. Schatz — German government bonds of a two-year maturity — had become notably harder to come by. Firms can borrow them from the ECB, but only on the strictest of conditions. The Bundesbank has been even more resistant: it’s long been reluctant to accept any kind of collateral of lesser quality than German government bonds.

What all that means is the modern financial system has come to rely so heavily on government debt that governments cannot issue enough of it. The trouble is, government debt can take cash from the economy. This is fine when the economy is overheated or there is inflation. Central banks can step in and sell their bond holdings to soak up the excess cash. That’s not the case today anywhere in the world. Instead, governments are looking to boost the retail economy by getting more cash into the system.

The result is an unsolvable conflict. On the one had we have a financial system demanding ever more high quality debt, in order to drive growth in asset values. On the other hand, we have a retail economy demanding more cash moving around in the system in order to stimulate economic growth. It’s why smart guys like James Rickards see a financial crisis in the near future. The methods to paper over this inherent conflict are just a delaying action. At some point, the pressure exceeds the restraints and you get a crisis.

An organized unwinding of trillions in debt is never going to happen, so that means we will have a disorganized unwinding of trillions in debt. That’s the definition of a crisis. It is the unexpected, disorganized unraveling of something that probably should never have been allowed to happen. The mortgage crisis is the most recent example. Lending billions to people, who have no way to repay the loans, turned out to be a bad idea. In the fullness of time, the mortgage crisis will be seen as a warning, one everyone ignored.

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Member
7 years ago

It’s fun to watch how deeply the left is in bed with the banks. They can’t pay for big government without the debt bubble, so the banks must be protected at all costs, ideology be damned.

Chiron
Chiron
Reply to  Taco_Town
7 years ago

Back in the 19th century was already noticed by Mikhail Bakunin that Karl Marx and the Rothschild family belong in the same tribe.

teapartydoc
Member
Reply to  Chiron
7 years ago

I think it was that the socialists have one foot in the revolution and the other in the banks.

Doug
Doug
Reply to  teapartydoc
7 years ago

You guys read this by Tom Baugh of Starving The Monkeys? Pretty good assesment.

http://starvingthemonkeys.com/2016/12/06/faithless-elector-update-6-dec-2016/

CaptDMO
CaptDMO
Reply to  teapartydoc
7 years ago

Oh yeah, hangin’ out at the protest camp, with daddy’s credit card just for…you know….emergencies!

Doug
Doug
Reply to  Taco_Town
7 years ago

If you notice since the election they have rapidly fallen back on the corporate world to wield their political power and derive their funding. Interesting to see how long that money lasts between that cabal of corrupt thieves bereft of morals and honor.

Member
7 years ago

That’s why if you have zero debt and $50 in your pocket, you’re one of the richest (but not wealthiest) people on earth. The Wizards of Smart need to find a new god to worship. GDP growth is tied inextricably to population growth and government spending. The first one is in decline in the West and in most industrialized nations (hence the immigration push). The second is increasingly dependent upon a shrinking pool of taxpayers due to slow population growth, and replacement by low skill workers (who consume, not pay, taxes) who history shows are incredibly bad at math and… Read more »

Member
Reply to  thezman
7 years ago

A similar fallacy underpinned the eurozone. It’s creators assumed that the strict rules of joining the euro would impose discipline on governments. We’re seeing how that turned out.

Tim
Tim
Reply to  thezman
7 years ago

You want a fun read on how this plays out? I dislike most if not all modern fiction but a novel by Lionel Shriver, The Mandibles, has it nailed. Life amongst the progressives when the bill comes due. A fun read a hoot but that author is going to be strung up if she ever sets foot on the Yale campus
Tim

Guest
Guest
Reply to  thezman
7 years ago

With all due respect, Z, the reference to the rail boom/bust is inapposite. Those were the days of hard money. Money creation was subject to a strict limit because it was convertible to gold and/or silver. In a world of hard money, when railroad bonds collapsed there was no way for the banking system to paper over the collapse of the credit bubble. Now it’s as simple as adding a zero to the credit limit and issuing paper. When Nixon closed the gold window in 1971 it ushered in a new era of government finance. The bond market was able… Read more »

el_baboso
Member
Reply to  thezman
7 years ago

Poor Tricky Dick. The Euros and Arabs were getting ready to destroy us by “redeeming” all of those Euro- and Petro-dollars for gold, and Nixon gets blamed by everyone for saving the country from insolvency. I haven’t looked in a while, but the only thing I’ve ever been able to find online about the Petrodollar and Eurodollar crisis is a paper written by a Red Chinese academic in the 1970s. Yet I remember you couldn’t pick up a magazine or news paper at the time without running across an article or two about it right next to the news about… Read more »

Doug
Doug
Reply to  thezman
7 years ago

I think the people who cooked up the currency arrangement we have today really don’t give a shit. They are rich beyond comprehension because of how they manipulate that debt. It was the whole point to begin with.

Nunnya Bidnez, jr
Nunnya Bidnez, jr
Reply to  thezman
7 years ago

“The idea that you could securitize tobacco taxes”
LOL.
What happens if/when the gov’t decides to eliminate all Federal taxes on tobacco?
That sort of unexpected event could be engineered by gov’t (even by unelected bureaucrats), with the express purpose of destroying those particular investors.
The gov’t (via FHFA) changed accounting rules “unexpectedly” for Fannie Mae and Freddie Mac; suddenly their $50billion cash reserves were declared not enough. That was the root cause of the Mortgage “crisis”.

Fuel Filter
Fuel Filter
7 years ago

In the final analysis this can all be traced to nations de-coupling their currencies from hard assets (precious metals {thanks FDR and Nixon}, lesser asserts like oil, uranium and the like) and the creations of monsters like the Fed and the IRS (thanks to that goddamn socialist, globalist prick Woodrow Wilson). Thanks to FDR (and the Rothchilds) instead of the natural economic correction we needed in the 30s he lengthened the depression by more than a decade and brought the entire world into the circumstances that led to WWII.  If he had just let the U.S. economy alone we could… Read more »

Al from da Nort
Al from da Nort
Reply to  Fuel Filter
7 years ago

Fuel;
None of the hard assets you mention have any actual, intrinsic, primary production, civilization-saving value (like that of a bushel of wheat or a barrel of beer). They are just tokens of exchange that (importantly) regularly facilitate more efficient production. Their primary value in that role was that, unlike credit money, they can’t be suddenly, arbitrarily and secretly depreciated to the detriment of actual producers.

Member
7 years ago

I’m only an amateur economist at best, so I have a question: when did businesses become more of a financial instrument than a production instrument?

Drake
Drake
Reply to  Taco_Town
7 years ago

Seems to be a gradual transition over the past 30 years I’ve been working. Taxes, regulations, labor troubles, laws and more regulations, and foreign competition have made it impossible for the operations guys to deliver profits in many industries. So management keeps looking at the finance guys to pull a rabbit out of the hat and magically deliver profit. I try to avoid investing in companies that don’t make their profits with easily identified products or services. In part because the sham might fail while my name is on the stock certificate, and partly because they may decide to screw… Read more »

Member
Reply to  Drake
7 years ago

Now that I think about it, I read another comment on another site that said international business these days is mainly tax, regulation, and wage arbitrage.

Guest
Guest
Reply to  Taco_Town
7 years ago

Methinks that was my comment on this blog a while ago. It was posted in reference to a free trade issue.

Doug
Doug
Reply to  Taco_Town
7 years ago

When they got rid of the gold standard and created the Federal Reserve, which is neither, it just the twelve banking families laundering a nations intrinsic wealth through their private banks and strip mining it of it’s actual real value, then selling off the devalued derivatives.
They make nothing, they create nothing of value, they rigged a system to extract that value and creation of value.
What was it old man Rothschild said about power he would have letting him create a nations money system?

Member
Reply to  Taco_Town
7 years ago

Directly on point … https://m.youtube.com/?#/watch?v=SW_G_eJYqrM

There was never a shortage of gasoline during the Bush years that justified a $4++ a gallon price at the pump. It was a shortage of futures securities. The CEO of Marathon explains the phenomenon in that video.

In my opinion, securitization inflates the cost of everything we buy these days, from food, to gasoline, to real estate, to rent. So even if you don’t have any debt, you are still working for the bankers.

CaptDMO
CaptDMO
Reply to  Taco_Town
7 years ago

SEE: The Merchant of Venice

Member
7 years ago

This is way above my pay grade, but I’d love to see a solution for this that puts the penalties/costs on government and the financial sector as opposed to the productive economy.

Doug
Doug
Reply to  Taco_Town
7 years ago

Withdraw consent for the sonofabitches every way possible. Great place to start.

Dorf
Dorf
7 years ago

The question that is rather obvious is where to Hide?

Drake
Drake
Reply to  Dorf
7 years ago

Somewhere you don’t own a lot of debt related investments.

Doug
Doug
Reply to  Dorf
7 years ago

Not hide, reject it. I say that with total sincerity. It is not what these insane governments are doing that matters, it is what each of us do, and how it all begins with each of us. That’s the truth my friend. Don’t let anyone tell you different My wife and I chose, key word, made the choice to divest ourselves of all debt. Not. A. Penny. Of. Debt. We seen it coming in 2007, gut instinct told us it wasn’t going to end well. It was obvious, the debt/derivative/401/cheap mortgage interest system was a shakedown operation to strip mine… Read more »

teapartydoc
Member
Reply to  Doug
7 years ago

I own nothing that I didn’t pay cash for except one vehicle that was on a company lease before I bought it. Primary residence has an underground propane tank and generator. Also have a farm where I can survive off the grid. And a residence in another country that pays for itself with a small grocery in front. Still I’m sure I’ve taken many things for granted, and something will surprise. It always does.

james wilson
Reply to  teapartydoc
7 years ago

You forgot to list the rifle. I know you have a rifle. If you don’t have a rifle you are going to meet some unprepared fellow who none the less has a rifle, probably not his own.

Doug
Doug
Reply to  james wilson
7 years ago

Like land, you ain’t Man unless you own a rifle.
It’s property, that is the first thing.
Property is freedom.
Debt is a form of indenturing your freedom by not outright owning your property. A rifle is to protect and defend you property, including your rifle to begin with.

Al from da Nort
Al from da Nort
Reply to  Doug
7 years ago

Doug; I sincerely hope that you don’t lack the goodwill of your neighbors. Should the SHTF the ability to ‘retain title’ will be key to your strategy and all similar ones. Being armed and dangerous all by yourself alone (not that you are advocating this yourself, but others are) will not be sufficient. Five organized, hungry, improvident-but-armed locals are likely to be a match for any ‘prepper’ (again, not that you are one). Being from da Nort, I am aware of the delusion among outdoors-oriented suburbanites that they can simply head for the woods and live off the deer herd.… Read more »

teapartydoc
Member
Reply to  Al from da Nort
7 years ago

It’s not hard to get socially connected when there is only one other permanent resident on your road. The notion that the places we choose to set up bug out locations are already heavily populated is easy to assume, I understand, just try getting to some of them. In fact, getting there when you will have to is a problem that we all think a lot about.

Doug
Doug
Reply to  teapartydoc
7 years ago

Make it a life instead. Why wait for disaster or tribulation. Win against this destructive construct the banisters create by their economic slavery to debt. Agrarianism is what created this nation. People went into the frontier of their time and created small closely knit thriving communities. That is what I and many others have done. We win big time too. Winning is a great thing. Winning your liberty even better.

Doug
Doug
Reply to  Doug
7 years ago

Darn spell check! Wrote Win against the “Banksters”

teapartydoc
Member
Reply to  Al from da Nort
7 years ago

A fella decided to try the hermit life and moved way out. After a while he became lonely and lo and behold a stranger appeared. They got acquainted and found out they were distant neighbors. The stranger said there was gonna be a party and would he like to attend. He says sure. The stranger says I gotta warn ya there might be some dancin’. Oh, that won’t bother me. Well, there might be some drinkin’. Oh, that’s OK. Well, there might be some sex, too. What should I wear? I wouldn’t worry about it, just gonna be you and… Read more »

Doug
Doug
Reply to  Al from da Nort
7 years ago

You know it. Love to answer your question. We have become befriended by so many of our neighbors, and become close allies, because of the culture in these mountains. It is difficult to define in words. It is truly provincial, there is deep underlying current of faith and a quiet sense of providence. People make it their business to know you, it isn’t nosiness, it is tiered priority by family kith and then the tribe of community. And it goes no further, a closed loop culture. It is clannish in nature. We are definitely imports on these ridge lines, and… Read more »

Al from da Nort
Al from da Nort
Reply to  Doug
7 years ago

Doug;
Praise God, you’re there. Your story should be the example_! Don’t just show up expecting to eat.

Doug
Doug
Reply to  Al from da Nort
7 years ago

The food here in WV is awesome. It’s a huge part of life. There is a festive component to around family and friends. Being it is rural and sparkly populated in the rugged mountainous areas like where we reside. Wild game is a large part of a lot of peoples diet, no lack of deer or turkey, and home canning is a long held tradition. Fermented corn and cabbage, pickles too. We can half our food we eat. There’s weenies and peppers, canned deer meat and stew, squirrel gravy, green beans & potatoes with bacon, of course lots of garden… Read more »

Member
Reply to  Doug
7 years ago

Come visit my little blog and I promise to get back to work on it! We lead similar lives, You’ve decided to follow the Subsidiarity Principle and I agree, it’s a better life for one and all, and best of all, it could be a way of phasing debt out of our lives, although politically, it will be a difficult if not impossible task; our host is likely correct that the unwinding will be by default (pun intended) instead of by design.

Nunnya Bidnez, jr
Nunnya Bidnez, jr
Reply to  Doug
7 years ago

DOUG– I’ve been thinking of going the other direction, back up to New Hampshire. Forest land in the remote areas seems cheap ($1000/acre), even taxes seem cheap, plus no state income tax.
I’m intigued to know why you’ve left, and why you chose W.Va? Is it just the warmer climate?
Thanks
PS ??you paid total $46k for 6 acres, less than half of the asking $110k??

Doug
Doug
Reply to  Nunnya Bidnez, jr
7 years ago

Nunnya- Yes winters where a factor. I miss a lot of NH, it is a stunning country up in the north country. You should go for it, specially if you have a home based income or something to make it viable to be self sufficient. I think if your a custom maker of traditional handcraft you can do well with some basic common sense business sense up in the north. My wife is from Missouri, it was getting too much for her bones. Cost of living overall was a factor, though long winters in the north country makes for not… Read more »

Brian-guy
Brian-guy
Reply to  Doug
7 years ago

Wow Doug. I can only imagine the amount of liberation you both must feel. Long before you and I existed millions were self sufficient. You and your wife are an inspiration and God bless you with what you’re doing. I’m curious though….kids? If so, are they or have they adopted your style of financial liberty??

Doug
Doug
Reply to  Brian-guy
7 years ago

Lord bless you too. Thanks for the kind regards man. It is a nice thing knowing everything is securely your own. It can not be taken from you. That is a great observation you bring up regarding self sufficiency and determination, it’s freedom right? Kids are all grown, they have their own lives, and are getting to the age where they are beginning to question the status quo and seek more freedom. In the beginning they called us crazy for moving down to WV. In fact almost everyone we knew basically said some cheese fell off our crackers moving to… Read more »

Doug
Doug
Reply to  Dorf
7 years ago

Montana. Or if you’re lucky, Alaska or Yukon.

Merrell Denison
Merrell Denison
Reply to  Dorf
7 years ago

Buy pitchforks.

Lorenzo
Lorenzo
7 years ago

Maybe Trump will, like Herbert Hoover, happen to be sitting on an economic volcano when it erupts. Hoover’s mistake was to intervene with counterproductive government fiddling which prevented the crisis from sorting itself out as the 1920 crash had done.

Let’s hope Trump avoids the sort of dumb moves that Hoover made,

james wilson
Reply to  Lorenzo
7 years ago

I like the Donald more and more, but there is no way he wouldn’t follow Hoover down that rabbit hole if it opens up. No one who actually understands (not thinks he understands, Ben B.) the valves and levers at that level of sovereign finance has ever entered electoral politics, so far as I know.

Solomon Honeypickle IV
Solomon Honeypickle IV
7 years ago

debt jubilee!

Jake Badlands
Jake Badlands
Reply to  Solomon Honeypickle IV
7 years ago

I mean, they can’t repossess *everything*

thor47
thor47
7 years ago

” . . . like repo agreements. ”

I got this image of a wrecker ( http://www.burchstowing.com/images/heavy-towing-and-recovery-rotator.png ) backed up to Air Force One. I think I would rather have an Apache. I have a friend who can fly that.

Al from da Nort
Al from da Nort
7 years ago

Following a mathematical ecology framework (which used to bare a more-then-passing resemblance to accounting rules), PRODUCTION is the most basic aspect of economics. And so it will be if the SHTF. The immediate problem will be to get the primary producers in the human food chain, i.e. farmers, to accept our tokens of exchange, direct barter being impracticable, for long enough for the higher level production functions to be restarted. Otherwise the 4 horsemen will surely ride. Since this exchange will undoubtedly feature some element of coercion to accept those tokens and to prevent outright theft, one key survival skill… Read more »

Taco_Town
Member
Reply to  Al from da Nort
7 years ago

I would love to see a new class war, not between the haves and have nots or debtors vs savers, but producers vs leeches. Leeches being defined as government, bureaucrats. Lawyers, academia, the media, the managerial elite, the deep state, big finance, etc.

A.T. Tapman (Merica)
A.T. Tapman (Merica)
Member
Reply to  Taco_Town
7 years ago

Throw in the welfare parasites and THEY have us outnumbered, but perhaps not outgunned.

Member
7 years ago

At long last after many years of waiting for the opportune moment and overcoming bureaucratic hurdles, the digital capital is going into a top-of-the-line water well drilling rig to complete the water systems business launched by my son, who lives next door on our farmlette in the Southern Cone. Everything owned outright, no debt (and those rigs are expensive!), shop on premises, and a solid Texas A & M engineering education combined with six years on an offshore oil drilling platform makes for good possibilities in an under-represented business in our area and beyond. This idea began forming about 15… Read more »

Guest
Guest
7 years ago

As long as central banks, and particularly the US Federal Reserve, can issue fiat credit money at will there is no upper limit to the amount of debt which can be issued. It’s not even paper anymore; it’s just electronic bits in a memory register. This tree really can grow to the sky–it’s as simple as tacking another zero on the end every time you approach the credit limit. This observation is the very core of modern monetary theory. There will be no financial meltdown in our lifetimes unless either the powers that be want to trigger a financial meltdown… Read more »

Taco_Town
Member
Reply to  Guest
7 years ago

If a financial collapse is impossible, a torches and pitchforks collapse will happen instead.

Doug
Doug
Reply to  Taco_Town
7 years ago

What do you call the devaluation of the dollar by 95% since the fed was created? That sure looks like a collapse to me. Granted it is a slow collapse, but that was the point, strip mine it steadily percentage by percentage. That is what “inflation” is about, how they crowed every week, oh 2-3 percent inflation is healthy for the GDP. Riiiight, see the sleight of hand there? Artificially create a false narrative of inflation, you get to play fast and loose with 3% of GDP. Wanna take a guess how much money that is in the size of… Read more »

Member
Reply to  Guest
7 years ago

I’m inclined to agree that the big collapse ain’t coming, but I certainly wouldn’t rule it our. Rational thinking is not a universal human trait and emotions can drive, oh, just about any response to a crisis you can imagine. I for one feel better being invested in owned-outright productive tangibles, productive land, well-built houses and low consumption. That’s not a consequence of failed understanding, it’s a “lifestyle choice”, as in a way of life.

teapartydoc
Member
Reply to  Montefrio
7 years ago

That’s pretty much my take on things. Prepping for me is part of recreation. I do it for fun. If you visit my places you would have no idea what the secondary use is. This way it is easy to get family involved. They think they are just hunting and fishing while I get them ready for possible disasters.

Guest-to-Guest
Guest-to-Guest
Reply to  Guest
7 years ago

Guest, your description is fairly accurate, but it only describes a part of the whole lay of the land. The population is not set up to play the same games with numbers, and they are getting close to tapping out. One example: a recent auto market report shows that one third of all trade-ins come with negative equity. What is going to happen when 100%+ of the majority’s income is spoken for, month after month? Economics might take a physical turn at that point. My guess is that from a number of possible scenarios TPTB will choose the most palatable… Read more »

Guest
Guest
Reply to  Guest-to-Guest
7 years ago

I saw the reports about car leases. It’s not good, but it’s a perfect example of moral hazard in the world of modern monetary theory. It’s perfectly rational behavior for banks and lenders. They know damn well they won’t get stuck holding the bag. Inflation is certainly possible. A debt jubilee is possible. A more palatable response to 100%+ income consumption, IMO, will be a negative income tax, which can be phased out at increasing income levels. We already have such a system in place–the Earned Income Credit (EIC). Debtholders win in an in inflationary environment, as they pay back… Read more »

Guest-to-Guest
Guest-to-Guest
Reply to  Guest
7 years ago

Right, debtholders would come ahead as long as the rates lag behind, which would be done intentionally in the partial jubilee scenario (and the banks probably compensated via Fed/Treasury). Should one bet on this by taking on some extra debt like you mention? It can play out many other ways too. Doug’s point is that he found a way to mostly opt out of the system (save for his minimized taxes) instead of trying to beat it. Partially this is because the new lifestyle suits him. It won’t suit many of us here though – school-age children, entrenched relatives, other… Read more »

Doug
Doug
Reply to  Guest
7 years ago

Thats the whole point. It isn’t an outlier, it is the reason in itself.

CaptDMO
CaptDMO
7 years ago

Whoever dies owing the most debt WINS! My “credit rating” (a number derived on how much EXTRA I’m will to pay) is non existent. Despite high 6 figure “sitting” in the bank, they couldn’t seem to get me a credit card. NOR could they seem to offer more than 1% interest. Oddly, the money I “loan” to companies too incompetent to check their “officers” parachutes, and outright PAY for their “expenses”, pay better than the bank. If they “miss a payment”, I repossess the principal. Just a matter of which “institution” to pull the principal out of,and convert to (physical… Read more »

JohnTyler
JohnTyler
7 years ago

When the dreck hits the fan, rest assured the printing presses will go into warp drive. As that brilliant MIT PHD and Princeton U. professor of economics, Ben Bernanke said: “The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.” (Note; Bernanke predicted the US economy was just fine, literally, just a few months before the entire US financial system cratered. ) And the EU central banks also have printing presses. There will be no shortage of money if the… Read more »

Dorf
Dorf
Reply to  JohnTyler
7 years ago

Economists continue to believe that their trade is a science that can be described with mathematics. Silly Goose.

Doug
Doug
Reply to  JohnTyler
7 years ago

Hey, it already hit the fan. The presses are on warp drive.

Steven M
Steven M
7 years ago

Martin Armstrong is another smart guy I like to follow. He has all kinds of things to say about government debt.

armstrongeconomics.com

trackback
7 years ago

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Nunnya Bidnez, jr
Nunnya Bidnez, jr
7 years ago

Zman said: “The mortgage crisis is the most recent example. Lending billions to people, who have no way to repay the loans, turned out to be a bad idea.” The root cause of the mortgage crisis was banks selling mortgage-backed-securities (MBS) to investors (both here and overseas); the terms and conditions of those MBS were “opaque” i.e. not easily understood. The payouts on those MBS were structured in such a away that even the slightest decline in home prices would trigger a massive default. Very little of the crisis was caused by ordinary home-owners defaulting on their mortgages, in spite… Read more »

Guest
Guest
Reply to  Nunnya Bidnez, jr
7 years ago

This is what we in the wordsmithing business call “bullshit.” The “root cause” of the mortgage crisis was, in fact, imprudent mortgage lending which led to widespread defaults at the consumer mortgage level. This was driven initially by pressure from FedGov. It started under the Clinton administration under the Community Reinvestment Act and continued under the Bush administration’s policy of an “Ownership Society.” Freddie and Fannie enabled these policies by underwriting mortgages with insane risk profiles (e.g., negative amortization, interest only, no downpayment, 100%+ LTV, balloon, etc.). With the consumer loan side of the business compelled to issue substandard mortgage… Read more »

Nunya Bidnez, jr
Nunya Bidnez, jr
Reply to  Guest
7 years ago

In general, you are correct; but in specifics regarding F&F you are not. “Freddie and Fannie enabled these policies by underwriting mortgages with insane risk profiles (e.g., negative amortization, interest only, no downpayment, 100%+ LTV, balloon, etc.” No, F & F don’t underwrite mtges.. They buy mtges from banks and brokers, then repackage them and sell MBS based on those pools. However, the vast majority of neg.amort, 100%LTV, NINJA, etc were not qualified under F & F’s guidelines… those were repackaged by other entities as PrivateLabelMBS (PLMBS). Those failed big-time, not F & F’s MBS. F & F did not… Read more »

Vince Turner
Vince Turner
7 years ago

Really enjoy the work you do, however, I do find annoying typos like this from time to time; “The result is an unsolvable conflict. On the one had we have a financial system demanding ever more high quality debt, in order to drive growth in asset values.” Should be, ‘on the one HAND’ instead of had.

james wilson
Reply to  Vince Turner
7 years ago

Oy vey. Guess you haven’t been reading but for a few months.

Lulu
Lulu
7 years ago
tex
Member
7 years ago

Credit Market Defn: Credit market refers to the market through which companies and governments issue debt to investors. TOTAL US CREDIT MARKET DEBT: The financial position of the US includes a minimum of $270T (1,576% of GDP) in assets & debts of $146T (852% of GDP) or Net Worth minimum of $124T (723% of GDP) as of 2014. Net Worth is a measure of financial health including financial obligations & service capacity. The US & its economic sectors has remained relatively consistent over time. It dipped during the recession & has largely recovered. Since a significant part of the increase… Read more »

tom
tom
7 years ago

fofoa.blogspot.com

tom
tom
Reply to  tom
7 years ago

And, we haven’t actually experience a true float in all currencies. Dirty float is really what we have seen for the currencies that matter. Wait till they all truly float.