The ECB – Departing Into the 'Twilight Zone'?

A recent Bloomberg article discusses the 'tools' left in the ECB's inflationary toolbox in order to combat the deleveraging cycle in the euro area. Allegedly Mario Draghi is about to take leave of the euro-zone in order to 'enter the Twilight Zone', a fabled territory of nutty monetary experimentation not even Heli-Ben dares to frequent.
“European Central Bank President Mario Draghi is contemplating taking interest rates into a twilight zone shunned by the Federal Reserve.....

Few central bankers dare to venture in to the Twilight Zone…but Mario Draghi may 

While cutting ECB rates may boost confidence, stimulate lending and foster growth, it could also involve reducing the bank’s deposit rate to zero or even lower. Once an obstacle for policy makers because it risks hurting the money markets they’re trying to revive, cutting the deposit rate from 0.25 percent is no longer a taboo, two euro-area central bank officials said on June 15.....

Should Draghi elect to cut the deposit rate to zero or lower, he’ll be entering territory few policy makers have dared to venture. Sweden’s Riksbank in July 2009 became the world’s first central bank to charge financial institutions for the money they deposited with it overnight. The Fed rejected cutting its deposit rate from 0.25 percent last year. With Europe’s debt crisis damping inflation pressures and curbing growth, the ECB may feel the benefits outweigh the negatives.”

Yes, there actually is such a thing as central bank-administered negative interest rates. The so-called 'zero-bound' is not relevant for the central bank's own deposit facilities, where the excess reserves of commercial banks are parked (these reserves and the currency issued by the central bank represent the vast bulk of its liabilities).

We would note to this that not even a negative deposit rate will induce banks to lend out money by pyramiding deposits upon their reserves if their fear of loss of capital is great enough. We doubt the big German banks would suddenly fall over themselves to lend to credit-starved Greeks or Spaniards, for instance, just because they might have to pay a ¼ point penalty. After all, in Switzerland the entire yield curve up to the five year note has turned into negative territory recently.

If on the other hand the penalty rate becomes large enough (i.e., if the interest rate on central bank deposits is moved deeply enough into negative territory) to actually induce the banks to create new loans and deposits, then there is no telling what could happen in view of €830 billion in excess reserves considering the paltry reserve requirement of 1% (!) for demand deposits in the euro area. In theory, the banks could lever up their reserves by a factor of 100. We don't expect that to happen, we're merely pointing out that it would be possible in principle. So this has to be one of the more crazy ideas out there, since if it doesn't work, it will only reduce the liquidity buffers of banks, whereas in case it does work, it could kick off a major inflationary episode. That doesn't mean it won't be tried. In fact, this particular Bloomberg missive on the topic may be a 'trial balloon' leak in order to find out how the idea is received.

Meanwhile, Chicago Fed president Charles Evans is once again calling publicly for more money printing on the part of the Fed, so the two central banks could perhaps start a competition. Best hang on tight to your gold...........

                                    .....................Pater Tenebrarum

Trampled Underfoot

forces like inflation and deflation are engaged in mortal combat... It is a tiresomely predictable cycle. The Fed blows up a bubble. The bubble pops. To protect powerful financial interests from loss, the Fed hunkers down to either blow up a new bubble, or to try to reinflate the one that just popped.....

....Central banks around the world are no different. Europe is engaged in the same bubble/ bust cycle. Buying elections and the favor of the people, debtor governments borrowed and spent more than they could repay. The European Central Bank served the privileged banking cartel by created trillions of euros for banker bailouts and central bank bond purchases....

In the case of the Federal Reserve’s serial bubble blowing – the dot com bubble, the housing bubble, and the current bond bubble – the central bank drives the affair with the creation of state credit and fiat money.....
the central bank’s needless cycle of inflation and deflation destroys the people’s livelihoods, crushes their savings, and tramples their prosperity.....

By this time the damage should be familiar:
The median net worth of American families fell 40 percent between 2007 and 2010. Predictably, the middle class took the biggest hit, while the wealthiest families’ median net worth actually rose.
Between 10 to 11 million home mortgages are underwater; Almost seven percent of home mortgages are seriously delinquent, 90 days or more past due.

One in seven Americans is on food stamps. The cost of the programs has exploded, up 135 percent from 2007 to 2011Unemployment persists at depression-era levels If one wants to avoid the recurrence of periods of economic depression, one must start by preventing the emergence of artificial booms. One must prevent the governments from embarking upon a policy of cheap interest rates, deficit spending, and borrowing from the commercial banks.....The people will be trampled as long as central banking and fiat money persist.....

............................ By Charles Goyette  

Why is Nobody Freaking Out About the LIBOR Banking Scandal?

The LIBOR manipulation story has exploded into a major scandal overseas. The CEO of Barclays, Bob Diamond, has resigned in disgrace; his was the first of what will undoubtedly be many major banks to walk the regulatory plank for fixing the interbank exchange rate. The Labor party is demanding a sweeping criminal investigation....

The furor is over revelations that Barclays, the Royal Bank of Scotland, and other banks were monkeying with at least $10 trillion in loans (The Wall Street Journal is calculating that that LIBOR affects $800 trillion worth of contracts).

Barclays traders badgering the LIBOR submitters to "push down" rates in order to fatten their immediate bottom lines, depending on what they were trading or holding that day.... rigged LIBOR downward in order to produce a general appearance of better health...the bank had carte blanche to rig LIBOR downward in order to help allay spiraling public fears about the banks’ poor financial health....

If Bob Diamond and Paul Tucker were having these talks about LIBOR, is it fair to wonder what else Hank Paulson and Lloyd Blankfein were talking about in the 24 discussions they had in the six days following the AIG disaster? When Paulson had a secret meeting with the entire board of Goldman Sachs in, of all places, his hotel suite in Moscow, in June of 2008? Or what other material nonpublic information was exchanged when Paulson met with a gang of hedge fund chiefs at the offices of Eton Park management in July 2008, and laid out for them a possible scenario for putting Fannie and Freddie into receivership?....

                                                                                

                                                    .................. www.rollingstone.com

The “European Monster State”

There is Greece, inexorably tottering towards its exit from the Eurozone. Once again, the despised Troika inspectors have arrived in Athens. Based on their findings, they’ll decide if Greece should get the next tranche of the bailout billions—default and/or conversion to the drachma being the alternatives.... Greeks have stopped paying their bills....
Which is logical. They’re hanging on to their euros under mattresses or in foreign accounts, assuming that they will soon be able to pay their bills with devalued drachmas....Hospitals stopped paying for medication, individuals stopped paying for electricity, the government stopped paying for construction work......
the number of bailout candidates continues to grow: in addition to the five that have already requested aid—Greece, Portugal, Ireland, Spain, and Cyprus—Slovenia is now discussing it. And Italy is at the brink. Seven. Out of seventeen.....
................

Piling Up: The Detritus Of Failed Stimulus Policies

....“ugly” can't describe is their relationship to the worldwide explosion of government deficit spending and central bank money-printing operations, ballyhooed for years and with deafening intensity as a powerful stimulant to the economy....
Since the onset of the financial crisis, central banks have forced yields on high-quality debt, such as US Treasuries, to near zero—and often below the rate of inflation. And they have printed voluminously to buy assets that are now decomposing on their balance sheets: $18 trillion “and counting,” or “roughly 30% of global GDP,” is now weighing down these balance sheets, according the Bank for International Settlements. A huge monetary stimulus.....and fiscal stimulus—that is, deficit spending—around the globe took on mind-boggling proportions. At the very top is Japan...by March 2013, the end of the fiscal year, gross national debt will surpass $14 trillion, or 240% of GDP....In the US, budget deficits have been ballooning for a decade,...by December 2012, gross national debt will have nearly doubled to well over $16 trillion. It’s already over 100% of GDP.

     .................. By Wolf Richter
 
But now the party appears to be over. The economies have burned through these trillions and have misallocated or squandered them, and what’s left are mountains of public debt everywhere, a debt crisis in the Eurozone, and central banks with balance sheets that are stuffed with reeking assets they’d bought with the money they’d printed.

 

In any discussion of the future of Gold, or of the price of Gold, the first thing that must be realized is that Gold is a political metal. In the true meaning of the word, its price is "governed".

This is so for the very simple reason that Gold in its historical role as a currency is fundamentally incompatible with the modern worldwide financial system.

Up until August 15, 1971, there has never in history been an era when no paper currency was linked to Gold. The history of money is replete with instances of coin clipping, printing, debt defaults, and the other attendant ills of currency debasement. In all other eras of history, people could always escape to other currencies, whose Gold backing remained intact. But since 1971, there is no escape because no paper currency has any link to Gold.

The global paper currency system is very young. It depends for its continued functioning on the belief that the debt upon which it is based will, someday, be repaid. The one thing, above all others, that could shake that faith, and therefore the foundations of the modern financial system itself, is a rise (especially a sharp rise) in the U.S. Dollar price of Gold.

On June 19-20, the FOMC met in the US. In the press release issued on June 20, it was revealed that Mr Bernanke and his merry band had decided to extend their "Operation Twist" (selling short-term Treasuries and using the proceeds to buy their longer-term counterparts) until the end of 2012. Mr Bernanke and the Fed are being as recalcitrant as their colleagues across the Atlantic. They are refusing to (once again) detonate the financial nuclear option and embark on another round of "Quantitative Easing". They are trying to muddle through without going even deeper into their bag of "unconventional measures". The "markets" are being starved of fuel, and they don't like it.

Look at the present picture from the point of view of those who refuse to look past the end of their noses. The US was in official recession for all of 2008 and the first half of 2009. The recession was ended by a huge surge of debt creation which was led by the US Central Bank but which quickly spread globally. The justification for this debt orgy has always been that if it hadn't been done, the global system would have collapsed in smoky ruins.
                                             .................... The Privateer

Barclays’ profit set for £6bn

Barclays is to attempt to turn the tide on “banker bashing” this week when it announces that it has exceeded its Government-set lending targets and made profits of as much as £6bn in 2011 despite tough trading conditions.

The British bank, moving into the eye of the storm over bankers’ pay with an expected £11m remuneration total for its chief executive, Bob Diamond.... The confirmation will come as the bank unveils full-year results for the year to December 2011, expected to show a profit of £5.5bn-£6bn, based on consensus estimates.... On top of that, he received a salary of £1.35m and could be given long-term incentives worth as much as £6.75m which will vest in three years. With other benefits, that will bring his total maximum compensation for the year to £11.7m.

For 2010, when Mr Diamond was head of Barclays Capital, he received a £6.5m bonus, £2.25m of long-term incentive awards deferred for three years, a £250,000 salary and £268,000 of other benefits, totalling £9.3m.......

Lloyd Blankfein, chief executive of investment bank Goldman Sachs, has been awarded a $7m (£4.4m) bonus in shares, cutting his award for the first time since the financial crisis. The award comes on top of his $2m salary. Mr Blankfein has received $96.6m in share options over the past six years, despite the financial downturn. 

                                            ..................... James Quinn

Sorry, Bucko, Europe Is Still in a Death Spiral

Replacing old impaired debt with new impaired debt does not generate growth. Borrowing more money will not reverse financial death spirals.

Friday's "fix" changed nothing except the names of entities holding impaired debt. We can lay out the death spiral dynamics thusly:

1. Growth was dependent on borrowing money and blowing it on consumption and malinvestment. Replacing old impaired debt with new impaired debt does not generate growth.

2. Borrowing more money to pay the interest on past borrowing will not generate growth. Money must be borrowed to pay the interest and additional money borrowed to fund current consumption. As interest increases, this creates a geometric increase in debt and interest costs.

3. Borrowing more money to fund current consumption is a death spiral, as the interest payments eat up future revenues, starving productive investment and future consumption.

4. Borrowed money must be backed by either collateral or future income streams. The collateral remaining in malinvestments (villas in Spain, etc.) is either impaired, near-zero or simply non-existent. There is no legitimate collateral on which to base more borrowing.

5. Future income streams are already committed to paying interest on past debt and mandated consumption (entitlements, government payrolls, etc.), so there is no legitimate collateral on which to base more borrowing.

6. Interest rates will rise as investors question whether their capital will be returned in full or if it will be returned in depreciated currency.

7. Export-based economies will contract as China's expansion slows to a crawl. Future projections of national income are overly optimistic.

8. As income is bled off to pay rising interest, there is less money available for consumption or investment. Without investment, income declines. As taxes rise, there is less private-sector income available for either investment or consumption. This is the "austerity death spiral," and borrowing more for State malinvestment will not halt it.

The more money that is borrowed to maintain Status Quo consumption, the higher the future interest payments. This is a financial death spiral.

9. There is no collateral for more borrowing, but "growth" depends on more borrowing.

10. Transferring bad debt to central banks does not mean interest will not accrue: interest on the debt still must be paid out of future income, impairing that income.

11. Lowering interest rates does not create collateral where none exists.

12. Lowering interest rates only stretches out the death spiral, it does not halt or reverse it.

13. Centralizing banking and oversight does not create collateral where none exists.

14. Europe will remain in a financial death spiral until the bad debt is renounced/written off and assets are liquidated on the open market.

15. Anything other than this is theater. Pushing the endgame out a few months is not a solution, nor will it magically create collateral or generate sustainable "growth."

16. The Martian Central Bank could sell bonds to replace bad debt in Europe, but as long as the MCB collects interest on the debt, then nothing has changed.

The Martians would be extremely bent when they discovered there is no real collateral for their 10 trillion-quatloo loan portfolio in Europe.
                                                    .................... Charles Hugh Smith