We’ve all done it, haven’t we? Chucked something in the wash and turned it on too high, only to see it pop out at the end of the cycle and it ends up the size of your hamster. Well, Obama has been doing the same. Except this time it’s not your winter woollies that he’s shrinking, it’s the greenback.
The US currency is shrinking as a percentage of world currency today according to the International Monetary Fund. It’s still in pole position for the moment, but business transactions are showing that companies around the world are today ready and willing to make the move to do business in other currencies.
The US Dollar has long been the world’s number one denomination in world currency supply. It represents 62% of total holdings in foreign exchange in central banks around the world. But, it is in for a tough race from up-and-coming strong currencies. The Japanese Yen and the Chinese Yuan are both giving the Americans a good run for their money. The Swiss franc is too (surprisingly). There is $6 trillion in foreign exchange holdings around the world at any given time, on average and the US Dollar represents almost two-thirds of that.
The fact that Brazil and China have also just signed a currency-swap deal worth something to the tune of $30 billion stands as living proof that the dollar may be further on the wane. China will exceed all expectations in the future as the world’s largest economy. The US will be overtaken. The Chinese currency will one day overtake the Dollar too. Has to be!
Although, it’s not quite there for the moment. China is not near being the world’s reserve currency yet. In order to be the world’s reserve currency there would be the need to produce enormous quantities of what the world wants. China has got that one off pat already. Then, countries holding the reserve currency would need to be able to spend that currency elsewhere in other countries or find a place to put it while waiting to do so. World capital markets are currently in dollars (40%), which means that there would be no possibility of using the Chinese currency. But, that’s only a matter of time. Some are predicting this will happen pretty soon.
The Federal Reserve has come in for some strong criticism over the unconventional Quantitative Easing methods that have resulted in 3 trillion spanking new dollars rolling off the printing presses. This has certainly brought about some degree of worry around the world that the dollar is not quite as safe as it might have been thought to be in the past. Is the world worrying that the dollar is not as safe a bet as it used to be in world domination. Are central banks worried that it will shrink in the wash and the colors will run?
Some are predicting that the dollar will shrink rapidly over the next two years and it will lose its top place as the world’s reserve currency by 2015. In the 1950s the dollar was 90% of total foreign currency holdings around the world. The dollar has definitely lost out to other currencies that are stronger. If there is a continued move and the dollar shrinks, then the resulting catastrophe that will ensue will have a spiral effect on the already enormous US budget deficit (over $1 trillion a year on average).
The only reason the Federal Reserve has been in a position to print more money recently is simply because they are in the strong position to be able to do so as the world’s leading reserve currency. If that changes, then the Americans won’t have the possibility of just hitting the button and setting the printing presses rolling. That means the US will be in no other position than to end up having to pay their debt back.
The US economy and the market are starting to show signs of recovery. Signs. It’s not sustained, hope as they might. If the dollar loses its attraction, then it won’t be used as the international reserve currency. Businesses will start using another currency and the dollar will lose out further still.
Some experts are saying that the problems of the dollar are like a time-bomb ready to explode. Ultimately, it will bring about the death of the dollar. As we stand on and watch, huddled around the coffin as it is lowered into the ground, we know it’s all too late. The flowers have been sent and the Stars and Stripes has been played in recognition of loyal service for the nation.
The QE methods are nothing more than aiding and abetting the already problematic situation of the greenback. We might look back in years to come and reminisce over whether it was the right (long-term) solution to use QE, whether printing bucks sent the greenback to an early grave, or whether it just reached the end of its life and croaked peacefully without making too much noise.
But, criticism of and worry over the dollar and its longevity have been hot topics for years now. The US dollar is a fiat currency that can easily lose status, deriving its value from government regulation and law. But, then again, so is the Euro. So, people living in Europe shouldn’t start throwing stones…they live in glass houses too…and that’s before they start.
Originally posted: Death of the Dollar
You might also enjoy: You’re Miserable USA! | Emerging Markets: Lock, Stock and Barrel | End of the Financial World 2014 | Kristallnacht on Wall Street? Bull! | China’s Credit Crunch | Working for the Few | USA:The Land of the Not-So-Free
Canada’s major freight rail carriers attempted to reduce safety inspections on rail cars carrying dangerous goods exactly a month before the Lac-Mégantic, Que., tragedy, CBC News has learned.
The Railway Association of Canada, whose major members include CNand CP Rail, asked the federal transport minister at the time, on June 7, 2013, to repeal rules that require certified rail car inspectors to do detailed examinations of brakes, axles, wheels and car components before they are loaded.
The RAC argued that the examinations done at designated yards were “redundant” and “overlay,” given that train conductors and engineers walk the length of their trains, and rail lines now are equipped with “wayside inspection detectors, wheel impact detectors and cold wheel set detectors.”
- Railway Association of Canada letter to unions
- CAW letter to Railway Association of Canada
- Teamsters letter to Railway Association of Canada
- Railway Association of Canada letter to Transport Canada
Last month, the RAC twice denied they had ever sought to repeal the inspection rules, until CBC News confronted the organization with their own correspondence. A spokesman released a statement Tuesday afternoon.
“The RAC proposed language to modify the rules,” wrote Paul Goyette, and among them was a suggestion to remove an inspection on dangerous goods cars before they are loaded. “In some instances, depending on route and railways involved, it might result in the elimination of a redundant inspection, but that would not have any direct impact on safety based on industry research, study and science.”
Goyette acknowledged in an earlier e-mail that “in light of events at Lac-Mégantic and in the interest of safety” the RAC withdrew their pitch to reduce inspections.
Late on July 6, 2013, an unmanned, 72-car train carrying crude oil rolled down a hill and into the town of Lac-Mégantic, Que., where it derailed and exploded, killing 47 people.
The RAC wrote to Transport Canada 12 days later, saying: “The RAChas had discussions with Transport Canada surrounding the proposed change, and at this time we both feel there is more work to be done in this area. As such, we would ask that you rescind our filing and we will revisit this matter at a future date.”
Early Wednesday, the office of Transport Minister Lisa Raitt — appointed days after the tragedy — told CBC News: “The RACwithdrew their pitch to reduce inspections and it’s a good thing they did, because I would have never allowed this to happen.”
Unions warned of risk
Unions consulted on the proposed change had objected from the outset, citing safety concerns for employees and the general public.
Robert D. Smith of the Teamsters Canada Rail Conference wrote on May 21, saying that “the boom in oil production has prompted a huge rise in crude-by-rail transport as output has outgrown the existing pipeline network. Recent train derailments causing spills have heightened concerns about the environmental impact of rail shipments.”
Even though it was six weeks before the events at Lac-Mégantic, Smith wrote: “This is therefore not the time to be considering a relaxation of rules … but rather a time to maintain that which is in place to safeguard these increased movements.”
Transport Canada figures show that since 2006, the volume of dangerous goods being shipped by train in Canada has risen more than 30 per cent. However, the numbers of accidents and incidents reported by rail companies involving dangerous goods appears to be falling.
The Transportation Safety Board’s database of dangerous goods derailments and incidents reported by companies shows 3774 mishaps across the country between 2000 and 2012.
Evidence ‘isn’t in’
The TSB data, obtained by CBC News, suggest one-third of all problems with dangerous goods rail cars was detected through inspections. Often, workers noticed the problem either by smelling it or spotting a leak.
Brian Stevens of Unifor, which represents the carmen who would normally make comprehensive inspections, echoed his May 23 objections to the proposed change, telling CBC News about the “over-reliance we see creeping into the industry where they want to rely more and more on the technology — hot box detectors, impact detectors, cold wheel detectors — to do away with the car inspections in the safety maintenance locations and say ‘listen, we have this terrific technology that’s going to tell us when cars are faulty.’
“And the evidence isn’t in on that.”
Stevens points to the recent derailment in Plaster Rock, N.B., where investigators found a broken axle contributed to the accident.
“That train had just recently passed a hot box detector and an impact detector, and didn’t note that,” Stevens said. “We had a similar situation last summer in Sudbury, where there was a derailment, took out a bridge (over the Wanapitei River), and that train I believe only nine miles earlier had gone past a hot box detector that didn’t detect the failure in the wheels.”
‘Dismal’ success rate
In his May 23 letter, Stevens said the most important inspection is on brakes.
“Data provided by CP in relation to Automated Train Brake Effectiveness (ATBE) scanners indicate a dismal train scan success rate of 69 per cent to date,” he wrote. “This misplaced reliance on technology thereby confirms that over 30 per cent of freight car equipment passing these detectors are not monitored.”
Last spring, the RAC argued that it had done a risk assessment and noted that the combination of inspections — by conductors and locomotive engineers who “have been extensively trained” to spot problems, and the automated detectors — would help prevent derailments.
Transport Canada refused to tell CBC News how many of their own inspectors are dedicated to inspections of dangerous goods cars, and whether those inspectors are on the ground or simply monitoring rail company reports on self-inspection.
In an email to the CBC, Transport Canada said: “Railway companies are responsible for the safety of their rail line infrastructure, railway equipment and operations. This includes ongoing inspection, testing and maintenance programs in accordance with regulatory requirements, as well as any particular operating and environmental conditions.”
Transport Canada did not respond to questions about its discussions with the RAC to reduce the inspections.
UK storms: rail chaos and more homes evacuated – live updates
- Cameron pledges £100m to tackle floods
- More than 200 homes evacuated in Devon and Somerset
- Nine severe weather warnings in place for the south west
- Dawlish seawall washed away adding to rail chaos
- Read the latest summary
- Share images and stories on GuardianWitness but keep safe
The government’s emergency committee has finished its meeting.
The Met Office has just released a warning of more stormy weather ahead, lasting into the weekend. It follows a similar warning by the Environment Agency earlier.
Met Office chief meteorologist Andy Page said:
The unsettled weather will continue over the coming days with heavy rain across the southern half of Britain on Thursday evening into Friday, and that will be quickly followed by another storm moving in early on Saturday.
This will bring the risk of flooding and damaging winds bringing down trees to cause disruption to travel and power networks.
BBC Somerset has posted audio of the police warning from a megaphone in a helicopter urging residents in three villages in the Somerset Levels to leave their homes.
One of the severe flood warnings, that relating to Lands End to Plymouth, has been removed, meaning that there are now eight in force.
Winds are continuing to strengthen and won’t die down until 9pm, according to one forecaster.
Patrick Hallgate, from Network Rail, told Sky News repairing the track at Dawlish represented “a significant engineering challenge”. The line is clearly not expected to be up and running for some time.
Guy Shrubsole, climate campaigner at Friends of the Earth, also criticised Cameron’s announcement. He said:
The Prime Minister may bluff and bluster about cuts in flood defences, but he can’t disguise his Government’s short-sighted and disastrous decisions.
Simply put, the new myRA program put forward by Obama is at best a sucker’s deal… or worse, it’s a first step toward the nationalization of private retirement savings. (Note: If you haven’t yet heard of myRA, I’d strongly suggest you read this excellent overview by my colleague Dan Steinhart.)
Even before the new myRA program was announced, there had been whispers about the need for the US government to assume some risk for US retirement accounts. That’s code for forced conversion of private retirement assets into government bonds.
With foreigners not buying as many Treasuries and the Fed tapering, the US government has been searching for new buyers of its unwanted debt. And this is where the new myRA program comes in.
In short, it’s ostensibly a new way for people to save for retirement. Of course, you can only invest in government-approved investments—like Treasuries—which probably won’t even come close to keeping up with the real rate of inflation. It’s like Jim Grant says: “return-free risk.”
In reality, a myRA doesn’t really provide any significant new benefits over existing options. To me it just looks like a way for the US government to pass the hot potato on to unsuspecting Americans in exchange for their retirement savings.
The net effect is the funneling of more capital to Treasury securities and thus helping the US government finance itself.
You’d be much better off using a precious metals IRA to save for retirement than participating in the government’s latest Ponzi scheme.
There are other protective strategies as well, such as internationalizing your retirement savings into assets that are hard, if not impossible, to confiscate on a whim—like foreign real estate and physical gold held abroad. More on that below.
Retirement Savings Are Always Juicy Targets
As bad as it is to deceive naïve Americans into trading their hard-earned retirement savings for garbage (i.e., Treasury securities), the myRA program potentially represents something far worse… the first step toward the nationalization of existing private retirement accounts.
I believe myRA is a way to nudge the American people into gradually becoming more accustomed to government involvement in their private retirement savings.
It’s incorrect to assume nationalization couldn’t happen in the US or your home country. History shows us that it’s standard operating procedure for a government in dire financial straits.
To me it’s self-evident that most Western governments (including the US) have current debt loads and future spending commitments that all but guarantee that eventually—and likely someday soon—they will try to unscrupulously grab as much wealth as they can.
And retirement savings are a juicy target—low-hanging fruit for a desperate government.
Naturally, politicians will try to slickly sell the idea to the public as something “for their own good” or as “protection from market instability.” This is how similar programs were sold to skeptical publics in the past.
In reality, governments take these actions not to “reduce the risk” to your retirement savings or whatever propaganda they happen to come up with, but rather to obtain financing—by forcefully dumping their unwanted debt onto seniors and savers.
Below are several ways it has happened or could happen. Of course, there could always be some sort of new, creative proposal that was previously unthinkable. No matter the method, however, the end result is always the same—the siphoning off of purchasing power from your retirement savings.
New Contribution Mandate: The government could mandate, for example, that 50% of new contributions to private retirement accounts must consist of “safe,” government-approved investments, like Treasury securities.
Forced Conversions: This is where a government will forcibly convert existing assets held in retirement accounts into so-called “safer” assets, such as government bonds. For example, if the US government forcibly converted 20% of the estimated $20 trillion in retirement assets (401k plans, IRAs, defined benefit and contribution plans, etc.), it would net them $4 trillion. Not a bad score, considering the national debt is north of $17 trillion.
Special Taxes: The government could look into levying special taxes on distributions from retirement, especially those deemed to be “excessively large.”
In order to be more effective, forced conversations probably wouldn’t happen until after official capital controls have been instituted. Once in place, capital controls would make it very difficult, if not impossible, for you to avoid the wealth confiscation that is sure to follow… like a sheep that has just been penned in for a shearing.
Since FATCA and other regulatory burdens already amount to a soft form of capital controls, it’s absolutely essential that you start implementing protective measures now.
It’s like I have always said: internationalization is your ultimate insurance against the measures of a desperate government. In the case that the government makes a grab for retirement savings, it’s much better to be a year or two early rather than a minute too late.
Internationalize Your Retirement Savings
It’s much more difficult for the government to convert your retirement assets if they’re outside of its immediate reach. If you have a standard IRA from a large US financial institution, it would only take a decree from the US government and Poof!: your dividend-paying stocks and corporate bonds could instantly be transformed into government bonds.
Obviously, this is much harder for the government to do if your retirement assets are sufficiently internationalized.
For example, you can structure your IRA to invest in foreign real estate, open an offshore bank or brokerage account, own certain types of physical gold stored abroad, and invest in other foreign and nontraditional assets.
In my view, owning an apartment in Switzerland and some physical gold coins stored in asafe deposit box in Singapore beats the cookie-cutter mutual funds shoved down your throat by traditional IRA custodians any day.
If and when there’s some sort of decree to convert or otherwise confiscate the assets in your retirement account, your internationalized assets ensure that your savings won’t vanish at the stroke of a pen.
There are important details and a couple of restrictions that you’ll need to be aware of, but they amount to minor issues, especially when weighed against the risk of leaving your retirement savings within the immediate reach of a government desperate for cash.
After placing a juicy steak in front of a salivating German shepherd, it’s only a matter of time before he makes a grab for it. The US government with its $17 trillion debt load is the salivating German shepherd, and the $20 trillion in retirement savings is the juicy steak.
Internationalizing your IRA has always been a prudent and pragmatic thing to do. And now that the US government has now officially set its sights on retirement savings, it’s truly urgent.
You’ll find all the details on how it to get set up, along with trusted professionals who specialize in internationalizing IRAs in our Going Global publication.
While we are sure it is a very sad coincidence, on the day when Argentina decrees limits on the FX positions banks can hold and the Argentine Central Bank’s reserves accounting is questioned publically, a massive fire – killing 9 people – has destroyed a warehouse archiving banking system documents. As The Washington Post reports, the fire at the Iron Mountain warehouse (which purportedly had multiple protections against fire, including advanced systems that can detect and quench flames without damaging important documents) took hours to control and the sprawling building appeared to be ruined. The cause of the fire wasn’t immediately clear – though we suggest smelling Fernandez’ hands…
While first print is preliminary and subject to revision, the size of recent discrepancies have no precedent. This suggest that the government may be attempting to manage expectations by temporarily fudging the “estimate ” of reserve numbers (first print) while not compromising “actual” final reported numbers. If this is so, it is a dangerous game to play and one likely to back-fire.
During a balance of payments crisis – as Argentina is undergoing – such manipulation of official statistics (and one so critical for market sentiment) is detrimental to the needed confidence building around the transition in the FX regime.
And today the government decrees limits on FX holdings for the banks…
Argentina’s central bank published resolution late yday on website limiting fx position for banks to 30% of assets.
Banks will have to limit fx futures contracts to 10% of assets: resolution
Banks must comply with resolution by April 30
And then this happens…
Nine first-responders were killed, seven others injured and two were missing as they battled a fire of unknown origin that destroyed an archive of bank documents in Argentina’s capital on Wednesday.
The fire at the Iron Mountain warehouse took hours to control…
The destroyed archives included documents stored for Argentina’s banking industry, said Buenos Aires security minister Guillermo Montenegro.
The cause of the fire wasn’t immediately clear.
Boston-based Iron Mountain manages, stores and protects information for more than 156,000 companies and organizations in 36 countries. Its Argentina subsidiary advertises that itsfacilities have multiple protections against fire, including advanced systems that can detect and quench flames without damaging important documents.
“There are cameras in the area, and these videos will be added to the judicial investigation, to clear up the motive of the fire and collapse,” Montenegro told the Diarios y Noticias agency.
The next handout to Greece may include extending the maturity on rescue loans to 50 years and cutting the interest rate on some previous aid by 50 basis points, according to two officials with knowledge of discussions being held by European autorities.
The plan, which will be considered by policy makers by May or June, may also include a loan for a package worth between 13 billion euros ($17.6 billion) and 15 billion euros, another official said. Greece, which got 240 billion euros in two bailouts, has previously had its terms eased by the euro zone and International Monetary Fund amid a six-year recession.
“What we can do is to ease debt, which is what we have done before through offering lower interest or extending the maturity of loans,” Dutch Finance Minister Jeroen Dijsselbloem, who heads the group of euro finance chiefs, said yesterday on broadcaster RTLZ. “Those type of measures are possible but under the agreement that commitments from Greece are met.”
Greek 10-year bonds rallied, with yields falling 33 basis points to 7.96 percent as of 4:02 p.m. Brussels time, the biggest drop in seven months. The Athens Stock Exchange Index jumped 2.4 percent.
New money would help Greece fill a financing gap that has vexed European Union and IMF authorities working to make sure the rescue programs stay on schedule. European Union PresidentHerman Van Rompuy said last month that Greece must continue to tighten its belt even as “the people of Greece are still suffering from the consequences of the painful but nevertheless needed reforms that are taking place.”
Under the eased terms, all the bailout-loan repayments would be extended from about 30 years and rates would be cut by 50 basis points on funds from the 80 billion-euro Greek Loan Facility, which was created for Greece’s first bailout in 2010, said the officials, who requested anonymity because talks are still in preliminary stages.
As Greece seeks to meet its aid conditions and unlock more money from its existing bailouts, it’s also looking for ways to make the most of 50 billion euros that was set aside for bank recapitalization. The country had hoped some money might be left over for other financing needs. That now looks less likely because the Greek banks will need more capital, according to an EU official close to the bailout process.
Greece is contesting requirements on how it should stress-test its banks, an exercise taking place before a European Central Bank review later this year, according to two officials. Hellenic banks face a mandate to keep their core tier 1 capital at 9 percent of risk-weighted assets, which Greece contends is too high. This has led to delays in its bank-assessment process, which in turn will determine how much money the banks need.
To win further easing of rescue terms, Greece is waiting for the EU statistical agency to confirm in April that it had a primary budget surplus, the balance before interest payments, in 2013. That’s the trigger set for possible debt relief. Greek Prime Minister Antonis Samaras said Jan. 30 that Greece’s primary surplus last year was more than 1 billion euros, higher than expected.
‘Not for Now’
Euro-area officials have mentioned the prospect of cutting interest rates further on the Greek Loan Facility part of the bailouts, “but this conversation is not for now,” EU spokesman Simon O’Connor wrote in an e-mail yesterday. He said focus remains on how Greece can meet its current bailout terms.
Samaras’s office declined to comment on the talks for a possible third aid package.
Officials from the so-called troika of the IMF, the European Commission and the ECB are due to return to Athens this month to renew work on whether Greece has qualified for another installment of money.
There are currently no plans for the troika of the IMF, the European Commission and the ECB to return to Athens in the near future because there is no prospect for an immediate completion of the ongoing review of the Greek program, according to two of the officials.
Finance Minister Yannis Stournaras aims for the review to conclude and a loan disbursement to be made before March, according to an e-mailed transcript of comments to reporters.
“Currently there’s no rush to decide anything,” Steffen Kampeter, deputy to German Finance Minister Wolfgang Schaeuble, said in an interview in Frankfurt this week. “We will be presented with all necessary data at the end of April, beginning of May. Only then will we be able to have a clear picture of Greece’s performance.”
To contact the editor responsible for this story: James Hertling at firstname.lastname@example.org
“It is absolutely impossible to forecast” Ukraine’s exchange rate, BNP Paribas notes in an ominous report today. Considering Ukraine’s huge need to cover its current account deficit, the country is increasingly reliant on financial inflows – and these will be difficult to secure. The Hyrvnia has collapsed this morninng to 9.00 back near December 2008 lows as BNP warns “The NBU faces a difficult task: let the FX rate devalue to a ‘new fair level’ without triggering a run on hryvnia retail deposits, which might have already started.” Relying on external support amid a forced devaluation “increases risks of disorderly adjustement,” and that appears to happening.
Ukraine’s currency – the Hyrvnia has collapsed to 9.00 this morning…
BNP’s warnings today (via Bloomberg):
“It is absolutely impossible to forecast” hryvnia’s exchange rate, BNP Paribas analysts Serhiy Yahnych and Yevgeniy Orudzhev in Kiev write in report today.
Ukraine’s current-account gap, unstable funding and anti-govt protests have “created a dangerous Molotov cocktail, which now seems to turn into a currency crisis:” BNP
“The National Bank of Ukraine conducted only a minor intervention yesterday, which led to increased demand for dollars this morning:” BNP
“The NBU faces a difficult task: let the FX rate devalue to a ‘new fair level’ without triggering a run on hryvnia retail deposits, which might have already started. Furthermore, it is forced to conduct devaluation having no external support package, which increases risks of disorderly adjustement:” BNP
BNP comments seem extremely accurate from last year…
… rebalancing of the current account has been virtually zero over the last few months.
Considering Ukraine’s huge need to cover its current account deficit, the country is increasingly reliant on financial inflows. These will be difficult to secure
We expect FX reserves to nosedive to USD 18bn by the end of 2013, underlining the case for a weaker local currency. Ukraine badly needs to rebalance its current account, with calls for a more flexible (and weaker) FX rate getting louder.
The Fed cannot create a bid in bidless markets that lasts beyond its own buying.
We all know the Federal Reserve (and every other central bank) has one last Doomsday weapon to stop a meltdown in the global financial markets: creating trillions of dollars out of thin air and using the cash to buy assets that are in free-fall. This is known as “the nuclear option”–the direct monetizing of stocks, Treasury bonds, commercial real estate mortgages, student loans, corporate bonds, non-U.S. sovereign bonds, subprime auto loans, defaulted bat guano securities, offshore loans denominated in quatloos–you name it: The Fed could print money and buy, buy, buy to create and maintain a bid in bidless markets.
The idea is to stop a cascade of panic by buying assets in quantities large enough to staunch the avalanche of selling. The strategy is based on one key assumption: that no more than a small percentage of the asset class will change hands in any day or week.
Thus a low-volume sell-off in the $20 trillion U.S. equity markets can be stopped with large index buy orders in the neighborhood of $10 – $100 million–a tiny sliver of the total market value.
But in a real meltdown, popguns will no longer conjure a bid in suddenly bidless markets, and the Fed will have to become the bidder of last resort on a massive scale in multiple markets. We need to differentiate between loans, backstops and guarantees issued by the Fed and actual purchase of impaired assets.
After poring over all the data, the Levy Institute came up with a total of $29 trillion in Fed and Federal bailout-the-financial-sector loans and programs. The GAO found the Fed alone issued $16 trillion in loans and backstops:
The heart of quantitative easing and ZIRP (zero interest rate policy) is the Fed’s direct purchase and ownership of assets: residential mortgage-backed securities and Treasury bonds. The Fed has been operating not as the buyer of last resort but as the bidder who buys interest-sensitive securities to keep interest rates near-zero (known as financial repression).
The Fed’s purchases of impaired mortgages has also made its balance sheet “the place where mortgages go to die:” the Fed can hold impaired mortgages until maturity, effectively masking their illiquidity and impaired market value. We can see these two major purchase programs in this chart from Market Daily Briefing:
Despite all the talk of “tapering,” the Fed’s asset purchases on a grand scale continues:
Such a handy word, “taper:”
The Nuclear Option rests on another questionable assumption: markets only go bidless in brief panics, not because the assets have lost all value. The basic model of Fed emergency loan programs and asset-buying is 1907–a financial panic that erupts out of a liquidity crisis.
In a liquidity crisis, the underlying assets supporting loans retain their market value; the problem is a shortage of credit needed to roll over short-term loans on those still-valuable assets.
But what the world is finally starting to experience is not a liquidity crisis: it is a valuation crisis in which assets and collateral are finally recognized as phantom. I explained the difference between liquidity and valuation crises in In a Typhoon, Even Pigs Can Fly (for a while) (January 30, 2014).
Let me illustrate why the Fed’s Nuclear Option is a one-way street to oblivion.
What is the market value of a defaulted student loan that has no hope of ever being repaid by an unemployed ex-student debtor? The answer is zero: the “asset” has a value of zero and will always have a value of zero. It is not “coming back.”
What is the market value of a commercial mortgage on a dead mall that has no hope of ever being repaid by an insolvent mall owner? The answer is zero: the “asset” has a value of zero and will always have a value of zero. It is not “coming back.”
The New York Times recently published an article that nails the core issue in the entire U.S. economy: the top 10% is the only segment able to support additional consumption:The Middle Class Is Steadily Eroding. Just Ask the Business World (Yahoo news version)
This raises an obvious question: can the excess consumption of the top 10% support every mall, strip mall, premium outlet and retail center in the U.S.? Equally obvious answer: no. Most dead malls cannot be repurposed; the buildings are cheap shells, and while the land might retain some value for future residential housing, the coming implosion of the latest housing bubble nixes that hope: WARPED, DISTORTED, MANIPULATED, FLIPPED HOUSING MARKET (The Burning Platform).
What is the value of a company’s shares if that company has lost any means of earning a profit? Answer: the book value of the company’s assets minus debt.Given the staggering debt load of the corporate sector, the real value of many companies once their ability to reap a real (as opposed to accounting trickery) net profit vanishes is near-zero.
How about the value of Greek sovereign debt? Zero. The value of mortgages on empty decaying flats in Spain? Zero. And so on, all around the world.
This leads to a sobering conclusion: Should the Fed attempt to create and maintain a bid in bidless markets, it will end up owning trillions of dollars in worthless assets–and the market for those assets will still be bidless when the Fed stops being the bidder of last resort.
Let’s assume the Fed’s leadership will feel a desperate need to stop the next global financial meltdown in valuations. Offering trillions of dollars in liquidity will not stop sellers from selling nor magically create value in worthless assets. The Fed can only stop the selling by becoming the entire market for those assets.
The list of phantom assets the Fed will have to buy outright with freshly conjured cash is long. Let’s start with hundreds of billions of dollars in defaulting/impaired student loans. Once the debtors realize the system is swamped with defaults and can no longer hound them, the flood of defaults will swell.
The Fed can buy as many defaulted student loans as it wants, but it will never raise the value of those loans above zero. The market for worthless student loans will remain bidless the second the Fed stops buying.
The same is true of all the defaulted, worthless commercial real estate (CRE) mortgages on dead malls, decaying strip malls and abandoned retail centers: no amount of Fed buying will create a market for these worthless assets.
Dead Mall Syndrome: The Self-Reinforcing Death Spiral of Retail (January 22, 2014)
The First Domino to Fall: Retail-CRE (Commercial Real Estate) (January 21, 2014)
There is no technical reason the Fed cannot create $10 trillion and buy up $10 trillion of worthless or severely impaired assets; the Fed can become the owner of every dead mall and every defaulted auto loan in America should it wish to.
That would of course render the Fed massively insolvent, as its assets would be worth a fraction of its liabilities. But so what? The Fed can simply assign a phantom value to all its worthless assets and let them rot until maturity, at which point they vanish down the wormhole.
The point isn’t that “the Fed can’t do that;” the point is that the Fed cannot create a bid in bidless markets that lasts beyond its own buying. The Fed can buy half the U.S. stock market, all the student loans, all the subprime auto loans, all the defaulted CRE and residential mortgages, and every other worthless asset in America. But that won’t create a real bid for any of those assets, once they are revealed as worthless.
The nuclear option won’t fix anything, because it is fundamentally the wrong tool for the wrong job. Holders of disintegrating assets will be delighted to sell the assets to the Fed, of course, but that won’t fix what’s fundamentally broken in the American and global economies; it will simply allow the transfer of impaired assets from the financial sector and speculators to the Fed.
Anyone who thinks that is the “solution” should read QE For the People: What Else Could We Buy With $29 Trillion? (September 24, 2012).
The Retail Commercial Real Estate Domino with Gordon T. Long and CHS:
The newest American tanks arrived at the American military base in Bavaria on January 31. So what? According to the statements made by American military officials, 29 heavy new generation Abrams tanks would be a part of the European Activity Set (EAS). They are supposedly just to serve as equipment for the training center.
The appearance of the tanks is explained by the fact that at a time when the American command has decided to continue training American tank personnel in Europe, they had nothing to train them on. In the course of reducing the US military presence in Europe the last tank brigade was disbanded and all tanks sent back to the US. And now less than a year later a new generation of Abrams tanks has been shipped back to Europe. But now it is exclusively to strengthen the military cooperation with the European colleagues…
In the spacious grounds and shooting ranges of the Joint Multinational Training Command (JMTC) at the US Tower Barracks military base in Grafenwöhr, military personnel from all over Europe have been trained there for many years. Why couldn’t the American military be trained at the American base? According to Colonel Thomas Matsel from the JMTC operations unit, “with the help of the EAS our regiments will have access to the whole spectrum of military operations that they potentially would have to conduct”.
The issue of a military equipment deficit in Europe is naturally an internal issue of the US and Europe’s NATO institutions. But the US has demonstrated a special interest towards a specific part of that “spectrum” – to the NATO Response Force. According to the American military, the “European set” created by them is to “give a new life to the US involvement in the NATO Response Force”.
Last fall Anders Fogh Rasmussen, Secretary General of NATO, explained what the NATO Response Force was. “The NATO Response Force is units of fast response, the tip of the spear of the North Atlantic Alliance – … capable of guaranteeing the defense of any member-state, capable of being deployed in any place and to withstand any threat”. On rotation basis the member states allocated their military contingents to that force for a period of one year. It is a natural and plausible intent. But it turns out that as of late not only NATO countries are looking to guarantee the defense of the member states.
In 2014 Sweden, Finland and Ukraine will allocate their military contingents to the NATO Response Force, while in 2015 Georgia has offered to join the rotation of the response forces. The largest stages of last year’s military exercises in November 2013 took place in Latvia and Poland. This year four large-scale exercises are planned in the same locations. “Keeping the tip in a sharp and ready condition” (as the NATO Secretary General defined the task of the exercises) is taking place in the European theater of military operations and oftentimes next to Russia’s borders. Is it possible that now the problems of the European defense will be resolved not only with the help of American missile defense systems, but also with American tanks?
It appears that the suspicions that come to the minds of the conspiracy theory advocates would be dissolved by the format of the “American set”. The battalion and the elements of the higher-ranking command and control staff could hardly be considered a large-scale force. But it turns out that the Americans have also developed their own very peculiar rotation scheme. The First Team, the name of the US 1st Cavalry Division, the tank personnel of which served the first term in Germany, precisely reflects the future plans of the pentagon. The tank personnel from other units will replace the battalion of the First Team. And their rotation will take place much more frequently than once a year.
In the US people also agree that the military games of the current period increasingly remind one of the lavish years of the Cold War. While commenting on the return of American tanks to Germany, Michael Darnell of the Stars and Stripes newspaper points out: “When the 22 M1A1 Abrams departed the continent it was seen as the end of an era… Now, it appears that chapter of history may have been closed a bit prematurely”.