The forces of inflation and deflation are continuing to impact the markets and the economies of the world. Main Street is still in the grip of a deflationary bust. The ordinary citizen of the western world cannot get credit. There are three reasons for this:
- Banks are bust. European, British, Irish, American banks do not have capital to lend.
- The governments are borrowing more and more and are competing with private citizens for capital.
- The ordinary citizens and small companies of the world are generally in a poorer position than before to borrow yet more capital.
The debts of the world are sucking money out of the system. Quite simply the debts of the world dwarf the amount of money in existence today. The amount of new money created in 2011 was not enough to offset these deflationary pressures. This is a headwind into which the economies of the developed world must presently sail.
Although world authorities have saved and maintained the international monetary system for now, they have not solved the debt crisis. Their actions debase their currencies and point towards inflation.
We are creating more money because there is not enough money in the economy
6th OCTOBER 2011
MERVYN KING – GOVERNOR OF THE BANK OF ENGLAND.
Governments and central banks are monetizing debts as they fall due. In other words, they are creating new credits at ever decreasing rates of interest to extend the maturity of existing debt. The reason for this monetization is that there is too little equity or real wealth and too much debt. There just isn’t enough money to pay down debt. The debts that exist today cannot be paid down via economic growth and/or austerity. Nor can they be written off without imposing catastrophic losses on some sections of society and posing systemic risks to our existing forms of governance. Printing new money and giving it away at a zero interest rate to be paid back at an indeterminate date is the final solution that they are working towards.
Rehypothecation and the Collateral Crunch
In order for a bank to borrow from its central bank it must offer collateral. The rules regarding the quality of this collateral have been discarded. But of even more interest is the number of times the same collateral has been pledged to different lenders and the actual quality of this collateral. The deeds of the Irish property market are allegedly pledged to our banks who pledged them to NAMA who pledged them to the ECB. How much are they worth now? All the new money created in the past year requires fresh new collateral to post against it. Where is it going to come from? In reality existing bank collateral is being rehypothecated (repledged). One set of deeds are being pledged as collateral for multiple loans -which means our ever expanding monetary base is skating on ever thinner ice and backed by fewer and weaker assets.
Ireland as a Microcosm
An easy way to view the world economy is to examine our own nation. Ireland will borrow an extra €15B this year. The government claims this debt will be paid back from future tax receipts. This is highly unlikely as the taxpayers are not in a good position. Most private debt and in turn much of our public debt is collateralized by our property market which is down 50% from its peak. The quality of our collateral is diminishing as our debts grow. The government is facing diminishing marginal returns from tax collections as it increases tax rates and reduces its spend in the national economy.
Ireland is faced with two choices. First we would renege on some or all of our debts. Second we can hang on for as long as possible and then renege on some or all of our debt. The second choice is the preferred choice of government; it requires lower interest rates and ensures that when we do go, it will be with a greater bang! On the National Treasury Management Agency website (www.ntma.ie) Irish government debt is projected to increase from $166B in 2011 to €206B in 2015. Our national debt was €44B at the height of our property market boom in 2006.
World national and international political systems are perfectly intertwined with the global banking / financial system. The Irish example given above is a very typical case. We are by no means an outlier. In fact we are one of the better run nations.
My worldview has not changed because the facts have not changed. All the players are acting out their roles and playing out their parts as did their forefathers in every other economic collapse in history.