Last Monday GoldMoney
published my article showing the frightening growth in money-quantities for the US dollar. In that
article I stated that the
hyperbolic rate of increase,
if the established trend is
maintained, is now running at over $300bn monthly, while the Federal Reserve is officially expanding money at only $85bn.
The first thing to note is that the Fed issues money because it deems
it necessary. The hyperbolic trend increase in
the quantity of money is
a reflection of this necessity, implying that if the Fed’s money issuance is at
a slower rate than required, then strains will appear in the financial system.
There are a number of reasons behind this monetary acceleration, not least the need
to perpetuate bubbles in securities markets, but there are three major underlying problems.
Government
spending
Federal government
spending is accelerating, due to rapidly escalating welfare commitments, not all of which
are reflected in the budget. Demographics,
particularly the retirement of baby-boomers, government-sponsored healthcare,
and unemployment benefits
are increasing all the time; yet
the tax base is contracting because of poor economic performance and tax avoidance. Furthermore, state and municipal finances are dire.
Economy
The US economy is
overloaded with debt to the point that it no longer reacts
positively to monetary
stimulus, and successive government interventions
have led misallocation of
economic resources to accumulate towards crisis levels. The private sector is now teetering
on the edge of an abyss overloaded by both debt and government
intervention.
Commercial banks
The banks are cautious
about lending to indebted
borrowers, and they have failed to adequately devalue collateral against existing loans. The result is that with
no bank credit being made available to support
renewed buying of assets, asset valuations are constantly on
the verge of collapse. Put another way, banks have backed off from creating ever-increasing levels of debt to perpetuate the pre-crisis asset bubble.
One should not take
comfort in attempts to improve asset ratios. According to the Federal Deposit Insurance Corporation,
the ratio of total assets to risk-adjusted
Tier 1 level capital is currently 11.25; but this does not adequately reflect off-balance sheet activities and non-banking business such as derivatives. The inclusion of derivatives
on US bank balance sheets
as a net as opposed to gross
exposure, seriously misstates actual risk.
Banks therefore face two different problems. An on-paper write-down of collateral assets of less than 9% wipes out the entire banking system, with a far lower threshold for many banks. Changes in GAAP accounting
rules over asset valuations in the wake of the Lehman crisis have allowed them to hide losses, a situation that is still
unresolved and suggests
the banking system is already close to the edge. Furthermore, any failure in the derivative counterparty-chain threatens to
trigger a collapse of the larger banks where derivative
exposure is concentrated.
Conclusion
We are in the eye
of a financial storm, for
which the only solution
– other than mass
default – is an accelerating
supply of money. Deteriorating
financial conditions in either
government, banks, private sector or securities markets are almost certain to trigger a run
on the others. And that is why a far larger figure than QE3’s
$85bn per month may be required to keep the system afloat.
Originally published at Goldmoney here
|