Debt Monetization Economics

Off the keyboard of RE

Published originally on the Doomstead Diner on January 12, 2013

Discuss this article at the Economics Table inside the Diner

If you are the kind of person who worries about Inflation and read the pages of Zero Hedge, there’s a good chance a few days ago reading through the article summaries on the Home Page you had to take a trip to the Throne Room and kneel down and Pray to the Porcelain God while Heaving the Technicolor Yawn.

Let me begin this article by pasting in a few of the synopses from Jan 7th, which came nearly one right after another describing the various and sundry Monetary “experiments” being undertaken by the Bank of Japan (BoJ), the People’s Bank of China (PBoC), the Swiss National Bank(SNB) the European Central Bank (ECB), and of course that Central Bank we all Love to Hate here in the FSofA, Da Fed(FRB).  Not all these main CBs are covered in these articles, but they are sufficient to detect a pattern forming up.


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Japan May Or May Not Mint Quadrillion Yen Coins, But It Will Monetize European Debt

Submitted by Tyler Durdenon 01/07/2013 – 22:03

Just when we thought America would be alone in crossing into the montary twilight zone where so many Keynesian lunatics have gone before, and where trillion dollar platinum coins fall from the sky right onto the heads of all those who have not even the faintest understanding of money creation, here comes Japan:


For those who have forgotten, the E in ESM stands for European (the S for Stability), not Japanese (Stability). Otherwise it would be, er… well, JSM. Keynesian at that. But yes – Japan will now proceed to “stabilize” itself by monetizing European debt. Because its own JPY 1 quadrillion in debt was not enough.

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Meet Jack Lew: Tim Geithner’s Replacement

Submitted by Tyler Durdenon 01/07/2013 – 19:58

Bloomberg is out after hours with news that was expected by many, but which was yet to be formalized, until now: namely that following today’s flurry of contntious nomination by Obama, the latest and greatest is about to be unveiled – Jack Lew, Obama’s current chief of staff, is likely days away from being announced as Tim Geithner’s replacement as the new Treasury Secretary of the United States. In other words, Jack will be the point person whom the people who truly run the Treasury, the Treasury Borrowing Advisory Committee, chaired by JPM’s Matt Zames (who just happens to also now run the notorious JPM Chief Investment Office which uses excess deposits to gamble – yes, you really can’t make this up) and Goldman’s Ashok Varadhan, global head of dollar-rate products and FX trading for North America (recently buying a $16 million pad at 15 CPW) will demand action from.


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Greek Banks To Merkel: “Please Ma’am, Can We Have Some Moar”, Or Here Comes Bailout #4

Submitted by Tyler Durdenon 01/07/2013 – 19:19

As loathed as we are to say “we told you so,” but we did and sure enough eKathimerini is reporting this evening that: thanks to the ‘voluntary’ haircuts the Greek banks were force-fed via the latest buyback scheme and the political uncertainty causing non-performing loans (NPLs) to rise (in a magically unknowable way), they will need significantly more ‘capital’ to plug their increasingly leaky boats. The original Blackrock report from a year did not foresee a rise in NPLs (which Ernst & Young now estimates stands at 24% of all loans) and the buyback dramatically reduces the expected profitability of the banks as it removes critical interest payments that would have been due. Whocouldanode? Well, plenty of people who did not just buy-in blindly to the promise of future hockey-stick returns to growth. Expectations are now for the Greek bank recap to be over EUR30bn.


Eooowwwchhh!   Reading this stuff, you get the sinking feeling that Monopoly Money is pouring off the Printing Press at Warp Drive Speeds, and in a fashion you would be correct in believing that.  The Nipponese are clearly in the Deep Doo Doo, their Export Market is collapsing,  the “Off” switch on “cheap” Nuke Power currently remains off (though the new Goobermint intends of firing them up again); the Greeks are a Black Hole of Debt the ECB and various and sundry Financial Special Purpose Vehicles (SPVs) like the ESM keep funding with more fictitious money, and of course Da Fed remains busy in Financing the FSofA War Machine through an exponentially growing Federal Deficit, while at the same time expanding it’s “Balance Sheet” in order to buy absolutely WORTHLESS collateral from the TBTF Banks to keep them from going under this week.

Trying to look at what EVERY CB is doing here to Monetize Debt is an exercise in futility, the rest of the post would be filled with Graphs up the Wazoo here.  As it is, just looking at FSofA Debt Monetization and Population Issues has more graphs than I like to jack into one article.  I’m a Big Picture Pontificator, not an Actuary or CPA, so inundating the reader with endless Graphology of the Exponential Function in action is not my Stock in Trade.  I’m a decent enough mathematician, but I am also perfectly aware that throwing out endless numbers for most people makes their eyes Glaze Over, so I try not to do that.

However, it is necessary in going forward with this post to look at what actually is occurring on the Monetary level, at least here in the FSofA utilizing Da Fed as the Example.  It’s no different for the BoJ,the ECB, the SNB or the PBoC, and in fact since Da Fed produces the WORLD RE$ERVE CURRENCY of the DOLLAR, this best represents what is occurring on a global scale with the monetary system.

Let’s begin with the expansion of the Balance Sheet of Da Fed.  This BS expands as Da Fed purchases Trash for Cash.  TBTF Banks unload worthless MBS, CDOs, Soveriegn Bonds, Securitized Student Loans and Baseball Cards (the ONLY thing in this list of real value)


As you can see, the FRB Balance sheet shot to the Moon in 2008, when in order to keep the Financial System from Imploding, Da Fed when on a Buying Spree of Junk Assets on the books of these banks they could not unload to anybody else for Cash, which everybody was short of at the time.  Does this really mean Da Fed “printed money” here for this stuff that wasn’t already in existence?  Not really, becuase these ‘assets” represented money that was already trading around in the system anyhow, Da Fed just traded FRNs for the collateral, providing more liquidity in the system.  Actual Dollars in Circulation, the M1 Money Supply didn’t change all THAT much, certainly not as much as what the above fairly TERRIFYING Graph would indicate.

Not that it still isn’t terrifying to see this vast expansion of Da Fed BS, it still is because it is indicative of the fact the regular Credit Market was in catastrophic failure mode so the assets were transferred off of Private Balance sheets onto Da Fed Public one, even though all this accomplishes is moving insolvency from one place to another.  In the end when the system does implode (it will), it really doesn’t matter who goes broke FIRST here because everybody will go broke.  The Banksters weren’t ever going to be able to pay off their Bad Bets, nor will the Taxpayer be able to do it.  Broke is Broke when distributed over an entire system like this.

The next graph shows the ALSO TERRIFYING expansion of the Federal Deficit, not coincidentally occurring at precisely the same point in time, 2008-9, when Da Fed Balance sheet went Ballistic.

Why is the Federal Deficit ballooning here at the same time?  Because with Private Credit drying up for lack of Creditworthy Borrowers in the Private Sector, in order to keep the system from imploding on this level, Da Goobermint steps in as the Borrower here, basically borrowing money on its own account to do the numerous Bailouts of failing institutional lenders.  This again serves the purpose of providing liquidity and keeping Zombie Banks as the Walking Dead a while longer, but it is still not really putting money into a system that wasn’t already there, just in other forms in the “Shadow Banking” system.  This is unaccounted for money, and nobody really knows how much of it is out there even now, estimates run as high as Quadrillions.  All that is happenning in this case is that some of that sloshing pool of fictitious money is being moved to the Public balance sheet, in dribs and drabs as parts of the system continue to fail.

So now what we have to do is to drop back from the gross debt being pitched around here and look at the components of the Money Supply to see how they are doing.  Below is the graph of the FSofA Monetary Aggregates, divied up into M1, M2 and M3 forms of “Money” that circulate and/or get parked as Savings or Investment in something.

The part of this graph that concerns the Main Street Economy and J6P is mainly down in Blue at the Bottom of the graph.  That’s the actual Cash FRNs floating around out there and digibits in your Checking Account.  As you can see, it has increased substantially since around 1980, but nowhere near the vast increase through the other components of the Money Supply, half of which were such a small component of the total supply in 1970 they don’t even show up on the graph.  This is where most of the “Money” is floating around, and it is mainly held in large Corporate Accounts, Pension Funds etc, in theory there as a balance sheet number, but in realty not there at all.  This is the most fictitious of the fictitious money.  “Other Checkable Deposits” I believe represents Reserves the TBTF Banks have on deposit at Da Fed, my good friend and fellow Macro Economist Steve from Virginia from Economic Undertow will correct me if I am wrong on this.

Although the increasing muber of FRNs and digibits is causing some inflation, particularly in Food prices now which are also being pressed on the Supply End due to drought,  overall cost per capita doesn’t expand that rapidly (at least not at an HI pace until there is a currency collapse of the Dollar), because this Main Street Economy money is distributed out over many more people than it was in 1970.  First the graph of US Population expansion over the time period in question.

As you can see, since 1970 the FSofA has seen a roughly 50% increase in population size from the 200M neighborhood to the 300M neighborhood, so what FRNs there are out there for J6P to earn are spread over more people.  All else being equal, if the number of FRNs don’t increase at the same rate the population size does, each person will have fewer of them, which would be of course highly deflationary for Prices.  Fewer people would have say $5 for a 1 lb Ribeye Steak at Safeway, so to sell the same number of ribeyes, Safeway would have to lower the price to what the new normal was, in this case a 50% decrease in available cash per capita of consumers of Ribeyes, so the price would have to drop to  probably around $3/lb to keep selling the Ribeyes.

Obviously no such thing has happenned, the price keeps going up, but not as fast as you might think it would if you look at the top graphs in the Fed balance Sheet and Federal Deficit graphs.  More money is out there, but sprinkled out over many more people than it was in 1970, and not just here in the FSofA either.  The vast increase in total money supply mostly is NOT distributed out either, it remains “in reserve” at Da Fed on accounts of the TBTF Banks.

This because with increasing Globalization of trade along with the fact the Dollar has served as World Reserve currency through the time period has meant many of these Dollars are now sprinkled across the WHOLE WORLD, often used as black market currency in many highly populous nations that are unable for one reason or another to run a viable currency system of their own.  So Dollars now aren’t spread through just the FSofA population, but across the whole WORLD population in one form or another.

So this leads us to look at the Global Population Graph for the time period, yet another TERRIFYING graph.

 Here you can see especially if you look at Asia since around 1950, the Global Population has more than Doubled, and where have many Dollars been spent to buy stuff?  From Asia of course, Japanese Carz and Electronics, Chinese Plastic Toys etc.  Since the FSofA has had a Trade Deficit since at least the 1970s, a constant outflow of Dollars produced has made it into the hands and savings accounts of literally Billions of Asians, when looked at across the aggregate scale anyhow.  In reality, most of said dollars are just in a few hands, not ALL Asians have gobs of FRNs stuffed in the Bank of Sealy.

Any given INDIVIDUAL in China doesn’t have gobs of FRNs to spend to buy a Ribeye steak, in fact most have far fewer than even the most imoverished Amerikans living on Food Stamps.  The result is that instead of getting an HI in the price of Ribeyes, what yoou mostly get is Demand Destruction as margins are compressed and the actual price a Cattle wholesaler can get is pressed down by the inability of most people to afford to buy the Ribeyes.

The same Bizness of course is occurring with Gasoline (Petrol for the Eurotrash), so instead of HI in Gas, actually prices have now once again DECLINED here in Alaska to BELOW what I paid for it when I first got up here 7 years ago.  It has been above that price for most of those years, but across the board the Demand Destruction is taking hold on this, and despite no increase in total production of Liquid Fuels (see Monsta666 Energy I&II articles), the prices are getting pushed back down again.  Mainly probably attributable to cratering demand for Gasoline in Eurotrashland, now Double digit Unemployment throughout the PIIGS countries and working its way into France also.

To conclude here in this portion of the running Kick the Can Game in Debt Monetization Economics,  despite some outrageously BIG numbers and some really TERRIFYING graphs is really just spreding its way across the entire global monetary system, but because all the CBs are currently engaged in the same process of trying to provide liquidity to an illiquid market, the RELATIVE VALUATIONS between the currencies are not yet changing that much.  Euro’s will spike up or down on a given day dependent on the Newz, same with Yen, same with the Dollar itself of course.  Everytime they do spike though, the OTHER CBs in the system react to it, genrally themselves ALSO adding more liquidity.  Absolute Numbers go up, Relative Values don’t change all that much, at least they have not YET.

Eventually, somebody’s currency will crack here in a Crisis of Confidence, forcing a run out of that currency.  Remains to be seen who is the FIRST to go down the Toilet, but it most CERTAINLY will not be the Dollar.  It is too big and too much of the current system is dependent on valuations made in Dollars.  the much more likely candidates are the Euro or the Yen.  These are the currencies most at risk right now for an HI event, not the Dollar.

In terms of actual Purchasing Power for all these currencies with respect to Oil & Food (closely related clearly), all are destined for terminal decline as the resource base declines and the Cheap Oil dwindles in availability.  What counteracts that on the gross scale is Demand Destruction, and that can occur a lot faster than actual resource depletion does.  It is moving at an INCREDIBLY rapid pace in Eurotrashland right now.

I had Chartist Friend From Pittsburgh do a curvilinear wave analysis of this graph, and as I suspected,  the resistance line is well broken and demand for Oil Products in Europe is likely to hit new lows as we move into 2014. How LOW will it GO by 2014?  13K BPD seems like a very good bet to me.  This represents around a 20% decline off Peak Demand in Europe for Oil, while at the SAME time the population there has increased substantially.  Obviously, per capita consumption of Oil is on a steady downward slope there already,  and this is nothing if not highly deflationary all around.  Thus of course the massive Unemployment problems the Eurotrash are immerssed in already.

Where will the Demand Slack be taken up?  Will it be in China or South America or Africa, in the “growing” economies of the developing world, or will it be in the last place to lose Credi to buy the Oil, likely the FSofA, home of the Printing Press of the Dollar and Home Base for the Big Ass Military?  One thing is for certain, TPTB cannot allow the Demand to Crater entirely, because when it does (it will eventually of course), the entire monetary system they depend on to maintain power goes with it.  The ULTIMATE demand side solution for this is full on WAR, and that of course is liekly to come down the pipe in the bye and bye.

Time will tell, but until the whole Geopolitical equation plays itself out, my bet is that no debt monetization undertaken by Da Fed will spark an HI in the Dollar during this period.  There are too many other weaker players in the same game.  The “Game” still has a few rounds to go in terms of competitive devaluations of the Major Currencies by each of the respective Central Banks, along with still more rounds of Austerity and Demand Destruction being embarked on by more Central Players, including France, Germany, and of course the FSofA.


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