Friday, March 19, 2010

Debt Creation Approaching Escape Velocity?

It was a beautiful Friday here. 70 degrees and very sunny. Seems Spring is upon us once again. I assembled the new grill I mentioned yesterday and now I am chomping at the bit to use it!

A few notes, a small post and then off to the Entertainment!

Profiles of a Healed Economy
As you all well know, the economy is just aces right now and things are so bright we have to wear shades, maybe even at night!

Here are a few headlines that cover all the good news:
Bank Failures 31-37; Busy Day for the FDIC
Banks often fail in good economic times. Often.

GSEs Green Light $200bn Buyout of Seriously Delinquent Mortgages
Barclays says so and they would know! Great note:
One of the GSEs, Fannie Mae said in a press statement earlier in March that it expects to continue purchasing delinquent loans in subsequent months until the seriously delinquent loan population is “substantially reduced.” Analysts at Barclays Capital remarked that Fannie will likely begin “buying out loans on a coupon-by-coupon basis, for all products including 10/20s, ARMs, starting with the highest coupons in the April report, and then proceeding to lower coupons in subsequent reports.”
In case you don't know, you are on the hook for these things.

Fed Must Disclose Bank Bailout Records As Court Of Appeals Upholds Historic "Mark Pittman" Decision
I have it on solid inside info this will be fixed by amending the law on page 12,897 of the Health Care Bill.

Debt Creation Approaching Escape Velocity?
This is going to be short because of two factors:
-I simply do not have command of the subject enough to describe or explain the mechanics at work
-The topic deserves a full on post or even a series of posts that I cannot do at the moment

That said, I can point you in some directions and open a debate.

The discussion is about money creation and banking systems. This is important for many reasons and not the least is that the entire foundation of our financial structure is based on assumptions, confidence, and group subscription and these things can go away in a hurry.

Most can understand fractional reserve banking and I often use it as an example because it is easier to grasp than how money gets created in our system. I think if people really knew how things ran they would all panic because the whole thing is a sham. That said, the relevant posts:
German Central Bank Admits that Credit is Created Out of Thin Air
George Washington posts at Zero Hedge and has some great reporting. Read the entire thing as it really helps, but an small excerpt:
Private banks don't make loans because they have extra deposits lying around. The process is the exact opposite:
(1) Each private bank "creates" loans out of thin air by entering into binding loan commitments with borrowers; then
(2) If the bank doesn't have the required level of reserves, it simply borrows them after the fact from the central bank (or from another bank);
(3) The central bank, in turn, creates the money which it lends to the private banks out of thin air.

It's not just Bernanke ... the central banks and their owners - the private commercial banks - have been running the printing presses for hundreds of years.

Of course, as I pointed out Tuesday, Bernanke is pushing to eliminate all reserve requirements in the U.S. If Bernanke has his way, American banks won't even have to borrow from the Fed or other banks after the fact to have reserves. Instead, they can just enter into as many loans as they want and create endless money out of thin air (within Basel I and Basel II's capital requirements - but since governments keep overtly and covertly throwing bailout money, guarantees and various insider-get-rich-quick schemes at the giant banks, capital requirements are meaningless).

The system is not based on assets. It is based on creating new debts, and then backfilling from there.
Not quite what you thought, huh?

Kid Dynamite offers more on yesterdays post today:
More on Bank Reserves and their Potential Meaninglessness
The comments section is where the meat is. It is worth some time.

My take was left in the comments section at Kid's site and I offer it here to frame how I see things:
What the summary here seems to be is that:
-As long as "liquidity" is available than money is fungible because you never really have to have it all at once.

Of course in the end the FED has a printing press so the argument is that liquidity can never be an issue.

While true in the lawyer/legal sense of the argument, it is also bullshit.

In essence the banking system is built on the idea that money once in motion, stays in motion and there is never a "called all in" to borrow a poker term. Of course back at the apex of the crisis when money markets were being drained this was a partial call and the FED/Treasury wet their pants in fear over the removal of a small (relative to the "liquidity" out in the system) amount of real money from the system.

The evidence would make the pie in the sky argument that reserves are meaningless and money can be created from nothing as long as loans (credit) are made a failure because why did they bother to do anything if everything was all set?

Sorry to simplify but all the tangled paths of this make something so simple very complicated.

The oldest profession is prostitution because it is hard to screw up (pun intended) and it is very profitable. The second oldest is banking for the two same reasons. Of course over time smart asses with theories have bent things around theoretical constructs so much that banking is screwed up. Classic. Remember the models and theories that said people would never, ever "walk away" from a home mortgage and never pay a credit card or car loan before a mortgage? Working out nicely indeed.

Taken as a whole it makes sense that debt is created and then some form of payment is arranged some how. The US consumer makes up 70% of the economy? They need to to keep accumulating the debts (money) issued by the banking system. No wonder no one this side of Wall Street can get ahead, everything is designed to maximize separation of you from your "money". I often wondered why the FED was so terrified of a recession and now we have the answer. Any speed bump in the debt accumulation race and things get ugly fast. Maybe debt has reached escape velocity and we cannot carry enough to backfill it. What then? Now I am dizzy.

Friday Night Entertainment
I need a drink and some fun stuff! Off we go!

WIN instead of FAIL
Let's try some WINS from the Failblog.

Reading the signs can help:

It is always the little black dress that causes trouble:


Film Clips
Great film is, well, great!

One of the scariest scenes in a movie for me was not even in a horror film. In 2010: The Year We Make Contact there is a scene that sends chills down my spine. When HAL 9000 relays a message to Dr. Floyd and tells him to look behind him I still get those chills! (start at 1:20 mark):

Because I have seen About Last Night I know that Rob Lowe can act. The closing scene is pretty good stuff:

Under rated film.

Rock Blogging
It just might be time to let it rock. Wait, ok, now it's time!

Anon requested the Go Go's and "Our Lips are Sealed" which was strange because I had this song in my head this week after hearing it on the radio! Weird! Here it is:

Lead singer Alex Chilton of The Box Tops died this week and one of my favorite old school songs is "The Letter" so check it out:

Obviously before the dawn of email!

Loyal reader Gawians, who if you have not been checking out his real estate commentary in the comments section you are really missing out, requests "Spiral Architect" from Black Sabbath and I mean who could say no to an unsung Sabbath tune?:

Awesome tune.

One more, two more? Two more seems about right.

Of course because I love Joan Jett and I know what rocks, they decide to make a film about her early band "The Runaways" that contained a few names you may recognize. Anyways, enjoy Joan playing "Light of Day" with the man that wrote it, Bruce Springsteen:

Studio version here.

Last call! The streetlights are on, time to go home!

Closing the show is always a struggle. Do I end with a ripper? A mellow relax tune? This is harder than it seems!

Well I could not decide between these two so you get BOTH! HA!

Close the show with a Depeche Mode double feature!

"It's No Good":

Kicks ass!

My favorite Mode song, "Personal Jesus":


Have a good night.


Anonymous said...

Thanks for the Go-Go's. Also, thanks for the Carpenters last week. It rained here again today.

getyourselfconnected said...

no problem at all. I hope it drys out for you soon. I love the go go's!

GawainsGhost said...

Thanks for the compliment, GYC. And you're right, "Spiral Architect" is one of Black Sabbath's best songs. Lyrically brilliant and musically complex, it really doesn't get any better than that.

Anyway, you want to know what I'm seeing more and more of lately? Census forms stuck on the doors of vacant repossessed homes.

You have to think really hard to understand the profundity of it. These homes are now owned by Fannie and Freddie--that is, the government. They know these homes are vacant. No one is living in them!

But to artificially boost unemployment numbers for a few short weeks, the government hires census workers to deliver census forms to houses that have to be known to be unoccupied.

Your stimulus dollars at work.

Think about how profoundly ignorant that is. Then ponder how many of your tax dollars are going to pay for it next month, when you file you income taxes.

I'm not saying, just saying.

"Of all the things I value most in life
I see my memories and feel their warmth
And know that they are good
You know that I should"

Moneta said...

GG: I think you're being a little harsh. Something tell me that if those census workers used *the* list to avoid empty homes, you'd be denouncing Big Brother.

Moneta said...

I find the fact that people are freaking out because central banks are creating debt out of thin air is hysterical.

It just shows how nebulous the concept of money creation really is for most people, even those in the know!

And even if you were 2 sole survivors on an island, you'd be creating money out of thin air. As soon as you trade with a future promise, you create credit out of thin air.

For example, let's say you give your partner a massage with a promise of receiving one in the near future you've created an implicit IOU... Imagine that, you've created credit out of thin air! What's so terrible about that?

It does not matter how money is created as long as the proper amount is created and that it is for productive industry. It's all about the proper allocation of resources and proper incentives.

Maybe we should be discussing the "how much" and not the "how". With debt/GDP at huge levels, it is obvious that we need the denominator to increase. Something tell me that the denominator will increase thanks to inflation and not growth. That's what our leaders surely want even if they are telling us the opposite.

It's easy to produce inflation. It's harder to produce it without a panic.

getyourselfconnected said...

great points and thanks for the great comment. Nebulous is the correct term! I think if even 30% of people knew the real deal things would fall apart, good thin ignorance is bliss! Thanks for stopping in!

I am never surprised at how tax money is wasted, never. Great song request as well!

GawainsGhost said...

Well, perhaps I am being unduly harsh.

These houses have no window coverings, drapes or blinds. All you have to do is look through the window to see that no one is living in the house. There isn't even any furniture or appliances! It's completely empty.

So you're a census worker sent out to help people fill out their census form accurately, because as we all know it's very important to have an accurate census count for the purposes of representation and funding for districts.

You come up to an empty house. What are you going to do, knock on the door? There's no one there! Now what? Well, it seems to me that, as a census worker whose job to help fill out the form--that is what I'm getting paid for, right?--the simple and most obvious thing to do would be to write on the form, where it asks "number of people in household," 0.

Instead you tape the form to the door and leave, so no one will ever fill it out? By the time the house sells and someone moves in the census will be over! Not only that but whoever buys and moves into the house has most likely already filled out a census form at a previous residence and been counted.

The more I think about how really stupid this whole thing is, the more I shake my head in disbelief.

sedintary state said...

Anyone know the name of that Sabbath song that has the air warning sirens in the background?

I tried to find it once and wasn't able to.

GawainsGhost said...

Without listening through my Black Sabbath collection--by the way, Black Box, which is a remastered set of the first nine albums, Black Sabbath through Never Say Die, is excellent and contains a book with all the lyrics--off the top of my head I'd say "Electric Funeral." But I could be wrong.

sedintary state said...

Cool, I'll check it out GG.

BTW, I'd never heard Spiral Architect before. Indeed awesome.

Kid Dynamite said...

i'm a springsteen FANATIC - but i've never seen this clip. nice.

at first, when he debuted this song on his tour almost 10 years ago, i hated it... then it became one of the key freak out moments of the show for me...

Bruce, in concert, does it a little different.... building up to a sick crescendo at :

"i've been thrown outa work on the KOOOOOOKOOOMOOOOOOOOOOO"

i remember almost jumping off the balcony at MSG, feeling like i could fly....

Kid Dynamite said...

here's a link to the E Street Band version:

"I canNOT promise you life everlasting - but i CAN promise you life.. RIGHT NOW!"

that part of the video right around 8:00 is when i can fly...

I was almost certainly at this show - as I went to 70+% of the NY/NJ shows from 2000 to 2008. those were the days: 8 out of 10 at MSG. 10 of 15 at Giants Stadium. it was a marathon!

i didn't know this was his song.. i thought JJ wrote it and he covered it. i guess it's like Blinded by the LIght? he wrote it and someone else made it famous?

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