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:

Yup!

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":

Unreal.

Have a good night.

Saturday Night Live

I have to say that Depeche Mode is amazing in live concert. The sound quality is unreal, and the energy the band puts out should be bottled and used as jet fuel. I had a great time! I am going to post a few small items, but not too much hard economics tonight. It is the weekend and i will jump into the entertainment.

GDP Numbers
Friday brought news that GDP only fell 1% in the second quarter, better than the never wrong estimates of -1.5%. Naturally this was seen as just aces, and all was rosy and fine. Zero Hedge has the best take down on the whole thing, and I would point you there. Final summation excerpt:

"..It is a sorry state where the only thing that is propping the world's greatest economy are promises of improvement and confidence games via the traditional media, with hopes of propping up a stock market which has long since ceased to be an indication of economic reality. The convergence between the S&P and the underlying fundamentals is, unfortunately for the administration, inevitable, especially since the government has now single-handedly taken over a key portion of major GDP output industries. Numerous empirical studies, especially from communist block countries, demonstrate just how "effective" the government is, when it decides to get directly involved in running a substantial portion of the economy."

Right on!

Clunker Cash Really Annoys Me
I thought I was about as disgusted as possible when the whole "mortgage modification" process started up. That level of sickness may have been surpassed by the "Cash for Clunkers" program which for some reason has really irked me to no end. A few random thoughts on this program:
-How desperate is the US government to be seen as doing something to help the economy? I mean in an hour they pass a 2 page proposal to restock the program after funding was projected to run out.
-How many cars and buyers really qualify for this? The $4500 is only good if your car is worth less than that, as you get no additional trade in value?
-A side angle I have not seen covered is that seeing that the government is behind this program 100% it is quite probable that banks will rush to make these car loans. Why do you ask? Because when anywhere from 10-30% of these car loans go bad the banks that made them can get the US government to pay them full price because it was their idea in the first place! Think of it as a pre-existing backstop.

Further reading on this topic can be found;
The Automatic Earth
"Its a good idea, but it's wrong"

Mish Shedlock win the "headline of truth award" with:
Free Money Runs Out, Congress Authorizes More

Saturday Night Entertainment
Some items for your amusement for the weekend.

Writing Sample
Recently at a lunch meeting with a good friend of this blogger, I was asked what I would like to do with my life, career, etc. While I imagine I will work in biotech for some time, I was really unprepared for the question. Since then I have tried to think about that more.

I love science, but I have been doing it for some time. I am somewhat limited on the upside because i would need higher degrees to get much further in my field, and I have zero interest in going to school again.

I think being an analyst for stock and market research would be great fun. I would be perfectly suited for pharmaceutical/biotech analysis. My attachment and study of the precious metals may be a good area too. I would never want to manage other people's money however! I am quite good enough at losing my own, no need to help others lose theirs!

When I think about it being a writer would be great. A have a story I have wanted to write since I was in 4th or 5th grade after I drew a sketch of a design I had thought up. The sketch is long lost, but the idea behind it is very wild (to me) and over time I have thought up a whole story around it. It has always been called "the device" in my mind. Life is so busy, I never get to follow through.

Anyways, at the concert last night I was struck by how moved I was by live music. I have not seen a live show in over 8 years! While I was listening to the music, the following words just popped into my head and I wanted to get them down someplace before I forget them. Please bear with my as I submit for your critique a small writing sample:

The drums.
The detail that struck out to me was how very different the drums sound in an open air arena. The sound cannot be matched through the channels of vinyl, tape, CD, or ipod. With every beat the drums came to life, a life of their own. Pumped through mega watt amplifiers, the stretched skin percussion pieces called out a sharp and declarative tone. I closed my eyes and could almost hear an undertow of joy as the drums were set loose upon the air, no longer muted and silenced by a recording that was played back. I even could sense a twinge of anger, anger at being restrained and having their message filtered. No, the drums were awake tonight, and they had plenty to say.

The guitar.
No longer just a sound on a track, the guitar is a muse that must be handled to produce magic. I could hear the hands of the player moving over the neck, I could hear the fingers tapping the frets. Touch a guitar just right, and it may respond with affection. And Respond it did. As each chord was played and sent aloft, it was as if the notes themselves wanted to stay and hear more. I looked skyward and for a moment I could see the aura of the chords as they floated up, but not out. The formed a sort of tapestry for the sounds played just moments before. It seemed as if they wanted an encore unto themselves. I clapped even harder to try and lend them some support.

Remember to be nice, I am very sensitive! And no I was not on any illegal substances!

Rock Blogging
An extended music section is now in order.

Here is the very song that inspired the written section above. Enjoy Depeche Mode and Personal Jesus:


Loyal reader Watchtower requested a song by Queen, Under Pressure, and even provided a link to a wonderful live performance of said song. Only truly great bands/performers can boast that their live shows are as good as or better than the studio albums. Queen, led by Freddie Mercury, clearly makes the cut. Makes my job easy, enjoy:


From the department of "I had no idea who sings this" I love the song Sundown by Gordon Lightfoot but I had no idea who the performer was:


I have featured Bett Midler's classic tune The Rose here before, but I did find a live performance of it that is no less moving and beautiful:


Another band I have seen live and can vouch for their great skill is Radiohead. Please enjoy a live version of Karma Police Super Sweet!:


You may have noticed the all live version theme, lets keep it up with L.A. Guns and Over the Edge, as song I have very recently begun to love:


Last Call!!!

I will close the show with one of the greatest live show bands ever, Iron Maiden. Few crowd energies can match a Maiden show. They will usually open with Aces High, and so we will close with their open:


Have a good night.