Applied Philosophy

In my post The Magical Jet Engine and Global Monetary Disconnect I wrote how dollars printed by a Federal Reserve eager to fight deflation are accumulating into pools outside of economic flow. That was on April 28 2008 when Excess Reserves of Depository Institutions with the Federal Reserve were a meagre $1.737 billion (source St. Louis Fed), today that number stands at $1,560.231 billion. Here is what I wrote, then, about the size of these pools:

So how big are these pools? First there is a little pool of fuel, a small matter of a trillion and a half dollars, called China; followed by a smaller pool, a solitary trillion dollars, called Japan, another trillion is divided by the world: hundreds of billions in the oil-exporting countries of Arabia, seventy billions in Russia, thirty billions in Venezuela, even crumbling Iraq has stash of dollars in its central bank.

Today Total Reserves excluding Gold for China are $3.2 trillion and it has doubled its official gold reserves since that time. Japan is a distant second with $1.2 trillion. Saudi Arabia has $558.7 billion, Russia has $456.5 billion. These four countries alone hold more than $5 trillion in reserves (source St. Louis Fed). US banks hold a trillion and a half with the Federal Reserve and European banks hold about a trillion with the ECB. All added up makes it about $7.5 trillion or fifty-percent of the US GDP.

The US is still printing dollars and exporting them to the world:

The trade deficit in the U.S. widened in January to the largest since October 2008 as imports rose to a record high.

The gap increased 4.3 percent to $52.6 billion, more than forecast, from a revised $50.4 billion in December, the Commerce Department in Washington said today.

—Trade Deficit in U.S. Widens as Imports Hit High, Bloomberg March 9 2012

China on the other hand are starting to export their own dollars:

China had its largest trade deficit since at least 1989 last month as Europe’s sovereign-debt turmoil damped exports and imports rebounded after a weeklong holiday.

The shortfall was $31.5 billion, the customs bureau said yesterday. Imports rose 39.6 percent from a year earlier, after a 15.3 percent slump in January, while exports increased 18.4 percent, the bureau said.

—China Has Biggest Trade Shortfall Since 1989 on Europe Turmoil, Bloomberg March 10 2012

Japan is also exporting its dollars:

Japan’s yen weakened after reported a record current- account deficit, the biggest shortfall since comparable data began in 1985, undermining the currency’s haven status.

—Dollar Reaches 10-Month High as Jobs Gains Dim Outlook for More Fed Easing, Bloomberg March 10 2012

Even Australia, a commodity exporter with a strong currency, is having a trade deficit:

Australia recorded a trade deficit in January, its first in 11 months, as weaker shipments of iron ore and coal contributed to the biggest drop in total exports in almost three years. The local currency fell.

—Australia Records First Trade Deficit in 11 Months on 8% Plunge in Exports, Bloomberg March 9 2012

All this money is going after real physical wealth: natural gas, oil, gold, etc. This in turn is pushing inflation up:

Inflation is back on the European Central Bank’s radar, complicating efforts to bolster growth as the sovereign debt crisis pushes the economy toward recession.

The ECB will lift its 2012 inflation forecast above the 2 percent price-stability threshold today, limiting its ability to cut interest rates further even as it lowers the outlook for growth, economists said.

—ECB’s Inflation Radar Complicates Growth, Bloomberg March 8 2012

High inflation has not stopped the Bank of England:

While inflation eased to a 14-month low of 3.6 percent in January, that’s still above the bank’s 2 percent target. Crude- oil prices have risen about 20 percent in the past six months. The central bank sees inflation slowing to 1.9 percent by the end of this year and 1.8 percent by end-2013.

—King to Face Renewed BOE Policy Maker Rift as Dispute on Inflation Simmers, Bloomberg March 8 2012

Inflation has been above 3.6% for the last 14 months, so inflation has been at least (it was above 5% for two months) 80% above the target. Despite all this inflation the bank has not lifted its centuries low interest rate of 0.5%. In April 2008 the monthly price of gold was $909 (declined to $760 in November) and the Federal Funds Target Rate was 2.25%, today gold is about $1700 and the rate is 0.25%. Somehow I do not believe that the central banks will react to inflation soon and when they finally do they will find that their actions have little effect.

The current international set-up is coming apart. Europe is breaking up. The Arab world is changing. China can not keep exporting cheap labour. Japan must wake up from its state of suspended-animation. Australia can not enjoy the “lucky economy” for much long. The world, as we know it, is coming to an end. End by itself is not bad: pregnancy ends with birth, study ends with graduation, life ends with a eulogy. The problem is refusing to knowledge change, prepare for it and manage it when it arrives.

The leaders of China have neither the will nor the ability to guide China into a national economy independent of the US and its global economic empire. They will drive China into the ground and then bow out of history; China will rise again as it has been doing for the last two thousand years (see The Future History of China Today).

Japan is not a fully sovereign nation and until it become one it will not solve its problems. For a people who have never endured foreign occupation in their history until 1945, they turned out to be rather docile clients of the US economic empire. This situation made sense as long as they enjoyed economic prosperity, but since 1990 they have suffered economic stagnation. The solution to their problems is extremely easy, but impossible to implement. The people themselves have neither the drive nor the will for change.

Australia is currently dominating the region with 22.8 million inhabitants, its close neighbour, Indonesia, has 237.5 million. Australia is enjoying economic prosperity, exporting the resources of the country and then re-exporting the dollars for oil and consumer goods. With a persistent current-account deficit since 1976, little wealth remains in Australia. Australia has the obstacles against change of both China and Japan: an inadequate leadership and unwilling people.

The current international set-up looks mighty solid, but inflation is like heat slowly melting the it and turning the world into a boiling liquid.

See also:

• Flow my Dollars the Central Banker Said, on the inflation/deflation debate of 2008.
• The Printing Press is a Harsh Mistress, once you start printing you can never stop.
• Stock Valuation and Interest Rate, the valuation of the stock market is inversely proportional to the interest rate.
• Zimbabwe’s Monetary Policy, an example of monetary policy in hyperinflation.

From William Shakespeare to Jane Austin

It seems there were times when people better understood the relation between capital and income. In past times when people had stable money and more importantly stable interest rates and their mathematical faculties were neither suitable for fractions nor large numbers they cleverly converted income to capital and vice versa.

SEBASTIAN

I prithee, foolish Greek, depart from me: There’s
money for thee: if you tarry longer, I shall give
worse payment.

Clown

By my troth, thou hast an open hand. These wise men
that give fools money get themselves a good
report—after fourteen years’ purchase.

—Twelfth Night – Act IV

Land was seen as an infinite stream of income (the landlord would lease it to tenants, so the only cost was the purchase price) similar to a perpetuity that can be easily capitalised by dividing the yearly income on the prevalent interest rate. The purchase price divided on the income would give a multiple dependent only on the interest rate. If the interest rate was about 7% then the multiple would be about fourteen, a land would sell for fourteen times its yearly income or put more succinctly: “fourteen years’ purchase.” (today this is called Capital Cost)

“He is a man of very large property in Derbyshire, I understand.”

“Yes,” replied Mr. Wickham; “his estate there is a noble one. A clear ten thousand per annum.”

—Pride and Prejudice Chapter 16

Landowners, on the other hand, who owned vast estates did not really care about the price of their lands for two reasons: they had no  intention of ever selling their land and the price was almost constant over long periods of time. They were basically living on fixed income or a perpetuity. The price of their estates can double or half without affecting their life, because their income is fixed. So a gentleman would not be known for his net worth but for his yearly income, for example: “his estate there is a noble one. A clear ten thousand per annum.”

From Francis Bacon to Bill Gross

Now I come to the subject at hand: Francis Bacon’s essay on usury. In my previous thrashing I skipped the part about setting up a primitive central bank to manage usury; today I handle it in detail. Here is the paragraph I skipped:

To serve both intentions, the way would be briefly thus. That there be two rates of usury: the one free, and general for all; the other under license only, to certain persons, and in certain places of merchandizing. First, therefore, let usury in general, be reduced to five in the hundred; and let that rate be proclaimed, to be free and current; and let the state shut itself out, to take any penalty for the same. This will preserve borrowing, from any general stop or dryness. This will ease infinite borrowers in the country. This will, in good part, raise the price of land, because land purchased at sixteen years’ purchase will yield six in the hundred, and somewhat more; whereas this rate of interest, yields but five. This by like reason will encourage, and edge, industrious and profitable improvements; because many will rather venture in that kind, than take five in the hundred, especially having been used to greater profit. Secondly, let there be certain persons licensed, to lend to known merchants, upon usury at a higher rate; and let it be with the cautions following. Let the rate be, even with the merchant himself, somewhat more easy than that he used formerly to pay; for by that means, all borrowers, shall have some ease by this reformation, be he merchant, or whosoever. Let it be no bank or common stock, but every man be master of his own money. Not that I altogether mislike banks, but they will hardly be brooked, in regard of certain suspicions. Let the state be answered some small matter for the license, and the rest left to the lender; for if the abatement be but small, it will no whit discourage the lender. For he, for example, that took before ten or nine in the hundred, will sooner descend to eight in the hundred than give over his trade of usury, and go from certain gains, to gains of hazard. Let these licensed lenders be in number indefinite, but restrained to certain principal cities and towns of merchandizing; for then they will be hardly able to color other men’s moneys in the country: so as the license of nine will not suck away the current rate of five; for no man will send his moneys far off, nor put them into unknown hands.

—Essays, by Francis Bacon: Of Usury [my emphasis]

Bacon advocate low interest rate for two reasons: asset price inflation and increased risk apatite leading to economic growth. He also wants to give a monopoly to lenders who would only lend to merchants, at a lower interest rate than what prevailed before. I will discuss each point below and then comment about Bacon’s brooking (enduring or tolerating) of banks.

If the prevalent interest rate is 6% and it is cut by one percentage point then the value of an asset will rise from sixteen to twenty years’ purchase, but why stop there why not cut it by one more point and assets rises to twenty-five years’ purchase; cutting the interest to 3% makes assets worth about thirty-three years’ purchase. Thus halving the interest rate doubles the asset price. Only big speculators would benefit, those living on the income of assets (e.g. gentlemen, widows, pensioners) would gain no benefit and suffer from the inflation brought about by declining interest rates. The speculation in the price of tulips came after chartered banking spread in the Netherlands (see Chronology of Money below).

If interest rates are cut capital will indeed shy away from investments that pay less and that might lead to increasing productivity or seeking new avenues that pay higher. In reality technological (“industrious and profitable”) improvements takes long time to bear fruit and carries with it potential risk. Money would more likely seek profit in asset price speculation aided by falling interest rates. Again society would not benefit but only speculators. Capital would flow from industry to property and speculation, destroying the industrial base of the country.

The monopoly Bacon suggest is nothing but government chartered banks run by a central bank. Both the Federal Reserve and the Reichstag (of the Weimer inflation) were limited to discounting commercial notes with duration not longer than three months. Both were allowed, by hook or by crook, to first discount government notes and then government bonds. Both ended up as money-printing machines for the benefit of the government and financial elite. The commercial banks follow the central bank like ducklings following their mother into the path of traffic.

Now I solve the riddle of the banks: Bacon does not “mislike” them and yet he clearly is trying to put them out of business. Francis Bacon is the creature of big money oligarchy that formed around Elizabeth and flourished under the Stewarts. Banks at the time were goldsmith shops that had cash (gold & silver coins) accounts and lent money at interest—England oldest private bank C. Hoare & Co started like that—he wanted to expropriate their role to the benefit of others. As I showed elsewhere Bacon had the interest of big money oligarchy at heart, not the merchants or the small landowners. His fall would be at their hands, lead by Sir Lionel Cranfield an MP for Sussex and the son of a mercer. Twenty years after Bacon’s downfall merchants and small landowners would break six hundred years of tradition and behead the king. Bacon’s essay provides an economic insight into that monumental struggle. This essay was not idle philosophising, The Act Against Usury which reduced rates to 8% was enacted in 1621, the year of Bacon’s disgrace (see Chronology of Money below).

The reason I skipped this paragraph, despite its importance, was because Bacon’s plan has become our reality for the last thirty years. The following graph gives an idea of the prevailing interest rates for the last thirty years, it is the 30-years treasury yield from its peak in January 1982 to January 2012 (with a linear trend-line):

30-Year Treasury Constant Maturity Rate 1982-2012

(Data source: St. Louis Fed. Graph made with LibreOffice. Image created with GIMP)

Long-term interest rates went from about 11% to 3% in thirty years, the value of assets tripled as a result; thus Chinese officials who put earned dollars into long-term Treasury bonds saw the value of their bonds tripling from 40% to 120% of face value; coupled with constant exchange rate they earned huge profits. Everyone who speculated in assets got awarded thanks to the falling interest rate. Over the last thirty years the world has seen one bubble after another: the Japanese bubble, the Asian bubble, the Tech bubble, the housing bubble. Here is the view from the head of the world’s largest mutual fund:

Still, the primary way to coin money over the past 30 years has been to use money to make money. Although the price of it started in 1981 at a rather exorbitantly high yield of 15% for long-term Treasuries, 20% for the prime, and real interest rates at an almost unbelievable 7-8%, the gradual decline of yields over the past three decades has allowed P/E ratios, real estate prices and bond fund NAVs to expand on a seemingly endless virtuous timeline.

—Defense by Bill Gross.

The price of assets that speculators buy rises because of falling interest rate and not because of any intrinsic improvement done by the speculators; money makes money bypassing useful productive activity.

At the same time industry and small business has been destroyed. In countries like Spain and Greece the process happened much faster: falling rates after joining the Euro caused a bubble in properties and financial assets, that ended in a bust with small business bankrupt and cut-off from credit and unemployment at all-times record high (up to fifty-percent for the youth).

Some commentator repeat that there is little room to cut interest rates any more, but to obtain the same result (tripling of price) the long term rates has to be cut from 3% to 1%. After cutting the short-term rates to zero the Federal Reserve has moved to longer-term treasuries; today 93.6% of the treasuries it is holding will mature in over a year compared to 47.9% in January 2007 (I cover operation twist in Will the Fed ever Get Paid Back). The Fed recently announced a 2% inflation target, leaving the real rate of a 30-year treasury at 1%. There is no upward limit on inflation.

Bill Gross sees the abyss lying ahead and is preparing for it, those at the helm seem oblivious to the dangers ahead. Business, industry, employment, pensioners, savings, the dollar, the whole lot will be thrown into the abyss to save system.

See also:

• Chronology of Money: 1600-1699, spread of banks in the Netherlands and England.
• Professor Antal E. Fekete, covering the destructive effect of rising and falling interest rates on industry and finance.
  
• Bacon on Usury, refuting Bacon’s arguments in favour of usury.
• Bagehot on Money, a monumental five part series about finance and how banks works.
• Liquidating the Debt of the United States, graphs of falling interest rate and a numerical example about asset price and interest rate.

When I wrote Zimbabwe’s Monetary Policy that country was at the peak of its hyperinflation, since then a lot has happened: A unity government, the sacrifice of sovereign rights on the alter of international finance, a resumption of the economic movement of society, et cetera.

In this post I will examine a document from the website of the Reserve Bank of Zimbabwe “December 2009 Monetary Policy Statement: Consolidating the Gains of Macroeconomic Stability” a most interesting document as you will shortly see dear reader.

First the limits of the Policy Statement:

1.2

In drawing this policy framework, the Bank is also guided by Government’s overall short-term, medium and long term economic and social programmes, as recently enunciated in the 2010 National Budget that was unveiled by the Hon. Minister of Finance on the 2nd of December, 2009, as well as the Three Year Macro-Economic Policy and Budget Framework 2010-2012 (STERP II), which was unveiled on the 23rd of December, 2009.

1.5

Under the current multiple currency system, which STERP II has clarified that it will still be with us by 2012, the Central Bank will primarily focus on the following key areas, which form the nucleus of the Monetary Policy activities and priorities over the next 6 months:
(b).
Contingent upon the availability of resources, the Bank will perform the lender of last resort function to ensure continuity and stability in the financial sector’s intra-day trading activities;
(d).
Implementation of the country’s Exchange Control Guidelines and Regulations in a manner that strikes a fine balance between maximising the virtues of economic and trade liberalisation and the need to ensure that the country gets maximum value for its exports shipped out, whilst also getting full value for import payments effected at all levels in the economy;
(f).
As Banker to Government, and as is spelt out in the statutes, the Central Bank will continue to manage the country’s gross international reserves position, including the holding of the Special Drawings Rights (SDR) accounts at the International Monetary Fund (IMF), with Treasury charged with the actual usage of the funds therein;

Notice how the role of ‘lender of last resort’ is contingent upon the availability of resources; in reality the RBZ cannot be the lender of last resort; further on I will quote a paragraph that states just that.

The moment that Zimbabwe gave up its sovereign right to issue and regulate its own money it gave up having a lender of last resort.

Western banks can gamble knowing that their central banks will bail them out, while third-world countries with currencies pegged to foreign money are out-bid on national assets and sometimes completely bought out.

These limitations are quite different from the situation a year ago:

1.7

The events of the 2004-2008 epochs, where virtually all aspects of public sector policy implementation were thrust on the Reserve Bank were a survival necessity that should be avoided now and in the future through robust policy formulation and implementation across all structures of Government.

1.8

The Reserve Bank is on record saying that we will not interfere in any areas outside our statutory mandate if those responsible for those areas are doing their job.

That is exactly why all countries have given up gold and silver and adopted fiat currencies: control. Money is the blood that circulates in society, carrying value from one place to another. Government should control society by political, moral and religious authority. A corrupt government will try using money to effect social movements in its favour, the ultimate result of that is fiat currency and tyranny. Zimbabwe’s hyperinflation only revealed this hidden aspect of modern society.

The last points of the first section might be the most important:

1.11

The Reserve Bank wishes to once again reiterate the inescapable truism that for as long as Zimbabwe remains under the hurdle of the illegal sanctions imposed on it, the fragility of the economy and the current multiple strains on its vital social sectors will be elongated over the outlook period.

1.12

This will continue to slow down the pace of meaningful resource mobilisation, investment promotion and vibrancy of the productive sectors of the economy.

Sanctions are the modern form of medieval sieges, the only difference is the number of people affected. A siege might affect ten thousands and kill a few hundreds, while sanctions affect ten millions and kill hundred of thousands.

I repeat what I wrote before:

Domestic poplar support in the west for such inhuman, unjust and illegal sanctions is the prelude for inhuman, unjust and illegal domestic restrictions; sooner or later societies will pay for their crimes (see The Seven Deadly Sins of Society).

We move forward to the second section and the state of the banking sector:

2.6

Our banking sector is now largely dominated by commercial banks following conversion of lower level licences in recent years.

All investment banks in the US have transformed into bank-holding companies, to be able to tap the Fed in case of a credit shortage.

The RBZ have been very innovative during the last few years, coming up with total new financial systems every six months or so; let us see if their latest idea’s have taken off:

2.7

In my previous Monetary Policy we advised that the Banking Act [Chapter 24:20] had been amended to provide for the licensing and supervision of microfinance banks by the Reserve Bank.

2.8

To date the Reserve Bank has received two applications for Microfinance banking licences, which are currently under consideration.

So micro-usury did not take off in Zimbabwe they are better off (see: Micro Credit is Usury), but the important question is how did the banks weather the end of the hyperinflationary storm:

2.12

The introduction of the multicurrency system necessitated the restatement of banking institutions’ balance sheets to take into account the value of assets which in conventional accounting terms had been depleted to zero, following the period of hyperinflation. The take-on balances were confirmed by the banks’ external auditors.

2.13

As supervisory authorities and in agreement with the accounting / auditing profession and the IMF, the Reserve Bank accepted restated values of owner-occupied and investment properties, subject to prudential “haircuts”, as part of qualifying capital.

Assets depleted to zero, i.e. debts hyperinflated away. The bank might have a note of one million, but can not collect because the smallest currency bill is worth ten millions. The solution was the same one used in Weimar Germany, but instead of the central bank mortgaging the property to back the currency in Zimbabwe it was the private banks that mortgaged the land and property to back their balance sheets.

You might wonder dear leader how the banks survived if their assets have been reduced to zero, easy: banks function according to the principle of the balance sheet, everything they lend (i.e. asset) is balanced by something they owe (i.e. liability); assets as well as liability were inflated away, including customer saving accounts.

Let me illustrate with a story from Germany circa 1922, it goes like this: A gentleman had sixty-thousand marks in his saving account. The bank sent him a letter telling that his account has been closed and they are sending him a one million mark banknote because that is the smallest available banknote in circulation. The punchline of this story, the post stamp on the letter was worth five million marks!

Save your fiat money in usury-banks and you will lose it all; it happened in Germany, Hungry ,Thailand, Argentina, et cetera.

Impact of the Global Financial Crisis

2.29

The effects of the global financial crisis have been far-reaching, affecting both the financial and the real sectors of the economy. The most evident impact of the crisis is declining demand for local and regional exports, depressed global commodities prices, job losses and currency dislocations.

2.30

The level of international capital inflows, including foreign aid, has also declined, as countries attempt to consolidate their financial positions.

2.31

Access to both international and regional lines of credit has been constrained, contributing to market- wide illiquidity and hampering effective financial intermediation by the banking sector, particularly, to the productive sectors of the economy.

Poor weak countries that open their markets to international foreign capital play a very dangerous game against an opponent who holds all the cards and changes the rules to suit himself, the only outcome is loss of national capital & resources.

Countries that become specialised exporters, following the fake advise of Western experts will be under the mercy of circumstances playing out on the other side of the world:

The eruption destroyed millions of flowers—in Kenya Floral exports make up 20 percent of the Kenya’s economy—and they have been completely shut down by Europe’s flight ban. The head of the Kenya Flower Council told the BBC that local growers have been forced to destroy 3,000 tons of flowers since last week with devastating effects on the local economy.

—Iceland’s volcano: 9 strange facts

Most of these countries have opened up their markets to receive aid from the West. Aid to Africa is one tenth of the money removed from Africa and even that small amount is used to implement policies favourable to the giving power (see Michael Hudson’s book The Myth of Aid). We saw that clearly with Zimbabwe, aid withheld when the people were dying in the street and given when a pro-Western government came to power.

Credit Reference Bureau
2.34

The Reserve Bank encourages banking institutions to consider funding the setting up of a Credit Reference Bureau.

2.35

The establishment of a Credit Reference Bureau will provide a central database for credit information sharing which will, among other things, augment credit risk management, and provide the requisite support infrastructure for the implementation of Basel II.

Such agencies as the ‘Credit Reference Bureau’ are not set up to protect the consumer from bad loans, but instead to protect the lenders from borrowers. Note how the banks are going to set up this agency and not the state, because it will function to their benefit.

When a lender decides to knowingly lend to people with bad credit and then sell these loans as triple A loans you get a ‘sub-prime crises’.

Zimbabweans should not borrow money because the Credit Reference Bureau give them a high score or a passing grade, forewarned is forearmed.

But banks are secondary, let us examine what is happening in the real sectors:

3.33

In terms of debt owed to Non-Paris Club members, China remained the largest creditor at US$323.4 million, followed by South Africa (US$16.3 million) while the balance is owed to Saudi Arabia (US$1.6 million) and Israel (US$1.2 million).

China is moving into Africa, their influence will be short lived as they face collapse of central government in less than thirty years (see: The Future History of China Today)

Gold

3.62

Gold output is estimated at significantly increase from 3 072 tonnes recorded in 2008 to 5 tonnes in 2009 [should read: from 5 tonnes in 2008 to 3702 tonnes in 2009]. This is largely due to the late resumption of operations by gold miners.

3.63

The liberalisation of gold marketing introduced in 2009 has, however, allowed gold mines which had suspended operations to resume production. In addition, the issuance of gold dealership licences to gold producers has resulted in mining houses securing lines of credit, critical in increasing production.

3.64

As a result, Zimbabwe’s largest gold mine, Metallon Gold, which had closed down its five mines, has since re-opened two of its mines, and is expecting to reopen the other three by year end.

3.65

In addition, capital injections allowed Mwana Africa to re-open its Fredda Rebecca mine and enabled it to complete its first phase of operations in September 2009.

3.66

Gold production as at November 2009 stood at 3 700 kgs.

Interesting developments in golds. I wonder what happened to all that gold though?

4.18

Since the liberalisation of Gold exports in January 2009, the country has exported Gold worth USD106.32million as at 31 December 2009.

$106 million is about 3700 kg worth of gold. Gold out, worthless dollars in. The 3,7 tonnes of gold would have produced 950 thousands zimbi’s (see: Hight Treason in Zimbabwe), more than enough for circulation. Building an economy based on a stable gold coin would have made Zimbabwe the only country in the world with a non-fiat currency, that would have been a magnet drawing capital from the moon itself!

3.81

In the absence of a lender of last resort facility and a non functioning interbank market, banks are not prepared to over expose themselves through increased lending to private sector.

3.82

The perceived high credit and liquidity risks in the country have seen banks forgoing returns on lending to productive sectors by depositing their excess funds offshore.

3.83

Financial institutions’ foreign assets are largely composed of deposits with foreign corresponding banks. As at October 2009, deposits with foreign banks accounted for 51.2% of foreign assets.

“In the abasence of a lender of last resort”! what happened to statement 1.5(b): “the Bank will perform the lender of last resort function” you might ask dear reader. Well that was only contingent on the availability of reserves. In most third-world countries the central bank can print its own currency but because of liberal capital regulations it has to defend the value of the currency in the open market with reserves. The result is that credit is withheld by the central bank resulting in the same situation as in Zimbabwe. Again the hyperinflation of Zimbabwe did not create these conditions it only exposed the cover.

The crazy situation in Zimbabwe where the savings of the people are lent to foreign banks who bankroll their own companies to go into Zimbabwe and buy all the assets, is the same one prevailing in almost all of the poor countries of the world. The world is currently lending money to the raiders of Wall Street to buy their assets and national resources.

Poor countries in Africa, Asia and south America who open up their small weak markets to the powerful forces of international capital and finance imperialism will never have a “monetary policy” because they have already given up their destiny. The slaves of Rome had more control of their destiny than these wretched sovereignties.

I leave sections 4 & 5 to the curious reader.

In a preliminary report released Tuesday, the U.S. Federal Reserve said it will turn over $46.1 billion to the federal government. That money comes from income the central bank received mostly from its investments in U.S. Treasury bonds and mortgage-related securities.

The Federal Reserve also made money from loans to banks and other firms.

The bank’s profits follow an unprecedented amount of spending in emergency investments.  At the end of 2009, the bank was holding more than $1.5 trillion in U.S. government debt and mortgage-related assets.

After paying operating costs, the Federal Reserve turns over all profits to the U.S. Treasury.  It returned $34.6 billion in 2007.

—US Federal Reserve Makes Record Profits in 2009 [my emphasis]

In September 2009 the Fed’s balance sheet was $2,144 billion, while in June 2007 it was $869 billion (source). Thus the profit-to-assets ratio is:

click to view

Record profits, indeed! Record low profits that it is.

Is it possible to have a fiat currency that does not end in hyperinflation? In this post I will try to explain why the answer is a resolute No.

Irresponsible governments who print prodigious amounts of paper to fund expenses beyond their ability to carry the debt are certainly going to end with hyperinflation, as is the case in Zimbabwe for example. The belief is that governments that have monetary experts at the helm and a strong economy that can service the debt-No economy can pay off the debt of the government and prosper at the same time unless the payments are colonial profits-then the currency can live on without the danger of hyperinflation; that belief is completely false.

To begin let us look at a time when the gold standard was in effect, so by comparison we can better understand fiat money. Here is the balance sheet of the Bank of England Issue Department at the end of 1869 (see Bagehot on Money):
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In Liquidating the Debt of the United States I showed how the central bank lowers the rate to help expand and refinance the public debt, but there is another reason why lower interest rates are demanded and greeted by stock market investors:

“The basic fundamental value in buying a stock or a business is the cash flow it can produce over time. Investors discount expected cash flows to a single present value to come up with a valuation for a stock or business. You value a stock the same way you would value a dry cleaning business. A prospective buyer of a dry cleaning establishment wants to know how much cash it can produce over time after all the bills are paid. Discounting the anticipated future cash flows of a business to the present (time value of money) helps you determine what the dry cleaner is worth today (valuation).”

-Where Valuations and Technical Support Intersect by Chris Ciovacco [my emphasis]

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When third world countries that had adopted the so-called ‘socialist’ system started to collapse in the seventies and early eighties they pointed to the future of the whole socialist block, they were the canary in the mine. The imported system with its western symbols and nomenclature was grafted by force on these countries’ societies, this left them extremely weak and so they failed before the countries that exported the system to them did.

The grafting of western liberal democracy on weak third world countries-with imported symbols, nomenclature, foreign educated leaders and deadly force where resistance is encountered-has already produced several victims: eastern Europe, the Asian Tigers, Russia, Argentina and last but not least Zimbabwe.
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