Wednesday, December 8, 2010

In Response to Pater Tenebrarum's Economic and Monetary Conditions in the US
You wrote plenty here Pater. The main deflationary force would hit financial assets if they allowed it to actually occur. The value of money, whether it be gold, silver or paper is in its payment of debt, something you mentioned far exceeded the money supply. The debt in the banking system includes the capital of banks which comes at the front of the line, as it is the imaginary amount on the credit side which stands between the deposits liabilities of banks and their inability to pay them. Reserves or not, the banks have no capacity to make loans and create deposits in what would be a good faith, conscionable manner. That is to be surety of what one cannot be surety of is fraud on its face.
I appreciate the comments about the currency being a reduction of reserves. The reserves were reduced when the currency was drawn. You might note how much total reserves were supposed to be in the banking system when this mess began. It was hardly above the amount of currency. Do you think the banks were sitting on $800 billion in currency and drawing no interest or do you believe the logical, that the reserves as described by most people were already out of the banking system? I believe this to be key as to what we have seen over the past few years and the true nature of the credit crunch, the circulation of liabilities of bankrupts in lieu of cash.
The true inflation in the system has manifested itself in high asset valuations and high corporate profits. The stock market, at least the stocks evidenced by the SPX, pays a 2% dividend roughly. No only would these dividends deflate in a deflation, but the credit expansion that has created this excess value would cease as well and the result would be a liquidation of value. I believe this to eventually be an inevitable situation that is merely being postponed. I can see a 50% reduction in dividends and a move to the historical 3% dividend peak value, meaning peak value of the SPX falls by 2/3. Normal value, a dividend yield in the 4.5% range would reduce value over 80% and the entire pension fraud would be exposed.
Where is the currency? Banks don’t put out currency for the hell of it. People are holding it here and around the world because some of us have enough sense to know the banks are broke. The illegitimate debts of banks that have circulated for years have been replaced by the QE. This round of QE merely states that they need more cash to allow bankrupts to write bad checks and little else. If you marked to market the assets of the big 4 US financials, I doubt any of them would be solvent. This factor not only allows the fraud to continue, but it allows the banks that receive the excess reserves an avenue that doesn’t include lending the cash back to the bankrupts. Remember, if you examine the amount of cash, it is clear there were no reserves whatsoever left in the banking system when this mess started.
The system of debt, credit and banking is so paradoxical that it is impossible to predict what will happen. But, in general, all debts must be paid, extended or defaulted. It is cold outside and people can’t pay their rent. Gasoline is going up without demand and I suspect it is the use of excess credit directly. Credit is being used to game the system and support unsupportable liabilities.
There can’t be a true recovery until there is a transfer if cash flow to the lower half of the income structure and a liquidation of debt. Debt is as much a part of the money supply as the deposits and currency are, the absolute paradox of the system. The true debts of a system cannot exceed the true assets. Thus, we have a pension system that is supposed to pay $X per month to its beneficiaries. If the assets, which ware debts of others, whether it be claims on the profits of corporations through stocks or bonds or mortgages, cannot pay the beneficiaries, the income doesn’t exist. A collapse of this system either leaves the retiree with nothing or a fraction of what he thought and planned he would get or place a debt on the system that probably cannot be paid. There not only is a difficulty in liquidating such liabilities, but a reluctance to allow liquidation to occur. This gives the meaning of the term “This note is legal Tender for all Debts Public and Private”, which is the only thing that keeps this stuff worth more than the ink on the paper.
There is nothing more powerful in this system than the dual columns of liabilities on the bank ledger. There are liabilities of the bank and liabilities to the bank. Most people look at these as assets and liabilities, but due to the nature of the entity, banking rests on the performance of both the debits and the credits. This is because the validity of either rests on the other. XYZ corporation can have plant and equipment on one side and debts and shareholder equity on the other and the only connection is that the plant and equipment must generate enough cash flow to pay the debts. Banking, the very existence of the cash comes from the debts and the debts can only be paid by the cash or through default.
Bernanke can do QE, but the cash still belongs to someone. The holder of the debt securities only changes hands. I believe you touch on this, that if the cash goes to a welfare recipient, it ends up in the till of a retailer who has sold his goods and services. Thus, indirectly the government owes the retailer for what he sold. The bank, instead of holding a debt instrument, holds reserves. The bank either acquires a new debt instrument or makes a new loan. If they make a new loan, they have in essence created a new bank liability and thus they are liable for 2 such accounts. The banker can also use the money to acquire commodities and other assets, but in doing so they also create a new liability and their balance sheet becomes more intangible in value, as the value of what they have purchased is less definite.
When we used gold, there was gold and bank credit. Gold was a limiting factor and that was all it was. The majority of money in circulation was bank credit, not gold and the system was insolvent immediately upon the extension of credit beyond the supply of gold. Nothing has changed in banking but the limitations and the willingness of the government to cover up the insolvency to the point that entire countries go broke covering up their banks insolvencies. This has allowed the creation of a series of IOU’s to the point those that created the debts that cannot be paid on both sides of the ledgers and are essentially bankrupts are calling the tune. I suspect QE is nothing more than a plan to allow the big banks to write bad checks until the system is looted to the point that all the debts are owed to them instead of to the people. Once one side has all the credits and the other side all the debts, game is up.
The entire system is a system of bank credit and until it can be seen as such, it cannot be understood. Watching the CPI or any other indicator bears little sense as to what is truly occurring. What is occurring is a widening gulf between what is owed and what can be paid. What is owed is so much beyond what can be paid that the debt value of currency either has to increase or collapse. I believe both will occur, but collapse only after increase. I think we will know when to move when assets represented by the SPX move to a price above fair value, which I contend is a dividend yield of 5% or higher.

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