April 20, 2008

Elaine Meinel Supkis



I compare two studies today. One is for the Federal Reserve and is filled with nonsense that tries to see how minimal a reserve we can get away with. The other is for NBER and is a study examining previous housing boom/busts in the last 30 years. It, at least, is sort of sensible. Citigroup has only 7.7% reserves which is utterly laughable. They blew through $16 billion in reserves this last six months. They are more or less bankrupt. But their stock has soared on the absurd assumption that the banking crisis is over thanks to the stupid Federal Reserve using their helicopters to drop trillions of dollars into the grinding maw of asset destruction. And this is worsening global inflation. But the Fed pretends they have nothing to do with global inflation. And truckers in the US are going on strike May first while Russia won't sell any more gold in international markets, they are keeping it at home to fight inflation.

Citigroup May Need to Sell Assets to Bolster Capital

Citigroup Inc. shareholders, cheered by a $5.1 billion first-quarter loss that wasn't as big as some analysts forecast, face growing concern that the bank may have to sell assets, reduce the dividend and attract outside investment to bolster capital. Citigroup's so-called Tier 1 capital ratio -- a measure of its ability to withstand loan losses -- fell to 7.7 percent at the end of March, the New York-based bank said yesterday. Citigroup says it needs a 7.5 percent ratio to provide a margin of safety and preserve its credit ratings. The bank's shares surged 4.5 percent yesterday after it reported $16 billion of asset writedowns during the quarter, less than some observers predicted. The writedowns burned through much of the $30 billion of capital Citigroup has raised since late last year, leaving it vulnerable to further charges and loan-loss provisions.



There is so much Federal Funny Money™ floating around the planet right now, strange and stupid things are happening. The sudden rocket-upwards of the stock markets this week based on what is basically very bad news is typical. Across the land, in the last few days, there has been much hue and cry about how the massive banking collapse in the West G7 nations is now over and all is well and the previous status quo is now reset and will resume. The feeling is, we are back in 2003 with super-low interest rates and cheap oil. And we will now plow ahead, getting richer, faster. All assets in the G7 community will resume climbing thanks to a new flood of red ink from the central banks.



There is a gigantic fly in all these ointments: unlike in 2003, we now have global inflation raging. And the flood of Federal Funny Money™ is making this worse and worse, rapidly worse. In 2003, we could cut taxes because the Federal deficit was 'only' $6 trillion. Now it is reaching to $10 trillion. We can't run up half a trillion in red ink every year forever. Like all systems that have a fast growth rate, there is a ceiling. There is a point in time when it will collapse.



Citigroup is basically bankrupt. This fictional bank only has 'reserves' due to the Federal Reserve manufacturing fake money to hand out as 'reserves'. And these 'reserves' are not gold, they are not other nation's currencies, they are TREASURIES which are debts! Which we, the US pubic, owes! Even so, the reserves of this bankrupt bank is only 7.7%? Talk about ridiculous! Why have any reserves if they are so low? Citibank had to go to the Arab oil kings for more funding because their reserves vanished. The Saudis are getting very steamed about all this. The Federal Reserve had to assure them, the US isn't out to cheat them.



There is a direct connection between Citibank's bankruptcy and the fact that Saudi Arabia this week announced they are cutting oil production is very possible. The Saudis are very angry that Citibank wrote down $16 billion which they replaced to keep it from going Bear Stearns. This article notes that these losses 'burned through' all the money Citibank got but doesn't mention from whom.



The Saudis know how to count. They are balancing their books by dropping oil production until they make up this extra $16 billion Citibank burned. The other day, there was news about a bank in India that allowed termites to eat up paper stored in their vaults. Then they told the victims to drop dead, they were not going to restore the lost wealth. Inflation is a termite colony set out to reduce the debts of the bankers and the ruling elites. They eat up all the savings and then the losers are told to go starve to death.



Saudi Arabia is now determined to regain their lost Sovereign Wealth via raising the price of oil. Since the US has cut Iran out of world oil markets, this is laughably easy. As we all die from high energy costs, just remember: the US wanted this. Our overlords set up the system that makes this possible. We are not at the Hubbert's Oil Peak yet but we are drawing close due to consumption rising. Every little political disruption will hammer us quite suddenly and ferociously.



Citibank should be forced into receivership. Saving it by creating hideous global inflation is stupid.



For first time, Central Bank buys gold from producers

MOSCOW. April 18 (Interfax) - For the first time, the Central Bank

of Russia purchased gold for its international reserves from gold

producers, a source in banking circles told Interfax. Previously the Central Bank had always purchased gold on the

interbank market.



Last year, to boost the dollar, the EU and Switzerland decided to pretend that gold had no value to bankers. This novel idea has been peddled by debt-raddled empires for centuries. When an empire is gaining strength, they are pro-gold. When the debts from endless wars and infinite corruption mount, all empires decide that gold is worthless and they don't need it. This infantile approach leads to hideous inflation as well as infinite debts and the results are stark: destruction of the empire, the capital in flames, all is lost. If the Goddess of History is certain about something, this is it. It is most interesting that the Russian empire which imploded and collapsed is slowly rebuilding and using the ancient virtues and principles of wealth accumulation. China, even more so. China's pursuit of old banking styles is most impressive. They admit to inflation and realize that food and fuel inflation is very important. And they raised the bank ratios to an impressive 16%. This is much more than double what Citibank considers to be a good reserve ratio. Citibank's ratios in the face of rising and worsening inflation is laughable. The US government should force all the banks to raise their reserve ratios and to not let them use crummy, illiquid papers as reserves for making loans.



Traditionally, banks had to attract SAVINGS in order to generate more money via the magic of signing on more loans. Instead, they played this game that excluded savings which is why the US has negative savings. Back when that dire news hit, I predicted a banking collapse. Which we are deep into these days. Savings are NOT improving at all. Instead, thanks to the super-low interest offered for savings, people are saving even less. And this is getting worse. Until interest rates rise above the rate of inflation, savings will collapse. But if the US lowers reserves so they don't matter, then the bankers can hand out loans with impunity, of course. Which is the problem!



Now here is a study commissioned by the Federal Reserve that shows us clearly how stupid they have become. This is due to being befuddled by modern economic teaching which has replaced intelligent analysis based on real dynamics with this goofy system of making up scientific formulas that 'describe' situations without UNDERSTANDING them. This mindless sort of mathematical magician work is hopelessly incapable of explaining relationships and systems. But it makes for great magic spells!



Federal Reserve Bank of New York

Staff Reports: Monetary Policy Implementation Frameworks: A Comparative Analysis

Abstract

We compare two stylized frameworks for the implementation of monetary policy. The first framework relies only on standing facilities, and the second one relies only on open market operations. We show that the Friedman rule cannot be implemented in the first framework, but can be implemented using the second framework. However, for a given rate of inflation, we show that the first framework unambiguously achieves higher welfare than the second one. We conclude that an optimal system of monetary policy implementationshould contain elements of both frameworks. Our results also suggest that any such system should pay interest on both required and excess reserves.

*snip*

Our analysis yields two main results: First, a pure corridor system cannot achieve very low rate of growth of the supply of reserves. Second, for rate of growth of the supply of reserves that can be achieved by both systems, the corridor system provides higher welfare. Using a simple parametrization of the model, we find that implementing a 2% inflation target with a corridor system induces a welfare gain of about 1% relative to implementing it with open market operations only. This result arises from the fact that a CB paying interest on reserves reduces the distortion associated with holding these reserves for any inflation rate. The first result arises because the CB does not have the authority to tax agents to remove reserves from the economy. Only the government has the power to tax agents to finance its debt. However, the CB can require that open market operations be conducted using the governmentís debt (Treasury securities). By buying some of it, the CB can then ináuence the amount of reserves that is extracted from the economy through taxation. Hence, the CB can remove reserves from the economy, but only indirectly. A CB that uses a pure corridor system can reduce the supply of reserves by charging a high interest rate for the reserves it lends. However, as the rate of inflation becomes su¢ ciently low, the opportunity cost of reserves decreases and agents prefer to hold reserves than using the CBís borrowing facility. This effect imposes a lower bound on the growth rate of the supply of reserves, which is necessarily higher than the Friedman rule.



And what is the gist of this magical wand waving? I fear, it is seeking an excuse to have little to no reserves! I joke about how the Federal Reserve is neither Federal nor has reserves! And look! We don't! It is that simple! The Federal Reserve, unlike the Bank of Japan or the Bank of China, has virtually no reserves! Both of our competitors have huge dollar reserves. We have tiny yen and yuan reserves. China and Russia are building up their gold reserves. We are not. Note how this study talks about the government taxing people to remove reserves from the economy! Isn't that interesting? Do our politicians talk about this?



In wartimes, the government sells bonds in order to soak up excess savings and stop inflation! But who is going to buy these bonds if inflation is raging out of control? This study was probably begun over a year ago back when the goofy idiots in the Fed imagined, thanks to offshoring our industries and reducing wages ruthlessly, the US had no inflation. When there was inflation in food and fuel, they decreed this didn't count! So they could pretend there was 2% inflation when it was well above 5%. Now, this paper arrives at Bernanke's desk right when rampant inflation is raging and there is NO reserves in the populace outside of the top 1% of the rich, who can 'sop up' this inflation via taxes!



Indeed, it is so much the exact opposite, it is very painful! Look at the tax goodies being handed out! Instead of collecting taxes to cut down on inflation, the Fed and the Fed are both creating more inflation! Already, I see commercials on TV preparing to lure everyone into stores to buy stuff with this government inflationary handout. And the government has been inflating for the last 35 years! Only very briefly, for one year, did this stop. And it so upset the guys inflating our currency to death, they ran off screaming for tax cuts. Tax cuts=inflation. See how simple is that? The Fed, itself, admits this.



The sole reason they have these complex magic formulas is so they can find a way of cheating reality. They hope, if they finesse things enough, they can have their cake and eat it too and not cause huge inflationary stresses. This stupid and childish desire is at the root of these equations, not a seeking of good systems that are reliable, sane and healthy. The Fed wants to see how sick they can make our system and not kill it. But they are killing it. This is because of the nature of magic formulas: they never work in the end due to simple greed. Everyone wants infinity.



Now here is a non-Federal Reserve study. It is actually quite good. It is from the National Bureau of Economic Research and was outsourced to Harvard. This sensible study tries to compare a group of different banking collapses to see if we can find a common matrix, a systematic course of events, one thing following another. Obviously, history is a great guide to the future and they use this tool to peer into our own future:



Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International

Historical Comparison*



Carmen M. Reinhart

University of Maryland and the NBER



Kenneth S. Rogoff

Harvard University and the NBER

The first major financial crisis of the 21st century involves esoteric instruments, unaware regulators, and skittish investors. It also follows a well-trodden path laid down by centuries of financial folly. Is the “special” problem of sub-prime mortgages this time really different?



Our examination of the longer historical record, which is part of a larger effort on currency and debt crises, finds stunning qualitative and quantitative parallels across a number of standard financial crisis indicators. To name a few, the run-up in U.S. equity and housing prices that Graciela L. Kaminsky and Carmen M. Reinhart (1999) find to be the best leading indicators of crisis in countries experiencing large capital inflows closely tracks the average of the previous eighteen post World War II banking crises in industrial countries. So, too, does the inverted v-shape of real growth in the years prior to the crisis. Despite widespread concern about the effects on national debt of the early 2000s tax cuts, the run-up in U.S. public debt is actually somewhat below the average of other crisis episodes. In contrast, the pattern of United States current account deficits is markedly worse. At this juncture, the book is still open on the how the current dislocations in the United States will play out. The precedent found in the aftermath of other episodes suggests that the strains can be quite severe, depending especially on the initial degree of trauma to the financial system (and to some extent, the policy response). The average drop in (real per capita) output growth is over 2 percent, and it typically takes two years to return to trend. For the five most catastrophic cases (which include episodes in Finland, Japan, Norway, Spain and Sweden), the drop in annual output growth from peak to trough is over 5 percent, and growth remained well below pre-crisis trend even after three years. These more catastrophic cases, of course, mark the boundary that policymakers particularly want to avoid.



Except for Japan, all the other nations in this study were not world powers. When a small country does what the US or Japan has done, they are hammered pretty relentlessly by outsiders. The US is quite different and this study doesn't examine the obvious and important differences. Namely, the entire world outside of a handful of terrorists who are taking great delight in our economic fumbles, the rest of the world runs a huge trade surplus with the US. So they want to help us keep on our wild misspending and wild overspending! They will literally move heaven and earth to keep us afloat. They desire for us to not change course. They want a strong dollar! They are not seeking to drop the value of the dollar. Asia is holding amazing amounts of dollars in order to control US inflation and US banking values. The oil pumping nations are trying to keep our banking system solvent!



They are not selling us. Or rather, because they are selling to us, they are letting us skate on very thin ice. But even China cannot keep the US afloat if we bloat our debts to impossible highs. There is a limit and then a grinding global collapse will happen. This study is rather shortsighted because it is not examining the US troubles in light of other GLOBAL EMPIRES. These have only a stellar few but significant few: the collapse of the Roman empire, the Holy Roman Empire, the Spanish Empire, the Netherlands Empire, the French Empire, the English Empire and the German Empires. All three of them. They feature something this study ignores: wars. Not one of the nations in this study were overspending on futile wars. ALL empires collapse due to this.



Aside from this caveat, this study is worth reading. Let's look at the charts they provided:



All banking collapses follow on the heels of huge runs in creating mortgages. The more these deadly things are made, the greater the crash. The faster the loan are lent, the swifter the decline as the army of new debtors give up as housing values collapse. This is a bad system that has to be avoided. This is simple: when regulators see housing suddenly climbing in value and numbers, they raise interest rates! Wow! We better tell Greenspan and Bernanke!





This chart shows us that running more and more red ink means more and more likely there will be a banking crisis. Duh. This simple correlation needs no fancy mathematical formulas. It is laughably easy to spot. Too much money spent on stupid wars=bankrupt empires. Haw! This could be the a one sentence 'Decline and Fall of Great Powers'! And of course, as Professor Kennedy said in his great work, deindustrializing is a certain road to non-great power status! I will also note that Germany is the most allergic to inflation and they are the world's #1 export industrial power! WOW. With unions! WOW. And communist China is now #2 and rapidly closing in on Germany's top status. The US is below that, we export a lot of stuff. We just don't worry about importing twice as much. Gah.



And none of these studies tie in this vital, utterly important fact! The red ink is all over the systems! And NO nation can thrive this way. NEVER. As Germany, China and Japan struggle to keep us afloat, we can't float if our boat is filled with nothing but red ink. End of story.





The debt-riddled US economic system hopes we can avoid going into negative growth numbers. To achieve this end, we are inflating global systems. Anyone can grow with global inflation! This is the definition of inflation! But there is a problem: the US can inflate the world but this will cause riots, revolutions, wars and utter destruction across the entire planet. This is STUPID. The world's biggest empire should be as allergic to this as Germany seems to be allergic to inflation.

Harvard:

Perhaps the United States will prove a different kind of happy family. Despite many superficial similarities to a typical crisis country, it may yet suffer a growth lapse comparable only to the mildest cases. Perhaps this time will be different as so many argue. Nevertheless, the quantitative and qualitative parallels in run-ups to earlier post- war industrialized-country financial crises are worthy of note. Of course, inflation is lower and better anchored today worldwide, and this may prove an important mitigating factor. The United States does not suffer the handicap of a fixed exchange rate system. On the other hand, the apparent decline in U.S. productivity growth and in housing prices does not provide a particularly favorable backdrop for withstanding a credit contraction. Another parallel deserves mention. During the 1970s, the U.S. banking system stood as an intermediary between oil-exporter surpluses and emerging market borrowers in Latin America and elsewhere. While much praised at the time, 1970s petro-dollar recycling ultimately led to the 1980s debt crisis, which in turn placed enormous strain on money center banks.3 It is true that this time, a large volume of petro-dollars are again flowing into the United States, but many emerging markets have been running current account surpluses, lending rather than borrowing.



This part of the study had to be included for all the infants and babies who have to read this report. Why, thanks to the Chinese and Germans and maybe the Saudis, we won't have to pay the piper! If we ignore global inflation, US wars and other horrors, maybe we can have a shallow recession! Right! And this is the problem: we can do this only so long as the Chinese want to bail us out of our own messes. And trust me, they are getting extremely angry about all this. The push by the US and Europe to dismember China this month has been tremendously dangerous. It is beyond words: life and death. This is a great way to start WWIII. Russia disintegrated peacefully---except for Chechnya---and the Europeans promised to not let the US menace Russia and put military bases in Russia.



But we did! And Europe broke promises and moved NATO forwards to Russia's front doorstep and sneered at Russian objections as the US parked offensive missiles aimed at Moscow in Eastern Europe! China knows they can't trust the West even slightly. The Russians keep forgetting this important lesson. So we have a financial system built on the good graces of China and Russia being friendly with Europe and the US even as both work hard to destroy Russia and China. Only the red ink is killing the G7. They goofed. They left out this important consideration. And they are nervous about the energy issues. Trapped, they wonder about just making global inflation and this way, destroying China's economic power and to render the loot sent to the oil pumping nations, worthless.



This is a most dangerous game. I sense it is evolving into a dynamic whereby the oil nations will declare an alliance with Russia and China. Already, we pushed Iran in this direction. Next: Saudi Arabia.



MAY DAY: A Call To Action

UPDATE: The Teamsters Union is also planning a strike. The Postal Workers are planning moments of silence and work stoppage.

*snip*

Nearly one hundred Longshore Caucus delegates voted on February 8 to support a resolution calling for an eight-hour "stop-work" meeting during the day-shift on Thursday, May 1 at ports in CA, OR and WA to protest the war by calling for the immediate, safe return of U.S. troops from Iraq. “The Caucus has spoken on this important issue and I’ve notified the employers about our plans for 'stop work' meetings on May 1,” said ILWU International President Bob McEllrath.



Diesel is now a dollar more per gallon than gasoline. This is totally insane. Diesel requires less refining! But the inflation in fuel used for commerce is faster than consumer uses! This is a VERY BAD SIGN. This is hammering farmers and truckers. Since these people also are big Republican supporters, they have to look in a mirror to see who was the fool. In Europe, truckers have shut down whole nations, hugely. And the military had to be called out. Here, I am betting this will have virtually no effect. Until the guys who do the labor figure out they have been conned, they will flounder and die. Soon, Mexico will flood us with cheap trucking labor. This is part of NAFTA. Note that any anti-NAFTA people running for office have been ruthlessly eliminated by the media.



The giant sucking sound continues. And it is connected to inflation and to the overspending by our government and our banking system that has no reserves! Lord help us all.



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