Breakout or breakdown?

Who knows? But I'd say we don't have to wait long to find out.




I would note it's ECB MTM party time, after which there is a general history of come-downs. Not that I'm a seller.

Who wants to sleep in a city that never wakes up?

Well, there's me for a start! :-) Sleeping dogs don't lie forever.

Stating the obvious now, there's just over a week until the next MTM party at the ECB. I don't know about you, but I don't see them wishing to mark their assets low. Jus sayin'.


^{but Dorothy was right tho}

Buy the bonds? No alternative? Really?

Everyone in the media, well I should say those very few people in the media that talk about economics and the euro debt problems in particular then, seems to consider only the idea of the ECB buying the bonds of the troubled sovereign nations. To prop up the decades-old game of "ignore the debt". Rolling over old problems. Kicking the can further down the road. Playing by the $IMFS rules. Making the creditors suck up the problem and bail out the debtors by caving in and buying up their debts as they need rolling over.

Why is it that nobody seems to be considering the alternative idea? That the debts won't be rolled over. That the can won't be kicked any more. That the debts won't be ignored any longer. That they will burn and go to debt heaven (or is it hell?). That perpetuating the $IMFS is not the only game in town.

Here is what I think will happen. The troubled sovereigns will default. The banks around the Eurozone will suffer massive losses as a result of the failed loans to those sovereigns. The member CBs of the ECB will QE some new base money into the system to replace the missing deposits at their banks — the money that won't be coming back to the savers due to the defaulting sovereign bonds.

There aren't more euros in the system, they're simply qualitatively different than the ones that were replaced. They are available to spend earlier than planned. Like, immediately. M1 base money replaced M3 credit money that was already in the system but vanished.

So, for example France and Germany will receive a massive infusion of new M1 base euros into their banks, to replace the missing M3 credit euros that can't be returned to depositors because the loan failed. There will be a much higher number of euros in the overall Eurozone that day than there would have been otherwise (they would otherwise have arrived later, as and when the loans were worked off by the debtor nations). But no more than would have been in the system later if everything had worked out according to the old plan. All this money was already baked into Eurozone M3 before.

A higher percentage of the euros in the system will reside in Germany and France — no more than were going to later anyway, in fact slightly less because there won't be the interest payments that would have rolled in over time too, but for today there are more than were previously planned. A lower percentage of current euros would also be resident in the defaulting sovereign nations than would have otherwise been the case today. On the plus side, they won't have to find the euros to pay the interest over time though. Or the loan principle.

The creditors have a bigger slice of the pie than before. The debtors have a smaller slice. More supply (supply brought forward from the previously-planned future) will have diluted the value of the euro today, earlier than planned, but the creditor nations will have been repaid in full for this dilution, and they are only receiving what they were scheduled to at a later date anyway. The dilution was going to happen over time anyway, it is simply brought forward to today. They are not down on the deal. You might even consider they are actually up on it, because they got their money back and can spend it early. The debtors are down on the deal, but at least still allowed to participate in the game as long as they agree to the new, stricter rules, and free from the shackles of their old debts. They'll have to learn to live within their means, but in the long run this is only healthy for them anyway.

What am I neglecting to factor into this scenario so far..? Could it be creditors elsewhere, outside the Eurozone, who can't dilute the euro money supply in their favour, like the Eurozone creditors, but who will also have a problem with the failed loans and an inability to return savings to their depositors? What will they have to do? They will have to make their own CB print the local currency to recapitalise their banks and make their depositors whole. Will this punish the debtors but bring the creditors out relatively better off? Or will it create a drop in exchange value for their local currency against the euro, because the supply most definitely then would have been immediately expanded beyond what was previously planned, not just early but previously unplanned. Is this rewarding the Eurozone members and punishing the non-Eurozone ex-creditors? I think so, yes. And, in particular of course, the Eurozone creditor nations — who now have a bigger slice of the cherry pie waiting for them to eat it, while the non-Eurozone creditors suck on a cup of their own brand bone sucking sauce.

Quite a show!

A thing for me

In the real world around you, there are only so many things available. In the pretend world of money, there are an unlimited number of claims to those real things.

If we could somehow scrape together a comprehensive list of all the things in the world that anyone could possibly buy, add up the total value of them all, we'd establish that a very large amount of money would be required for all those things to be bought.

But not as big a number as the total of all the money already in the world. (And there's still plenty more money coming from where that all came from!)

How can all the claims for stuff spread out across the bank accounts of the people of the world (not even considering the additional claims that are coming into the system all the time) provide all of the claim-holders with the stuff they will wish to purchase at some point in the future (why else would they hold money rather than spend it on something right now?), given there are already so many more claims than goods available?

What if you suddenly came to realise that your current savings are not really worth what they say they are? Because, clearly, we can't all buy what we think we can today. There is too much money and not enough stuff.

You understand this at some level as of today, if you didn't consciously know before. But what if everyone else realises too? Will you beat them to spend your money on stuff, before all the stuff runs out and your money no longer buys you anything?


^{No more claims for me,
a thing for me please!}

Debt, Equity, Debt-for-Equity

Base money = 'equity'

Credit money = 'debt'

QE = 'debt for equity swap'

Hyperinflation has already happened. We the people requested the bankers to issue more credit money. We can try to pin the blame on bankers, but at the end of the day the reality is they could only lead a horse to water. It only drinks if it wants to.

The bankers resold these loans to others, who had equity and were happy to exchange it for debt securities with a yield (creditors -- depositors and investors). The creditors gave up their equity, but the key point is that they still considered it their equity. The debtor also took that same equity and spent it into the economy somehow or another (why would they pay interest to stick it in a shoe box?).

The same equity appeared as an asset on the balance sheet of two parties in the system -- a physical impossibility but money isn't physical, it's just an idea.

So the amount of "money" in the system has been expanded, but prices didn't go up significantly as a result, because the creditors couldn't spend a debt security until the underlying base money has been repaid to them. Again, the equity is being counted twice in the system, with the debtor and the creditor both laying claim to it. The hyperinflation has already happened, but it was disguised by the locking up of equity into debts. Through creditors being led to believe their credits were assets.

In an expanding economy this doesn't seem like a big problem, because the debtor is reasonably expected to eventually over time work it off and repay the equity (base money) back to the creditor. The creditor gets repaid extra equity for the inconvenience of his foregone consumption, in the form of the paid interest, while the debtor was happy to be able to bring forward future production into the present. Everyone's a winner. Until everyone's a loser.

The problems only come in a recession, when large numbers of debtors (or large debtors, like say a sovereign nation or two perhaps) find they can no longer support the repayments on their debts. The creditors won't willingly accept that their equity is actually gone when the debts default.

So the Central Bank has little political choice but to issue new equity (base money) into their system and swap it with the creditor for its defaulting debt securities. "The debt for equity swap". This doesn't result in an increase in the overall money supply, just the equity (base money, M1) part of the total money supply (M3/M4) is now a larger percentage of the same total. The credit went to money heaven, but the creditor was made whole to prevent them withdrawing completely from the system.

All equity holders have been diluted out by this process, just like a business issuing new shares to the directors and their friends. The loss is socialised across all of the equity holders, who each now hold a smaller percentage of the increased total supply.

But, on the plus side, deflation and bank runs have been averted. Phew! No depression. So far, so good...

The difference between base money and a debt security, to the holder, is that one can be spent at will while the other cannot be spent until it is either sold on to another investor in exchange for base money, or held to maturity and fully repaid. Swapping credit money for base money means that there isn't more money overall in the system, but base money makes up a larger percentage than before. More base money is able to chase after the same amount of goods and services. Velocity increases.

An increase or decrease in money velocity has the same effect as an increase or decrease in money supply. MV=PY

Hyperinflation of the money supply has already happened. The musket was already packed.

QE is unlocking the failing credit (debt) part of the money supply by converting it into base money (equity), in order to prevent total economic collapse. That's lit the fuse. More of the total money stock is out in the wild, and it's only a matter of time before velocity will increase.

The fuse will continue to burn down until the point in time when the widely held fear of deflation is seen as the political impossibility it always was, and sentiments reverse. The recession will finally be over, but the problems will really just be getting started.



OK, how about some evidence to back this up you say?

<sup>As we can see, courtesy of the St Louis Fed,
M1 (base money) has been ramping

Meanwhile we also see M3 (base money + credit money)
has been basically flat</sup>


Interesting to see M1 and M3 graphs cheek-by-jowl, no? Not so very surprising the Fed haven't since 2006 really wanted you to see this and understand what is happening. To spell it out one last time, if M3 (base money + credit money) is flat, while M1 (base money) is expanding ... that means credit money has been going to money heaven and been replaced by base money. Simples.











See also:
1) Wiki: Money Supply
2) Wiki: Fractional Reserve Banking
3) St Louis Fed M1 data
4) US Fed discontinued reporting of M3 on March 23, 2006. Can't think why.
5) ShadowStats still collate all the US money aggregates, including M3, even if the Fed won't show you their version of the same.

WE are the PIIGS

^{We are the stars
Of the fire-ing,
Of the fire-ing line}

Swiss cheese

When you want to signal to the world that using your currency as the go-to "safe haven" is simply no longer cool with you because it's killing your economy ...

^{"If you want a haven, go away and buy gold instead!"}

Can You Find A Way?

^{Physical gold.
Payment in full.
No worries, mate.}