This week, the world’s most powerful central bankers, led by Ben Bernanke, will hook up in Jackson Hole in Wyoming for their annual chinwag. This year, Mario Draghi will not be going, as he has some urgent business to attend to in Europe. However, like no other year, the chitchat of these individuals will determine the path of a global economy which is increasingly dependent on infusions of cheap credit from central bankers.
A few months ago in this column I wrote that this would be the “year of the central bank”, and it has pretty much turned out this way.
This week we are going to take two different angles – one American and one Spanish – to try to answer the main question perplexing financial markets these days, which is: can central banks save the day, or is each round of monetary easing simply pushing the day of reckoning out further?
We will try to answer this before the expected announcement this week from the ECB about what it intends to do about buying government bonds in the months ahead and – probably more crucially – before the German constitutional court ruling on September 12, on the legality of using German money to bolster the eurozone’s stability funds.
But first let’s examine what is going on the US and what Ben Bernanke is expected to announce, or at least hint at, in his Jackson Hole speech.
The economic news in the US is at best patchy. Second quarter GDP growth was upwards, but it is nowhere near as robust as it has been in previous recoveries. Unemployment is still far too high, and America is deleveraging at a ferocious rate, paying back debt which was built up in the Noughties boom.
While the private sector is deleveraging, the public sector is taking on more and more debt. This is quite normal because, after all, if we are all saving, who is going to do the spending? However, the figures for US debt build-up are quite startling and are worth having a look at.
Last week, US federal debt rose to over $16 trillion. Last year the figure was $15 trillion. It took 200 years to accumulate federal debt of $15 trillion, it took less than nine months to add another $1 trillion.
As Bill Bonner of the Daily Reckoning blog points out: “The average interest rate paid on this debt is only 2.13 per cent. At that low rate, the cost is only about $340 billion in interest payments. Were the interest rate to double to a more normal 4.26 per cent, the total interest cost alone would be closing in on the Pentagon budget.
“Without putting too fine a point on it, debt – much of it in foreign hands – is growing at about an 8 per cent annual rate. GDP is growing at a 1.7 per cent annual rate. For every dollar of extra output, debt increases more than $4. Official debt is growing more than four times faster than the economy that is meant to sustain it”.”
This is the problem for the US because, the more the economy struggles, the more quantitative easing (QE) is likely to be brought forward and, on present trends, it is taking more and more debt to generate less and less output. If this continues, the US will continue to get indebted faster.
It looks scary, but does it actually matter? The US current account deficit is narrowing. Therefore the US private sector is financing this budget deficit and many argue that, as long as this is the case, the government is simply recycling savings and there is no problem. In fact, much of mainstream economic thought would suggest that this is the right thing to do in a balance-sheet recession where people and companies are deleveraging.
But Paul Ryan, the Republican vice-presidential candidate, doesn’t believe this. He sees the build-up of debt as the beginning of the end for the American economy, and if his running-mate, Mitt Romney, wins the election, we are likely to see a massive reduction in the US budget deficit and a massive reduction in central bank monetary easing. From where I am sitting, this looks guaranteed to tip the US into recession in 2013.
Therefore, the central bankers at Jackson Hole this weekend are bound to have one eye on monetary developments, the other on politics and a third on Europe.
Europe’s problems are mounting by the week. The best indicator of this is data from Spain. In terms of deposits fleeing, Spain is turning into a big Greece. €74 billion of deposits left Spanish banks in July. This is twice the previous monthly record. Spanish banks have now lost 11 per cent of their total deposit base this year. This is what happened in Ireland, but the pattern is more like Greece.
Banks that lose deposits have to replenish these with a direct infusion of capital. This can only come from someone buying equity in the bank, someone lending fresh capital via bond purchases or selling some of their assets to raise money.
How likely is it that someone would take an equity stake in a Spanish bank now? Not very likely. How likely is it that someone would like to buy the assets on the books of the Spanish banks, the most liquid of which are Spanish government bonds? Not likely either. And how likely is it that someone in the private sector would buy Spanish bank bonds now with the economy cratering and bad debt rising? Again, not likely.
The Spanish problems explain why Draghi is not at Jackson Hole this weekend. He knows he is the last line of defence for the Spanish banking system, which is the precursor for similar developments in Italy. The ECB will simply either have to buy up Spanish government bonds directly or orchestrate another massive LTRO (long-term refinancing operation – ie, cheap loans for banks) initiative to keep the Spanish banks from going under.
As a result we should expect more aggressive monetary financing from the ECB this week. Otherwise the Spanish banking system sinks. In the US, we should also expect Bernanke to announce more QE if necessary. This will up the ante for both the Republican Party and the German constitutional court in the weeks ahead. As to whether printing money can save the world, the evidence thus far suggests, not on its own.
No it can’t but you haven’t said what else is needed.
‘It looks scary, but does it actually matter? ‘
That depends on which side of the working end of a us made machine gun you find yourself on! If your country has the raw materials to help the US balance it’s books and you are looking at the working end of the machine gun you be fucked!
Life begins at 40.
Has hyper-inflation ever worked David?
David, you are finally addressing the root of the problem, although somewhat reluctantly. you know well that the root cause of our problems world wide is the central banking system and their ability to print unlimited cash. Adding money to the economy never did anything other than create inflation and the illusion of wealth. If it were added at no interest by treasury it is still inflationary. When it is added as a debt to the government it impoverishes us all even faster and allows the bankers and their controllers to steal all the real wealth from the people. QE… Read more »
Can Printing Money Save Their Ponzi Scheme?
Hi adelalide,
Not on its own. You also need to subjugate your neighbours by paying back the bonds they bought from you in the devalued currency you just printed. This is only possible if your currency is used as thr works reserve, you have the military to implement the rape and a general staff as amoral as the financial nazis in control of the banks.
Excellent observation though!
David,
Is the article writing about the saving of the real economy or is it about the saving of the mafia banking counterfeit system looting the common wealth?
Hi Shaneh,
Your point of view on tony’s point is welcome but not entirely accurate. The worlds physical currencies are based on paper and the metal nickle, have been for centuries and will be for millennia to come. The issue with gold as a currency is that it restricts economic expansion and also most importantly fed issued interest bearing debt is where the problem is whereas govt issued interest free currency is the way to go not in gold but in a medium which can increase ad the economy expands.
McWilliams is a very creative writer no question.
Michael.
It’s all a tussle between hope and reality now
What we need is a proper banking system that is controlled by people who have a wide experience of how to benefit the country as a whole . This should be run as a state bank ,not a rescue bank,it’s ok when joe public says sure we own the bank. We may own the bank but we may as well not own the bank,for all the use it is. This country could stand on its own to feet but instead we have chosen the weaker option by electing a government of weak puppets,it’s really like buying something cheep that falls… Read more »
RESIST! EU’S “PEACE OF THE GRAVE” SPREADS OVER SPAIN Sept. 2 (EIRNS)–Is a government which celebrates that it has driven down its people’s expenditures on medications by 23% in one month, fit to survive? Spanish Prime Minister Mariano Rajoy declared in an interview with four European newpapers published on Sunday: “There has been a very positive piece of information: in the month of July, expenditures on pharmaceuticals in Spain fell by 23% as a consequence of the administration’s decisions.” That cold-blooded statement epitomizes Rajoy’s message to Italy’s {Corriere della Sera}, France’s {Le Journal du Dimanche}, Germany’s {Bild am Sonntag}, and… Read more »
The hyper-inflation during the Weimar republic ended badly. The current monetary crisis David is describing is different in nature. It is symptomatic and caused by even more difficult to manage fundamentals. Chief among these causes is our inability to govern and manage our species on this little planet. Indicative of how out of control we are is the unfettered population growth (now 7 billion) with no concomitant resource management. I have ten more such indicators but it will take a book to deal with properly. All of our currencies were never designed for sustainability and we have massive corruption in… Read more »
Some interesting food for thought here alright. People are indeed paying back debt. If they can they are lumping money into credit cards. There is a real aggression out there to pay off as much as possible. People I know have given up on the pub and are getting rid of the second car. There will be no spending among huge numbers of people. People were definitely caught out when the crash came they wont be suckers a second time around. Not every one is as motivated. I see people who are in denial and I see people who cannot… Read more »
Hi Tony,
Your points are very well thought out. I am curious how the economy you describe can expand if there is no surplus currency to provide lending. If my earnings are earned through you spending where is the lump sum of money going to come from to fund new business and facilitate economic expansion?
Just curious,
Best regards,
Michael.
Right now the best place to be is first in real estate and next in US dollars. This may seem strange to many, especially here in the US, but after the metal bubbles implode it will be about who the last man standing is. Money is needed for expansion and yes in this context the only solution is to keep printing. Failure to print will guarantee a depression and politicians will never take such risk except for Germany perhaps.
Is it just me, or does it seem that the consensus here is that no matter what, whether in 5 months or 5 years, we are going to see a dramatic and tumultous collapse in how our society’s economic system (& thus implying our social system)? With global power linked to historic exploitation of resources & now teetering on the brink of global reserve currency in dollars threatened. The very same globalisation of capitalism & the march of technology that has peaked has now made the world as a whole susceptible to greater global sized shocks. And western society has… Read more »
Next leg of the distruction of fiat currency!?
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/9/3_Turk_-_A_Remarkable_%26_Historic_Breakout_In_Gold_%26_Silver.html
Keep printing David, and the sooner it all blows up, but it won’t be pretty. From Franklin Saunders What does it say to y’all that after comments from a German former ECB official & a Bavarian politician recommending that Greece leave the EU, the German Chancellor Angela Merkel pleads in public for everyone to “weigh their words carefully”? Does that sound like someone who has a solution, or someone who sees the wheels falling off & wants everybody to keep his mouth shut? What is proposed for the ECB is to buy the debt of Spain, Italy, Greece, etc., effectively… Read more »
@ bonbon The biosphere is not being left to its own. Humanity is already involved in non-conscious geoengineering on a planetary scale. The first responsible step we must take is to address the impact we are already having on the biosphere; and we cannot do that until we get our political house in order. Planetary development is not a simple matter of creating a gross increase in the energy-flux density of the biosphere; no more than proper human nutrition is a simple matter of consuming a larger quantity of food. It is a matter of creating the right increase; and… Read more »
The Spirit of The West
In the past few years some of us have met informally for a few hours or so to share a banter or two . It may be opportune again to make another call and rekindle our thoughts again .
Suggestions are welcome .
Adare has been a meeting point more than once for those in the West/ South.
Arise ….I say …hark I call ….come in from the dark …..key in your names below if you are interested .
Hi Tony, I really admire your passion re gold. I am a gold bug. I use goldmoney to buy gold in a vault in Canada and Switzerland. I don’t buy in the vault in the Uk Or hong kong for fear the authorities will confiscate in the coming collapse. I agree a worldwide collapse is coming. I still am not persuaded of your arguments regarding fixing the supply of currency. Before the revolutionary wars in America the Spanish doubloon coin was capable of being broken into 8 sections to facilitate the increase of the money supply as the value if… Read more »
“Without putting too fine a point on it, debt — much of it in foreign hands — is growing at about an 8 per cent annual rate. GDP is growing at a 1.7 per cent annual rate. For every dollar of extra output, debt increases more than $4. Official debt is growing more than four times faster than the economy that is meant to sustain it” – At this rate of annual growth (8%) the present debt of $16 trillion will have reached $32 trillion by 2021, just a little short of 9 years! But does it really matter?!!! I… Read more »
Hi cooldude,
The answer is that the us uses it’s military to subjugate wealth creators in other country’s through repaying us bonds in devalued currency and any country which complains can take up the argument with the US air Farce!
I’m not messing or left wing. I am an old fashioned right of centre capitalist.
Regards,
Michael.
Assumption The powers that be… it would be naive to think that the ECB as well as certain politicos are immune to the “wishes” of Geithner etc. With a vampire squid that occupied major functions in Europe, draw your own educated conclusions. x x x x This “eclectic” blog – LOL – has turned into an advertisement platform for a fascist political cult. Sadly, there is no function to IGNORE bonbon’s indoctrinate diarrhea so it would not even show in the blog once he is set to ignore. Interesting to learn that such is being tolerated, under the camouflage of… Read more »
China can trigger the event to blow the US economy. Personally I do not think they will doit until they are ready. After they have wrung out all the benefits. They will suck off all the meat and spit out the bones. The Holter Report Is China Japan? Author : Bill Holter Published: August 27th, 2012 Do you remember back in the late 1980’s when “Japan is going to take over the world” was all the rage? The Japanese had so much money that they bought US gem properties such as Pebble Beach and Rockefeller Center only to lose them… Read more »
As Ireland, Greece, Italy, Portugal, Spain head straight where Argentina was in 2001, here is a little reminder for the “international elite bankers” what awaits them : Argentine Judge Demands Arrest and Extradition of Bankster David Mulford Sept. 3 (LPAC)–Argentine Federal Judge Marcelo Martinez de Giorgi has ordered the “international arrest” of former Deputy Treasury Secretary David Mulford, in connection with the latter’s role in the usurious June 2001 “mega-swap” he orchestrated in Argentina, on terms intended only to loot the economy and the population. Mulford is now Vice-Chairman International of Crédit Suisse. This international bankster, who has repeatedly failed… Read more »
Tony, this silver thing as money thing, well one thing struck me about it. Silver has to be mined, right-those who own the mines will have the same power of creating money as the central banks do now. How do you prevent this abuse Tony? What’s to stopping the mine owners becoming the new overlords?
The Mexican Libertados are very pretty, and they have no face value-a bit like the coin you prospose to be phased in here.
Martino
Cost of production re. Gold approx 1,200 per oz.
Central banks cost of production re. paper money, press a button on a computer.
Which is the overlord?
Does that answer your question.
Should you we wise enough to buy silver, at 30$ you are buying at below production cost.
If fiat currency is good, why do Central banks need a monopoly, if fiat currency is not good, why are we still using it?
Our government looks after the interests of the central banks and not the people who elected them. The Italians call that type of cosy arrangement fascism.
Perhaps the Central banks make too much profit from
their ponzi scheme to allow a free market.
My very , very best friend Bobbie Connolly is about to compete in the paralympics today, she has a chance of winning some gold, wish her luck —- the gold standard has now some merit. Printing money is about relativity and liquidity, but more worthless paper will only mutate the problem not solve it- but if one country prints in isolation as is the UK and the USA —this could be divisive and lead us to a dangerous place —- the “pivot of war machines to Asia’s south china seas” nice to see politics mentioned in Davids topic above, but… Read more »
Cameron has a reshuffle with no economic policy but with new heads to promote nothing out loud – optics at large
Printing Money can save local communities there is no doubt about it .It has been done before and can be repeated again. Currently on a national basis we only buy imported goods and this has been tested in a new program by TG4 to be screened soon. Local communities can create their own home markets and issue their own legal tender only to be used and cashable within their region. On a Sovereign basis Jersey , Guernsey , and Sark all separately issue their own notes and are not honoured by the UK Banks. But the system works for their… Read more »
Eggheads for Glass Steagall Sept. 4, 2012 (LPAC)–The 2012 Fall Issue of the Phi Beta Kappa Society’s 80-year-old quarterly, {The American Scholar}, which prides itself on including nearly 300 presidents of the leading colleges and universities in the United States among its 25,000 subscribers, delivers the message that it is time to restore Glass-Steagall. In about as many words as the magazine has subscribers, University of South Carolina law professor and former contributing editor of The New Republic, William Quirk, presents the case for Glass-Steagall under the title, “Too Big to Fail and Too Risky to Exist.” Banks are more… Read more »
Get out of the system and get out now. -Jim Sinclair Monty Guild, a friend of mine for more than forty years, is the most honest and capable man, in my opinion, in money management. I respect Monty’s feelings on many matters, certainly the macro picture. Monty, like I, believe it is possible that coordinated central bank actions in the USA, EU, Japan and China are being discussed. The economic problems are so severe, so international, so global, so entwined, so insoluble and still caused primarily by the greed of the 1990s to present finance in the form of OTC… Read more »
So, would you know…? Good morning, ask yourself, before you had your first coffee in the morning, just jumped out of bed, could you tell the difference between: – The Council of the European Union – The European Council – The Council Of Europe So, would you know? I do, but that is only because I am a member of a species on the brink of extinction, I read, which is the strange behavior you will still find in some remote areas of this world where you can find people hiding their heads – they should be reported to THE… Read more »
Will the next budget bring down the government .
Will there be a revolt against what’s comming in the budget.
This government have allowed themselves to be back into a corner.
This government will be on the ropes.
At the end of the day we have to live here and yes there will be a hard budget but if the pain it’s not shared fairly I for one will be out protesting .
David please do a post on the unemployment in this country will the number of people on the dole increase to 20 percent.
If there was no emergration what would the unemployment figure be.
http://www.zerohedge.com/news/41-years-after-death-gold-standard-look-how-we-ended-economic-purgatory
41 Years After The Death Of The Gold Standard, A Look At “How We Ended Up In This Economic Purgatory”
Submitted by Tyler Durden on 08/15/2012 20:53 -0400
[…] Read the rest @ DavidMcWilliams.ieBe Sociable, Share! Tweet […]
The Holter Report Spain is already Greece, are you listening to the metals? Author : Bill Holter Published: September 5th, 2012 Spain had a nearly $100 billion outflow from it’s banking system in just the month of July (Fears Rising, Spaniards Pull Out Their Cash and Get Out of Spain). They have a 25% unemployment rate, a declining economy and the sovereign itself probably has less than 60 days before it goes total “Greek”. This is a full fledged bank run in progress as their largest bank Dexia was bailed out last week. The bailout of $7 billion or so… Read more »
Richard Russell (dowtheoryletters.com) September 4, 2012 The national debt of the US is now well over $16 trillion and growing at the rate of over one trillion dollars a year. It can never be paid off through the “normal” means. Paying off by normal means would entail a huge, really killer boost in taxes and a brutal unmerciful, slashing of entitlements. The only way the US’s debts can ever be seriously addressed is to devalue the dollar. The US owns the world’s greatest hoard of gold. Here’s what I think the authorities have to do. They should unilaterally, overnight raise… Read more »
Jim Sinclair’s Commentary I believe it’s going a lot higher. It’s going to have a parabolic spike, caused by some event or some loss of confidence. A US dollar crisis would be a perfect example. That will cause gold to go through the roof, and then everybody will want to own it. I don’t think we’re even close to that yet. Gold will probably have a much greater run than some of the other hard assets because it’s also a currency. – Frank Giustra, mining industry entrepreneur Jim Sinclair’s Commentary We will pay the Piper. There is no other alternative.… Read more »
GATA (www.gata.org) So what has GATA been saying all these years? In essence, there is a structured Gold Cartel out there that has been managing the gold price in surreptitious fashion by borrowing gold from the central banks and feeding it into the physical market to meet a serious supply/demand deficit, one which runs over 1,000 tonnes per year. This is very significant as mine supply is less than 2500 tonnes per year and going lower. This Gold Cartel includes The Fed, US Treasury, Exchange Stabilization Fund, bullion banks such as Goldman Sachs, JP Morgan Chase, etc. There are those… Read more »
Hi bonbon Humanity is not ready to engage in conscious planetary geoengineering. We have to address what we are already doing non-consciously; and put the human world in order. Just look around. The human world is in utter disarray. Socially, politcally, economically. The Western imperialist elites are beating their war-drums. They have wars planned decades ahead. Many of them consider nuclear weapons a tactical option. How’s that for geoengineering? Full-spectrum dominance as they call it. Global corporate hegemony for them; neo-feudal serfdom for us. The noosphere, or the human world, is a newly emergent level of natural order in the… Read more »
ECB Offers Choice “Between Plague and Cholera” Sept. 5, 2012 (EIRNS) — Hans-Peter Martin, an Austrian member of the European Parliament who was in the closed-door meeting with Draghi at the Finance Committee the other day, reported to his emailing list that we are now faced with making a choice “of plague or cholera.” “If the ECB now starts to buy state bonds on a large scale, the danger of inflation grows. Almost everything will become expensive, maybe not immediately, but in the near term. If the ECB does not do that, the insolvency of several states approaches, with unpredictable… Read more »
“Breakwater For The Eurozone” Is Crumbling Sept. 5, 2012 (EIRNS)–Germany’s Angela Merkel travels to Madrid on Thursday to meet with President Mariano Rajoy to discuss terms for an EU bailout of Spain — the same day that Draghi will be rolling out his plan for bond-buying and mega-bailouts. Options are few: either there is a European-wide Glass-Steagall reorganization of the banking system; Spain receives a bailout unlimited in both amount and duration from someone, somewhere, somehow; or Spanish government, bank, and corporate debt blows out. And that in the very short term. The EU, ruling out the first, continues to… Read more »
Traitors Get Cold Feet 1: Hollande and Monti Sept. 5, 2012 (EIRNS)–The imminent ruling of the German Constitutional Court with the possibility that the activation of the ESM could be delayed, is scaring European traitors. According to leaks reported by {La Stampa}, French President François Hollande and Italian Prime Minister Mario Monti discussed an issue “unutterable in public: what will the decision of the Karlsruhe Court be on the compatibility between the ESM and German law? At the dinner at Villa Madama … the latest rumors from Germany — one, in particular — were discussed with concern from both sides:… Read more »
It may be a wonderful and welcome opportunity for the Germans to let the Irish take the blame for the potential dismantling of the ESM. I believe no decision will be made on the 12th. of September by the German constitutional court. They will await the outcome of the Thomas Pringle case, which comes before the ECJ on the 23rd October. In his action Mr Pringle has questioned the compatibility of the ESM treaty with existing EU treaty provisions.He has questioned the lawfulness of a related amendment to the EU treaties. The Irish Supreme court referred these Q to the… Read more »
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