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Panda

Brilliant - Sort Of Sums Up Where We Are?

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http://tradethetape.com.au/have-we-learnt-anything/

Today, the global economy is like a big rubber raft. Instead of being inflated with air, it’s inflated with credit.

On top of the raft you have all the asset classes – stocks, bonds and commodities, including gold – and 7 billion people.

The problem is the raft has now become fundamentally defective.

So much credit has been created that the income of the 7 billion people is insufficient to service the interest on the debt… and they keep defaulting.

When they default, the credit leaks outside of the raft. In other words, the raft is full of holes. And the credit keeps leaking out.

There’s a fundamental flaw in the raft now.

There’s too much credit relative to the income, at least in the way that world income is currently distributed.

The natural tendency of the raft is to sink.

And when it sinks – as it did in 2008… and when QE1 and QE2 ended – all asset classes go down together.

Stocks go down… commodities go down… house prices go down, etc. People start to get their feet wet. And they start to panic.

There’s only one possible policy response – and that’s to pump in more credit.

That’s what the QE is about.

Central banks pump in more credit. And when they do the raft reflates. Asset prices all go back up again… people have dry feet again… and they’re all happy again.

What happens if policymakers completely cut off money printing now and don’t step in with some other policy, like more aggressive fiscal stimulus?

The raft would sink just like it did in 1930.

We would get sucked into a deflationary whirlpool… the international banking system would collapse… and global trade would collapse.

Edited by Panda

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So central banks are doing the right thing then?

Things get so bad, that people wont willingly accept taking that option, even if it means avoiding something even worse down the pipe.

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I think this curse, ooops sorry course of action/scenario could run for another 20 odd years, unless there is an EVENT of some kind?

The endgame we all talk about could be a generation away or an EVENT tomorrow?

I guess it all about living today and making the best of the current/bad situation for some but not for all; as tomorrow we do not know of?

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The BoE reported just the other day, that UK banks looking good for capital.

I still hold to a view markets are self-balancing. How about some of the boomers that tip up smiling-smilers (yes not all) with £1.8m and £650K valued homes (and piles and piles of cash, and pensions beyond belief), take some HPC. They are not on any raft, at the top of the Layer Cake.

Sat on £Trillions in equity. Here's some news... HPC for that part of wider market won't hurt the banks. They earn no money on all those owned-outright houses with no mortgages. And of course, the BTLers who've been on the doubled down. They can take some HPC. HPC followed by decades of lending, on much lower stable/level house prices, and it equalises out. Only fresh debt can defeat structural debt.

BoE says UK banks within "hair's breadth" of capital adequacy target
Reuters
March 7, 2016 3:00 PM

LONDON, March 7 (Reuters) - A Bank of England (BoE) policymaker said on Monday that Britain's banks would not need much more capital to comply with its solvency rules, as the central bank tries to quell talk that another major increase in capital requirements is on the way.

Despite rising volatility and declining prices for bank shares as well as disappointing earnings, core capital levels average nearly 13 percent, the bank's executive director for financial stability strategy and risk, Alex Brazier, said.

"All ghosts of crises past. But one ghost has not returned to haunt us. Questions about returns haven't translated as they've done before into questions about resilience," he told a banking conference in Washington.

https://finance.yahoo.com/news/boe-says-uk-banks-within-200001548.html

Because the complacent HPIers and BTLers are carrying those risks.

Edited by Venger

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...

There’s only one possible policy response – and that’s to pump in more credit.

That’s what the QE is about.

Central banks pump in more credit. And when they do the raft reflates. Asset prices all go back up again… people have dry feet again… and they’re all happy again.

What happens if policymakers completely cut off money printing now and don’t step in with some other policy, like more aggressive fiscal stimulus?

The raft would sink just like it did in 1930.

We would get sucked into a deflationary whirlpool… the international banking system would collapse… and global trade would collapse.

The raft is inflating like a balloon. Getting slower, less maneuvrable, dangerously unstable. The passengers are lulled into a false sense of security. One day it's going to blow up. Again. We need more paddling and less floating.

Edited by Steppenpig

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The EVENT is break of the EU. Whether we brexit or not it will collapse and pop the bubble. Best get out while we can.

The EU doesn't increase stability, it tries to gives the impression it does. Its demise will probably allow things to roll on for a little longer. Our leaving can be used as an excuse for the 'collapse 'reforming' of it.

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I have a slightly different view.

The possible payments is a bath (the actual economy of wealth creation), the water in the bath is the excess money supply, and the level of the water float the assets.

due to the destruction of money ( normal) there is no plug.

Ideally, there should be little water in the bath, assets are supported by the actual wealth of the economy.

As the taps are opened money and asset prices rise nearer the brink of supportability. the reverse is true too.

Edited by Bloo Loo

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another easy way of looking at it is Exter's inverted pyramid of liquidity, with gold being a debt to no one and a perfect money at the base. As credit is extended the derivatives of gold(everything financial is ultimately a derivative of gold) expands through the layers starting with paper money, then t bonds, govt bonds, muni bonds, stocks, real estate, and derivatives at the top. When credit saturates the economy and is unable to be serviced the liquidity layers start collapsing from the top and there is a progressive stampede into the lower layers causing them at first to rise in value until they too collapse. In a general collapse only gold is left standing, because again, gold is not intrinsically a debt to anyone.

This is also why t bonds rose after the 2008 collapse. We never got down to the gold layer because the govts stepped in and reflated. We will get to the gold layer next time imo

http://www.goldcore.com/us/gold-blog/fed-central-banks-trapped-gold-foundation-of-exters-pyramid/

Edited by evetsm

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Private sector debt caused the crash and continues to be the principal obstacle to recovery. With private debt at today’s levels—an average of 160% of GDP for advanced economies 135% for emerging countries, and 150% for the global economy—not only is a sustained credit-driven recovery impossible, even a slight deceleration in credit growth is sufficient to cause a significant fall in aggregate demand, and thus recession.

Govts and central banks have held up aggregate demand via fiscal stimulus and QE but in doing so have merely re-created the same dangerous asset bubbles as before but in a zero yield environment, thus imperiling the financial system all over again. The impact on private sector debt levels has been minimal, recession via a systemic margin call looms.

The only (potential) non-recessionary solution to the crisis is to reduce private sector debt without reducing aggregate demand via People's QE (helicopter drops) or some form of debt jubilee. Both controversial and unproven.

Edited by zugzwang

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another easy way of looking at it is Exter's inverted pyramid of liquidity, with gold being a debt to no one and a perfect money at the base. As credit is extended the derivatives of gold (everything financial is ultimately a derivative of gold) expands through the layers starting with paper money, then t bonds, govt bonds, muni bonds, stocks, real estate, and derivatives at the top. When credit saturates the economy and is unable to be serviced the liquidity layers start collapsing from the top and there is a progressive stampede into the lower layers causing them at first to rise in value until they too collapse. In a general collapse only gold is left standing, because again, gold is not intrinsically a debt to anyone.

This is also why t bonds rose after the 2008 collapse. We never got down to the gold layer because the govts stepped in and reflated. We will get to the gold layer next time imo

http://www.goldcore.com/us/gold-blog/fed-central-banks-trapped-gold-foundation-of-exters-pyramid/

Gold's value is set by money, imo, in the market. I don't want to live in a world where it all comes down to gold. Although I can understand why one might hope it would, if they have a gold position. Gold as the core, and thus its value balloons. I certainly don't want it to go mad-max gold. Even if Gold is not a debt to anyone, and a core-reserve as such (US didn't come along and collect British gold reserves from our vaults in locations around the world, to clear us out and make us pay for war-materials that way, before lend-lease, for no reason) - it's not very flexible.

The world is full of promises. Promises are real, even if they aren't something physical. Keep your promises or suffer consequences. Also recognise that if other people who have big values up in an asset (house prices) over decades, begin to be unable to keep their promise, and start selling their holdings for lower prices, then the value of your asset will likely fall too, in an active market.

Debts are retired by paying them off, "restructuring" or default. In the first case, no value is lost; in the second, some value; in the third, all value. In desperately trying to raise cash to pay off loans, borrowers bring all kinds of assets to market, including stocks, bonds, commodities and real estate, causing their prices to plummet.

The process ends after the supply of credit falls to a level at which it is collateralised acceptably to the surviving creditors. Financial assets, and all other asset-classes of value, will be selectively repudiated by default, not obliterated by inflation.

I'm backing the banks (well I want to buy shares if and when house prices begin to fall - waiting to see what actually is value for bank shares and how they react to such house price falls), and see a lot of European bank sector weakness there during the last year as a tell, for those carrying the risks in the wider market.

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The EVENT is break of the EU. Whether we brexit or not it will collapse and pop the bubble. Best get out while we can.

We ARE out of the euro - but we can't quite 'escape' it.

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Thought? True or False?

http://independenttrader.org/war-on-cash-a-piece-of-a-bigger-puzzle.html

For over a decade the World has experienced a peculiar kind of war – the war on cash. According to governmental propaganda, the noble reason behind it is the fight against money laundering and financing terrorism. Meanwhile, the involvement of the HSBC in the biggest money laundering for Mexican drug cartels scandal was swept under the rug. The bank never formally admitted anything. It had to pay a penalty but the fact is that no employee faced charges, not to mention any jail time.

Knowing the above, can you actually believe in the war on cash being waged against criminals? No. You simply cannot. There are two true reasons behind this:

Firstly, increasing control over the citizen. I wrote about it more than a year ago in this article - 'Attack on cash = more power for the state and banks'.

Secondly, a controlled reduction of the total debt has been rising since ‘70s but the huge jump was seen in 2001 when Keynes’ theory about spending government’s way out of a crisis became fashionable all over the world. No one had enough money in their budgets to do that resulting in an orgy of debt.

Easily available credit and low interest rates made authorities, corporations and consumers borrow faster than the economies grew. Finally, we arrived at the point where the total debt (public, corporate and consumer) equals 245% of GDP. It is an absolute record. On top of that it was partially the debt itself that made it possible for economies to grow in the last 15 years.

Today our economies exhausted this avenue where markets grow with the simple application of additional debt. Credit does not generate economic growth anymore as the scale of indebtedness and servicing costs outweigh any marginal expansion.

Institutions that control monetary system understand the above and now the focus is on the inevitable – debt reduction.


There are two ways to reduce debt:

a) Direct bankruptcy (very unpopular as rioting people are hard to control).

B) Inflationary escape (much more destructive solution for the economy, lengthy in time. Preferred due to the fact that the majority of population do not understand what is happening and who is responsible for that).

Everything points to the second solution being utilised soon on a massive scale. Central banks all over the world lowered their interest rates to zero. The EBC is printing more than ever and rate hike in the US was a just one-time event and chances of returning to both ZIRP and QE are rising.

Practically all countries in the world note budget deficits (government spends more than it collects from tax revenues). The difference is paid by printed money (inflation).



We already can observe NIRP (negative interest rates policy) in Switzerland, Denmark, Sweden and Japan. Budget deficits openly announce the need of inflation. Conditions are nearly perfect to manufacture one. I used ‘nearly perfect’ as in my opinion, central planners will move even further than their idols from the USSR.

The scale of QE will grow

As of now central banks are the biggest players in the bond market. All printed funds do not end up in the real economy. Partially they are tunnelled into investment funds that sell artificially overpriced government debt. The market is fed with currency which finances the budget deficit and in the case of 10 biggest economies it varies from 0.5% to 10.3% GDP. The only exception is Germany with budget surplus in 2015. However, this year’s influx of immigrants will demolish Merkel’s budget.

In order to produce double digit inflation you need to print more money than just 3-4%. To ‘stimulate’ the economy governments can propose variety of ‘boosting programs’ and lower taxes to make sure deficits will explode. The authorities will finance it with freshly printed money leading to inflation.

More resourceful politicians instead of tax reduction could offer giving the money out – this has been mentioned already as ‘helicopter money’. Unofficial sources hint at the possibility of the EBC giving out 1300 EUR to each person if the central bank’s policy fails at delivering inflation target. Sooner or later we will experience higher inflation thanks to bankers’ crazy ideas.

Reducing the debt – second part of the plan

Let’s assume that central banks achieve what they want and real inflation reaches 8-10% with simultaneously keeping interest rates at zero or negative levels. The inflation is now higher than interest on any deposit or bond.

Investing in debt is absolutely pointless but everything is ‘under control’ because the only buyer of debt is the central bank itself. The central bank plays the long game here and the continuity of the system is much more important than the return on this investment. Even today, thanks to central bank shopping for government bonds many of those bonds can boast negative interest rates (buyer loses money). By increasing the scale of printing we can hike the difference between debt interests and real inflation – and what is important – still keep the control of the system. The devaluation of debt happens quicker than the speed of adding new debt.

In the event of NIRP, keeping your money in the bank account does not make any sense. Bank instead of giving us interest on our deposit would require payment from us. If the interest you earn from deposit is marginal it is still ok but when Mr. Smith will see that bank charges him due to NIRP he will pull his money out of the bank very quickly.

We can defend ourselves against NIRP as long as we can operate with cash. If limits of cash transactions are going to be strengthened and banks are going to charge for every payment and withdrawal, society will accept NIRP as cheaper than using old-fashioned cash.

This can lead to a situation where the share of cash in the economy will be so marginal that banks can limit withdrawals over few thousand in any currency. When you want to take out any bigger amount of money (few thousands) you need to state the reason for doing so, wait few days for an appointment and then collect your funds. Europe will definitely continue in the same direction.

The elimination of cash achieves one more goal. Preventing 'bank runs'. In the past banks in bad condition used to go bankrupt when people in the fear of losing money wanted to withdraw their deposits. A sudden outflow of capital ended up in bankruptcy. In Bulgaria, two years ago all offices of one bank were closed for 30 days due to the amount of withdrawals. The panic was a result of a gossip spread among social media regarding possible bankruptcy of the bank. With no cash there is no risk of a ‘bank run’. The question is – what will then stop financial institutions from taking even bigger risks?




Many people previously depositing money in banks will turn to investment funds only to escape additional taxing. On average 80% of people are not ready to start their experience with investing and they should stick to deposits. As a result the level of savings will dramatically plummet and society’s dependency on government will increase. Maybe this was the plan from the very beginning?

One-time, extraordinary taxes

Another big danger stemming from the elimination of cash is surrendering the rest of personal freedoms to the state. An example of Poland is useful. Two years ago when government lacked money they ‘appropriated’ billions from private pension funds and covered a huge deficit. This shows the actual level of control over masses.

What if after printing money, ZIRP and other manipulations government still lacks money? Maybe ‘one-time’ tax of, let’s say, 10% on all deposits? Why not? A ‘solidarity tax’ in the name of saving the country, right?

What if an overly leveraged bank on the brink of bankruptcy takes over 30% of our deposits? We cannot take the cash out as it has been eliminated. The ‘Bail-in’ procedure was introduced for something, wasn’t it?

Summary

The policy of central banks in developed countries clearly points out that people behind this rigged system are trying to devalue four decades of accumulated debt with inflation. The Debt is a problem of primarily developed countries. In developing countries we record very low levels of credit – and what is crucial – it is kept in check with high interest rates. After 2008 its value substantially increased but its scale is beyond comparison with the one of developed countries.



The increase of money supply rests at the foundation of the inflationary escape from the debt crisis. It is also under tight control of the BIS (Bank of International Settlements). For a period of time one central bank starts printing money and then reduces the money supply. Then another central bank takes its place. In 2008 the FED started printing then followed by the Bank of Japan and the Swiss Central Bank. Today the ‘mad’ ECB destroys the euro. The supply of money is increased in a way to make sure there is no loss of credibility of respective currency, sudden hyperinflation or losing control over the system.

In case the trend accelerates, debt can be cut by 7-10% each year. Unfortunately the debt itself does not disappear. It is being paid by a hidden inflationary tax. In other words, government creates circumstances for the creditors to be paid by using money from those people who have savings. Together with the level of savings falling, the middle class diminishes and society becomes impoverished and increasingly dependent on the state.

The perfect example of how printing money does not work is Japan’s three lost decades. Fresh example is the US where due to hidden inflation the total indebtedness fell from 374% in 2008 to 348% now. This kind of debt reduction lowered the labour participation share in the US society (increase of unemployment), decreased an average salary and lowered money velocity and share of real estate owners. As you can see, an inflationary reduction of debt has some unintended – negative – consequences.

The time will show who is right but the recent performance of Janet Yellen suggests that in the next six months the FED will cut interest rates and probably start printing again. The effect will be an increased inflation which can become harder to control, especially because the US dollar slowly loses its reserve currency status. The USD inflation is not contained in the US, this problem touches the whole world. Most of dollars are being kept as reserves in nearly all countries on the globe. The result everyone should fear is a destructive stagflation – a deep recession with heavy inflation.

I wouldn’t like to end on such a negative note. The effects of the debt reduction will be felt in every country but in different ways. The dire the consequences the higher the debt level. Many developing countries will experience very miserable times but nonetheless, some have a fantastic perspective for development in the forthcoming years.

When thinking where to put your capital, take a look at countries with low level of indebtedness and sensible demographic profile.

Edited by Panda

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Private sector debt caused the crash and continues to be the principal obstacle to recovery. With private debt at today’s levels—an average of 160% of GDP for advanced economies 135% for emerging countries, and 150% for the global economy—not only is a sustained credit-driven recovery impossible, even a slight deceleration in credit growth is sufficient to cause a significant fall in aggregate demand, and thus recession.

Govts and central banks have held up aggregate demand via fiscal stimulus and QE but in doing so have merely re-created the same dangerous asset bubbles as before but in a zero yield environment, thus imperiling the financial system all over again. The impact on private sector debt levels has been minimal, recession via a systemic margin call looms.

The only (potential) non-recessionary solution to the crisis is to reduce private sector debt without reducing aggregate demand via People's QE (helicopter drops) or some form of debt jubilee. Both controversial and unproven.

Exactly, it's a right mess, I do suspect that maybe the penny had dropped.

In the mean time austerity Osborne has gone from 500bn to 1.6trn debt, there is no way back.

Personally I just can't see helicopter money or debt jubilee or any other such thing. I can just seen the prols being allowed to starve.

Generally the prols are so hopeless at anything they won't complain and will sit around waiting for something to turn up.

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Exactly, it's a right mess, I do suspect that maybe the penny had dropped.

In the mean time austerity Osborne has gone from 500bn to 1.6trn debt, there is no way back.

Personally I just can't see helicopter money or debt jubilee or any other such thing. I can just seen the prols being allowed to starve.

Generally the prols are so hopeless at anything they won't complain and will sit around waiting for something to turn up.

Nah. The protests like the ones yesterday are just getting started.

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I'd speculate that financial deregulation in the 80s created a whole industry not adding value, so they are basically sucking wealth out of the rest of the economy (similar to effects of tax) so interest rates had to be lowered and money borrowed to try and keep the real economy afloat, causing ever increasing bbbles in asset prices, which the financial "services" industry feeds on sucking more wealth out of economy, so interest rates have to be reduced...

Solutions. Taxes on assets, taxes on wealth, taxes on debt, taxes on property, taxes on financial services. CGT, IHT, and stamp duty increases. Reduced taxes on income.

Edited by Steppenpig

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I'd speculate that financial deregulation in the 80s created a whole industry not adding value, so they are basically sucking wealth out of the rest of the economy (similar to effects of tax) so interest rates had to be lowered and money borrowed to try and keep the real economy afloat, causing ever increasing bbbles in asset prices, which the financial "services" industry feeds on sucking more wealth out of economy, so interest rates have to be reduced...

Solutions. Taxes on assets, taxes on wealth, taxes on debt, taxes on property, taxes on financial services. CGT, IHT, and stamp duty increases. Reduced taxes on income.

Exactly and they're still plodding on with the same old mantra , it's not working and getting deeper in the doodoo. Edited by frederico

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Guest BillyNI

This is my concern. I have enough money to buy a place outside London (be that abroad) but not enough to buy in London without a massive mortgage. I fear that the government plans to inflate my savings away to nothing. So I either buy a place now (for cash) or get burnt later when the same place caosts 50% more due to inflation!

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