Published
7.12.2016
Abstract: We face yet another 2008 as major
banks are ready to fall from bad loans. The problem is centered in the EU this
time and capital must be raised to provide liquidity to the zombie banks[1]
in Italy and Germany and this liquidity may come from your bank deposits or
from special bonds banks sold to you or other or from printing money by the EU
government, as usual. The IMF or Fed may ‘loan’ money to those banks as well
hiking EU debt levels. Be assured that your money will in one way or another be
used to satiate these zombie banks that have no future. You EU folk that have
bank deposits are at risk of being replaced with phony bonds and that money
used to keep the bank solvent while your bonds sink in value. The quest for
money by governments is now in full force as they have exhausted most other
options and all they have left is yours. The US is looking at this along with
negative interest rates. Your savings, deposits, IRAs, 401(k)s and such are not
immune to confiscation by governments around the globe. The US admires this
system and may try to implement some of this .
Background
Since the fall
[or Fall!] of 2007 the US and several foreign housing markets have plummeted
and bounced around without a full recovery while the stock market has made
impressive gains since Mar 9, 2009. QE[2]
[quantitative easing or stark printing of money] from the Fed has fueled most
of this US equity price increase. But, interest rates seem to continue to descend
toward zero [or below] and this, coupled with the massive US debt of some $24
trillion dollars[3]
continues to plague us. No country has
ever had such enormous debts and survived and we are in the same relative state
as Japan, UK, and EU. All four have massive debts.[4]Cheap
Credit[5]
of this sort was probably responsible for the Great Depression. The excuse by
government is that they can borrow at ‘cheap rates.’ Cheap credit may crash the
EU and pull us down as well in the US.
If we look
at the important economic vectors such as interest rates, GDPs across the
world, unemployment, inflation or the lack of it, printing money and the money
supply M2, credit, bank reserves, size of government, tax rates and such things
as bank failures we find that: compared to, say, the standards of the 80s or
90s that every critical fiscal component in this system is warped in some way. Trouble
in fiscal terms is on the horizon.
Here are some Danger Signals:
[1] Gold and silver prices
are rising at a rapid rate. Emerging countries’ currencies are falling. This is
known as a race to safety. This means people are buying the dollar and yen so
far.
[2] The GDP of the EU is
essentially flat. The US has been less than %2 for 8 years.
[3] There is essentially
no inflation according to governments despite rabid money printing.
[4] The unemployment rate
in the US, Japan, UK and EU are phony, but range above 8% in most places [US U6
is about 8%] with some like Greece and Spain above 25%
[5] Some banks are in
major trouble[6]
[6] World derivatives
markets: World derivatives[7]
market is 650 trillion dollars of which Deutsche Bank holds $ 72.8 trillion[8]
which is more than 11% of the entire world’s market. The world GDP is only $61T and the world debt
is about $260T so how can this happen? Derivatives are often purchased by banks
and others to protect the value of an asset by guaranteeing the interest rate
within certain limits or to pay for a bond in case it defaults or both.
Bank Problems
Banks have
balance sheets[9]that
feature statements with the usual general categories: assets, liabilities and
such. The critical bank reserves are scattered around the sheets on the asset
side and income reports as vault cash, deposits at the Fed, deposits in other
banks[10],
stockholder’s equity and the Fed deposits and more. Banks need sufficient cash
such that their liabilities do not exceed assets at the end of the day. If the
sum is negative then the bank is insolvent and may borrow funds from several
sources or call for a rescue from the central bank. Central banks will try to
rescue problem banks by buying up some of their ‘assets’ or with loans or in a
host of other ways. Suffice it to say that this is complicated and difficult to
follow even for the bank regulators.
The perilous
asset in banks is their loan book which includes mortgages and such. Banks have a precarious business model in
that they take in monies on a daily basis and loan out money on a decade basis.
US banks failed in 2008 due to millions of non performing mortgages crashing
their loan books, many of which were forced upon the banks by the CRA[11]or
Community Reinvestment Act, designed to help the poor get loans without much
credit or no credit at all. Falling loan books forced insolvency and the need
for instant liquidity from the Fed. Non-performing loans fall in market value
so they do not reflect the original value when the loan was issued.
Italian and German Banks are in
Trouble
Italy’s 4th
largest bank, Banca Monte dei
Paschi di Siena, is only
an example of the major problems of recapitalizing the banks to keep them
solvent.[12]
The money must come from somewhere [World Bank, IMF, ECB, ..] as most of those
banks have huge numbers of non-performing loans thus their asset book values
are plummeting. This pushes them toward
insolvency. Many Italian banks have sold higher interest rate bonds than the
markets offer to retirees and such and those are at risk of being used to save
the banks.
Bank bail-in
is a new form of hybrid bond is known as the Coco bonds [contingent convertible
bonds].[13]
The Cocos are
designed to absorb losses when the capital of the issuing bank falls below a
certain level.’[14]
What this is a slush fund where the bank can dip into the previous purchases of
their depositors and use that money to support the bank’s reserves. The rescue funds could come from many places
but the EU laws [supposedly] prevent the ECB [European Common Bank] from
printing money and forces the bank loses upon creditors and not tax payers, or
so it seems. Cyprus first used a novel system now known as a bank bail-in[15]
model where the bank attaches a portion of your account, against your will, and
uses that to attempt to remain solvent. This switches liabilities of deposits to assets! This truncates your account balance. The ’bonds’ you
got in return fell 90% or so in a few months later when the bank allowed the
bonds to be sold.
Deutsche
Bank is also in big trouble:[16]
“Deutsche Bank is sitting on more than $75 Trillion in derivatives bets — an
amount that is twenty times greater than German GDP. Their derivatives exposure dwarfs even JP
Morgan’s exposure – by a staggering $5 trillion.”
Summary:
The world
debt is so massive [$261 trillion against a $61T GDP] that there is no way to
handle debt in a rational manner any more. The ‘solution’ to the problem is to
print more money or push the bank debts off into the future upon those who will
be able to pay taxes in the future or for no one to have to pay if the currency
collapses to zero. Now, the liability is now gone but we then will certainly get
social unrest or worse. Most of our nation’s leaders are socialist or
left-liberal in nature and cannot conceive of cutting spending [Austerity] so
the debt will rise monotonically until it consumes all tax revenues. Then, our
system collapses.
[1] Fiscally dead in any terms.
[2] QE or
https://en.wikipedia.org/wiki/Quantitative_easing
[3] [total arrived at by adding in what is known about
the Fed’s balance sheet of about $4.5T to
$19 trillion dollars]
[4] Usdeptclock.org
http://www.usdebtclock.org/world-debt-clock.html
[5] Reliving the Crash of '29 https://mises.org/library/reliving-crash-29
[6] A
Look Inside Europe's Next Crisis: Why Everyone Is Finally Panicking About
Italian Banks,
http://www.zerohedge.com/news/2016-07-05/look-inside-europes-next-crisis-why-everyone-finally-panicking-about-italian-banks
[7] “In
finance, a derivative is a contract that derives its value from the performance
of an underlying entity. This underlying entity can be an asset, index, or
interest rate, and is often simply called the "underlying".[1][2]
Derivatives can be used for a number of purposes, including insuring against
price movements (hedging), increasing exposure to price movements for
speculation or getting access to otherwise hard-to-trade assets or markets.[3]
Some of the more common derivatives include forwards, futures, options, swaps,
and variations of these such as synthetic collateralized debt obligations and
credit default swaps. Most derivatives are traded over-the-counter
(off-exchange) or on an exchange such as the Bombay Stock Exchange, while most
insurance contracts have developed into a separate industry. Derivatives are one
of the three main categories of financial instruments, the other two being
stocks (i.e., equities or shares) and debt (i.e., bonds and
mortgages”-- https://en.wikipedia.org/wiki/Derivative_(finance)
[8] Is
It Time To Panic About Deutsche Bank?
http://www.zerohedge.com/news/2016-02-03/it-time-panic-about-deutsche-bank
[9] Analyzing
A Bank's Financial Statements
http://www.investopedia.com/articles/stocks/07/bankfinancials.asp
[11] The Community Reinvestment Act (CRA, P.L. 95-128, 91
Stat. 1147, title VIII of the Housing and Community Development Act of 1977, 12
U.S.C. § 2901 et seq.)https://en.wikipedia.org/wiki/Community_Reinvestment_Act
[12]
Sharing the Burdon of Italy's Troubled Banks. Who Pays?
http://www.bloomberg.com/news/videos/2016-07-07/sharing-the-burdon-of-italy-s-troubled-banks-who-pays
[13]
ECB is having second thoughts on ‘coco’ bonds
http://www.ft.com/cms/s/0/23d61e50-08a7-11e6-b6d3-746f8e9cdd33.html#axzz4DjY9OVIW
[14]
CoCos: a primer http://www.bis.org/publ/qtrpdf/r_qt1309f.pd
[15]
We've All Been Warned (the Cyprus "Bail-In" Model is coming to a
Country Near You)
http://www.zerohedge.com/news/2015-10-28/weve-all-been-warned-cyprus-bail-model-coming-country-near-you
[16]
Is Deutsche Bank The Next Lehman?
http://www.zerohedge.com/news/2015-06-12/deutsche-bank-next-lehman
