“Let’s Twist Again”: The Financial World Does a Monetary Chubby Checker
Posted: Saturday, October 15, 2011
by Christofer French
Rain Dancer Associates, LLC
With my tentative bearded chin pushing little pebbles off the Edge of Naiveté, my bulbous wide eyes, looking down into the vast expanse of “What the Hell?” – I left Janus Capital Group in October of 2008, as a part of the 13% laid off through no fault of their own. I went through the heart-fluttering fear that so many had during those days of collapse. Those halcyon days of pure unmitigated “what’s going to happen to the world” heart palpitations - back when white-knuckled trauma was the well-informed reaction. Oh, but we are so much older than that now. There were so many kinds of scenarios coming from so many experts, authors, economists and even historians mounting digital pulpits, broadcasting through all of our modern means to paint murals of predictive certitude.
Bailouts, TARPS, TALFs, ZIRPs, QEI, QEII, and now the TWIST
In both Europe and America the financial sector has been on the edge of disaster for the last three years. Each time a crisis flares up, the fixers rush in with a remedy --- Bailouts, TARPs, TALFs, ZIRPs, QEI, QEII and now the ‘TWIST’. In its latest effort, the Fed announced:
“The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.”
This is the Kind of Language that Both the Interested Consumer and the Expert Love to Hear.
The Dark Magic
Already, short-term lending rates are so low it is as if money-in- hand had less than zero value. Adjusted for inflation, you pay the US government to store it for you. Even with interest, you get back less than you lent. “And now, the Fed aims to perform the same dark magic on long-term funds, artificially lowering the cost of money so that people will borrow more of it.” I read and reread the above paragraph and try to divine how it all works. As I am both intrigued and confounded by this, I am taking comfort that Bonner and Wiggins choose to call this “Dark Magic” themselves.
The Fixes Have the Same Effect
All the fixes have the same effect. They add to the world’s debt and subtract from its ability to pay it. The first proposition is self- evident. The second requires some explanation. Prices — set by willing sellers and able buyers — are information. They tell us where to focus our resources. They tell us when we have too much of one thing and too little of another. When prices are low, generally, we redirect investment to where they are high. This brings forth more supply of the thing that was wanted and less of the thing that was not. The result of this just described process is that: real growth occurs.
No price is more important than the price of money. It tells us when and in what it pays to put our money.
Bonner describes this overarching plan.
“But bring in the fixers to suborn prices; they make them lie. That, of course, is the demented idea behind the twist program, to mislead investors as to the real price of long term credit. They’re supposed to believe that the world is so awash with money they’d be fools not to take it.”
Thriving on Mendacity
In America, households and businesses generally ignore the signal. Household debt is doing down, despite the fed’s blandishments. Families know the rates are fraudulent. But the least productive sectors — finance and the governments itself — thrive on mendacity. They borrow with insouciance (nonchalance, apathy, indifference) and spend with impunity (not having to suffer a consequence).
Resources, which might have been used to add wealth, are tricked away from the real economy. Value is not added to resources; it is subtracted. Wealth is not produced; it is consumed.
Europe has had its own fixers on the job. They put on a fix in one country; then, another in another country when that one springs a leak.
Last week, Angela Merkel and Nicolas Sarkozy said they had reached an agreement on recapitalizing the banks — which could cost as much as $3 trillion. Then, this week, they gave themselves a deadline to do what they said they had already done; now, they will reach an agreement on Nov. 3rd.
This week too, the Chinese fixers swung into action. They will recapitalize their own big banks. China “will support the healthy operations and development of key state-owned financial institutions...” said the official news agency.
What does it mean to “recapitalize?” It means to put in capital, again. Once more. But what happened to the capital that was there? And what is healthy about putting more capital into financial institutions that couldn’t manage to hold onto what they had?
The Four Letter Word – “Debt”
When a Fix of these kinds of dimensions is afoot, it is better not to ask. To pose the question is to cast doubt on the whole, earnest fixing spirit.
The problem with the fixers’ fix is that it is exactly what got the fixees into such a fix in the first place. The fixers keep administering more of the thing that caused the breakdown — debt. Adding more of it does not make it go away. It just makes the problem bigger.
The Ailment and the Cure are Both Fatal
In the Civil War, one of the most futile efforts took place in the medical tents. Because so much of modern medicine had not yet been developed, and Doctors had a paucity of the medicine that was available and assistance was inadequate, a wounding often meant a death.
If a man’s leg was hit with a 50 caliber ball, he was dragged moaning to the hospital tent. They did their best to stop the bleeding. The best medical response was to cut off the leg so that the man would not bleed to death, and his wound would not rot.
Piles of limbs would form next to the medical units, as the best and only response, in most cases was handled case by case.
As men were “saved”, they would retire to a cot and try to survive. A very high percentage of these kinds of wounds resulted in death, because the “after care” was so dismally inadequate. Blood loss, gangrene and a host of complaints caused these deaths.
So, does it matter how “big” the problems get? When the ailment and the cure are both fatal? If the debt is reckoned with now, many banks, businesses, households, investors and sovereign borrowers will be dead. If the fixes continue, they will be even deader. How much deader? We can measure the direct fiscal spending programs. We can count the deficits. We can count the extra zeros on central bank balance sheets. There are also specific spending programs with specific costs. The US “food stamp” program now helps feed one in 7 Americans. The student loan program is up 300% since 2008. There was the bill for TARP and TALF...and now a new one. Last week, Mr. Obama called for $447 billion in new outlays to put people back to work.
Will the Twist Be Extra Taxing?
Total public and household debt in the US in 2007 was $22.4 trillion. Now it is a $26.3 trillion problem. We can tell how much good this did by looking at gross output. Growth was spectral, up from $14.30 trillion to $14.58 — with every penny of ‘growth’, and more, attributable not to honest, real increases in output, but merely transfer payments from the government to its zombie clients.
In other words, the problem gets bigger. The solution — real, private sector prosperity -- gets smaller.
I remember watching Chubby Checker, living in Newark and giving the Twist my best effort. It was fun watching the girls. I remember trying my best and thinking. “This is sure a lot of effort, but for me it puts me ill at ease. I sure am glad there are other kinds of dances”.
As we look over our current Financial Twist, it also takes much effort and puts us ill at ease. Collectively, it would seem that this Twist in the end is going to be very Taxing.
dr@dailyreckoning.com
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Top-level comments on this article: (2 total)THANK YOU! This is the most rational explanation of events, since the Sept 2008 market crash, that I have heard. Amazing insight Christopher.
I hear some say that the politicians do NOT know what they are doing, but suppose they really do, and there is purpose in all of the finagling, to bring about a distinct global purpose?
My analagy is that all of this money hoopla is like an addicted Alcholic, who drinks to postpone the pain that he will feel tomorrow, then needs more Alchol to forget; and the cycle continues. Then perhaps the question might be more accurate than the analagy.Thank you very much for your comment. Yes, alcohol is a good analogy. When I finally figured out what I did not really previously understand is the way the system creates "debt instruments". The big players understand what they are doing, but like the drunk, we are so far into our "curative responses" that the two questions remain: How much time is there, as this finally unfolds. And as it does unfold, what will the extreme state be that we finally come to?
Intelligently researched and written. Sterling write and I like the way you did not fall into a place of wrath for this will not help. My grasp is somewhat more intuitive in nature and I feel those that cannot smell the rat must have no whiskers. 'They' do know what they are doing and are not acting for humanity. It has been going on for a long time. Let it end in peace.I love your observation, especially in light of the subject matter at hand. This is indeed so overwhelming, it does not need commentary. For lack of a better analogy, the water is rising and rising, but we are all somehow still floating, now. Thanks for your comment.
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