JBS CEO Art Thompson's weekly video news update for December 5-December 11, 2011.
Economist and TV personality Larry Kudlow explained that the decision on Wednesday by many of the world’s central banks made it easier for European banks to borrow dollars from the Federal Reserve.
He made it clear that “nothing has been solved in Europe. The Europeans are not yet helping themselves. Why should the ECB (the European Central Bank) write a trillion-dollar check to near-bankrupt governments?” The real problem isn’t liquidity. There’s plenty of money sloshing around in the banks of the world. The instant problem is the type of money. The banks want to hold dollars, not euros, and the costs of holding dollars was rising to levels not seen since the collapse of Lehman Brothers in 2008.
And the reason dollars were getting increasingly expensive? One main reason was that American money market funds were pulling their dollars out of European banks: Between May and October those funds reduced their holdings in European banks by 42 percent, while their holdings in French banks were cut by two-thirds.
When demands were made on those banks for dollars, the banks had to sell euros to get them. As Capital Economics explained:
As central banks around the world unleashed a coordinated deluge of new money to deal with the economic crisis swamping Europe, critics expressed outrage that the Federal Reserve System — and all holders of U.S. dollars by extension — would be bailing out profligate European governments and the troubled euro currency. And furious American lawmakers are again demanding congressional oversight of the Fed and a restoration of sound money.
On November 30, the Fed announced in a press release that it was cutting the cost of temporary dollar liquidity swaps almost in half. The rate was slashed from about one percent to slightly over 0.5 percent, making it much cheaper for foreign central banks and the financial institutions they fund to borrow a practically unlimited supply of newly created U.S. dollars.
The news was met with outrage by Congressman Ron Paul, whose subcommittee deals with monetary policy and the central bank. Paul is once again calling for, among other measures, an audit of the Fed and the eventual restoration of honest money.
“The Fed's latest actions in cooperating with foreign central banks to undertake liquidity swaps of dollars for foreign currencies is another reason why Congress needs enhanced power to oversee and audit the Fed,” said Rep. Ron Paul (R-Texas), the Chairman of the House Domestic Monetary Policy and Technology Subcommittee. “Under current law Congress cannot examine these types of agreements.”
Cato Institute senior fellow Jim Powell wrote in Forbes magazine about the inevitable and predictable decline of rich nations that debauched their currencies in order to pay their bills. Powell said that politicians’ urge to promise and then to spend is almost overwhelming, calling it “a visceral urge to spend money they don’t have. They can’t control themselves. They’ll weasel their way around any efforts to put the lid on the cookie jar.”
The Roman Empire was on a gold standard, minting and using the aureus from the 3rd century B.C. until the 4th century A.D. The aureus initially contained 10.9 grams of gold, which was worth about 25 denarii, or about a month’s wages. As the empire devolved into promising more and more services (grain subsidies, public entertainment, and a huge bureaucracy and military establishment) it soon exceeded revenues generated through taxation. To make up for the difference, the aureus was steadily debased so that by 50 B.C. it contained 9.09 grams of gold, 8.18 grams by 46 B.C., 7.27 grams by 60 A.D., 6.55 grams by 214 A.D., 5.45 grams by the year 292, 4.54 grams in 312, and 3.29 grams by 367.
Paper money was more easily debased, as the Chinese discovered. Powell noted that seven different Chinese dynasties issued paper money to pay their bills and all of them eventually collapsed or were defeated by others that issued their own paper currency.
The Federal Reserve Bank and five other central banks across the world cut the "temporary U.S. dollar liquidity swap arrangements" rate for central bank borrowing nearly in half, from just over 1.00 percent to a bit more than 0.50 percent, according to a November 30 Federal Reserve Bank press release. Stock and commodities markets rallied all day with the news, with the Dow Jones Industrial Index gaining 490 points on the day.
The swap rate is the interest rate the Federal Reserve charges foreign central banks to borrow dollars from the Fed. A lower interest rate makes it easier for European and Japanese central banks to go further into debt.
"The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," the Federal Reserve claimed. In plain English, that means the central banks' answer to the European debt crisis is to make it much easier to borrow more money and get deeper into debt. That's a bit like a bunch of doctors agreeing that the solution to the pain in a patient's eye is to push the ice pick further into his eye.
The European Central Bank and the national central banks of Canada, Switzerland, Japan, and the U.K. also lowered their swap rates. This will have the effect of burgeoning the money supply, meaning existing money will purchase less and less goods for an equal price — inflation.
As the finance ministers from each of the 17 members of the eurozone meet in Brussels today, the main topic is “integration.” It’s a race against the clock.
One of the first items being discussed is putting in place the leveraging of the stability fund — otherwise known as the EFSF, or European Financial Stability Fund. At present, this fund holds some $600 billion in assets, much of which has already been invested in government bonds issued by the eurozone's weak sisters: Ireland, Greece, and Spain. The leveraging, through some opaque maneuvering, will then allow the fund to do some serious purchasing of enough of Italy’s debt to solve two problems at the same time. One is to bring down interest rates to some level that Italy may be able, in the short run, to afford to pay. And the other is to give the new Italian technocrat, Mario Monti (who was appointed on November 12 to replace Prime Minister Silvio Berlusconi after he was forced out), enough time to implement even more severe austerity programs in order to meet eurozone guidelines.
That is the next item on the Brussels agenda: Just what are those guidelines, and who is going to enforce them, if necessary? According to Reuters, this would involve “deeper financial integration” among its members. The term “integration” is being increasingly used to disguise the erasing of national sovereignty and the installation of the final step toward a United Europe run by international bankers (such as Monti) and other unelected elites.
The European crisis continues to mushroom, even as Eurocrats meet in Brussels to try to stave off implosion of the eurozone. Tuesday’s sale of Italian debt forced the government of Italy again to accept interest rates or “yields” in excess of seven percent, a level proven by experience to be unsustainable. Thursday will be another bellwether day, as Spain and Belgium — both of whose bonds are commanding steep yields — auction off debt of their own. But at the rate interests on government debt are rising across the eurozone, a few more weeks could write the epitaph for the once-touted international currency.
While European politicians continue to insist, as politicians will, that Europe’s problems will be resolved and that the eurozone will be kept intact at any cost, the world’s financial and banking elites are apparently coming to a different conclusion. Banks and banking regulators in Asia, the United Kingdom, and North America are busily drawing up contingency plans for a eurozone breakup while trying to reduce their exposure to European debt. “We cannot be, and are not, complacent on this front,” declared Andrew Bailey, a regulator at Britain’s Financial Services Authority, last week. “We must not ignore the prospect of a disorderly departure of some countries from the euro zone.”
According to the New York Times’ Liz Alderman, writing on November 25:
The Federal Reserve Bank committed some $7.77 trillion in funds to major Wall Street banks during the height of the 2008 financial crisis, according to a report published by Bloomberg News November 28 through a Freedom of Information Act request.
It's unclear from the methodology explained by Bloomberg's analysis of some 29,000 Federal Reserve documents released how much overlap there is with the Government Accountability Office audit published last July that counted some $16 trillion in Federal Reserve loans to major Wall Street banks. Bloomberg's explanation of its methodology does indicate at least some overlap.
Throughout the financial crisis, Congress remained blissfully unaware that trillions of dollars were being committed by the Fed with the implicit guarantee of the U.S. taxpayer. “We were aware emergency efforts were going on,” Massachusetts Democrat Barney Frank told Bloomberg, but “we didn’t know the specifics.” Frank, who announced his retirement November 28 after the Massachusetts state legislature gerrymandered him out of his district, served as Chairman of the House Financial Services Committee at the time the bailouts began. That committee is charged with oversight of the Federal Reserve and the banking industry.
Amid growing speculation over the collapse of the euro, British embassies are now preparing for worst-case scenarios, such as riots and civil unrest. The Telegraph reported, “British embassies in the eurozone have been told to draw up plans to help British expats through the collapse of the single currency, amid new fears for Italy and Spain. As the Italian government struggled to borrow and Spain considered seeking an international bail-out, British ministers privately warned that the break-up of the euro, once almost unthinkable, is now increasingly plausible.”
The euro’s endangerment comes as the International Monetary Fund, of which Britain is a large shareholder, may be forced to give Italy a rescue package that would allow its new Prime Minister, Mario Monti, time to implement tax increases and spending cuts.
Likewise, revelations indicate that a pact has been struck between German Chancellor Angela Merkel and French President Nicolas Sarkozy that did not include Britain, nor did it include countries outside the European Union. Under that plan, EU member states will be forced to have their budgets approved by the European Union before even being approved by their own national parliaments. Likewise, countries will have to sign on to new rules on the size of debts they may take on and will be sued in the European Court of Justice for any breach of those rules.
In its attempt to quell rising uneasiness in the wake of the failed German bond sale last week, the establishment magazine The Economist rushed in over the weekend with a series of four separate articles promoting its globalist and internationalist perspective on the matter.
The first article noted that the risk to the euro within the next few weeks is “alarmingly high” unless measures are taken. The article blamed lack of leadership — “denial, misdiagnosis and procrastination” — for the unfolding and accelerating crisis. First, a recession appears to be imminent as the austerity measures are taking hold across the euro zone and slowing already shaky economies.
Second, there is evidence of a run on banks holding large positions in the sovereign debt of the weaker countries. As the banks are facing a June 2012 deadline to improve their capital positions they are now seizing this opportunity to unload as much of that debt as they can, thus explaining the significant rise in interest rates all across the zone. This reflects the simple fact that the banks have loaned money to each other — loans that exceed their deposits, according to The Economist — and now are unwilling to continue to make those loans. This is putting the various spendthrift — “feckless” is their word for it — governments at risk of default when they can’t borrow the money to pay their bills. Especially at risk is Italy, which has to roll over $42 billion of debt the last week in January and another $62 billion at the end of February.