The close of 2011 has brought so much liquidity and free money into the system that one has to question whether our central monetary authorities are running one big Ponzi scheme. In the last six months alone, the ECB has grown their balance sheet by €789 billion from €1.94 trillion on July 1, 2011 to €2.73 trillion today. The Fed too has been busy printing money bringing their balance sheet up more than $500 billion this year to $2.92 trillion.
The two central banks have recently begun collaborating together through existing currency swap facilities now discounted at a highly favorable rate relative to the market. The total amount drawn from the Federal Reserve is now $95 billion, up from $2 billion before the rates were reduced. We’ve written about the effects of these borrowings here.
While $95 billion is a significant amount of money, and has gone a long way to propping-up the Euro zone, it pales in comparison to the $640 billion lent to over 500 European banks through their Long-Term Refinancing Operation (LTRO). Many banks had already been borrowing from the ECB through similar facilities like the Main Refinancing Operation (MRO) and a shorter-term LTRO, but borrowing skyrocketed when the ECB allowed borrowing at 1 percent for up to three years in unlimited quantities which are the terms of the new LTRO.
These terms allow borrowers to make ungodly amounts of money never before possible in a market absent a central bank. Banks are now able to conduct carry trades by buying the debt of their country’s government risk-free with borrowed money from the ECB netting “profits” of upwards to $50 billion. It’s free money. Banks are also using the money to issue more of their own debt. The result is simply more debt hitting the market both from sovereign governments and from banks. Due to the seemingly infinite amount of free cash now available, interest on the debt is significantly lower than it otherwise would be allowing both banks and nations to continue operating in an unsustainable manner.
Banks can continue to pay their employees big bonuses and salaries while adding no value to the economy (which would otherwise be done through business loans, project loans, corporate loans, etc.) simply by taking advantage of the free money from central banks. Similarly nations like Italy, Spain, Portugal, and others can continue to offer social welfare, bloated pensions, and 25-hour workweeks without committing to austerity measures that would wean their citizens off of hand-outs and encourage their efforts into more productive means, benefitting the economy as a whole.
The Fed and especially the ECB believe that the current crisis in Europe and the financial crisis, which is still rearing its ugly head, is a liquidity problem. As such they are both throwing unlimited quantities of money at banks and governments to allow them to continue operating. They both also acknowledge that banks and governments are suffering from a crisis of confidence and that by backstopping their every failure, participants in the market (that’s you, me, institutions, sovereign wealth funds, and everyone) will be inclined to invest in and lend money to banks and governments.
The goal through all this money printing is that at some point bank assets will be able to generate enough cash flow to satisfy cash outflows from bank liabilities and similarly for governments, tax revenues will be able to satisfy all government commitments. The problem is that bank balance sheets are growing, and similarly so are government commitments. And they are both doing so from the free money furnished by central banks. Without it, banks would be forced to slim down and governments would be forced to streamline and cut commitments. So long as central banks can prop-up the massive size of banks and governments, both will continue to operate inefficiently and run-up larger and larger debts.
It has become clear that the ECB and the Fed, either unilaterally or jointly, will do whatever is necessary to continue funding the debts of banks and governments no matter what the prospects are for their future. Greece is in fact insolvent. So are a host of European and American financial institutions that would otherwise fail if not for the free money provided by central banks. Portugal is also insolvent but not to the extent of Greece, and Italy is not far behind them both. Yet, all remain funded, perpetuated by a free flow of money that circulates from banks to governments and back again providing unsustainable social services and banker compensation.
Bernie Madoff promised to his clients’ unsustainable returns, much like our government and governments of the European periphery have promised unsustainable benefits and programs. At some point Bernie could not produce his promised returns from the market alone and had to take money from new clients and the portfolios of others to continue producing his stated returns. In his mind, Bernie thought this borrowing would be temporary and that once he could make up for the losses in the market, he could return the borrowed money and continue producing his stated returns. But it wasn’t to be. His promised returns proved to be unsustainable and rather than quit early and return client money at a small loss, he chose to continue borrowing more and more money from new and existing clients to fund not only his lavish lifestyle, but also the lavish lifestyles of clients he had successfully fooled into thinking they had vast wealth accruing vast gains.
We all know how it ended. Confidence broke, clients demanded more than $50 billion that had already been spent, and everyone lost. A few individuals involved even took their own life.
The situation we’re facing now is not all that different. Banks promised unsustainable returns, and governments promised unsustainable programs and benefits. Rather than taking the pain of reducing these returns and taking losses on some of the commitments, our central banks instead are choosing to borrow unlimited amounts of money to continue down an unsustainable path thinking foolishly that at some point we’ll be able to produce gains and grow so extraordinarily quickly to the point we can all return the money in good faith. Like Bernie’s Ponzi scheme, it too will fail.
We will soon see further borrowings from the ECB and most likely QE3 from the Federal Reserve to the tune of $600 to $800 billion as early as February, 2012. The Fed’s swap facility has already reached nearly $100 billion in less than a month with purchases going straight to Europe and some are projecting it to reach $1 trillion or more. Rather than bring government and bank debt to a manageable and sustainable level now through write-downs and spending cuts, we’re betting our futures on a Ponzi scheme.
Because that is the clear path we have all chosen, coupled with the fact that Obama’s approval rating is the lowest of any standing president and the GOP has been selecting their chosen one based on either good hair or a numbered tagline, it very well may be prudent to have Bernie Madoff as commander-in-chief. We could certainly use someone with his experience.
He’s slated to be in jail for the next 150 years, but maybe our government could make an exception just this once because his skills and talents as a con artist are so desperately needed to protect the security of the world’s economies.
Our country’s future, our collective ability to live the lives we deserve, and the security for both depend upon growth, innovation, and prosperity. All of which is threatened by maintaining the status quo through historically unmatched monetary control. Yes, short-term pain will be felt by spending cuts and a reduction in monetary backstopping, but it will be short-lived, and it will not be felt by all. Money should be allocated to its most productive means, not towards the discretionary wishes of a central authority. This is terribly lacking under the current regime.
Trillions and trillions have been printed and pumped into the system since the financial crisis, and all we’ve been told when inquiring about accountability is that it would have been much worse had anything short of the trillions spent not been allowed. Well, it’s been more than three years and still there is no plan for when the money printing will stop or what entity and individuals are accountable for the inevitable mistakes. Central banks are completely reactionary. Every call for capital is met with more borrowing, more printing. It is a Ponzi scheme, and it is completely out of control.
Bernie Madoff for President.