The Fed's Bailout Of Europe Continues With Record $237 Billion Injected Into Foreign Banks In Past Month

Submitted by Tyler Durden

on 02/09/2013 15:20 -0500

Last weekend Zero Hedge once again broke the news that just like back in June 2011, when as part of the launch of QE2 we demonstrated that all the incremental cash resulting from the $600 billion surge in the Fed's excess reserves, had gone not to domestically-chartered US banks, but to subsidiaries of foreign banks operating on US soil. To be sure, various other secondary outlets picked up on the story without proper attribution, most notably the WSJ, which cited a Stone McCarthy report adding the caveat that "interpreting the data released by the Federal Reserve is a bit challenging" and also adding the usual incorrect attempts at interpretation for why this is happening. To the contrary: interpreting the data is quite simple, which is why we made an explicit prediction: 'We urge readers to check the weekly status of the H.8 when it comes out every Friday night, and specifically line item 25 on page 18, as we have a sinking feeling that as the Fed creates $85 billion in reserves every month... it will do just one thing: hand the cash right over straight to still hopelessly insolvent European banks." So with Friday having come and gone, we did just the check we suggested. As the chart below shows, we were right.

Another way of showing what has happened: in the past 4 weeks, the Fed has injected a record $237 billion of cash into foreign banks with access to the Fed's excess reserves: a number greater than both the cash influx surge seen after the Lehman collapse, and faster and more acute than the massive build up of cash during the spring and summer of 2011 when all the Fed's brand new QE2 cash was once again, solely used to overfund European bank cash.

Another way of showing precisely what we said would happen, and what is happening: in the past month, as $237 billion in cash was being handed over by Ben Bernanke to foreign banks, cash to both small and large domestically-chartered banks declined.


The result is that of the record $1.8 trillion in cash sloshing within the US financial system (consisting of US and foreign banks), a record $955 billion, or 52.6% of total is now allocated to foreign banks.


Do we know that the cash in the US financial system is purely a result of the latest open-ended QE? Yes we do, because as the chart below shows, every dollar change in excess reserves created by the Fed is tracked tick by tick by the total amount of cash held by US and foreign banks. And as the yellow area - foreign bank cash - in chart further shows, all the cash generated by QEternity has gone straight to foreign banks.


Another way of showing this correlation: the change in excess reserves vs just the change in cash assets held by foreign banks. There is no doubt on which banks' balance sheets the Fed's "excess reserves" are appearing as cash.

Finally, as a reminder there was a second part in our forecast as to what these European banks will do with this fresh prop-trade funding cash courtesy of Bernanke - they will "push the EURUSD higher, until, as in the summer of 2011 it goes far too high, crushes German, and any other net European exports, and precipitates yet another wholesale bailout of Europe by the global central bankers. Just as the Fed did in 2011."

Sure enough, it required the intervention of none other than Mario Draghi last Thursday to stop the massive, sharp ascent in the EUR in the past two months, which as we showed in the morning before the ECB's announcement on Thursday, had resulted the EUR surge by over 10% on trade-weighted terms. The reason for this intervention: to prevent the collapse of what little is left of Europe's export economy. However, unlike previously, now that Japan is also actively crushing its own currency to promote its exports over those from Germany and France, things will be just a little bit more acute as everyone scramble to be the exporter of only resort to what little import demand remains in a world where everyone is desperate to grow their trade balance through currency manipulation.

So whether European banks will continue buying the EURUSD, or redirect their Fed-cash into purchasing the ES outright, or invest in other even riskier assets, remains unknown.

What is, however, known beyond a reasonable doubt is that at least through this point, the sole beneficiary of the Fed's open-ended quantitative easing which launched in September of 2012, and which was supposed to help lower US unemployment and raise inflation (it will certainly succeed in that eventually, and what a smashing success it will be), are once again solely foreign - read almost exclusively European - banks.

Nothing Is Real In Markets Any More, This Will End Badly
February 12, 2013

Today Egon von Greyerz told King World News that when it comes to markets, “... nothing is real.” Greyerz, who is founder of Matterhorn Asset Management in Switzerland, also believes we are seeing a sucker’s rally in stocks. 

Here is what Greyerz had this to say: “Eric, I believe investors are focusing too much on the short-term movements in the precious metals. Gold is up seven times in 13 years, and it’s likely to go up much more than seven fold in the next 4 years.”

Egon von Greyerz continues:

“So the fact that we’ve consolidated near the highs for 17 months is only positive. That will generate massive energy for the next move, and that move is coming soon. So instead of looking at the short-term, we must step back and analyze what’s actually happening in the world.

My conclusion is that nothing is real....

"Just look at the stock market, Eric. For a few months I predicted in these interviews that we would see new highs in stocks, and this is exactly what is happening. But this is a sucker’s rally. It will draw everybody in and we will see new highs before we see a secular bear market starting. That bear market will last for many years, Eric.

This rally we’re seeing now has many signs of a bubble. Margin debt is at a high, and mutual fund liquidity is at a record low. So this rally isn’t real, it’s a rally based on QE and money printing. What we are seeing now is exactly what we have seen in many hyperinflationary economies like the Weimar Republic and Zimbabwe. Initially stock markets surge before they collapse along with the economy.

The next major market which is unreal is the bond market. This market is totally manipulated by governments as they set interest rates at zero and then buy their own debt. The Fed holds over 30% of the 30-Year Treasury bonds which have been issued since 2009. The Fed also holds 29% of the 10-Year bonds.

Even worse, in February of this year the Fed will buy 75% of the 30-Year bond auction. Well, as I’ve said many times, you can’t issue unlimited credit and have zero interest rates. Eventually the law of supply and demand will prevail, and will always prevail in the long-term.

So rates might stay low for a while and remain under pressure as investors begin to sell the stock market after it begins to decline. But when the dollar starts falling, and it will fall, it will eventually collapse along with bonds. This will lead to much higher interest rates. I know many are convinced rates will remain low as long as there is QE, but I have to disagree.

Another unreal market is the property market. It’s based on massive credit creation and artificially low interest rates. 

The property market is still overvalued in virtually all countries, even in places like Spain and the US where it’s down 30% to 50%. New home sales in the US are currently running at a rate of 400,000. Well, 400,000 is the same level it was in 1967, and that was back when the US population was only 200 million.

If we look at GDP, it’s not real either. GDP would be negative without the massive QE and credit creation we’ve seen. But even with this, credit expansion is what is fueling GDP. However, GDP is still not going up. It shows how weak the economy really is, Eric.

What I’m saying is we have a US and world economy with no foundation. The whole world rests on an extremely fragile house of printed paper money. This cannot and will not prevail. It simply cannot provide a solid base for a sound economy which can recover. 

So the world economy will not recover. Just look at the US debt. The debt, including unfunded liabilities is now $86 trillion. Look at that debt vs a $16 trillion GDP. It’s totally unrealistic that the US can ever repay the debt of $86 trillion in today’s dollars.

Sadly there will be an end to the illusion that we are living under now, but before that time there will be more money printing as governments desperately try to kick the can down the road. This is why the next phase will be hyperinflation. I think this hyperinflation will start in 2013.”

Greyerz also added: “In my view it’s absolutely critical for investors not to be seduced by a rising stock market or information from the mainstream media that we are on the road to recovery. Nothing could be further from the truth. We are on the way to perdition.

We are on the road to reality, but this reality will certainly be one where a large part of the world’s population will suffer. For the privileged few that have savings such as gold and silver, these metals will continue to reflect the destruction of paper money. But remember, precious metals must be held in physical form and outside of the banking system.”

© 2013 by King World News®. All Rights Reserved.

February 12, 2013 6:45 pm
The case for helicopter money
I fail to see any moral force to the idea that fiat money should only promote private spending
Ingram Pinn illustration©Ingram Pinn

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” This comment of Mark Twain applies with great force to policy on money and banking. Some are sure that the troubled western economies suffer from a surfeit of money. Meanwhile, orthodox policy makers believe that the right way to revive economies is by forcing private spending back up. Almost everybody agrees that monetary financing of governments is lethal. These beliefs are all false.

When arguing that monetary policy is already too loose, critics point to exceptionally low interest rates and the expansion of central bank balance sheets. Yet Milton Friedman himself, doyen of postwar monetary economists, argued that the quantity of money alone matters.

Measures of broad money have stagnated since the crisis began, despite ultra-low interest rates and rapid growth in the balance sheets of central banks. Data on “divisia money” (a well-known way of aggregating the components of broad money), computed by the Center for Financial Stability in New York, show that broad money (M4) was 17 per cent below its 1967-2008 trend in December 2012. The US has suffered from famine, not surfeit.

As Claudio Borio of the Bank for International Settlements puts it in a recent paper, The financial cycle and macroeconomics: what have we learnt?,deposits are not endowments that precede loan formation; it is loans that create deposits”. Thus, when banks cease to lend, deposits stagnate. In the UK, the lending counterpart of M4 was 17 per cent lower at the end of 2012 than in March 2009. (See charts.)
divisia money, money supply and lending data

Those convinced hyperinflation is around the corner believe that banks expand their lending in direct response to their holdings of reserves at the central bank. Under a gold standard, reserves are indeed limited. Banks need to look at them rather carefully.

Under fiat (that is, government-made) money, however, the supply of reserves is potentially infinite. True, central banks can pretend reserves are limited. In practice, however, central banks will advance reserves without limit to any solvent bank (and, as we have seen, to insolvent ones). With central banks able to supply reserves at will, the constraints on lending are solvency and profitability.

Expanding banking reserves is an ineffective way to increase lending, not a dangerous one.
In normal circumstances, bank lending responds to changes in interest rates set by central banks. But, as Lord Turner, chairman of the UK’s Financial Services Authority, argued in an important lecture given last week, Debt, Money and Mephistopheles, this lever is broken.

The response of policy makers is to try even harder to make the private sector lend and spend. Central banks can indeed drive the prices of bonds, equities, foreign currency and other assets to the moon, thereby stimulating private spending. But, as Lord Turner also argues, the costs of this approach might turn out to be high. There is “a danger that in seeking to escape from the deleveraging trap created by past excesses we may build up future vulnerabilities”. William White, former BIS chief economist, expressed a similar concern in a paper on Ultra Easy Monetary Policy and the Law of Unintended Consequences, last year.

Alternatives exist. As Lord Turner notes, a group of economists at the University of Chicago responded to the Depression by arguing for severing the link between the supply of credit to the private sector and creation of money. Henry Simons was the main proponent. But Irving Fisher of Yale University supported the idea, as did Friedman in “A Monetary and Fiscal Framework for Economic Stability”, published in 1948.

The essence of this plan was 100 per cent backing of deposits by public debt. This scheme, they argued, would eliminate the instability of private credit and debt, dramatically reduce overt public debt and largely eliminate the many defects of current forms of private debt. The Chicago Plan Revisited, a recent working paper from the International Monetary Fund, concludes that the scheme would indeed bring these benefits.

Let us not go so far. But this plan still brings out two important points.

First, it is impossible to justify the conventional view that fiat money should operate almost exclusively via today’s system of private borrowing and lending. Why should state-created currency be predominantly employed to back the money created by banks as a byproduct of often irresponsible lending? Why is it good to support the leveraging of private property, but not the supply of public infrastructure? I fail to see any moral force to the idea that fiat money should only promote private, not public, spending.

Second, in the present exceptional circumstances, when expanding private credit and spending is so hard, if not downright dangerous, the case for using the state’s power to create credit and money in support of public spending is strong. The quantity of extra central bank money required would surely be smaller than under today’s scattergun quantitative easing. Why not employ monetary financing to recapitalise commercial banks, build infrastructure or cut taxes? The case for letting fiscal deficits facilitate private deleveraging, without undue expansion in overt public debt, is surely also strong.

What makes this policy so powerful is the combination of fiscal spending with monetary expansion: Keynesians can enjoy the former; monetarists the latter. Provided the decision on the scale of financing rests in the hands of the central bank and it, in turn, looks at the impact of the policy on the economy, this need not even generate high inflation, let alone hyperinflation. This would require discussions between the ministry of finance and the independent central bank. So be it. That cannot be avoided in extreme predicaments.

Cancer sufferers have to undergo dangerous treatments. Yet the result can still be a cure. As Lord Turner notes, “Japan should have done some outright monetary financing over the last 20 years, and if it had done so would now have a higher nominal gross domestic product, some combination of a higher price level and a higher real output level, and a lower debt to gross domestic product ratio”.

The conventional policy turned out to be dangerous. Whether this is also true of troubled countries today can be debated. But the view that it is never right to respond to a financial crisis with monetary financing of a consciously expanded fiscal deficithelicopter money, in brief – is wrong. It simply has to be in the tool kit.

Copyright The Financial Times Limited 2013

Will Currency Wars End With A Return To The Gold Standard?
Submitted by Tyler Durden
on 02/12/2013 10:57 -0500

Gold continues to flow from the west to east. Reuters reports that U.S. Commerce Department data showed U.S. exports of nonmonetary gold, which excludes central bank transactions, climbed by 43% to $4 billion in December from the prior month.


That's the highest total and the largest month-on-month jump in U.S. private gold exports since September 2011, when gold rallied to a record nominal high over $1,920/oz. Hong Kong accounted for nearly half of the $4 billion.

The Group of Seven nations have reiterated their commitment to market-determined exchange rates and said fiscal and monetary policies must not be directed at devaluing currencies.

Actions speak louder than the words of the communiqué and the reality is that the fiscal and monetary policies of many members of the G7, and especially the U.S., are directed at devaluing currencies through competitive currency devaluations.

Concerns about the devaluations and the growing risk of a severe bout of inflation have led to calls for a return to fixed exchange rates and a gold standard.

Bloomberg’s Trish Regan and Adam Johnson interviewed TCW Group’s Komal Sri-Kumar and Bank of New York Mellon's Michael Woolfolk about the risks from currency wars on Bloomberg Television's "Street Smart."

Trish Regan asks whether there is a danger that “we have massive inflation worldwide for years to come?”

The answer is yes and both agree that inflation is a real risk as is a loss of credibility by central banks.

Komal Sri-Kumar is asked what the solution is and is asked about his Op-Ed in The Financial Times in which he calls for a return to a gold standard.

He replies that a gold standard today would be no different to “how good it was from 1945 to 1971.”

“It worked, the world was in prosperity, there was economic growth and there was clearly certainty in terms of what exchange rates were.”

He warns that “even in the short term there is nothing to be gained by devaluing. We have tried that in the United States. We have been devaluing through QE1, QE2 and QE Infinity, the most recent one ... we don’t have sustained economic growth.”

In his Op-Ed in The Financial Times, Sri-Kumar called for gold to be fixed just above today’s levels at $1,675/oz:

“A first step would be to fix the price of gold in dollar terms at near its current level of $1,675, with assured convertibility. To ensure that currencies are neither over- nor undervalued, the consumption basket (or the hypothetical loaf of bread) should be valued at roughly similar levels in different currencies at fixed rates against the dollar.”

Bank of New York Mellon's Michael Woolfolk says that you could back the dollar with gold as “the value of gold would have to be astronomically high to back the money supply”.

“At the time of the 1960’s a dollar was a unit of currency and $35 bought an ounce of gold, but the velocity of money is so much greater now the price would need to be higher”, Columbia University educated Kumar said.

The benefit of the gold standard was that there was a fixed exchange rate.

“If we went back to the gold standard you would be looking at a global recession,” says Michael Woolfolk. “We don’t have enough gold and it’s not growing fast enough”.

Kumar disagrees that by using a gold standard and that having it fixed exchange rates, the certainty would increase global trade and overall global production.

“The price of gold would have to be astronomically high, plus you couldn’t guarantee that all countries have different interest rates set”?

Michael, I don’t think the inflation would be much higher if the country submits itself to a fixed exchange rate” said Kumar.

Sri-Kumar concluded the following:

During the Bretton Woods period the The Vietnam War pushed the inflation up as the U.S. had to print dollars to finance a war. Then Nixon abolished the gold link in August of 1971 was death net. After that, money supply increased by 10% in one year and this was not consistent with the fixed exchange rate. If you had not done that we would have avoided the push up in inflation in 1973-1975 and the subsequent increase in oil prices in 1979.

This debate shows how gold is being seen as money and as a safe haven asset again, and shows the silly nature of the ongoing suggestions that gold is a ‘bubble’.