The US is by far the biggest economy in the world. Its financial markets — be it equity, bonds or derivatives markets — are the largest and most liquid. The Greenback is the most important transaction currency. Many currencies in the world — be it the euro, the Chinese renminbi, the British pound or the Swiss franc — have actually been built upon the US dollar.
The world is effectively on a US-dollar-standard, and the US Federal Reserve (Fed) has risen to the unofficial status of the world’s central bank. The rise of the Greenback has to a large extent been propelled by international banking, which has basically “dollarized” in terms of its lending and issuing activities.
The Fed Sets Global Policy
The Fed’s policy not only determines credit and liquidity conditions in the US, but does so in many financial markets around the world as well. For instance, movements of long-term US interest rates regularly have effects on credit and equity markets in, say, Europe and Asia. The Fed’s actions are the blueprint for monetary policymaking in many countries around the world.
The graph shows the Fed’s supply of newly created US dollar liquidity sent to other central banks around the world. It also shows the so-called “euro cross currency basis swap,” which can be interpreted as a “stress indicator”: If it drops into negative territory, it means that euro banks find it increasingly difficult to obtain US dollar credit in the free market place. The Fed’s injection of new US dollar balances into the financial system has helped to reduce the euro currency basis swap. Since late 2016, however, it has started to venture again into negative territory — potentially signaling that euro banks are again heading for trouble.
The financial and economic crisis 2008/2009 has increased further the dependency of the world’s financial system on the US dollar. As early as December 2008, the Fed provided so called “liquidity swap agreements.” Under the latter the Fed is prepared to lend newly created US dollars to other central banks around the globe.
For instance, the European Central Bank (ECB) can obtain US dollars from the Fed and lend the funds on to shaky domestic banks in need for US dollar funding. In other words: Liquidity swap agreements can easily replace foreign currency funding in the market place by foreign currency credit provided by central banks.
Meanwhile, all major central banks around the world — the European Central Bank, the Bank of Japan, the Chinese central bank, the Bank of England, and the Swiss National Bank — have joined the liquidity swap agreement club. They also have agreed to provide their own currencies to all other central banks — in actually unlimited amounts if needed.
It is no wonder, therefore, that credit default concerns in financial markets have declined substantially. Investors feel assured that big banks won’t default on their foreign currency liabilities — as such a credit event is considered politically undesirable, and central banks can simply avoid it by printing up new money.
Moving Toward a Worldwide Central Bank
The close cooperation and coordination among central banks under the Fed’s tutelage amounts to an international cartelization of central banking — paving the way toward a single world monetary policy run by a yet to be determined single world central bank. Such a development is, or course, in the very interest of those in favor of establishing a single world government.
How will President Donald J. Trump and his administration deal with the cartelization in central banking? Mr. Trump doesn’t seem to be an “internationalist,” seeking to build a new world order by political and military means. If that is so, he will sooner or later have to come to grips with the Fed’s policies — most notably with its liquidity swap agreements.
The Fed’s policy has made the world’s financial system addicted to ever greater amounts of US dollars, easily accessible and provided at fairly low interest rates. From this the US banks benefit greatly, while average Americans bear the brunt: they pay the price in terms of, for instance, boom and bust and an erosion of the purchasing power of the US dollar.
What Trump Should Do
If the Trump administration really wishes to live up to its campaign promise “Make America great again,” there is no way of getting around addressing Fed policy. A first step in that direction is the idea to subject the US central bank to public scrutiny (“Audit the Fed”), bringing to public attention the scope of the Fed’s interventions into the world’s banking system.
Of course, the liquidity swap agreements in particular can be expected to be heavily defended by central bankers, bank representatives, big business lobbyists, and mainstream economists as being indispensable for financial system stability. And for sure, a sudden withdrawal from this practice would almost certainly deal a heavy blow to financial markets.
If push comes to shove, it could even make the worldwide credit pyramid, built on fiat money, come crashing down. However, the really important argument in this context is that the continuation of the practice of central bank cartelization will eventually result in a despotic regime: and that is a single world fiat currency regime.
Of course, change for the better doesn’t come from politics. It comes from better ideas. For it is ideas that determine human action. Whatever these ideas are and wherever they come from: They make humans act. For this reason the great Austrian economist Ludwig von Mises (1881 – 1973) advocates the idea of the “sound money principle”:
The sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.
Mises also explains convincingly the importance of the sound money principle for each and every one of us:
It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of right.
Mises’s sound money principle calls for ending central banking once and for all and opening up a free market in money. Having brought to a halt political globalism for now, the new US administration has now also a once in a lifetime chance to make the world great again — simply by ending the state’s monopoly of money production.
If the US would move in that direction — ending legal tender laws and giving the freedom to the American people to use, say, gold, silver, or bitcoin as their preferred media of exchange — the rest of the world would most likely have to follow the example. That said, Mr. Trump could really make a real change, simply by embracing Mises’s sound money principle.
And banks feel that they currently have TOO MUCH capital…
By Simon Black
In a scathing editorial published in the Wall Street Journal today, the president of the Federal Reserve Bank of Minneapolis, Neel Kashkari, blasted US banks, saying that they still lacked sufficient capital to withstand a major crisis.
Kashkari makes a great analogy.
When you’re applying for a mortgage or business loan, sensible banks are supposed to demand a 20% down payment from their borrowers.
If you want to buy a $500,000 home, a conservative bank will loan creditworthy borrowers $400,000. The borrower must be able to scratch together a $100,000 down payment.
But when banks make investments and buy assets, they aren’t required to do the same thing.
Remember that when you deposit money at a bank, you’re essentially loaning them your savings.
As a bank depositor, you’re the lender. The bank is the borrower.
Banks pool together their deposits and make various loans and investments.
They buy government bonds, financial commercial trade, and fund real estate purchases.
Some of their investment decisions make sense. Others are completely idiotic, as we saw in the 2008 financial meltdown.
But the larger point is that banks don’t use their own money to make these investments. They use other people’s money. Your money.
A bank’s investment portfolio is almost entirely funded with its customers’ savings. Very little of the bank’s own money is at risk.
You can see the stark contrast here.
If you as an individual want to borrow money to invest in something, you’re obliged to put down 20%, perhaps even much more depending on the asset.
Your down payment provides a substantial cushion for the bank; if you stop paying the loan, the value of the property could decline 20% before the bank loses any money.
But if a bank wants to make an investment, they typically don’t have to put down a single penny.
The bank’s lenders, i.e. its depositors, put up all the money for the investment.
If the investment does well, the bank keeps all the profits.
But if the investment does poorly, the bank hasn’t risked any of its own money.
The bank’s lenders (i.e. the depositors) are taking on all the risk.
This seems pretty one-sided, especially considering that in exchange for assuming all the risk of a bank’s investment decisions, you are rewarded with a miniscule interest rate that fails to keep up with inflation.
(After which the government taxes you on the interest that you receive.)
It hardly seems worth it.
Back in 2008-2009, the entire financial system was on the brink of collapse because banks had been making wild bets without having sufficient capital.
In other words, the banks hadn’t made a sufficient “down payment” on the toxic investments they had purchased.
All those assets and idiotic loans were made almost exclusively with their customers’ savings.
Lehman Brothers, a now-defunct investment bank, infamously had about 3% capital at the time of its collapse, meaning that Lehman used just 3% of its own money to buy toxic assets.
Eventually the values of those toxic assets collapsed.
And not only was the bank wiped out, but investors who had loaned the bank money took a giant loss.
This happened across the entire financial system because banks had made idiotic investment decisions and failed to maintain sufficient capital to absorb the losses.
Nearly a decade later, Kashkari says that banks still aren’t sufficiently capitalized.
(He also points out that banks today are obsessed with pointless documentation and seem “unable to exercise judgment or use common sense.”)
The banks themselves obviously don’t agree.
As Kashkari states, banks feel that they currently have TOO MUCH capital.
Bizarre. They’re basically saying that they want to be LESS safe, like a stunt pilot complaining that his helmet is too sturdy.
I’ve written about this many times– the decision for where to hold your savings matters. It’s important.
In addition to solvency and liquidity concerns, there are a multitude of other issues, like routine violations of the public trust, collusion to fix interest and exchange rates, manipulation of asset prices, and all-out fraud.
(I personally got so fed up with our deceitful financial system that I started my own bank in 2015 to handle my companies’ financial transactions. More on that another time…)
Yet despite these obvious risks, most people simply assume away the safety of their bank.
They’ll spend more time thinking about what to watch on Netflix than which bank is the most responsible custodian of their life’s savings.
There are countless ways to figure this out, but here’s a short-cut: much much “capital” or “equity” does the bank have as a percentage of its total assets?
These are easy numbers to find. Just Google “XYZ bank balance sheet”.
Look at the bottom where it says “capital” or “equity”. That’s your numerator.
Then look above that number to find total assets. That’s your denominator.
Divide the two. The higher the percentage, the safer the bank.
Kashkari thinks the answer should be at least 20%, especially among mega-banks in the US.
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