Friday, March 4, 2011

Bail Out the Banks

The original article at The Daily Bell can be found here:

The subject interview can be found here:,1518,748239,00.html

DB: “There is no head-scratching over HOW banks became undercapitalized. There is only the assumption – a nearly religious one – that banks need to be recapitalized, especially in Europe.”

In the recent Rickard’s interview, he goes through the point of the world being bankrupt. If you could prepare a balance sheet for the economies of the world, there would be no equity, in fact negative equity. I would safely speculate this is a first in modern times, likely a first ever.

DB: “For Eichengreen however, the answer is not to cut spending. The tax stimulus is very ineffective, he says, because it tears another hole in the budget and rich people are not inclined to spend the money that they save with the cuts.”

Banks need to be recapitalized, but of course we can't do it with real savings (which can only be provided in any quantity by the "rich"). One more stupid economist convinced that spending is the path to creating wealth, and savings destroys wealth.

It is simple: true savings results in investment, investment results in productivity improvements, productivity improvements result in improving conditions for man on earth. Remove savings, and man’s condition on earth worsens. We have seen visible signs of man’s worsening condition in the Western world for at least 40 years coincident with the destruction of savings. It is now becoming quite visible in the Middle-East today, and likely soon the tide will turn in China.

DB: “The idea will be to put a basket of currencies in place via the IMF's SDRs that will include the dollar.”

For 100 years the economies of the world have been on the path of wealth destruction. They are at the end of that road. A new currency does not create new capital. It does not improve the state of the balance sheet. The “real stuff” hasn’t increased. The introduction of a new currency only results in the re-allocation of the previously existing real stuff. Real assets don’t increase, liabilities stay the same (in fact, increase, because people are fooled into thinking they have new, real capital).

DB: “We would hope that the chaos that Western powers-that-be are now inflicting on the world will result not in another elite-mandated system but a general breakdown of the abysmal fiat-money system.”

They may last long enough to implement the SDR scheme or some other, although events seem to be moving so quickly that this is not an even-money bet, in my opinion. They may not make it to this point. Whether before or sometime shortly after the introduction of another fiat money scheme, the system will fail. Of this there is no doubt. Smaller communities will be left to pick up the pieces and decide, for example, what to use as money.

Eichengreen (from the Spiegel interview): “But I worry that [bond traders] will begin to distrust the US soon too.”

This is why they will fail. The laws of economics will win out over the desires of man. He worries about the “distrust” of bond traders, giving away the fact that it is all a con game. There is no bond trader that wants to be the last one out the door. Sooner or later, someone will yell “fire”.

No comments:

Post a Comment