A crisis in liquidity is unfolding, meaning that the banks just don’t trust each other. The Federal Reserve is buying $60 billion in Treasuries every month in the effort to pump cash into the system, but the banks hoard the cash and don’t lend.
There are no new technologies out there, like it was with the Internet or mass production of cars from the years gone by, nothing big at the horizon worth investing serious money into.
The Bank of International Settlements in Basel recently put out a report about it, and they’re supposed to be some sort of authority, even called the “central bank of central banks”.
For the last few years I am trying hard to understand why, and I am failing every time I try.
The report is a joke, so don’t bother reading it, but here is my understanding of the issue – it’s all about access to cash to settle overnight obligations, or not (read: being broke).
When you go about your business every day you make payments, buying gas, groceries and other things. Now, the gas station you paying at doesn’t necessary have the account with the same bank you do.
When you make your payment and the little terminal flashes “approved” it is everything but. Nothing is approved at this point – your bank is on the hook to settle overnight with the bank of the vendor.
It is not about your account balance, it is about settling between banks, which they may, or they may not be able to do, depending on how much cash they have on hand.
They will put up commercial paper at a discount for cash to be able to pay up, and this discount is the repo rate. We’re talking about $1 trillion money moving overnight, to put it into perspective (and the repo rate spiked at the end of September from about 2 to 10%).
The US banks will not lend to European banks, because they don’t trust them. “Who is holding all the worthless paper?” is the question. Just look at the percentage of non-performing loans in Europe (NPL) and realize that someone has trillions of the junk paper that backs it up on the books.
Welcome to the definition of “banks don’t trust each other”.
Just when you thought that it’s safe to go outside, huh?
The institutions can put up Treasury bonds as a collateral to get cash and take positions in the markets, which was illegal until 1971 (end of the gold standard).
What we have now is that you can post debt to guarantee new debt.
It’s like using your car, which has a loan on it, to borrow money for a new boat. Once you have the loan for the boat approved, you use is as a collateral to buy a new Harley Davidson.
I am amazed just watching it, looking for a punch line that will punch hard unless there is a divine intervention.
But the divine intervention record is bad. Not existing, actually.
What if the worst is true, that there is no God and you’re only going once around and that’s it?
Enjoy every moment of it, that’s all.
The image of Him cures the illusions that make you sick – I think it may be the central point of any faith, actually.
“You’re a fine looking old man,” I said to myself in the mirror this morning.
“And what’s more, you have the correct attitude – you don’t care if it ends or if it goes on. And as for the violin music, there will be plenty of it in paradise.” *
I am convinced that guys with that attitude live the longest.
In the Biblical Garden of Eden, in the paradise, the snake shows up, a most unexplainable thing. And then he changes the reality forever, ruining the undisturbed life, demanding effort and causing pain.
The way I read it is that God had the choice to make us safe, or to make us strong.
He went with strong.
* Lyrics by Leonard Cohen
Tom Kubiak is the author of The Traveler