Melamine in my Money

“Melamine is sometimes illegally added to food products in order to increase the apparent protein content. Standard tests such as the Kjeldahl and Dumas tests estimate protein levels by measuring the nitrogen content, so they can be misled by adding nitrogen-rich compounds such as melamine.” - Wikipedia on Melamine

Unscrupulous operators added Melamine to pet food and the result was the death of thousands of loved pets all over the world. It should have been a dire warning but no, not long after, other unscrupulous operators added Melamine to milk products and human babies started dying. This irresistible temptation lies in the fact that Melamine fools the protein test, which in turn allows the operator to degrade the product for greater profit. The doctored foods pretend to have great nutritional value but ironically will kill you.

The horrible truth is that Melamine, a deadly toxic compound, is added to foods to cover up another criminal act. First a food is diluted to increase mass and therefore allows the operator a greater profit. Then Melamine is added to fix the protein content so the product will pass the protein tests. It is a stealth poison. It accumulates mostly in the kidneys and acute kidney failure occurs only after the body has absorbed a relatively high dose over time.

In a world of monetary management we find a similar process. The first step is for Central Banks to dilute the wealth of all holders of money by creating fictitious money. The fictitious money is fed into the economy via the debt channel. Banks are given access to Central Bank Melamine Money on repurchase agreements of Government Bonds (or any other qualifying financial assets – all forms of debt). You may immediately ask, what can possibly be wrong with that?

The repurchase arrangement between banks and the Central Banks is fatally flawed as a fictitious money creation mechanism. It is not technically difficult to understand. The bank will sell Government Securities to the Central Bank and will undertake to buy the Government Securities back after a specified elapse of time. The repurchase price would be calculated as an amount equal to the selling price plus interest calculated for the period. It is simply a loan against security but for the fact that the Central Bank becomes the legal owner of the Government Security until the Bank repurchase that Government Security. Being a legal owner allows the Central Bank to simply keep the Government Security should the bank fail to repurchase the Government Security and the Central Bank would not need to engage in complex legal procedures to gain ownership of the collateral which would be the case of a loan against security. The unintended consequence of this practice is outright fictitious money creation.

A simple but absolute truth is that Central Banks do not have the money to buy the Government Bonds (or any other asset) from banks. The Central Bank must borrow that money. The fantastic part about Central Bank borrowings is that they never pay interest because they do not have to negotiate the loan with the providers of the loan. They simply take it at will. Be amazed at the simplicity and duplicity of the process.

The Central Bank will simply create a money credit for the bank in exchange for the Government Stock. It is a “loan” against the inherent wealth in the economy. Even better the Central Bank gets to earn interest from the bank on the money that it granted itself on an interest free basis. Ever wondered how Central Banks “earns income” to finance their own activities, this is how it’s done – earning interest by diluting our wealth. Accounting rules based on “substance over form” allows banks to show “assets under repurchase agreements” still as their own assets and requires a contra “loans from the Central Bank” to be shown on the liabilities side. Here is where my teenage daughter would comment, “How cool is that!”

It all happens because Central Banks do not need to ask anybody for a loan. The Central Bank can simply borrow purchasing power from the economy without anybody’s permission. That is macroeconomic talk for the Central Bank can borrow money form each and every economic participant through money creation. It is what happens every time that the Central Bank enters into a repurchase agreement with a bank (it’s called it providing liquidity to banks).

Interesting how the Melamine Money can fool the economy into believing that purchasing power has not been compromised. The objective has been achieved, successful dilution without detection.

Melamine is described as a compound with low toxicity. That makes it no less deadly. The initial dose will not cause kidney failure, nor the next but eventually it will be achieved. The characteristic which gets you is the fact that it is accumulating. Acute kidney failure occurs after acute exposure to melamine. It is the same with the economy and money creation. It never leaves the system and it can never be digested, so it accumulates in bubble formation and excessive speculative activities. Then the bubble markets fail and the market experience systemic failure. Banks start dying because they suckle on too much Melamine Money.

The answer from monetary and treasury authorities is to increase the dosage of Melamine Money and distribute it as bailouts to all and sundry. Distribution by the Central Bank happens through liquidity provision; and buying more Central Government Securities with money created from nothing will allow Treasury to engage in bailout activities. Consider for instance that the bailouts have now been extended even to the suppliers of goods and services to the auto industry. The source of all bailouts is Melamine Money.

So the patient has been placed on life support and given a melamine drip. No recovery is immanent. The economy goes into a slow death, just look at the Japanese economy. Their melamine money was initially introduced in too large quantities to sustain an export orientated, undervalued currency economy. The Melamine Money caused systemic failure. Melamine Money solutions kept a deteriorating economy in a downward spiral of life support and slow death for 19 years from that fateful December 1989 when the Nikkei started its own downward spiral.

The toxic flow from melamine money accumulates and eventually causes systemic failure. Ultimately Central Government Debt is used to settle all debt but debt just circulates and accumulates in Central Government debt which never seems to be in need of settlement. It sounds like a snake eating itself up from its own tail and grows bigger as a result of the sustenance, because it follows a similar bizarre logic.

Schematically the process can be shown as follows:

The process begins with the issue of Government Bonds.





The Central Bank purchases Government Bonds with Melamine Money (steps 1 & 2). In the normal cause, the Central Bank would again sell the Government Bonds and would sterilise the Melamine Money when it receives payment (steps 3 & 4). The only Melamine Money remaining would then be that for which the Central Bank carries Government Bonds on its own balance sheet.

The Melamine Money is reintroduced when the Central Banks enters into any repurchase agreement(s) with any bank. The introduction of Melamine Money to the economy is accelerated when the Central Bank accepts financial assets other than Government Bonds for repurchase agreements and accelerated again when the Central Banks make outright purchases of financial assets from the banking or non-banking sectors such as purchases of commercial paper.


It is a growth spiral of exchanging debt for debt. Now imagine a process which requires banks to offer a physical good such as gold as collateral asset for a Central Bank repurchase agreement. The act of being forced to purchase gold would sterilise the money creation. The money is “frozen” in gold form. The compounding nature of Melamine Money creation is stopped in its tracks. It should come as no surprise that gold in this context can be called an antidote for Melamine Money poisoning.

I have never understood how thinking such as hereunder could prevail in a sophisticated and enlightened global society such as the one we are living in.

1. “A Central Bank which actually has no money can lend money to Central Government and lately to almost anybody without simply creating “money” from nothing.
2. The “money from nothing” loans can be used to buy real goods and services in the economy without any consequences other than inflation.”

The sci-fi economies usually functions this way, but it is fiction nevertheless. Since this kindergarten variety of economic theory postulates that Central Bank money represents economic value, I would propose that we all stop working and simply demand access to Central Bank money for our purchasing needs. Sadly we will all run around with wagonloads of money but find nothing to purchase since nobody will be producing anything. The economic truth is that Central Bank money has no value other than to temporarily fool the tests for money. Fool the tests for long enough and the economic patient goes into systemic failure and will stay there until the toxic compound is removed from the system.

Inflation is the first symptom of Melamine Money poisoning. Acute Melamine Money poisoning expresses itself as a deflationary depression in the economy. Economic death by Melamine Money poisoning is the final stage in a Hyperinflationary Depression (lots of Melamine Money but no products to buy). Care should be taken with predictions of economic death by monetary poisoning. Japan has shown that the acute monetary poisoning stage can last a long time without the economy slipping into the Zimbabwe example.

No matter how you want to look at it, Melamine Money has no economic nutritional value.

Sarel Oberholster
BCom (Cum Laude) CAIB(SA)
3 January 2009

© Sarel Oberholster

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .

Note: I will soon publish “War on Savings” which contains a detailed economic theory of the progression of monetary invention through the various inflation stages. I also deal with the consequences of monetary excesses beyond inflation. Please send me an e-mail to ccpt@iafrica.com with “War on Savings – request” and I will provide you with link to a pre-publication copy which I will make available on my blog from 14 January 2009.