Bank Corpses on Friday Nights

“The pursuit of the Bank's vision will express itself through leadership in the formulation, implementation and monitoring of policies and action plans for fighting inflation, stabilisation of the internal and external value of Zimbabwe's currency and of the financial system in a manner that gives pride of achievement to Zimbabweans across the board.” Mission Statement of the Reserve Bank of Zimbabwe

The banking Angel of Death descends like a curse on Friday nights to claim the lives of banks. Bankers must fear this weekly curse sufficiently to pack their cardboard boxes on Friday nights. One has to avoid the embarrassment of the Lehman employees who had to run from press photographers clinging to their boxes. Most unflattering and not good press for their next employment interview. So they probably keep their personal belongings at home over week-ends.

I want to concentrate on the vulnerabilities of systemic risk but a list of which bank died when for those interested can be found at this link http://www.fdic.gov/BANK/HISTORICAL/BANK/index.html . This Friday it was Guaranty Bank with assets of $13billion and a few others, last Friday it was Colonial Bank the 27th largest bank commercial bank in the USA according to Wikipedia and assets of $25billion and a few others. The fact is these banks are dead. The FDIC had 305 problem institutions and 21 failed institutions on its list as at 31 March 2009. We'll have to count the corpses at year end again. The reality of systemic failure is alive and well.

Negotiations over the week-end between survivors of the Friday Night Curse, the Fed and State Regulators will arrange for the removal of healthy organs, the surviving portfolios of debt. Deposit insurance from the FDIC will kick in to guarantee the courageous survivor brave enough to “take-over” the dead bank and will “share” losses. The Fed will shield the brave warrior from defaults with asset buybacks and showers of liquidity. Central Government will throw in a few more loss absorbing arrangements to sweeten the deal if needed. Until next Friday’s visit from the banking Angel of Death.

The reality is that these banks have died. It is no takeover. It is a redistribution of portfolios while the structure and business of the dead bank is cremated before sundown on Saturday night. All in all a morbid event reserved for week-ends. The hole in the economy is re-inflated with printing press money. Comes Monday the sunshine of a growing economy and the success of the Fed in saving the global economy from systemic collapse must be celebrated. On Mondays we joyously dance on the graves of the dead banks; long live the FED.

It is the systemic cycle of death. The Japanese came to know it well. Their politicians also celebrated recovery at every possible opportunity while hiding the systemic decay under the printing press. Reassurances of a return to the boom only faded after about 7 years had elapsed from that fateful December 29th 1989. If on Mondays the stock exchanges of the world look a bit shaky, it’s because of healthy profit taking (we certainly won’t mention dead banks and other doom and gloom events that firmly belongs to Saturday mornings).

What is all this raving about you may ask? It is about the process of systemic risk and a characteristic that systemic failure will never be admitted even when it is patently visible to all. There is a very good reason.

Systemic failure has two components. The first is failure of debt formation and the rise of a seemingly endless stream of defaults. It is in this phase that banks fail and creditors are parted from their savings by government sponsored initiatives to “forgive debt” offering creditors a fraction of their capital, or else… Having stripped the creditors of their savings does not repair the hole in the economy. It only moves the hardship from one spot in the economy to another. One which everybody seems to think is more able to absorb the loss. As Karl Marx has said, each to contribute according to his ability and each to receive according to his need. GM needs the money, AIG needs the money, CIT needs the money, Chrysler needs the money and even Readers Digest has negotiated a pre-arranged bankruptcy. A carwash system whereby any old dirty debt riddled business is taken to the drive through bankruptcy carwash to emerge sparkling clean and debt free on the other side compliments of a benign government and flabbergasted creditors. Thus the creditor had the “ability” and the debtor has the “need”. Sorry creditor, it’s not personal (it is political). The broken business model is saved until the next crises.

Transferring defaults to creditors is just one more way of discounting the future to today. The saver intended to use the savings for some future consumption which will no longer happen. It is replaced by the consumption that has happened and is now paid for by way of default. Most important, the saving has been wiped out, gone, transferred form the future to the past. Down we go on a slippery slope towards the second systemic event.

The destruction of the functional value of the currency. There are a number of components to this phase.

1. The destruction of the store of value characteristics of a currency.
2. The destruction of the value of the currency for settlement of cross border transactions (the exchange rate).
3. The destruction of the currency as a sovereign means of exchange thus destroying its ability to function as a money in any way (domestic settlements).

Zimbabwe knows all about currency destruction despite their very ironic mission statement. They no longer have a currency and mostly uses US$’s as a surrogate. Talk is they are contemplating a new currency backed by gold. Their stock exchange acted as a pretender store of value for a while and in the initial stages of the hyperinflation process was the best performing stock exchange in the world. The Zimbabwean Stock Exchange totally collapsed even before the Zimbabwean dollar was discontinued and only opened in February 2009 as a dysfunctional exchange hardly trading at all. Perhaps that is why the Zimbabwe government is not offering to back their currency with the stock exchange, only a real store of value will do. (Will all governments only offer responsible monetary management at the very end?) I have been told by Zimbabweans that the gold jewelers did very well during the rise and fall of hyperinflationary Zimbabwe.

Where the first phase is a deflationary phase, the second is the transition to asset bubbles, inflation and hyperinflation. A global deflation is terrifying but an economic process that we can survive. A global or just USA hyperinflation is an economic event of such finality that I place it on faith in the hands of intelligent people to prevent this outcome. The hardships of deflationary adjustment will be candy floss to the poison of a hyperinflationary event in the USA. I stubbornly believe that this outcome will be prevented politically.

The extent of undermining the functional value of the currency will dictate the extent of the inflationary pressure. Channeling money creation to assets is the preferred activity in a post debt bubble monetary environment. At first it will lead to the development of asset inflations in perceived stores of value. This does not yet alter the deflationary bias of the economy.

Hyperinflations across sovereign economies are associated with the destruction of the currency as a means of settling international transactions and in the final instance in the destruction of a currency to the extent that it can no longer function as a means of settlement of transactions within its sovereign borders. The epicenter again is money creation particularly in the interaction between the Central Bank and the banking sector of which the new open channel between the Fed and the erstwhile Investment Banks is a money creation distribution channel which pose severe asset inflation risks. This risk will be exacerbated where such banking entities are also primary dealers of Central Government debt securities. This channel is a money creation highway.

A government cannot debase through money creation its debt obligations by undermining the international value of its currency without severely damaging its ability to settle international transactions. There is no easy raid on foreign savings down this road.

It required the political desperation of a Weimar Germany or the monetary and fiscally but also politically reckless unrepentant political systems typical to recent hyperinflationary emerging economies to push an economy into hyperinflation. There is as yet no example of a failure of political processes in a modern democratic developed economy, which opened the door to hyperinflation. I sincerely hope to never see one.

Japan’s economy has very strong governmental control elements and a history of hyperinflations, yet they have averted the destruction of the currency since the advent of the Japanese crisis almost 20 years ago. They opted in stead for the stasis of monetary carries, i.e. the practice of creating money to contain any systemic collapse.

Destruction of a money is a relative process, one currency’s value against the value of all other currencies in the world and against all potential alternative stores of value. Stores of value will become extremely popular when all governments globally were to engage in policies aimed at destroying or undermining the relative value of their currencies. Even dubious “store of value” asset classes such as shares may be regarded as stores of value. From this is born the unique power of the US$ as reserve currency of the world to transfer the savings of the international saver in UD$ debt assets to a US$ creditor.

Second phase money creations are not a solution for the problems of the first phase. Currency destruction or a lesser undermining of the relative value of the currency in “carries”, will accelerate and deepen economic collapse from the monetary excesses of the first phase. Containment of the systemic events does exactly that. It undermines the sovereign and international value of the currency and postpones any recovery further into the future when it discounts income and tax receipts to today while transferring savings from those perceived by government as “able” to those perceived by government as “in need” (the government also has needs of its own).

Relative political power comes into play. Voting strength and the numbers are weighed in favor of the debtors. The power of the printing press is only a power to redistribute the wealth of a nation or in the case of the US$ the wealth of nations. It certainly does not create wealth. The redistribution allocations of the printing press are crude, patently unfair, fraught with self preserving ideals of politicians (and the head of the FED is certainly a politician), corrupt in allocating to powerful self serving interest groups and devastating to savers of which pension savings as a class is probably the most vulnerable.

Do not bow down and pay homage to the printing press for its ways are not the way to economic salvation. Do not succumb to the lure of asset inflations in your search for value. Take control of your savings and pick your stores of value with great care when you hear the beat of hammers nailing up the corpse of just one more bank on a Saturday morning.

“Admission’s free you pay to get out” Hellacious Acres (Words & Music by Paul Williams and Kenny Ascher – from a Star is born.)

Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
25 August 2009

27 August 2009. The latest information from the FDIC is: 416 troubled banks. 81 banks have been taken over so far for 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/ .

Run from your Money

Cash is trash, they say. You have to be fully invested, they say. Oil is going to $85, they say. The Dow Jones is going to 10,000, 12,000, 16,000 or more, they say. Buy copper, they say. Fill the warehouses with commodities or float fully loaded oil tankers but whatever you do you must run from your money. Interesting, why?

Because the central banks of the world has slipped the leach on the printing presses and the global economy is drowning in liquidity. The new game in town is to get hold of printing press money, preferably first and to convert it into a “store of value”. Flipping cash for stores of value is the way to go. Cash burning a hole in your pocket has a whole new meaning.

Funny thing about stores of value is the market chemical reaction to cash-is-trash liquidity flows. It changes colour like a magical chemical experiment and previous stores of value turn into red hot speculative assets, the next big thing. No longer is there any store of value intentions. All that remains is speculation on the next price increase. Flipping to the next big fool with a wad of cash to get rid of.

China said we will rid ourselves of the dollars and buy commodities. The Chinese population gets access to easy debt and floods the Hang Seng and Shanghai Composite with buy orders. “Investors” and Investment Banks draw down the cash and buy oil and the Dow. Get away from the sidelines and commit your cash is the refrain. The dollar is going to crash get out. Who knows what the miners do when they end up with all the cash?

Bubble, bubble, toil and trouble goes the nursery rhyme. Inflation is alive and well and living with the previously known as “stores of value”. Incredibly, gold is the Cinderella of the stores of value. Perhaps gold’s money prince will meet her at midnight when all other so called stores of value will be exposed as the ugly sisters.

Keynes’ saying “the market can be irrational longer than you can stay solvent” is another misguided observation of an interventionist. Are all these people really stupid? Were they stupid when they flipped houses? No, they were and are riding the wave of massive debt formation (then) and liquidity formation (now). The behaviour to get rid of the cash is fully consistent with the very logical and rational conclusion that the printing press money is actually worthless. Get it, get rid of it and let some other idiot hold the worthless trash.

Sharing the same thought is a recipe for group hysteria and bubble formation. Those who bought as a store of value are mightily pleased that their store of value has appreciated by 20%, 50%, 100% or more. Soon all thought of “store of value” is gone and rabid speculation takes its place. Value is counted daily with soaring stock exchanges and multiplication in commodity prices. Look at that, I was trying to preserve value and boy, did I preserve value…

It becomes the bluff and the double bluff, the triple agent on the inside. The stores of value can only be stores of value when they are firmly entrenched in the real economic environment. The flow of liquidity detaches these stores of value form reality and the noisy crowds form. Reasons to anticipate a reconnect to reality at some future date are legion. Shares in bubble, no way – the economy is in recovery and the stock exchange is anticipating that recovery by at least 6 months (property never goes down in price, you know). I suppose that the “stock exchange” was anticipating a boom until it crashed. Oil is running out and there is an economic recovery underway (I have seen a green shoot with my own eyes). Soon the lack of demand will catch up with the heady price, which in fact is still far too low for the serious shortages which may occur then.

Economics is about “cause and effect”. The reality disconnect is “effect and cause”. Companies post excellent results (not better than expected low ball estimates but the real thing) and the effect is that the share price rise. Cause = profitability and increased income stream. Effect = rising share price.

The liquidity disconnect turns it on its head. Effect = rising share price. Cause = profitability will improve at some stage in the future. The real cause is printing press money. Hoping for something is not the same as identifying a real cause. I can start a rabbit farm anticipating a massive demand for cheap red meat but I suspect I will end up with lots of rabbits to feed and no money. Well, at least I would have rid myself of all that trashy printing press money.

The world is running out of oil but the effects may only be felt in 20 or 30 years provided nothing happens to change that outcome. The dramatic demand adjustment to an oil supply squeeze in the 1970's proved the case for economic rebalancing to oil shocks. It is not wise to invest in or trade oil as if the “peak oil” day is today when the rest of the economy is not adjusted for that event. Ask the question, is it demand or printing press money in the driving seat? High and rising oil prices are a disconnect with the economic reality of demand today. Price distortion caused by printing press money will cause economic rebalancing. Incessant meddling with price formation and discounting future income to today (cause) will perpetuate and accelerate violent economic adjustments (effect) in proportion to the distortions caused. What an excellent example the cash for clunkers programme is of meddling with price formation and discounting future income to today. The giant of all gigantic meddlings with price formation and discounting future income to today is the policies of zero interest rates which abolish interest on savings (just add the banking margin to zero for the lending rate) and Quantitative Easing allowing Central Government to excessively discount its future income (taxes!) to today. Christians will know that even Jesus demanded the usury that the saver is owed (Mat 25:26-27 “His lord answered and said unto him, Thou wicked and slothful servant, thou knewest that I reap where I sowed not, and gather where I have not strawed: Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.”).

Understanding the inflations of the printing press requires an understanding that inflation will express where the printing press money ends up. Meat and potatoes prices will inflate if the money ends up in meat and potatoes. House prices will inflate if the money flows via debt formation into houses. Zero interest rates, Quantitative Easing and unlimited liquidity drive investors out of money and into stores of value. The inflation goes with the flow. Follow the flow to identify the inflation. Asset inflations always end up deflating when the flow slows. There is no need to remove the flow. The cycle of exponential growth only needs to be broken and the money flow asset inflation will deflate.

Run from your money and rush into inflated assets. Run from the US$ and into some inflated 3rd world currency (emerging markets are the next big thing, you know; they say emerging markets will save the global economy). Emerging economies with a dictatorial political or utterly corrupt political system where politicians are not inflating their money supply (or are they printing at 25%pa or even 50%pa and have been engaging in unofficial Quantitative Easing for ages). How promiscuous savings can be, whoring in dark corners with the printing press crowd.

Make sure your savings avoid the STD’s of printing press money when you pick your stores of value. Buying into asset inflations sets you up for the next bubble collapse from which only the nimble or the lucky escapes.


Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
23 August 2009


© Sarel Oberholster

Ps This is a rambling satire on the insanity of building economic foundations on printing press money and the self congratulations that goes with it. I logically and a bit more boringly explain the process of a flight to stores of value in “War on Savings” which is available as a PDF download on my blog.


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/ .