Silver Smoke & Golden Mirrors

"Whenever in the judgment of the Secretary of the Treasury such action is necessary to protect the currency system of the United States, the Secretary of the Treasury, in his discretion, may require any or all individuals, partnerships, associations and corporations to pay and deliver to the Treasurer of the United States any or all gold coin, gold bullion, and gold certificates owned by such individuals, partnerships, associations and corporations. Upon receipt of such gold coin, gold bullion or gold certificates, the Secretary of the Treasury shall pay therefor an equivalent amount of any other form of coin or currency coined or issued under the laws of the United States."

Emergency Banking Relief Act of 1933, U.S. Statutes at Large (73rd Congress, 1933 p. 1-7) – Amendment (n) to Section 11 of the Federal Reserve Act. Approved, March 9, 1933, 8.30 p.m.



Many reasons are offered to explain Central Bank sales of gold. The one most often offered is a lack of return. Holding another Government’s bonds earns interest but gold has a storage cost. Holding sovereign risk is the reason for the difference in return and presently buying sovereign risk is still in a bull trend. Gold on the other hand is free of credit risk and should gain when sovereign risk becomes unpalatable. The current race to zero interest rates, a race for 2nd place as Japan has already won, pose an intervention risk for gold price formation.

The much valued return on government bonds is now more than counterbalanced by a risk of capital loss should interest rates start to rise. Then again why would interest rates rise? Japan has been at near zero interest rates since September 1995 when it first plunged below the 1% level. Thirteen years below 1% and the clock is still ticking. The USA seems to be playing follow-my-leader.



Exhibit 1

Data Source: Japan Basic Discount Rate – Bank of Japan series: Policy Interest Rates and Money Market Rates in Major Economies. USA Target Rate - Board of Governors of the Federal Reserve System series: DFEDTAR month end data.



There is only one way to get to an interest rate below 1% and that is the route of money creation. Use expansive monetary policy to flood the market for debt with money created from nothing and rates can be forced to below 1%.


Exhibit 2



A consequence of such an expansive policy is a lower return on Central Government Bonds. The rational expectation would be that Gold would under these circumstances be well placed to compete with Government Bonds.


Exhibit 3




It is exactly at the point where Gold becomes a competitive threat to money when the first part of the above quote becomes important: “Whenever in the judgment of the Secretary of the Treasury such action is necessary to protect the currency system of the United States”. It is not in the interest of the Central Government to allow Gold a competitive advantage over currency.

The expansive monetary policy is inflationary for the price of Gold and will make Gold increasingly attractive as an alternative store of value. The inflationary effect on Gold should in theory protect the holder against a constant devaluation of the currency.

Both the fiscal and monetary authorities cannot allow Gold to become an effective competitor for the currency. Steps would therefore be taken to manage the competitiveness of Gold relative to the currency

This is not a conspiracy theory. These are rational and logical steps which must be taken to protect the currency. A high interest rate will automatically afford a currency protection against Gold. A policy of near zero interest rates or even zero interest rates will make a currency vulnerable to any stores of value. Gold as the most traditional store of value will then be targeted for management. It is not significantly different form targeting an artificial interest rate. One intervention necessitates another.


Exhibit 4





Exhibit 4 shows a 1 year return and a 3 year return on an investment in gold at a monthly average price for entry and exit. The theory of inflation would have one expect that Gold would outperform Government Bonds under an expansionary monetary policy regime. Gold should therefore under monetary conditions of extreme liquidity accelerate equally in price. Yet, every attempt to outperform collapsed. Lately the Gold price has been under pressure.

It is clear from Exhibit 4 that monetary policy will fail should Gold be allowed to raise consistently as a result of easy monetary conditions. Gold would absorb newly created money and short-circuit the monetary stimulation. Contemplate the dilemma of a FED creating debt against a Gold liability. It would become a de facto return to a Gold Standard. Proactive management strategies will be undertaken to avoid such an outcome.

The second part of the quote above contains the alternative strategy in the event that the steps taken to negate the competitiveness of Gold fail. The holders of Gold will be forced to exchange the Gold for currency on such terms as the Central Government will dictate.

Central Banks across the globe cooperate on monetary policy. They will all cooperate to prevent outcomes which will reduce the efficiency of their policies.

"…in an unprecedented joint action with five other major central banks and in response to the adverse implications of the crisis for the economic outlook, the Federal Reserve, again, eased the stance of monetary policy. We will continue to use all the tools at our disposal to improve market functioning and liquidity, to reduce pressures in key credit and funding markets and to complement the steps that treasury and foreign governments will be taking to strengthen the financial system."

Ben S. Bernanke, The Economic Club of New York –– October 15, 2008, pp 4


The now very obvious global monetary choice is a choice for Stasis. Containment of the financial crisis. All economies get stuck in a downward spiral similar to the example of Japan. Monetary authorities provide unlimited liquidity to sustain Stasis. A rising Gold price will not be tolerated under these conditions.

The market risks are not that easily overcome. Every step taken to sustain Stasis on a global scale holds the risk of weaker countries failing. Sovereign risk will cause funding limitations and currency depreciations. Gold will become attractive given such an outcome.

The ultimate risk is currency failures. Monetary policy taken to the zero bound invites currency failure. Japan’s economy was structured to encourage a weak yen for an economy positioned strategically to export to the rest of the world. How many other economies can say the same? How long can the structural imbalances and stresses be held in Stasis with unlimited liquidity?

The monetary policies of Stasis will include the management of the Gold price. Gold will become prohibitively expensive should control over the global structural distortions be lost in spreading hyperinflations. Understand the smoke and mirrors of monetary policy. Understand the risks of facing off against the FED. Be extremely aware of entry and exit points when trading in Gold. Comprehend the signals when the first Hyperinflationary episodes appear. Only those who have physical gold stored outside the jurisdiction of their governments will be protected when their currencies collapse.

I leave you with a final quote form Paul Volker’s 1990 Per Jacobsson Lecture (p17, published by the graphics section of the IMF)



Sarel Oberholster
BCom (Cum Laude) CAIB(SA)
6 December 2008

© 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/ .

The reality of fiscal irresponsibility




A genuine Zim note, given to me at Joburg airport as a novelty. It is worth a couple of dollars US.

Kind regards

PETER DAWE

News Flash

Dear Visitors.

First I want to wish you all the very best holiday season. May you and your families share in a season of personal generosity.

I have been working on a substantial and significant assessment of the global crisis and the document is in the final stage of editing for publication. I had hoped to have a result form the publishers by now but the assessment is taking longer than expected. It is groundbreaking new work so perhaps some patience is appropriate. Please click a reminder or come and visit again.

"War on Savings" will be posted immediately upon publication.

Kind regards,
Sarel Oberholster

Beware December 29th

“Suppose the Bank of Japan prints yen and uses them to acquire foreign assets. If the yen did not depreciate as a result, and if there were no reciprocal demand for Japanese goods or assets (which would drive up domestic prices), what in principle would prevent the BOJ from acquiring infinite quantities of foreign assets, leaving foreigners nothing to hold but idle yen balances?” [p20]

“By a fiscal component I mean some implicit subsidy, such as would arise if the BOJ purchased nonperforming bank loans at face value, for example (this is of course equivalent to a fiscal bailout of the banks, financed by the central bank). This sort of money-financed “gift” to the private sector would expand aggregate demand for the same reasons that any money-financed transfer does. Although such operations are perfectly sensible from the standpoint of economic theory, I doubt very much that we will see anything like this in Japan…” [p23-p24]

Japanese Monetary Policy: A Case of Self-Induced Paralysis?* Ben S. Bernanke, Princeton University, December 1999
* For presentation at the ASSA meetings, Boston MA, January 9, 2000.


You can call it a “lack of confidence” when you cheat on your wife or girlfriend and get caught out. You can sweet talk your way back into “confidence” but should not believe that you can continue to cheat. Do not complain to others that the problem with your relationship is a lack of “confidence” then continue cheating. The excruciatingly simple answer is that your cheating is the problem. The “lack of confidence” is only a symptom of your cheating.

Try explaining this simple concept to a Central Banker. They cheat on the market with unlimited liquidity and artificially low interest rates. A “lack of confidence” they say, is the problem when the market catches them at it. Then they want to sweet talk the market but go right back to cheating. On 29 December 1989 the Nikkei kicked out the sweet talking Japanese Central Bankers. Nineteen years later she still refuses to listen to their sweet talking. Nineteen years they keep trying to talk their way back in without giving up their cheating ways.

Central Bankers in the West treated the Japanese market behaviour like that of a wilful child. Telling the Japanese you should cheat more and sweet talk with more purpose. It did not work and sometime in 2007 the sweet talking Romeo’s in the rest of the world also got kicked out. No amount of sweet talking would restore confidence when they chose to go on a cheating binge.

Stop cheating or stay outside in the cold. Nobody is listening. Take a good look at what to expect for the next 20 years should Central Bankers fail to stop their cheating ways.


Banking Stagnation.




Systemic banking failure with the Bank of Japan providing unlimited liquidity and zero or near zero interest rates. This Central Bank policy prevents debt clearing and ensures stagnation. It is no surprise that Bank of Japan officials have designated the NPL (Non Performing Loan) as enemy number one for Central Bank policy.


Long term Bear Market in Stocks with high volatility.




Let’s record the pivotal points again. 29 December 1989 intraday high of 38,957; 19 August 1992 intraday low of 14,194; 28 April 2003 intraday low of 7604; and 28 October 2008 new intraday low at 6995. A nineteen year Bear market in the Nikkei and still making new lows. Any stock market trader would look upon this chart and identify the trend but know that one wrong point of entry could end his career. This market is for long term professionals and not for speculating taxi drivers.


Exploding Government Debt without pressure on long term interest rates.




The Nikkei high of 29 December 1989 haunts this chart. Japan’s Government liabilities exploded upwards and tapered off only at the height of the boom in the rest of the world. How near is Japan to the precipice of a Hyperinflationary episode?

The world in 2008 stand before three choices, none of them pleasant.

1. Liquidation of Debt. This choice is the least palatable for politicians and Central Bankers alike. It will bring about a market driven realignment of the economy. The rebalancing of the economy will remove the malinvestment and structural imbalances from the economy and produce fast recovery thereafter. An undertaking to follow prudent and responsible Monetary and Fiscal policies will restore that elusive “confidence”. The political will for this option does not exist and it is therefore an unlikely scenario.
2. Japanese style incremental liquidation of debt. All my research indicates that this process will take from fourteen years to longer. The fourteen year benchmark is the extent to which monetary policy had stimulated 20 year mortgage absorption below the 8% crossover where capital repayment become more important than interest repayment, which need to be rebalanced. The reality of the Japanese scenario is as above, nineteen years and still counting. This is the explicitly stated choice of the Politicians and Central Bankers as of November 2008. I can detect no change in the intent or rhetoric indicating a change of heart. It is therefore very likely that we will get to experience this scenario. The likelihood is high that the experience will prove worse than Japan. Japan had savings, reserves and a huge Current Account surplus and a rest of the world in an extraordinary boom to keep it from slipping further into the abyss. Let’s not forget the Yen Carry Trade so eloquently suggested by Bernanke to the BOJ in the quotation above. (Beware anyone who does not comprehend that the FED could choose to engage in exactly the same tactic). The 2007 Depressionary Bubble is now world wide in decline with everybody trapped in its grip.
3. Hyperinflationary Bubble. It requires one final co-operation between Monetary and Fiscal Policy. The creation of money for direct spending by Central Government without using the formation of debt as the distribution channel. The risk if Monetary and particularly Fiscal interventions getting out of hand is high but not likely for now (my sincere hope). I have no personal desire to experience this scenario firsthand.

It is good to look at the 1929 experience. So too the 1970-1976 experiences. History gives us prior warning and we need to revisit the lessons of yesterday but the Japan experience is the prior warning for the 2007 systemic collapse. The cause was the same type of Monetary Policy, the collapse was the same type of systemic banking failure and the remedy so far is the same. Why would the result not be the same?

Sarel Oberholster
BCom (Cum Laude) CAIB(SA)
14 November 2008


© 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/ .

Ps. I count the 17 years for the Deflationary Bubble from 1991 when the property bubble joined the collapse. For a good chart see Fig 8 on page 25 of "Effects of the Quantitative Easing Policy: A Survey of Empirical Analyses by Hiroshi Ugai, published by the BOJ.

ARE WE NOT CIVILISED MEN?

“… “Not to go on all-fours; that is the Law. Are we not Men?
“Not to suck up Drink; that is the Law. Are we not Men?
“Not to eat [raw] Fish or Flesh; that is the Law. Are we not Men?
“Not to claw the Bark of Trees; that is the Law. Are we not Men?
“Not to chase other Men; that is the Law. Are we not Men?”…
“His is the House of Pain.
“His is the Hand that makes.
“His is the Hand that wounds.
“His is the Hand that heals.”…
“His is the lightning flash,” we sang. “His is the deep, salt sea.”…
“His are the stars in the sky.”…
“He is a five-man, a five-man, a five-man—like me,” said the Ape-man.”…”

“The Law” - The Island of Doctor Moreau
Author: H. G. Wells - 1896

(http://www.gutenberg.org/etext/159 Download the ebook for free from this site)


Dr Moreau plays god over life in this classic tale of HG Wells. Over and over the question is asked “Are we not Men?”, for the descend into barbaric animalistic behaviour is a constant almost irresistible temptation. Perhaps the question should be asked, when does Economic Man become a Beast?

The first Law of Economic Man is respect for private property. Oh the temptation of the Beast to show disrespect. Take from the “Rich” (“Are they not Men?”) and give to the “Poor”. Take for the individual (“Are we not Men?”) and give to the Banks, the Insurance giants, the motor Manufacturers, the Government Supported Entities. The joy of the gift with other people’s money has not the loss of giving from your own.

The second Law of Economic Man is to save. How the Beast hunger for Debt? Why does He (Government and Central Banks) encourage debt with low interest rates and unlimited liquidity provision? Do not encourage the Beast, encourage Economic Man. Economic Man pays for his consumption from the fruits of his labour. The enslavement of Economic Man starts when he succumbs to the temptation to pay for his consumption with Debt.

The third Law of Economic Man is ownership of his body and the fruits of his labour. Increasingly He dispossesses Economic Man of the fruits of his labour and disrespects Economic Man’s ownership of his body to gift other men (“Are we not Men?”) with the fruits of Economic Man’s labour.

The fourth law of Economic Man is to resist the cravings for easy monetary solutions. Recognition of the inflationary spiral is essential. Stimulatory monetary policy by His hand is a process with known consequences. It’s a drug addiction to the Beast. Rehab from this drug addiction is inflation and a recession. Refuse rehab and accelerate monetary consumption and the next stop is endemic inflation and a deep recession (in its final phase called stagflation). Still not prepared to go to rehab? Binge on debt and asset bubbles in a hallucinatory boom followed by a depressionary systemic collapse. Absolutely refuse rehab with exponentially growing money and liquidity creation backed by unfunded fiscal stimulations to destroy the monetary system in a hyperinflationary death. Death by overdose.

The fifth law of Economic Man is preventing Him from indebting Economic Man and his children, and his children’s children. He will indebt Economic Man fiscally when Economic Man resists the temptation of debt enslavement. He will seduce with promises of prosperity in the interest of all. The Beast will succumb to the siren songs of endless debt. This is the refrain of the Beast.

Not to disrespect private property; that is the Law. Are we not Men?
Not to suck up Debt; that is the Law. Are we not Men?
Not to eat the Labour of fellow Men. That is the Law. Are we not Men?
Not to claw the Bark of the Money Tree. That is the Law. Are we not Men?
Not to debt burden other Men. That is the Law. Are we not Men?
His is the House of Debt.
His is the Printing Press.
His is the Hand that makes Exuberance.
His is the Hand that Gifts.
His is the Hand that Controls.
His is the deep, dark Depression.
His are the dizzy heights of Hyperinflation.
His is the slave master of our children.

The Beast has five fingers on each hand and five toes on each foot just like you. Are you not Economic Man?

Sarel Oberholster
BCom (Cum Laude) CAIB(SA)
10 November 2008

© 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/ .

Stealth Tax and the Money Tree

[This is a previously unpublished essay written by Sarel Oberholster in November 2004 but the subject matter of Basle accords and capital coefficients were considered not digestible fare for the readers of finance and investment essays. Perhaps this essay deserved to be published as it deals with the very reality that we are facing today. The content of this essay is even more relevant now in October 2008.]

Fractional Banking, the Money Multiplier and money creation by banks are economic concepts that need updating. Failing to do so will expose you to almost limitless taxation by stealth. Nothing is safe, not your income, or your wealth; even your pension is there for the taking.

Fractional banking is a derivative of the money multiplier theory, which works like this. A bank receives a deposit, which can then be recycled and multiplied throughout the banking sector subject to the “fraction” that a bank will or are obliged to retain as a “reserve” against withdrawals. Say the reserve is $10 out of $100, then the 1st deposit-receiving bank can lend out $90, the money recycles in the economy and ends up as a $90 deposit with the next bank who in turn will “reserve” $9 and lend out $81, ad infinitum until the fractions simply gets to small to matter. Not a complicated theory at all, only starting at the wrong place. The very 1st $100 is the only “money” the rest is simply an assumption about credit distribution. The multiplication may or may not happen. Of more importance is that the existence of “reserving” will act as a natural brake on the extent of credit distribution in any economy. This is the first area where updating is required.

The advent of a standardised worldwide approach towards bank supervision as new monetary policy embodied in the Basel Accords (Basel I – the 1988 Capital Accord and Basel II - 2001) have effectively superseded “reserving” as part of monetary policy. You can read up and find these accords at the BANK FOR INTERNATIONAL SETTLEMENTS, Basel Committee on Banking Supervision by following this link http://www.bis.org/bcbs/ . Implementation guidelines for the Basel II accord can be found at this link http://www.bis.org/publ/bcbs109.pdf .

These accords changed the focus of credit creation by banks as managed by central banks. All forms of credit and banking risks are graded (“risk weightings”) and banks are required to hold a prescribed percentage of capital against each class of risk. These are called capital co-efficients and banks must then comply with “Capital Adequacy Ratios”. It follows that capital adequacy ratios have taken over from fractional reserving as the limiting variable in credit creation by banks. The size of the reserving “fraction” has become so small such as to all but eliminate it as a brake on credit creation.

The new overarching credit creating policy variables are the Capital Adequacy Ratio from Central Bank Supervision over banks and Liquidity Accommodation to banks. First let’s look at Capital Adequacy.

The Capital Adequacy Ratio for banks under Basel II is generally targeted at 12% by 2005. This simply means that a bank’s capital must equal 12% of the sum of its risk exposures. A simplified example would be that a bank’s Capital Requirement would be $12 if it has advances of $100. It gets a bit more complicated with different “tiers” of capital and the fact that the $12 may also be lent out, but the fundamental principle of the example holds true irrespective. Risk weightings make up the sum of the risk exposures.

The risk weighting for standardised credit risks is 100% (the vast majority of all Bank lending other than residential mortgage lending, lending to government and public sector entities, and lending to other banks). This only means that the full 100% of the $12 shown in the above example will apply.

Special rules of “risk mitigation” apply to certain classes of loans made by banks. Residential mortgage advances of high quality can get risk weighted as low as at 35%. Again a simple process. $100 of these mortgages will get only 35% of the normal $12 Capital Requirement i.e. $4.20, which translates to almost 3 times as much Residential mortgage lending at the original $12 capital. Lending to governments can be as low a risk weighting as zero but normally would not exceed 10% as a risk weighting. That means banks can lend to government 10 times more than to anybody else, as a worst case scenario, but at a zero rating, banks can lend to government an unlimited amount. Hang on to this principle for it is part of a simple circular process to create unlimited government funding via the banking sector, for the Fed will supply the banks with all the “money” they need to advance to borrowers to complete the circle.

Armed with understanding the basics of Capital Adequacy, Risk Weightings and risk mitigation, facilitates understanding of the processes in place to distribute unlimited credit, or better known as unlimited debt. Banks are very capable in managing their capital needs to satisfy the capital adequacy requirements.

Banks do not actually create money. They distribute credit. Their ability to distribute credit used to be a function of the amount of deposits that they could attract. That was the next problem that stood in the way of limitless credit. This problem was solved through central bank “accommodation”, even before the advent of Basel I.

Banks are credit shops; they buy and sell credit. Banks operate on the basic principle of selling all qualifying credit on any given day and then try to balance the books at the end of the day. This they do by attracting deposits. They sell the excess, when deposits exceed their sales of credit, in the inter-bank market. Those banks experiencing a shortfall after exhausting all sources of deposits will access the inter-bank market for deposits. Obtaining a deposit from the central bank makes up a shortfall after exhausting the inter-bank market.

The process involved in obtaining such a deposit is normally described in complex technical language, but it remains just a deposit by the central bank at the bank with a shortfall. It is a structural given in the modern economy, that there will always be a daily shortage of available deposits. The shortage is made up by the central bank in terms of its liquidity policies towards the banks. The central banks would also penalise banks when they make use of this accommodation. Such penalties, hawkish or dovish, would be a function of prevailing monetary policy and will be expressed as an interest rate. Here, however, is the link in the chain; banks would normally need government securities as collateral to obtain accommodation, so banks will tend to hold fair volumes of government debt as “liquidity reserves”.

Think about it. Banks have no idea of exactly how much credit they will grant on any given day or what the level of withdrawals will be. So, a bank will not say, “lets see what deposits amount to for the day?” and then grant loans until the deposits have been used up. Any luckless, would be borrowers, would then have to wait until the next day to know if the bank managed to obtain enough deposits to grant them a loan. It just does not work that way. Banks sell credit first and then balance the books thereafter; there is no other way!

The economic and logical trap that creates the mirage of banks as money alchemists can be found in misinterpreting bank credit and fiat money as the same thing. They’re not. Every bank must balance its books every day. Credit sold must equal the sum of deposits taken, capital and central bank accommodation. It is no more complicated than that from a global perspective. The only money creation in this exercise is the accommodation by the Central Bank.

Here’s a sample from the Bank of Japan accommodation policy, where an “unlimited accommodation” policy has been in place for a long time. Available on the Home Page of the BOJ, by following this link, http://www.boj.or.jp/en/seisaku/04/pb/k041029_f.htm [this link has since been deactivated].

“[Monetary Policy Meetings]

October 29, 2004
Bank of Japan
(For immediate release)
________________________________________
At the Monetary Policy Meeting held today, the Bank of Japan decided, by unanimous vote, to set the following guideline for money market operations for the intermeeting period:
The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 30 to 35 trillion yen.
Should there be a risk of financial market instability, such as a surge in liquidity demand, the Bank will provide more liquidity irrespective of the above target.”

The Central Bank is the only entity that can show a deposit to a bank on one side of its balance sheet and a “money” liability on the other side of its balance sheet. It is of no relevance for money creation how many debits or credits are created in the books of all the banks in the world on any given day. That is simply the turnover of banks. The end of day “accommodation” where central banks balance the books of banks is where the money creation happens. The existence of providers of credit beyond banks, such as Mortgage Lenders Freddie Mac and Fannie Mae, Corporate Finance entities such as used by GM and other “in-house banks” and large scale direct investments in securities from junk bonds to high quality mortgage securitisations have made the measurement of “money supply” in M2 and M3 susceptible to gross understatement of the actual “money creation” taking place. Credit derivatives, collateralised debt obligations and other exotic financial instruments, actively used by banks and other financial entities will not even appear on the radar. In the end it is better to follow trends in debt rather than the traditional money supply variables.

Large-scale stimulation of the economy through budget deficits (fiscal stimulation) and quantitative easing (monetary stimulation) would be expected to show up on the balance sheets of commercial banks as an increase in holdings of Government Securities. More so if overnight interest rates for banks are much lower than yields on Government Securities and the Fed promises lower rates for longer (the “carry trade”). It is therefore interesting to observe how holdings of U.S. Government Securities at all Commercial Banks [1] increased since the 1st quarter of 2001 with the recorded growth rate at 5.52% in Feb 2004 the highest growth rate in this series from its inception in Jan 1947. Observing this increase against the advent of the downturn in equities and subsequent recovery is most illuminating. The down trends in both Commercial Bank holdings of Government Securities and the DJIA may just be a very ominous signal. Note also a similar down tendency early in the first bear phase of the DJIA.





The explosive growth in purchases by banks of Government Securities is consistent with similar increases in the budget deficit, the trade deficit, mortgage debt, in fact almost all types of debt, all of which manifested in an equally stimulated aggregate demand, creating an illusion of a healthy growing economy.

The money tree belongs to the Central Banks and only them. They guard this power jealously. Banks cannot create money; they can only function as the conduit for the Central Bank’s credit stimulation policies, which in turn is derived from monetary policy as expressed by government. Ultimately all other financial intermediaries’ actions will be captured in the central bank accommodation provided to the banks. Knowing also that central banks can actually provide unlimited accommodation and banks just need to ensure capital adequacy, leads to understanding how an economy can be stimulated with unrelenting quantitative easing at any level of interest rates. Add to this the arrival of all new forms of electronic banking and internet banking, facilitating the distribution of credit in almost real time and you will get an idea of how efficient and dangerous debt stimulation has become. Finally add the fact that the Basel accords are being implemented right now all over the world, duplicating the quantitative easing/liquidity accommodation circle like an internet virus in every nook and canny of the world and then decide for yourself how concerned you should be.

Stealth tax is the name of every turn of the circle between quantitative easing and liquidity accommodation, stealth tax on your assets, stealth tax on your future income and even stealth tax on your children’s income and their children’s income. The “debt ceiling” of $7.4 trillion must be raised urgently, a couple more turns of the circle and US Congress will be asked to raise it again, and again, and again …

Sarel Oberholster
BCom (Cum Laude), CAIB (SA).
8 November 2004
E-mail – ccpt@iafrica.com

[1] Series USGSEC. Source: Board of Governors of the Federal Reserve System.