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Archive for June 8th, 2011

Corporate Party to run fake Democrats

Posted by Charles II on June 8, 2011

Apparently there aren’t enough fake Democrats. The Republicans are reduced to trying to disrupt Democratic primaries by running conservative activists to confuse the voters even further. Monica Davey, NYT via t/o

…Republican leaders are clearly worried about what the recall elections may bring. Stephan Thompson, executive director of the Wisconsin Republican Party, acknowledged on Monday that Republicans were encouraging “protest candidates” (who he describes as conservative activists) to run as Democrats in the recall contests. The intent is to force Democratic Party challengers to the threatened Republican senators to compete in invented primary elections, and to buy the Republicans more time to make their cases to voters before a general contest.

Posted in election theft, Republicans acting badly | 6 Comments »

Is Europe printing real money?

Posted by Charles II on June 8, 2011

The phrase “printing money” is used carelessly. As part of the bailout of US (and, now we learn, some foreign) banks, the Fed swapped them cash for financial instruments which could not have been sold on the open market for the same amount of money. The banks would have cash that they supposedly would lend to businesses and consumers (they didn’t). As long as the deal was that the banks would buy back the bonds for the amount they had sold them for, no money would have been created… or at least it could be uncreated promptly. The Fed also made below-market loans to banks, allowing the banks to then buy Treasuries and earn some lagniappe from the federal government. Still, since the loan effectively amounted to selling US Treasuries, no money was created.

No, the way a central bank prints money is generally by changing reserve requirements. If a bank is normally required to hold $1 in assets for every $10 in loans, and then the requirement is loosened to $1 for every $20 in loans, $10 in real cash has appeared in the economy. A central bank can also force short-term rates lower (by lending at lower rates), making borrowing more attractive. If the reserve requirements permit increased lending and lending standards are lax, the effect is money creation. That is how the US housing crisis blossomed.

Now Hans-Werner Sinn of the University of Munich has claimed that the EU is printing money by some accounting legerdemain. Here’s the basic story:

If Irish banks transfer more euros out of the country than they receive, the liabilities side of the Irish Central Bank’s balance sheet will be too small. The money doesn’t disappear however; it shows up on the liability side of some other Eurozone central bank’s balance sheet. Thus one central bank, say the Bundesbank for example, will have liabilities that are too large and one will have liabilities that are too small. Target balances ‘clear’ these discrepancies.

The accumulated net flow of euros leaving Ireland is thus the Irish Target deficit. …

Basically, a debt is created between the central banks of (in this case) Ireland and Germany, which is covered by creating an entry on the balance sheet called a “Target balance.” And real Euros are printed and pushed into the economy. Now, in principle, those Euros have to disappear from the economy at a later date, just as the financial instruments sold to the US Treasury at above-market rates have to be redeemed for real dollars eventually.

Unless, of course, a country defaults. Then the debt has to be written off. And with that write-off probably comes the contractionary effect of leverage. Not necessarily. Central banks could of course simply raise the leverage they permit their member banks to offset any contraction in the money supply. But it gets messy, especially with a managed currency like the Euro. The cost of default could end up being the monetary union itself.

Now, the actual size of these Target deficits is relatively small, 344 B Euros (roughly $500B). These are concentrated in the Bundesbank. In effect, Germany has been financing continued spending in deficit nations. But the Target deficit is growing by 100B Euros annually, all concentrated on an economy of ca. $3300T, so very roughly comparable to a $600B annual growth in debt for the American economy. In other words, it’s starting to add up to real money.

Now, Sinn is, I think wrong to believe that there’s no solution. The solution is to recycle the money by Germans investing in deficit countries. The difficulty is really in investing in non-predatory ways. Usually the goal of investment is to maximize the profit of the creditor at the expense of the debtor. If Germany bought Irish factories, then the profits of those factories would leave Ireland, leaving Ireland even poorer. But suppose that the German central bank invested in a manner that paid it only a reasonable rate of return. For example, it could provide loans at 4% per year. Then, as long as the profits of the Irish firm were well above 4% per year, both Irish and Germans would profit.

In a sense, that’s what the Chinese are doing with us, namely recycling their surplus from trade with us in the US so that we can afford to buy their products. Only we are investing in wars and tax cuts, the wages of which are death and debt.

Via The Big Picture

Posted in economy | Comments Off on Is Europe printing real money?

 
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