Last Thursday night, December 12th – as vote-counting began in the process of giving Prime Minister Boris Johnson an administration in his own right – something infinitely more important took place in the US. The New York Fed announced a dramatic increase in the size and scope of its overnight repo operations. Despite the MSM’s determination not to report on the elephant in the liquidity room, we now have a mammoth problem on our hands. And yes, that includes you.
I’m not going to waste too much space writing about Boris Johnson’s new Cabinet. The Chancellor is probably better qualified to deal with the gathering storm than anyone in recent history, but he strikes me as far too smug about how bad the storm is going to get. The other central roles are woefully light on the kind of export, marketing and trade skills we are going to need post “Brexit”. Boris himself seems likely to call at least part of the Barnier bluff. Clearly, there are plans to reduce civil service power by the introduction of more external advisers (good luck with that one)….but Sir Mark Sedwill remains in place, and (with the possible exception of Dominic Raab) this is not looking like a One Nation Conservative administration to me.
Across the Pond, the hegemonistas have considerably bigger fish to fry.
To see banks in the repo financial sector through to 2020 – that’s exactly two weeks away – the NYFed will whack $130bn of button-created money into that niche to stop collapses…and in the first ten days of January, another $180bn. By the end of the first month of the year, something like 3 trillion dollars will have been thrown at the problem since September.
Be confident that (a) it will wind up being more than that; and (b) it will not solve anything. It’s important to understand why we’re here, and how – yet again – the banking sector’s heel-digging lobbyists are about to land us all in the doo-doo.
Why is this happening?
Repo stands for repurchase agreements. They enable very short-term borrowing for banks from money market funds, often overnight. Repos grease the wheels of liquidity.
After the 2008 Crash1, despite all their attempts (largely successful) to avoid being reined in by regulation, the banks themselves lost all trust in each other. In this playground, there is zero honour between thieves – just children playing at Lord of the Flies. For weeks before 2008 went critical, nobody trusted Lehman. Equally, Wall Street firms stood and watched as other banks circled round Lehman like sharks in a feeding frenzy – sinking their teeth into the bloated whale by withdrawing cash. Barcap wound up buying the bank for a song.
So repo became a channel for offsetting risk while providing short-term liquidity or credit. Banks still demanded collateral for their loans to other banks, and so the repo market became a way of avoiding that by spreading risk and using cheap government bonds (T-Bills) as collateral.
However, since late 2017, lending via the repo has been a quadropoly involving the megabanks. Any reduced willingness by the Big Four to lend there reduces in turn the liquidity of other banks….who have, of course, spent the last decade overleveraging themselves again. Hedge Funds have also been abusing it: they’ve been getting short-term funding from the repo-market to buy U.S. T-bills, which they then re-invest in the repo-market to obtain more short-term funding to buy T-bills. This is high finance, folks: higher than a pheasant full of maggots.
Ultimately, scarcity of funds sends interest rates skyrocketing. Simple supply and demand: one of the many basics not even MoUs can ignore forever.
The idea of rising interest rates scares the living daylights out of the the “élite”, because they know that market rates within Zirp and QE (as I’ve written here many times) can’t be normalised when every sovereign, trader, firm and consumer on the planet is drowning in debt. Emerging nations would go bankrupt, markets would collapse, traders would go under, banks would implode, there’d be a stampede into precious metals….but last (and very much least in their twisted view of life) the world economy would almost cease to be.
So interest rates have to stay low, and credit more or less free….until one day, Joe and Jane on the street find themselves paying substantially to have the bank look after their money. This was the outcome new ECB boss Christine Lagarde was so blasé about last week.
Is there any way out of this mess?
Well, actually, yes. Butch and Sundance are holed up, but they could jump 200 feet into the ravine river at their backs. Oh, and I forgot to mention: they can’t swim.
So, er no.
Much admired James Bianco of Bianco Research said last week, “The Fed was hoping this might fix itself. I see no reason why it should: this is already much bigger than any of them thought it would get”.
Of course (going back to Butch and Sundance) they could kick another can into the ravine. That’s called full-on QE again, and I’m offering 100-1 on that it’ll happen. So any semblance of life returning to normal in financialised economics will be gone.
But that’s not a solution either – for obvious reasons. The Hole in the Wall gang have empty guns, but there’s no hole in the wall. They’re in a hole and all holed out at one and the same time. This isn’t a Jackson Hole jolly or a hole in one, it’s a Black Hole and that’s enough hole references so let’s move on.
The two alternatives are either let the banks fail or watch every tradeable currency and every saver become devoid of any net worth some time around 2028.
The first of those isn’t even on the radar, so forget it. The second would be acceptable to Mme Lagarde and a lot of other Red-carpeted Zil Lane lunatics, but would cause social upheaval on a global scale that few if any political structures anywhere could survive.
Silly analogies aside, the form of globalist finacialised monopolism that has, since the Ronnie and Maggie love-in, gradually become an accepted norm, is a busted flush. It isn’t capitalism, it’s fiat funny business. It isn’t workable as a fiscal model based on the laughably titled Modern Monetary Theory, because it produces deficits and debts that grow from bubbles into Montgolfier balloons ad infinitum. It isn’t laissez-faire free market economics, because much of the existing mess has involved central banks meddling and rigging and pumping and Zirping in an effort to disuguise human greed. And it isn’t liberating for either Man or Planet Earth, because the self-interest involved is only rarely enlightened.
This is what insane neoliberal globalism has produced: obscene wealth disparities, international tensions, obsessive energy development protectionism, a privileged class above the law, social instability in the shape of revived class divisiveness, the growth of “services” that are often meaningless mirages of hokum, media concentration that has murdered investigation, loss of trust in money and financial institutions, quarterly returns at the expense of research and exploration, the death of mutual banking to helped entrepreneurs start up and young people to own a home, the rape of educated philosophy and enquiry, engorged egos based on puerile materialism, profit before ethics, asset bubbles fit to burst at any moment, and the loss of any meaningful comparison of worth.
The last thing any of it is doing is maximising the fulfilment of the maximum number of healthy life forms – especially us.
Nobody has the answer to “What next?” because first, they’re quite comfy for now thank you; second, there are no votes in it; third, they’re distracted and educated to be conformist; or finally, they’re too tired, busy, desperate, lazy or thick to think about it.
The Communists say we need socialism: but collectivism’s track record makes neoliberalism seem like exemplary economic logic by comparison. We’re in the last stages of a failed attempt to try and force-fit a socialised species into a systemic functionalist box as it is: the last thing we need is a purpose-built box designed to asphyxiate every last sign of living, breathing creativity.
We need to think outside the box. To build a stronger Jack in the box. For life is like a box of chocolates and enough with the boxes, already. All these holes and boxes are getting in the way.
We are back where we always seem to be these days: at the three per cent, and whatTF to do about them. In our own back yard, I think it is fair to say that a Conservative Government has been reformed in new packaging. The likelihood of it striking out independently to reform the nihilistic economic model we have is, on a scale of 1 to 10, -56.
I would submit that, once the twister hits – and the slates start peeling off Blighty’s roof – Borisconian Conservatism will rapidly morph into Law & Order Conservatism, more denialism and then some form of repressive collapse.
I have three reasons for such an outlook:
- The Stürm Abteilungen formerly known as Momentum and People’s Vote are not going away, and they remain as nasty, intolerant, well-funded and fanatical as ever
- The 3% reckoning I have always called Crash2 will throw all Boris’s spending policies wildly off course
- While London Mayor, the Prime Minister invested heavily in water-cannon, cover-ups, the Olympics, dodgy taxi stats and rentamob property development. He has always been an assiduous networker….Boris the Spider Neoconman, as he so clearly demonstrated during the Skripal caper. So I think we know where his instincts and procilivities lie – viz, uncomfortably close to “Centrist” Macron.
I abhor the idea of violence – especially top-down violence. Admittedly, our rulers are unreformable, and will never give up their Gated Berghofs. But spilling blood has never produced anything stable in the way of human liberty, and most often delivers Dantons, Robespierres, Stalins, Hitlers, Maos and Gaddafis.
Ground-Up reform alongside civil disobedience, power devolution, self-sufficiency and the spread of mutualist capitalism relevant to a digital century represent the best route in ex-Westminster form. At Westminster itself, I still long for radical ideology-free realists to appear….but when and how? I am still stumped.