Show Me the Money
Rod Tidwell: It’s something very personal, a very important thing. Hell! It’s a family motto. Are you ready Jerry? I wanna make sure you’re ready, brother. Here it is: Show me the money. SHOW! ME! THE! MONEY! Jerry, it is such a pleasure to say that! Say it with me one time, Jerry.
Jerry Maguire: Show you the money.
Rod Tidwell: No, no. You can do better than that! I want you to say it brother with meaning! Hey, I got Bob Sugar on the other line I bet you he can say it!
Jerry Maguire: Ye, ye, no, no, no. Show you the money.
Rod Tidwell: No! Not show you! Show me the money!
Jerry Maguire: Show me the money!
Rod Tidwell: Yeah! Louder!
Jerry Maguire: Show me the money!
Rod Tidwell: I need to feel you Jerry!
Jerry Maguire: Show me the money! Show me the money! (clean clip)
The world economy has reached a new dangerous point. It is best explained in simple terms. Basically the blowup of fictitious capital has wiped out the leveraged capital Riskloves. Simply put, ABC Risklove or XYZ Pig Man once had $1.0 billion in capital, and made spread bets on $10 billion in suspect “assets”. He (she, it) took on $9 billion in liabilities to do so. Now hypothetically the assets are worth at best $7 billion (no one really knows, as market has broken), and that’s only if a further panic can be avoided. A panic is averted by pretending the assets are still worth $9 billion, leaving $2 billion in fictitious capital (FC) on the books. FC spins are conducted by spewing out propaganda that only subprime is the problem. The credit agencies meanwhile act like they are on the old case files playing some catchup, but ignore the next tsunami wave two feet off shore. Fitch, who moves quicker, is downgrading some of the second wave, but it is slow motion. All the other blowups like commercial mortgages, and unsecured consumer loans are largely ignored.
Still given the leverage that was used by the Riskloves, it means he has lost his grub stake capital. That is easy to see, and is now generally recognized. That’s why the financials are off over 30% from their highs. But many of these losses are stuffed into unregulated hedge funds, and thus are largely hidden. If the loss was recognized truthfully as $3 billion instead of $1 billion, financials would be off 50% or more, and many institutions would disappear all together. Perhaps that is now unfolding quickly, with this crash like action in the markets. But we aren’t at that recognition stage yet, although the failure of the monolines will hasten the pace.
Of course ABC and XYZ still owe $9 billion, but his creditors don’t really want that collateral back because they know it’s really only worth $7 billion, and only if tomorrow is sunny. Except there is another tsunami sighting. By not taking the collateral they too can pretend the loss on ABC’s $9 billion is small. So ABC goes around looking for fresh capital of $1 billion to replace the lost billion. At this stage there are a few folks who have the ole gambling Risklove “take these dice from my cold dead hands” attitude, and the money is sometimes provided but at a steep rate. If the money is not forthcoming, it is either put in the Milky Way or deferred.
Who seems to have that old time religion attitude about risk now? Who shows the money to the Berserkers and Riskloves? Strangely the “providers” are now increasingly quasi-governmental institutions like central banks and sovereign wealth (risk) funds. One is the Fed, and to illustrate how this topsy turvy world looks right now, look at the Fed’s latest data on non borrowed reserves in the system. Notice under January 16th, the latest release that the number is only 200. In other worlds there is only $200 million in non borrowed reserves in the banking system. The banks have gone through $40 billion in non-utilized reserves in just two months to absorb (return SIVS to their own balance sheets) their own FC. Did they pick it up for 70 cents on the dollar from other parties, or full value from their SIV conduits? I think we can guess, mostly the later. Show me money psychology prevails.
But that isn’t all, notice the three numbers listed under “term auction credit”: 11,613, 30,000, and 40,000. Add the number 1377 from “other borrowing” (discount window). This means various XYZs have borrowed (at favorable rates) about $83 billion total. I would surmise, but do not know, that some form of FC was used as collateral. I also believe it is important to recognize where the bulk of these auction credits came from. The answer is that the Fed sold (reduced) $50.8 billion from it’s own balance sheet since the end of the 3rd quarter. They have taken from one hand, and put into another hand.
Still the show me money question has to be continually asked at each step. Does this some how mean FC is still worth 90 instead of 70? No, that is determined by the performance of the assets, not the availability of stop gaps to maintain phony capital. And the Fed has never monetized any thing but Treasuries in it’s history. If they started buying mortgages, sirens should go off all over the planet. But the fact of the matter is that foreign central banks are doing that. It is very erratic but after a drop of $3.9 billion in holdings between Dec. 27-Jan. 10, the FCBs bought a whopping $24.1 billion. George Bush trip to Saudi Arabia may have been about oil on the front page, but the reality may have had more to do with FC support operations. Looks like somebody obliged. Perhaps he arranged for a big capital infusion into the monoline insurers from the Gulf Boyz as well, don’t be too surprised if that transpires. We would get a big relief rally, but again this is still fictitious capital, so show me the money. This is no way to run a financial system, and has more to do with rear guard action against an overwhelming force, the destruction of fictitious capital.
In my weekend post What About Munis, one of my readers (see GSM, comment 26) mentioned points about exploding M3, and FCB blank checks. He quotes John Williams of Shadowstats:
“The current 15%-plus level of annual growth in an ongoing estimate of M3 — the broadest measure of the U.S. money supply — has not been seen since August 1971. “So, how can annual M3 growth be at 15.2% with the monetary base showing annual growth of just 1.5%? The answer lies in a number of factors, including liquidity flowing into the United States from outside the system, the impact of which is within the Fed’s control. The Fed has opted for systemic liquefaction.
The strong growth in M3 partly reflects still-growing foreign investment in U.S. Treasury securities. The Federal Reserve has control over the nation’s money supply. In terms of spiking broad money growth, the U.S. central bank can take action to inject funds directly into the system, or it can do so on the behalf of others, or sit passively by as others act. By not sterilizing or offsetting the impact of foreign held dollars going into U.S. Treasuries or Agencies, the Fed is setting a policy of inflating money growth just as much as if it were injecting the funds itself. “
I get the impression many readers just skim over what I say on this topic. I’m sorry this is long and I may seem a bit testy, but I am not going to keep repeating answers to the same questions. You have to read and think about this one, skimming doesn’t cut it. I think M3 and FCB activity describes what HAS happened in the past, before FC blew up. This can best be described in this exchange between Jerry McGuire and Rod Tidwell in the movie classic where Jerry is a bit confused about the money: Jerry Maguire: Ye, ye, no, no, no. Show you the money. Rod Tidwell: No! Not show you! Show me the money! The reality is that the “money” has evaporated. As I have stated before there is no way to accurately measure money supply when much of the money (capital) is worth 70 cents on the Dollar at best. And the more esoteric the money is, the less of it exists today. If you ask me what the current money supply level is, I really haven’t a clue, except to say far less than is being reported.
Which brings us full circle to FCBs. There is absolutely no denying that this liquidity flow has been huge. But in reality there has really been very little going into Treasuries. In fact readers can track this over any period of time. For example, go to the Fed’s H4.1 site, and check the numbers for January 4, 2007, and the latest. This shows that FCBs bought only $78.6 billion in Treasuries, and $235.4 billion in “Federal agencies”. Going back to January 5, 2006, FCB custodial holdings of “federal agencies” has increased $409 billion. In total FCB hold $836.9 billion of these so called “federal agencies”. What is the collateral and condition today of all this paper bought at the peak of the housing market? None too good I would imagine? I have come to conclusion that there is no transparency at all in this general “federal agency” account label. What is it exactly? I have NEVER seen anybody (besides myself and perhaps Lee Adler) question it either. I’ve mentioned it several times in my posts, and it has engendered almost no discussion. I feel alone in the wilderness on this one. Nobody has ever asked to be shown the money, but the implication is that FCBs have exclusively bought pure vanilla standard mortgages issued by GSEs. I suspect that this has hardly been the case, and that they too have large undisclosed losses. It’s one thing for Berserkers to piss away the money of other speculators while collecting big fees. It something all together different for central banks to have done this. This will end up being the biggest scandal of all from this whole tawdry affair. SHOW ME! THE! MONEY!
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