Is this the endgame for ExtraFiat money?

[Chris Coles]

Have we now come to the final piece of the jigsaw puzzle; the failure to see that, where in the past it was always the Central Banks that printed money, today, it is the investment banks and the hedge funds. This has turned up on the UK press:
From The Times December 5, 2009

Glazer family hit the wall over refinancing of Manchester United

James Ducker, Helen Power

The Glazer family, the owners of Manchester United, are struggling to refinance their enormous debts amid concerns about the impact they are having on the club.

The Times understands that the Americans have been trying unsuccessfully to secure a refinancing package for part of the club’s £699 million debt for months, having failed in 2007 and last year, because of the bleak global economic climate.

The main concern is understood to centre around the £175.5 million worth of debt that the Glazers are personally responsible for, not the £518.7 million of loans secured against the club.

It is these so-called Payment In Kind (PIK) notes, money borrowed from US hedge funds that “rolls up” at an annual interest rate of 14.25 per cent, that the Americans are believed to have been trying to refinance.

The intention was always to pay off these loans within a few years of the takeover in May 2005, but while they managed to redeem some of the original PIK debt of £275 million, the credit crunch has made this difficult.

By the time the debt matures in 2017, it will stand at £580 million unless the Glazers can pay part or all of it off before then, or secure a preferential rate of interest. With the club also facing rising capital repayments from 2013, the PIK debt is a concern. It grew from £152 million to £175.5 million in one financial year.

More here:

http://www.timesonline.co.uk/tol/spo...cle6945421.ece

Again, another football club, (soccer to you in the USA), here in the UK experiencing problems is Portsmouth:

Portsmouth players left empty-handed again after club fail to pay wages

Portsmouth have failed to pay players’ wages for the second time this season...that the new regime has also been unable to fund its payroll. “Portsmouth FC can confirm that the majority of the first-team squad have not yet...
Nick Szczepanik
04 December 2009 The Times

What we are watching is a very slow but inexorable process; the unwinding of the money printed by the investment banks and hedge funds. Do you remember that just after the SHTF the US re-designated the investment banks as ordinary banks. They did that, without telling you all why. They did it to stop them printing their own money. They had been writing loans without any control over the QUANTITY of money. Now, today, there must be countless businesses that were built upon this, shall we call it "ExtraFiat" money that now cannot be replaced with new loans but must be repaid.

The end game has started and it is inevitable to my way of thinking, that it must end in tears. No one has any real idea of just how much ExtraFiat money is in circulation; but, at the same time, no one holding an ExtraFiat money note is going to let go of it. They are, on the face of it, much too valuable to let go as the moment you do, the value vanishes. Every Merger or Acquisition over the last decade has at the least raised some part of the finance from ExtraFiat money. And the final irony is that, as the ExtraFiat money is called in, the conventional banking system does not have anything like enough on their balance sheets to be able to replace it. And there is the nub of the matter; all roads lead to collapse. The vacuum must be filled, or the whole thing collapses. No way to fill the vacuum, so collapse is inevitable. So get into Gold? Surely it is the only thing you can rely upon.

Food for thought?

[Fiat Currency]

Re: Is this the endgame for ExtraFiat money?

Now, today, there must be countless businesses that were built upon this, shall we call it "ExtraFiat" money that now cannot be replaced with new loans but must be repaid.

I call it anti-money.

I can't wait for silver to become the day-to-day money again.

Fire Guy 78x80.gif

[jtabeb]

Re: Is this the endgame for ExtraFiat money?

Have we now come to the final piece of the jigsaw puzzle; the failure to see that, where in the past it was always the Central Banks that printed money, today, it is the investment banks and the hedge funds. This has turned up on the UK press:
From The Times December 5, 2009

Glazer family hit the wall over refinancing of Manchester United

James Ducker, Helen Power

The Glazer family, the owners of Manchester United, are struggling to refinance their enormous debts amid concerns about the impact they are having on the club.

The Times understands that the Americans have been trying unsuccessfully to secure a refinancing package for part of the club’s £699 million debt for months, having failed in 2007 and last year, because of the bleak global economic climate.

The main concern is understood to centre around the £175.5 million worth of debt that the Glazers are personally responsible for, not the £518.7 million of loans secured against the club.

It is these so-called Payment In Kind (PIK) notes, money borrowed from US hedge funds that “rolls up” at an annual interest rate of 14.25 per cent, that the Americans are believed to have been trying to refinance.

The intention was always to pay off these loans within a few years of the takeover in May 2005, but while they managed to redeem some of the original PIK debt of £275 million, the credit crunch has made this difficult.

By the time the debt matures in 2017, it will stand at £580 million unless the Glazers can pay part or all of it off before then, or secure a preferential rate of interest. With the club also facing rising capital repayments from 2013, the PIK debt is a concern. It grew from £152 million to £175.5 million in one financial year.

More here:

http://www.timesonline.co.uk/tol/spo...cle6945421.ece

Again, another football club, (soccer to you in the USA), here in the UK experiencing problems is Portsmouth:

Portsmouth players left empty-handed again after club fail to pay wages

Portsmouth have failed to pay players’ wages for the second time this season...that the new regime has also been unable to fund its payroll. “Portsmouth FC can confirm that the majority of the first-team squad have not yet...
Nick Szczepanik
04 December 2009 The Times

What we are watching is a very slow but inexorable process; the unwinding of the money printed by the investment banks and hedge funds. Do you remember that just after the SHTF the US re-designated the investment banks as ordinary banks. They did that, without telling you all why. They did it to stop them printing their own money. They had been writing loans without any control over the QUANTITY of money. Now, today, there must be countless businesses that were built upon this, shall we call it "ExtraFiat" money that now cannot be replaced with new loans but must be repaid.

The end game has started and it is inevitable to my way of thinking, that it must end in tears. No one has any real idea of just how much ExtraFiat money is in circulation; but, at the same time, no one holding an ExtraFiat money note is going to let go of it. They are, on the face of it, much too valuable to let go as the moment you do, the value vanishes. Every Merger or Acquisition over the last decade has at the least raised some part of the finance from ExtraFiat money. And the final irony is that, as the ExtraFiat money is called in, the conventional banking system does not have anything like enough on their balance sheets to be able to replace it. And there is the nub of the matter; all roads lead to collapse. The vacuum must be filled, or the whole thing collapses. No way to fill the vacuum, so collapse is inevitable. So get into Gold? Surely it is the only thing you can rely upon.

Food for thought?

This is also what steve keen says.

He says demonstrates how the rise in monetary supply FOLLOWS credit expansion not the other way around.

This is key because it implies that there is still a VAST monetization that must take place to "fill the void" as you put it.

The collapse of the credit expansion forces all the existing debt to be monitized, as there is not enough money in circulation now to service the debt.

Bottom line is DEFLATION in economic activity, and INFLATION or dulition in the monetary base.

It's the worst of all worlds.

Assets deflating while economic activity contracts AND simultaneously there is a decrease purchasing power, how can that be bad?

[grapejelly]

Re: Is this the endgame for ExtraFiat money?

This is also what steve keen says.

He says demonstrates how the rise in monetary supply FOLLOWS credit expansion not the other way around.

This is key because it implies that there is still a VAST monetization that must take place to "fill the void" as you put it.

The collapse of the credit expansion forces all the existing debt to be monitized, as there is not enough money in circulation now to service the debt.

Bottom line is DEFLATION in economic activity, and INFLATION or dulition in the monetary base.

It's the worst of all worlds.

Assets deflating while economic activity contracts AND simultaneously there is a decrease purchasing power, how can that be bad?

I agree, exactly right. Asset deflation and monetary inflation.

Right now the vast amount that the banks have in terms of increased reserves has been funding US treasury debt. That money is and will be continuing to be spent if only on bogus "jobs" programs and other theivery, not to mention perpetual war. No private borrowing needed. This drives up the price of commodities and lowers the buying power of existing paper, financial instruments and "pension investments by private individuals", thus effectively robbing the entire middle class of everything they have left.

This is EXACTLY what is in the process of happening right now.

And it's what people like Mish (I love Mish, don't get me wrong, but he is flat wrong on this) don't get -- that no private borrowing need take place to create massive inflation. Just look at what is playing out now...

[Rajiv]

Re: Is this the endgame for ExtraFiat money?

It is worth reading Steve Keen's latest article - Debtwatch No 41, December 2009: 4 Years of Calling the GFC

I first realised that the world faced a serious financial crisis in the very near future in December 2005, as I prepared an Expert Witness Report for the NSW Legal Aid Commission on the subject of predatory lending.

My brief was to talk about the impact of such contracts on third parties, since one ground to overturn a loan contract was that it had deleterious impacts on people who were not signatories to the contract itself. I was approached because the solicitor in the case had heard of my academic work on Hyman Minsky’s “Financial Instability Hypothesis”.

Minsky’s hypothesis argued that a capitalist economy with sophisticated financial institutions could fall into a Depression as an excessive buildup of private debt occurred over a number of financially-driven business cycles. I had built a mathematical model of Minsky’s hypothesis in my PhD, which generated outcomes like the one shown below: a series of booms and busts lead to debt levels ratcheting up over time, until at one point the debt-servicing costs overwhelmed the economy, leading to a Depression.


Figure 1

When I began writing my Report, I started with the comment that “debt to GDP levels have been rising exponentially”. But since I was an Expert Witness in this case rather than the Barrister, I knew that I couldn’t rely on hyperbole–and if the trend of growth wasn’t exponential, then I couldn’t call it that. I expected that there would be a rising trend, but that it wouldn’t be quite exponential, so I would need to amend my initial statement.

I downloaded the data on Australian private debt and nominal GDP levels from the RBA Statistical Bulletin, plotted one against the other, and my jaw hit the floor: the trend was clearly exponential. The correlation coefficient of the data since mid 1964 with a simple exponential function was a staggering 0.9903. The only thing that stopped the correlation from being absolutely perfect were two super-bubbles (on top of the overall exponential trend) in 1972-76 and 1985-94.


Figure 2

I expected that the situation in America would be as bad or worse, which was confirmed by a quick consultation of the Federal Reserve’s Flow of Funds data. Though not as obviously exponential as in Australia’s case, the correlation with simple compound growth was still 98.8%.


Figure 3

So debt had been growing faster than GDP–4.2% per annum faster in Australia’s case for over 40 years, and 2.7% faster for longer in the USA’s. An unsustainable trend in debt had been going on for almost half a century.

Staring at those graphs (at roughly 3am in Perth, Western Australia), I realised that these debt bubbles had to burst (and probably very soon), that a global financial crisis would erupt when they did, that someone had to raise the alarm, and that given my knowledge, that someone was me. As soon as my Expert Witness Report was finished, I started making comments in the media about the likelihood of a recession.

Less than 2 years later, the Global Financial Crisis erupted, and economists who didn’t see it coming, and who for decades had argued that government spending could only cause inflation, suddenly called for–and got–the biggest government stimulus packages in world history to prevent an economic Armageddon.

To some degree, the government stimulus packages worked.

I am happy to admit that the scale of the government countermeasures surprised me. As Australia’s Prime Minister Kevin Rudd pointed out, the collective stimulus over the 3 years from September 2007 till September 2010 was expected to be equivalent to 18 percent of global GDP. That was huge–bigger in real terms than the US’s military expenditure during World War II.

That huge government stimulus has attenuated the severity of the crisis, and led to positive growth figures in many countries–most notably Australia, which recorded only one quarter of falling GDP versus a norm of 4 consecutive quarters for most of the OECD. But it still has not addressed the cause of the crisis–the excessive level of private debt, and the transition from a period of decades in which rising debt fuelled aggregate demand, to one in which the private sector’s attempts to reduce debt will subtract from aggregate demand.

For that reason, I do not share the belief that the GFC is behind us: while the level of private debt remains as gargantuan as it is today, the global economy remains financially fragile, and a return to “growth as usual” is highly unlikely, since that growth will no longer be propelled by rising levels of private debt.

Private debt has, as in past downturns, started to fall compared to GDP–though in Australia’s case the so-called “First Home Owners Boost (which doubled the amount of money the government gave to first home buyers from A$7,000 to A$14,000) enticed so many new entrants into mortgage debt that Australia’s ratio started to rise again in mid 2009.

America’s ratio, on the other hand, continued to rise through the start of the GFC, but is now clearly falling.


Figure 4

Having driven demand higher every year since the 1990s recession by rising and rising faster than nominal GDP, private debt is now falling and reducing aggregate demand. This is deleveraging at work, and it is the force that governments are trying to resist by boosting their own spending as private spending stagnates.


Figure 5

Australia’s success in avoiding a recession has been partly due to the fact that its policies encouraged private debt to grow again, as first home buyers took the additional A$7,000 of government money to the banks and borrowed against it (but even there, debt reduction by business and the reduction in personal debt is counteracting the rise in mortgage debt).


Figure 6

This is one foolproof means to avoid a serious recession–go back to borrowing and spending up big. This is, after all, what ended the recession of the 1990s–and in the USA’s case, it happened without debt actually falling. Australia’s greater recession then was due to the fact that debt did actually fall between 1991 and 1993, so that deleveraging drastically reduced aggregate demand.


Figure 7

So could the global economy get out of the global financial crisis the same way it got out of the 1990s recession–by borrowing its way up? That’s where the sheer level of debt becomes an issue–and it’s why I stuck my neck out and called the GFC, because I simply didn’t believe that we could borrow our way out of trouble once more. Debt did continue rising relative to GDP for several years after I called the GFC, but it has now reached levels that are simply unprecedented in human history.

For the “borrowing our way out” trick to work once more, we would need to reach levels of debt that would make today’s records look like a picnic. What are the odds that that could happen again?


Figure 8

The debt servicing burden

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The entire article is well worth a read

[Raz]

Re: Is this the endgame for ExtraFiat money?

This is also what steve keen says.

He says demonstrates how the rise in monetary supply FOLLOWS credit expansion not the other way around.

This is key because it implies that there is still a VAST monetization that must take place to "fill the void" as you put it.

The collapse of the credit expansion forces all the existing debt to be monitized, as there is not enough money in circulation now to service the debt.

Bottom line is DEFLATION in economic activity, and INFLATION or dulition in the monetary base.

It's the worst of all worlds.

Assets deflating while economic activity contracts AND simultaneously there is a decrease purchasing power, how can that be bad?

Excellent assessment. Thanks for putting it succinctly so an old guy like me can take it in without stressing neural transmitters. :cool:

[grapejelly]

Re: Is this the endgame for ExtraFiat money?

what sucks is that the gubmint is the borrower, so money borrowed and spent (created out of thin air) vastly increases the scope of government in our lives, and the percentage of coercion and compulsion in those lives.

The next GFC event at some point will be the collapse of government. See an interesting article by Gary North on how that may happen, VERY worth reading and pondering.

As the crisis of the economy becomes more obvious to more people, and as it becomes obvious that the government and the central bank are unable to reverse the effects of the previous Keynesian policies, the public is going to withdraw legitimacy from the central government.

There will be two competing strains of opinion, as there always are. One group will call for centralization. It will appeal to the fears of the general public about the immediate economic crisis. The public will respond to these fears. But, at the same time, there will be discontent with these proposed solutions by a growing minority of citizens who do not respond as citizens traditionally have responded, namely, to call for even more centralization. This is the great conflict politically in our time. This conflict is going to increase.

There is going to be a push for centralization nationally, as the crisis unfolds, and there will be resistance as never before. We are seeing already an attempt by the elite to expand their program, inaugurated no later than 1919, to create a one-world government. The failure of national governments to foresee the crisis in the economy in 2007 is being used as justification for the expansion of international power over the economy.

This appeal is beginning to lose steam. Even if there is additional power granted to these government agencies on an international level, the ability of these agencies to impose negative sanctions against countries that refuse to cooperate is limited. There is no method for imposing sanctions at the international level which will enable the internationalists to complete the centralization of the world economy. They waited too long. The new economy has developed without them. The growth of trade, the free flow of capital, and above all, the free flow of information have all combined to create a system of political defense that will not tolerate interference by unelected bureaucrats 5,000 miles away. The bureaucrats may think they can get away with this, but they will not get away with it. They do not have the level of control over communications comparable to what they had in 1945. They are never going to get it back.

If we take seriously the Austrian theory of the trade cycle, we know what lies ahead. There will be escalating monetary inflation, followed by escalating price inflation leading to hyperinflation, or else there will be a stabilization of money. If there is a stabilization of money, interest rates will rise, the Federal government will become essentially bankrupt, and the economy will fall into a depression.

[goadam1]

Re: Is this the endgame for ExtraFiat money?

what sucks is that the gubmint is the borrower, so money borrowed and spent (created out of thin air) vastly increases the scope of government in our lives, and the percentage of coercion and compulsion in those lives.

The next GFC event at some point will be the collapse of government. See an interesting article by Gary North on how that may happen, VERY worth reading and pondering.

Good piece. Seems about right.

This is the end of a monetary regime. They all end.

[Chris Coles]

Re: Is this the endgame for ExtraFiat money?

Good piece. Seems about right.

This is the end of a monetary regime. They all end.

Absolutly correct. There is one big problem; every debt has to be eventually repaid. Now, if you can do that with new income, fine, but if not, then you have to find someone that will lend to you, that which you need to borrow to re-finance or default. But if last year the sum of all the lending was, say $500 billion, but this year there is only say, $125 billion available to lend due to reductions in leverage forced on the investment banks, then in very simple English TSHTF. Particularly as now there is a recession that deflates income and profit drops from adaquate to none.

Now you fall back on the value, but everyone else is now in the same boat, no income and no way to borrow the money to buy...... because there simply is not enough to go around... THAT is the problem. and, it applies to EVERYONE including the FED for the very simple reason that they cannot continue to buy in toxic paper and pass the cost on to those buying Treasuries.... NO ONE is buying treasuries for exactly the same reasons.... We are about to witness the most fantastic smashup in financial history. If you thought the Credit Crunch was over, it has only just started.

[Starving Steve]

Re: Is this the endgame for ExtraFiat money?

Put in a few large tax increases, and all will be well in America. A federal sales tax in the U.S. would solve all of the problems with deficits. A war tax on consumption would help too.

Yes, the standard of living of Americans will have to fall, but the U.S. has to stop consuming; America has to live within its means. This is called austerity. It's called: "Suck-it up; tighten your belt; get real, and get on with it."

Otherwise, if Americans choose to trust in faith that some magical new stimulus, or some new war, some new tax-cuts, or somehow the rest of the world will rescue them, or that some magical (supply-side) economic growth would bail them out one more time, then America may become the next Argentina....Most likely, this latter scenario of hyper-inflation and political chaos is what awaits the Americans.

[ThePythonicCow]

Re: Is this the endgame for ExtraFiat money?

It's the worst of all worlds.

Not of all worlds.

The stuff that's real, such as one's tools, clothing, housing, vehicles, land, practical knowledge, family, friends, and neighbors becomes more valuable.

It is the stuff that is measured in dollars (pick your favorite fiat currency) that is collapsing to it's base element, the currency. We're losing 50% to 90% of the "value" of all that's in that world, and converting much of the rest to the base fiat currency.

We're having a run on the bank of an alchemist.

In an old fashioned run on a bank issuing gold certificates, the amount of money in circulation collapses.

Before the bank run, the banker issued say 1000 certificates backed by only 100 units of gold, and the local economy ran as if it had 1000 units of gold.

After the bank run, the banker was hanging by a short rope from a tall tree, and the local economy ran on 100 units of gold. Those who had owed others money defaulted, and the borrower and the lender contested for the collateral property (if any) that secured the loan. Those who saved in gold or held clear title to property or personal possessions won. Those saved in the now worthless currency, or who invested in or extended loans against the higher cash flows of the former booming economy lost except to the extent that they could seize loan collateral still useful to them. Some of the economy kept going. The horseshoer got paid in wood for his fire rather than in paper currency. People focused their much more limited expendable resources where they needed it the most. The tailor of fine suits, his wife and his five children went hungry.

In this new fangled bank run, the banker is an alchemist. The Fed can print dollars and it can exchange dubious debt for dollars.

However the banker still has a neigh impossible task ahead of him. There is a fundamental shift going on, favoring those who were long "real" stuff, away from those who were long the discredited certificates and highly leveraged against collapsing cash flows and asset prices. The banker is still caught in the middle of a great turning in the tide of men's fortunes, which can be very nasty and very lucrative. Almost everyone is losing; the banker is vilified for "printing" both too much and too little "money."

But, but, the above analogies are all too narrowly focused. They apply to a locality, region or nation in which a decent proportion of the people have a sustainable existence somewhat independent of economic trade with far away strangers.

Under the hegemony of the U.S. since World War II, the world has transformed into one in which billions of people, from the suburbs of Sacramento to the fields of India, are vitally dependent on world trade for their livelihood and sustinence.

The key will be whether or not world trade collapses for a prolonged period of time as it last did in the 1930's, an event for which we are far less prepared this time. If that happens, I fear billions dying.

I don't expect that to happen. I'm more optimistic. Rather I expect that we'll see the world monetary system being rejuggled from using the U.S. Dollar as its reserve currency to using some sort of IMF concoction. Gold will collapse again, once this happens. The most powerful bankers will maintain control, and they prefer to deal in debt, not gold, for most of their work.

For now, gold rises as a marker of the increasing relevance of nations such as India and China. After the rejuggling, the U.S. Dollar will fetch quite a bit less on the world's markets. There will be massive debt write-off's for that debt written against the Dollar, with some of the "lucky" debt moving first (as seen now) to the Central Banks ledgers, and then to the new IMF facility ledgers. That is, the IMF (of which the U.S. is a member, of course) will be the lender of last resort to even the U.S. As usual, debt based money is created by entangling debt, thus cementing (with imperfect glue) the long term interests of the two parties.

To get the American people to agree to such a subordination of their almighty Dollar to some world monetary agency's concoction will be difficult. "They" (TPTB) are going to have to hit "us" upside the head with a large 2x4. This they can do and have done before (that not being a topic I should discuss here.) This I presume and fear they will do again. This time I fear it will take many months or a year of most Americans fearing for their homes, food, gas and job. We're not there yet, just warming up.

Just as we saw a sweeping enthusiasm for "Change We Can Believe In" sweep a relatively novice Chicago politician into the White House, who has become a willing puppet and teleprompter reader for TPTB, similarly we might see sweeping changes in the House and Senate seats, bringing in "new" (but compliant when need be) representatives to Congress. That's just a possibility -- I'm not predicting it.