Category Archives: Economy and Meltdown

How The Fed Is Handing Over Billions In "Profits" To Foreign Banks Each Year

Over the past two weeks we have reported that just like during the spring and summer of 2011, all the cash generated by Fed excess reserves, has gone to foreign banks operating in the US, which according to the Fed, are vastly composed of European financial institutions. In other words, the cash that the Fed is creating out of thin air by monetizing the US deficit, is going solely and exclusively to European banks and a handful of other foreign banks. This can be seen both in the chart below, and is confirmed by the Fed itself, which in a paper from November 2012, admitted just this when it said that “the recent unprecedented build-up of cash balances by [foreign banks] was almost entirely composed of excess reserves.”

What is notable about the chart above is that while cash parked at US-domiciled banks, both small and large, has been relatively flat in the past 3 years at just about $800 billion, it was been foreign banks that absorbed the bulk of the Fed’s newly created reserves.

All of this was explained in extensive detail previously here and here.

Just as importantly, and as also shown previously, the excess reserve cash parked at foreign banks just hit a record $954 billion as of the week ended January 31.

What is still a mystery, however, is just what do foreign banks use this cash for: does the cash undergo collateral transformation whereby the cash collateral is transformed into various “safe” intermediary securities via the shadow banking system (as Monte Paschi was discovered to have done recently), and if so what is the ultimate use of free Federal Reserve funds.

We hope that before the Fed loses all control of the economy and markets we will get the answer to this budding question.

But even assuming foreign banks do nothing with this cash and it merely sits on the Fed’s books, this does pose another question, one which we hope someone from Congress will ask Chairman Ben at the upcoming Humphrey Hawkins presentation at the end of February. Namely: why has the Fed paid some $6 billion in interest to foreign banks, in the process subsidizing and keeping insolvent European and other foreign banks, in business and explicitly to the detriment of countless US-based banks who have to compete with Fed-funded foreign banks and who have to fire countless workers courtesy of this Fed subsidy to foreign workers?

As readers will recall, on December 18, 2008, the Fed dramatically changed its policy to control the suddenly all critical fungible liquidity bailout reserve level, by implementing a cash interest paid on reserve balances held at Reserve banks, amounting to 25 basis points on the excess reserve balance. The Reserve banks included all foreign banks operating in the US. It is these banks that now have a record $954 billion in cash as of the week ended January 30, and it is this $954 billion that now accrues an interest of 0.25% per year.

We show the surge in the foreign bank cash level, as well as the cumulative cash interest paid to these banks assuming a weekly cash interest payment. What the chart shows is that from December 2008 through the last week of January, the Fed has paid out some $6 billion in cash (red line) to European banks simply as interest on excess reserves.

But that’s just the beginning. If we are correct in assuming that QE3 will be a replica of QE2 when all the new reserves created ended up as cash on foreign bank balance sheets, it means that we can quite accurately forecast what the total foreign bank cash position will be on December 31, 2013 (as the Fed will certainly not end its open ended monetization of the US deficit before then, or likely, ever). The result: just under $2 trillion in cash held be foreign banks operating in the US, which also means that in calendar 2013, the Fed will fund and subsidize foreign banks a blended interest payment of $3.5 billion! This is entirely separate from the $2 trillion liquidity subsidy that Bernanke will also have handed out to keep these banks afloat, and is $3.5 billion that will flow right through the P&L and end up in the pockets of offshore shareholders who otherwise would very likely be wiped out had it not been for the Fed’s relentless efforts to bailout foreign banks.

And since it is improbable that excess reserves held by any banks will decline at all in the coming years, one can also assume that the annualized interest paid to foreign banks, which would amount to at least $5 billion pear year, every year, will continue indefinitely as a direct Fed subsidy to the bottom line of Foreign banks.

All of this, of course, ignores what happens should the Fed hike interest rates across the board, which will also mean rising the rates on IOER, once inflation finally strikes: simple math means a 1% IOER means some $20 billion in interest paid to foreign banks, 2% – $40 billion, 5% – $100 billion paid to foreign banks, and so on. Putting these numbers in perspective, let’s recall that Italy’s third largest bank just got a €3.9 billion bailout (its third), and has a market cap of some €2.9 billion.

We can only hope someone in Congress asks Ben Bernanke in two weeks just under which Fed charter it is that the Fed is more focused on generating profits (not just trillions in excess liquidity) for European banks, than on opening up consumer lending which has been stuck in “petrified” mode for the past 4 years, with the total amount of loans outstanding currently at all US banks – foreign and domestic – at levels last seen the week Lehman filed for bankruptcy.

Argentina's Financial Collapse – Past Is Prologue

The following rather stunning documentary provides a critical insight into what Europe (and Argentina once again) could well be progressing towards. There is a reason we highlight the ‘scariest chart in Europe’ as that of youth unemployment and with the central banks printing money at ever increasing paces and the next round of global competitive devaluation beginning, the debt slaves will suffer ever more. In 2001, Argentina collapsed; after many years of apathy in the country, the insurrection exploded. As TopDocumentary notes, the spontaneous revolt of ‘faceless’ people meant saucepans were being banged in every neighborhood.

What happened to Argentina? How was it possible that in so rich a country so many people were hungry? The country had been ransacked by a new form of aggression, committed in time of peace and in a democracy. A daily and silent violence that caused greater social disruption, more emigration and death than the terrorism of the dictatorship and the Falkland Islands war.

Ever since independence, almost 200 years ago, Argentina’s foreign debt has been a source of impoverishment and corruption and the biggest scandals. Since the first loan negotiated by Rivadavia in 1824 with the British Bank Baring Brothers, the debt was used to enrich Argentinean financiers, to control the finances and empty the country of its wealth.

This foreign debt always went hand in hand with big business, and with the complicity of nearly every government, from Miter and Quintana to Menem and De la Rua. The policy of indebtedness gave rise in Argentina to generations of technocrats and bureaucrats, who favored banks and international corporations over their own country. Educated at Harvard, Chicago, Oxford or Buenos Aires, their portraits hang in the official galleries.

 

Guest Post: Note To Fed: Giving The Banks Free Money Won't Make Us Hire More Workers

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Lowering interest rate and making credit abundant doesn’t make employers hire more workers.

 
The Federal Reserve’s policy of targeting unemployment is based on a curious faith that low interest rates and lots of liquidity sloshing around the bank system with magically lead employers to hire more workers. I say this is a curious faith because it makes no sense. In effect, the Fed policy is based on the implicit assumption that the only thing holding entrepreneurs and employers back from hiring is the cost and availability of credit.
 
But as anyone in the actual position of hiring more staff knows, it is not a lack of cheap credit that makes adding workers unattractive, it is the lack of opportunities to increase profit margins by adding more workers.
 
If the economic boom of the mid-1980s proves anything, it is that the cost of credit can be very high but that in itself does not restrain real growth. What restrains growth is not interest rates, it is opportunities to profitably expand operations.
 
What the Fed cannot dare admit is that in a crony-capitalist, globalized, State/cartel-dominated economy, there are few profitable opportunities, regardless of the cost of credit. Yes, there is a natural-gas boom in the Dakotas, but outside of energy plays the harsh reality is that the only way for most businesses to increase profits is reduce labor, not hire more workers.
 
The second survival tactic is to lower labor costs by recycling full-time, full benefits jobs into part-time or lower-paid jobs. Rather than pay insanely high healthcare premiums on full-time jobs, businesses lay off full-benefit workers and replace them with a mix of part-time workers who receive no benefits or contract workers who handle their own healthcare costs.
 
There is another way to recycle jobs to reduce costs: fire a $90,000/year employee and hire someone for $60,000 to do the same job. Mish has shown that virtually all the gain in employment since the start of the “recovery” is in the 55+ age group: Startling Look at Job Demographics by Age (Mish)
 
 
Older workers often complain that they have been replaced with “cheaper” younger workers who will work for less, but the real trend to is to hire higher-productivity workers for less pay. In most cases, as revealed by the above chart, the older workers are higher productivity for a number of self-evident reasons: they won’t take maternity leave, they know their work well and have proven a work ethic that younger workers may not have had the opportunity to prove.
 
It is difficult to transition to a new career or get a job as an inexperienced worker for the reason that employers want someone who can be productive on Day One. Sadly, it is too costly and risky to take chances with on-the-job training or mentoring; it is lower-risk to find someone who can do the work immediately.
 
Older workers’ healthcare insurance costs are skyhigh, but the solution is to hire older workers as consultants and push the costs of healthcare onto them. In many cases, older workers are covered by a spouse’s insurance, so they can afford to take a job that offers no benefits.
 
The other trend the Fed cannot dare recognize is that cheap credit enables employers to reduce labor by investing in automation and software. If opportunities are scarce (and they are), or if the business is hanging on by a thread, then hiring more employees is the last thing an employer would do to boost productivity: the solution is reduce headcount and invest in tools that make the remaining employees more productive.
 
We can see this reality in the following charts: full-time employment has returned to levels reached 13 years ago, but median wages are lower, reflecting the “recycling” described above.
 
 
Meanwhile, labor’s share of the non-farm private economy has fallen off a cliff, along with money velocity, which measures the relative activity of cash and credit:
 
 
So exactly what mechanism is the Fed trying to boost with super-low interest rates and massive liquidity (free money) in the banking sector? Answer: push businesses into high-risk ventures.
 

Federal Reserve Bank of Chicago President Charles Evans: “The investment climate seems to be one where people are increasingly understanding that very low interest rates on super safe assets are going to be around for a while. And if they’re worried by that they need to take on more risk – and taking on that more risk will help get the economy growing.”

In other words, the Fed’s policy is to push for more mal-investment. There is no other way to describe the flow of money into risky, marginal ventures.
 
Note to Fed: there is too much of everything. Too many restaurants, too many apps, too many empty dwellings (19 million at last count), too many malls, too many nail salons. There is too much junk for sale everywhere, from retail outlets to online to jumble/garage sales. The developed world is awash in overcapacity in every sector other than a relative handful of special equipment/services (deep-ocean drilling rigs, etc.)
 
Pushing businesses to borrow money to gamble in risky ventures is precisely what happened in Japan in the late 1980s. With interest rates low and credit in abundance, bank reps went around to enterprises small and large begging them to borrow money for essentially any reason.
 
The net result: massive bubbles across asset classes and an overhang of debt that remains 20+ years later, as unpayable now as it was in 1992. That is the result of pushing enterprises into risk-on bets: bubbles and collapses.
 
What those with access to the Fed’s free money–big banks and hedge funds–are doing with the zero-cost credit is invest in rentier skimming operations: buying 5,000 single family homes, buying $1 billion in apartments and homes to rent out, etc.
 
 

“It’s hard to find a private-equity firm on the planet that doesn’t have a strategy in this space,” Gary Beasley, chief executive officer at Waypoint Homes, said last week at the American Securitization Forum’s annual conference in Las Vegas. The Oakland, California-based company has bought homes in California, Arizona, Illinois and Georgia.

How many jobs are created by rentier skimming? Very few. Get the houses painted, hire a few handypeople to take care of maintenance and a few people to handle the property management.
 
The other way to make money with nearly-free credit is to chase risk-on assets, for example stocks. Why would any hedge fund or bank trading desk with easy access to the Fed’s free money bother taking risks in the real economy which is burdened with massive over-capacity and sclerotic State-mandated cartels (healthcare, defense, etc.) when the easy money is in chasing assets higher?
 
How many jobs are created by chasing assets higher? Maybe the Fed thinks that high-end Manhattan restaurants will add staff to handle the influx of new money skimmed from the stock and bond markets, but if they think rentier/speculative skimming is going to add millions of jobs to the economy, they are delusional.
 

Perhaps if any of the Fed governors had ever operated a real business in the real economy, the board might have a somewhat better grasp on reality.

Russia Flips Petrodollar On Its Head By Exporting Crude, Buying Record Gold

China has been a very active purchaser of gold for its reserves in the last few years, as we extensively covered here and here, but another nation has taken over the ‘biggest buyer’ role (for the same reasons as China).

 

Central banks around the world have printed money to escape the global financial crisis, and as Bloomberg reports, IMF data shows Russia added 570 metric tons in the past decade. Putin’s fears that “the U.S. is endangering the global economy by abusing its dollar monopoly,” are clearly being taken seriously as the world’s largest oil producer turns black gold into hard assets. A lawmaker in Putin’s party noted, “the more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency.”

Putin’s gold strategy fits in with his resource nationalism, statist agenda, as Bloomberg notes when Russia defaulted in 1998 it took 28 barrels of oil to buy one ounce of gold, was 11.5 barrels when Putin came to power and when in 2005 it had fallen to 6.5 barrels (less than half what it is now), he went all in, telling the central bank to buy.

Russia has gone through bouts of hoarding before – from 1867’s Tsar Alexander II to Lenin, for now, with more than five years left in Putin’s term, Russia plans to keep on buying – “The pace will be determined by the market,” First Deputy Chairman Alexei Ulyukayev said in an interview in Davos, Switzerland, on Jan. 25. “Whether to speed that up or slow it down is a market decision and I’m not going to discuss it.”

 

 

Via Bloomberg,

Putin Turns Black Gold Into Bullion as Russia Out-Buys World

 

When Vladimir Putin says the U.S. is endangering the global economy by abusing its dollar monopoly, he’s not just talking. He’s betting on it.

 

Not only has Putin made Russia the world’s largest oil producer, he’s also made it the biggest gold buyer. His central bank has added 570 metric tons of the metal in the past decade, a quarter more than runner-up China, according to IMF data compiled by Bloomberg. The added gold is also almost triple the weight of the Statue of Liberty.

 

“The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency,” Evgeny Fedorov, a lawmaker for Putin’s United Russia party in the lower house of parliament, said in a telephone interview in Moscow.

 

 

In 1998, the year Russia defaulted on $40 billion of domestic debt, it took as many as 28 barrels of crude to buy an ounce of gold, Bloomberg data show. That ratio tumbled to 11.5 by the time Putin first came to power a year later and in 2005, after it touched 6.5 — less than half what it is now — the president told the central bank to buy.

 

During a tour that November of the Magadan region in the Far East, where Polyus Gold International Ltd. and Polymetal International Plc have operations, Putin told Bank Rossii not to “shy away” from the metal. “After all, they’re called gold and currency reserves for a reason,” Putin said, according to a Kremlin transcript.

 

Lucky Guy

 

At the time, gold was trading at an 18-year high of $495 an ounce and the Moscow-based central bank held 387 tons, or 2.2 percent of its $165 billion total reserves. The share reached 3.5 percent within a month, according to data compiled by Bloomberg.

 

An ounce of gold for immediate delivery traded at $1,670 as of 7:24 p.m. Moscow time on Feb. 8. It rose 7 percent last year, the 12th straight year of gains. Analysts expect the metal to advance again in 2013, to $1,825 by the end of the year, according to the median of 26 forecasts in a Bloomberg survey.

 

“Putin’s gold strategy fits in with his resource nationalism, statist agenda,” said Tim Ash, head of emerging- market research at Standard Bank Plc in London. “It’s kind of a defensive play, but it worked, right?” Ash said in an interview in Moscow. “You need luck in politics and business, and clearly the guy has it.”

 

Brown’s Bottom

 

Other world leaders haven’t been as lucky. Gordon Brown, as U.K. finance minister, sold almost 400 tons of gold in the 30 months to March 2002, when prices were at two-decade lows. London tabloids have referred to the period as Brown’s Bottom.

 

Quantitative easing by major economies to support financial asset prices is driving demand for gold in the emerging world, said Marcus Grubb, head of investment research at the World Gold Council. Before the crisis, central banks were net sellers of 400 to 500 tons a year. Now, led by Russia and China, they’re net buyers by about 450 tons,

 

 

While Putin is leading the gold rush in emerging markets, developed nations are liquidating. Switzerland unloaded the most in the past decade, 877 tons, an amount now worth about $48 billion, according to International Monetary Fund data through November. France was second with 589 tons, while Spain, the Netherlands and Portugal each sold more than 200 tons.

 

No Hoard

 

Communist secrecy regarding the country’s gold holdings fueled speculation that party elites had amassed a huge hoard of bullion that they spirited out of the country before the Soviet Union disintegrated in 1991.

 

 

“When people ask about the party’s gold, my answer is always: Are you an idiot or something?” Gerashchenko, 75, told Afisha magazine.

 

For now, with more than five years left in Putin’s term, Russia plans to keep on buying.

 

“The pace will be determined by the market,” First Deputy Chairman Alexei Ulyukayev said in an interview in Davos, Switzerland, on Jan. 25. “Whether to speed that up or slow it down is a market decision and I’m not going to discuss it.”