All attempts to reflate the system are failing. Leverage is collapsing. Next on the docket is a series of interest rate cuts by Central Banks. They RBA will probably lead off that global parade today at 2:30pm in Sydney.
How big will the cut be? It will be 50 basis points for sure. But if the RBA really wants to make a splash-and give the banks room to pass on the reduction to borrowers-it will be a full percentage point.
By the way, did you see in today’s Australian that Aussie banks have been borrowing from the Future Fund? The paper reports that, “Three of Australia’s largest banks have obtained long-term loans from the Future Fund as cash dried up from other sources.” It happened in late March and early April of this year, just after Bear Stearns went belly up.
“The ANZ, Westpac and National Australia Bank (NAB) tapped funding for up to 10 years.” Leaked documents showed that ANZ borrowed $500 million from the Fund. What NAB and Westpac borrowed were not disclosed.
Now isn’t that interesting? A back-door borrowing program at the Future Fund. Or is investment? You decide!
All borrowing is, one way or another, borrowing from future income. If you can create surplus value with the borrowing, then you are not stealing from future income. But if you’re borrowing from the future to meet today’s liabilities-well that’s a kind of theft.
That is the theft the managers of the global economy are trying to get away with at the moment. They are creating massive new government liabilities via bank rescues and bail out plans. That’s not money the central banks have in a giant lock box. It’s money borrowed from the future that will have to repaid.
Even though gold stocks are still struggling, we expect bullion prices to go much higher. Governments will increase their liabilities massively in the coming months. The supply of money is growing. The supply of gold is not.
Let’s not forget the context of today’s bursting credit bubble. From 2001 to 2006 you had a huge explosion in global real estate financed by massive easy credit courtesy of historically low interest rates. Now, the real assets bought with that borrowed money-houses-are falling all over the globe. This makes households less wealthy-especially households that converted what little equity they had into lines of credit to finance consumption.
At the same time, those houses were securitised, insured, guaranteed as credit-worthy and sold as investments to pension funds, money centre banks, regional banks, life insurance companies, and central banks. They were also used as collateral for further borrowing by those same institutions. A huge edifice of finance was built on a foundation of borrowed money. With the foundation crumbling into rubble, it’s all falling apart. What happens next?
The central bankers are now in the position of deciding which institutions are saved and which fail. There will be some saving in the next few weeks. And then there will be the failing. More money will be created out of thin air. The forces of inflation are going to counter attack, but only after burying their dead.
Depositors in banks should be protected, especially since governments in Europe, the U.S., and Australia have explicitly moved to guarantee banks deposits. But there will be no such insurance for stock prices. The only saving grace for Aussie investors is that the collapse in share prices gives you the best chance since 1987 to pick up real assets selling at or below book value. More on when the share market will turn tomorrow.
Markets and Money