How Central Bankers Attempt to “Cure” Insolvency

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Like trying to patch a nuclear reactor with scotch tape and chewing gum, the central banks of the world’s leading economies are trying to Spackle over cracks in the global monetary system with a variety of desperate tactics and measures.

Unfortunately, hiding the cracks does nothing to strengthen the underlying infrastructure. To the contrary, hiding the cracks dupes individuals into believing all is well, even as the monetary system is crumbling around them and banks and governments become insolvent.

Many European governments, for example, are spending much more money than they can possibly confiscate through taxation. These guys are broke… plain and simple. But so is the United States, based on any intellectually honest assessment of the facts.

According to the US Treasury’s own data, the US ended 2011 with total debt of $15.2 trillion, which means the US debt-to-GDP is now more than 100%! Move over Greece! Make way for Uncle Sam.

Bankrupt governments usually default…at least they used to. In the modern era of faith-based currencies and Ivy League educated central bankers, bailouts and shell games are the cogs and wheels that drive the global monetary machinery. But this machinery does not actually power anything…other than a massive fraud. It merely sputters along, chugging out massive plumes of toxic theories and misguided manipulations.

And whenever a central bank cannot provide direct, overt assistance to a specific insolvent investment bank or government, not to worry, a central bank can still provide indirect, covert assistance.

The recently announced “backdoor bailout” of European financial institutions illustrates the point. The European Central Bank (ECB) cannot directly bail out the insolvent governments of Greece, Italy, Spain, Portugal, et al. Meanwhile, the US Federal Reserve cannot directly rescue Europe’s insolvent banks.

Enter the indirect bailouts… Here’s how they work:

The Fed extends unlimited lines of credit to the ECB under so-called swap agreements. The ECB, in turn, provides dirt-cheap capital to Europe’s struggling banks. Then, the banks – understanding an unspoken quid pro quo – use the dirt-cheap financing to buy the high-yielding bonds of Greece, Italy, Spain, et cetera.

So if you follow the money, the Fed is lending money to Greece… and all along the way, the insolvent European banks are making money they don’t deserve to make, while taxpayers lose money they don’t deserve to lose… and also stand first in line to lose even more money as these various coddled banks and governments eventually default anyway.

Does this characterisation of the Fed’s activities sound like an exaggeration?

Consider this fact, courtesy of The Wall Street Journal: As recently as a few weeks ago, the amount of dollar swaps – i.e., loans – with the ECB was only $2.4 billion. “For the week ending December 14, however, the amount jumped to $54 billion,” the Journal reports. “For the week ending December 21, the total went up by [another] $8 billion… No matter the legalistic interpretation, the Fed is, working through the ECB, bailing out European banks and, indirectly, spendthrift European governments. It is difficult to count the number of things wrong with this arrangement.”

Thus far, the Fed’s indirect bailout of Europe is relatively small, at a mere $62 billion. But we should expect that number to grow…a lot. And as that number grows, the Federal Reserve will be providing yet one more reason to buy gold, silver and other hard assets.

No modern central banker can seem to resist the urge to “cure” insolvency with more credit – credit that comes not from a store of accumulated capital, but from the mouth of a printing press.

Gold is a buy, perhaps now more than ever.

Publisher’s Note: This is an edited version of an article that originally appeared in The Daily Reckoning US (www.dailyreckoning.com).
Eric Fry is the Editorial Director of Agora Financial.

Eric J. Fry
Eric J. Fry has been a specialist in international equities since the early 1980s. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short- selling. Mr. Fry launched the sometimes-abrasive, mostly entertaining and always insightful Rude Awakening.
Eric J. Fry

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4 Comments on "How Central Bankers Attempt to “Cure” Insolvency"

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shortchanged
Guest

For every law or rule made, someone will circumvent or break it, citing “Extraordinary Circumstances” or some such twaddle.
The worst., the saddest part is we, the taxpayers, get deeper into debt by our governments and there is nothing we can do about it.

SvetlanaBabe
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I’ve recently been adding to my existing gold reserves by buying 10 0z of PHYSICAL gold. I couldn’t believe how much the bank tried to talk me out of closing my long term savings account. They even suggested that storing gold at home was illegal (sic).

shortchanged
Guest

Ah, yes, svetlanaBabe Banks don’t like it when you take YOUR money out of their bank. Plus the damn cheek of asking/demanding to know the reason why. Next time I’m asked i shall smile sweetly and whisper “its for a sex change operation” that might shut them up. Must remember not to take my granddaughter in with me though, might spoil the moment. Or enhance it, you never know.

John Smith
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My bank made a mistake (they’ve admitted to) about the interest they agreed to pay me. The bank performed a “recalculation” which I am sure is incorrect (in their favour). Took forever to get the interest credited so short-changed once again (unable to compound the interest). Now they bluntly refuse to do another recalculation. Getting the run-around each time I ask to be shown a line-by-line account of how interest was calculated. Is this small-scale theft a sign of things to come from Aussie banks?

wpDiscuz
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