A View from the Trenches, November 17th, 2009: "The Ponzi way"
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The week started on a highly “accommodative”, inflationary tone.
During the weekend, we had the Asia-Pacific Economic Cooperation
meeting and yesterday, Fed’s Chairman Bernanke gave a speech in New
York. Both forums contributed to the obvious notion that monetary
policies will remain accommodative in the US and the countries that
have decided to import US inflation (i.e. Brazil, Canada, Russia,
China). With the weekend news, the positive GDP numbers from Japan and
Retail Sales figures released at 8:30am yesterday, everything took a
lift from the big tide: Oil, gold, equities, treasuries, corporate
Investors seem to have lost perspective here and, as year-end
approaches, the need to show performance by fund managers is taking us
to new highs. Is this dangerous? Not necessarily. From where I see
things, I am gradually coming across debt refinancings that no longer
target longer maturities for the sake of delaying the Day of Reckoning,
but which seek to facilitate acquisitions, mergers or simple
restructurings. That is a good thing, as long as resources diverted in
that direction are based on the right premises, one of which is their
price outlook. I sincerely hope this is the case for the energy,
transportation/logistics and mining industries.
On another note, I believe there is a piece of news that market
participants may have discounted. On November 12th, the Federal Deposit
Insurance Corp. (FDIC) approved the final rule on prepaid assessments.
In short the FDIC, “…voted to require insured institutions to prepay
slightly over three years of estimated insurance assessments…” (Refer:
http://www.fdic.gov/news/news/press/2009/pr09203.html ). According to
the FDIC, “…Payment of the prepaid assessment, along with the payment
of institutions’ regular third quarter assessment, will be due on
December 30, 2009. The FDIC estimates that it will collect
approximately $45 billion from total prepaid assessments. The payments
will come from the industry’s substantial liquid reserve balances,
which as of June 30, totaled more than $1.3 trillion, or 22 percent
more than a year ago…”
Think about this for a moment… The US government is bankrupt,
issuing debt that is placed at foreign official institutions to avoid
the scrutiny of the laws of supply and demand. On the other hand, it
issues a guarantee for deposits in its financial system, for which it
charges a premium of $45BN.
How can the also bankrupt financial system afford the premium? It
credits the FDIC with funds from its Reserves account at the Fed.
But…where did the funds that are currently allocated to Reserves come
from? The US government provided them through its stimulus programs.
How did it do so? By issuing more debt!
If this is not the Ponzi scheme of all schemes, then I do not know
what is. What is one left to conclude? When individuals engage in these
transactions, they end up in jail. When governments engage in them, are
their financial systems strengthened? As far as I know, the last
country to take this path was Argentina, under the Menem and later the
De La Rua administrations. If my memory works well, Argentina’s
financial system also had a reserve ratio in the order of 30%.
Everybody knows how the story ended in 2002.
True, the US has considerably more resources than Argentina, but at
the end of the day, we all have to buy, sell, pay and collect. Of
course, gold is now trading at $1,140+/oz. Why would it not?
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