There must be something in the air this winter – something that is besides the whiff of climate cant and manufactured eco-hysteria emanating from Davos and all the other organs of bien pensanterie. For, everywhere you look, someone is going less than quietly insane, either cooking up or Swedish chef rehashing glaring errors of economic idiocy or sweet-shop window socialism. Bork, bork, bork!
[This article can be heard as a podcast on Soundcloud under ‘CantillonCH‘ or iTunes under ‘Cantillon Effects‘]
It’s bad enough that we have a 16-year old, Joan of Arc-wannabe, Green extremist getting prime billing at the annual Plutocrats’ Ball at the WTF meeting (sorry – the wEf shindig), but we must also routinely endure all the mass media and half the witchfinders in the Twitterverse fawning over the jejune posturing of a Congresswoman of IQ 16 as she insists that the only way to see out the year 2031 without becoming a caramelized coating on the glowing cinder which will then be our planet is to confiscate all wealth, abolish all property, and usher in the long-awaited dictatorship of the Trolletariat – the whole to be undertaken under her incontestably sagacious tutelage, naturally.
As we discussed in our last little monologue, on top of all this madness, the MMT crowd is enjoying an undeserved renaissance as the vanguard of the assault on the crumbling curtain-wall of our liberties; their patent medicine man schtick having been rendered almost respectable by the lunacies both being pondered and – alas – practiced by the contemporary monetary authorities.
After all, when you have Benoit Coeuré at the ECB, the ineffable Divus Marcus Carney at the Bank of England, and others of their ilk now adding the IPCC to CPI and PPI among their list of major concerns, or the San Francisco Fed proudly proclaiming its leading role in the fight against something it calls ‘climate gentrification’, how wild-eyed can the champions of MMT – ‘Mosler Meets Trotsky’ – appear to be in comparison?
Thus even when a rare shaft of enlightenment does break through the Stygian gloom of our folly, the chances are it will soon shatter into a rainbow of wrongheadedness amid the swirling miasma of error which so completely engulfs us.
Take Sun Guofeng of the PBOC who, last week, correctly noted that it is principally the everyday commercial banks, not their Big Mother central banks, which create money through making the ex-ante loans which later reappear on the other side of their balance sheets as ex-post (demand) deposits.
Ironically, Sun’s claims echoed a conversation I had at much the same moment with my very bemused, engineering-student son whose carefully inculcated sense of logic and propriety was very much affronted at my assertion that this WAS the case – and also that, as such, it was a primary cause of the conjoint phenomena of the ‘stocks for the long run’-, ‘HODL’-, and ‘houses never decline in value’-thinking which dominates the expansive, Blue Sky phase of every weary, old business-financial cycle.
“But if they create money, surely they can never go bust,” was his not unreasonable objection – one I only partly overcame with my attempt to explain bank runs (more peer-related wholesale today than Jimmy Stewart or David Tomlinson retail, I told him) much less with my rehearsal of the idea that bank capital – as ethereal a concept as THAT is – is perhaps the main determinant of how much money a bank can originate, not the partly mythical ‘money multiplier’ so beloved of all the macromancers eagerly sending each other ‘Aren’t I smart’ billets doux of something they call the ‘global monetary base’ over social media platforms.
Perpetuum Mobile Banking
Our man Sun made a similar point to that latter at a conference called to help demystify some of the central bank’s thinking but, before we laud his perspicacity on that narrow issue, we should pause to wonder at his endorsement of the smoke-and-mirrors ruse which is that august body’s current perpetual bonds wheeze.
This runs as follows. In order to address the limiting shortage of capital which we have just identified as the critical nexus, Bank A will henceforth be encouraged to buy Bank B’s perpetuals – and, of course, vice versa.
Individually, therefore, each bank will seem to have met its Basel requirements and so will be able to pile loans to the tune of nine or ten times the face value of the bonds on top of this new fountain of riches.
Systemically, however, you will note that this leaves banks-plural with no more capital than before but only enmeshes them in a tangle of those so-called ‘triangular’ obligations of mutual boot-strapping which have so bedevilled smaller enterprises up and down the land as they struggle to overcome gaps in their cash flow which mainly originate from their shocking maltreatment at the hands of the larger, politically-protected, tardily-paying SOEs on whom they rely for so much of their custom.
But, wait, it gets worse. In order to wring the last drops of leverage out of the process, the PBOC stands ready to ‘swap’ these bonds for its own, handily zero risk-weighted issuance of bills – for a period of up to three years. Furthermore, should its counterpart commercial bank later wish to free up even more room on its balance sheet to lend to whatever identifiable sector is the state’s flavour of the month, that latter can return the central bank’s own obligations back to it as ‘collateral’ in one of Big Mother’s routine lending operations and so enable the pledgor to make yet another loan, out into the real world.
So, to recap – in more meanings of the phrase than one – Chinese banks will augment their lending power by playing three-card monte both with each other and their conniving overseer, all the while playing lip-service to the internationally accepted norms for capital adequacy AND theoretically avoiding any direct involvement of the central bank in credit allocation.
Neat!
But, such is the magnitude and intractability of the present woes in China, that even this may not be sufficient.
Hinting at the fact that the authorities are fully aware of this, a few weeks ago, one Guo Fangming, a functionary at the Ministry of Finance, publicly advocated that the PBOC undertake a little Abenomics and expand the money supply more vigorously by directly buying the government debt which he and his fellows stood ready to issue.
When the Bank’s initial reaction was to have the likes of our man Sun try to dampen speculation that this was indeed now a policy objective, one of Guo’s Treasury department colleagues, a certain Wang Xiaolong, pointed out that the PBOC’s aggressive use of MLFs – Medium-Term Lending Facilities – to funnel liquidity into the system against collateral mainly consisting of – of, yes! – T-bonds was functionally little different from what was now being more formally proposed.
So far the PBOC seems not to have elected to attempt a refutation of what is, after all, far from being a groundless accusation on this score.
Bolting the Stable Door
Here the plot thickens further. In the middle of last month, the Dean of the National School of Development at Peking University, Yao Yang, rhetorically asked the audience of a forum at which he was speaking whether it had been entirely necessary to kill off the entire ‘shadow’ finance system last year and hence choke off so many of the institutionally-challenged private companies from the credit markets, to their evident and still very much continuing distress.
Citing the effect of the simultaneous tightening of rules on asset management company intervention, Yao boldly suggested that the central bank step in to buy the shares and other securities of struggling companies for its own account in a kind of broader – and more enduring – imitation of the TARP programme by which the US authorities bailed out Wall Street in the aftermath of Lehman’s collapse.
In one of those curious quirks of non-coincidence, all this coincided with the ‘sideways promotion’ of the chief stock market regulator, CSRC head, Liu Shiyu, to a kind of metaphorical rural re-education camp as head of the nation’s giant agricultural co-operative agency.
Brought in to try to mop up after the collapse of 2015’s disastrous ‘Mississippi Scheme 2-point-0’ equity bubble, Shiyu suffered the ignominy last year of seeing prices slump back to much the same lows at which started his reign, thus drawing upon his head much criticism for being too restrictive and of preventing the market from fulfilling its primary role as a means of raising capital rather than just acting as a vehicle of speculation and a means of abetting peculating chief executives as they ‘tunnel’ investor riches into their own bulging back pockets.
In his place comes the new broom, former Industrial Commercial Bank boss, Yi Huiman, who will be tasked with inviting gullible foreign investor flies to enter the parlour of the voracious Chinese spider, as well as with overseeing yet another regulation-lite, tech start-up market to replace the one Premier Li Keqiang was pining to launch at the height of that previous mania.
Ironically, one feature of this new ‘White Heat’ incubator will be the waiving of the necessity for firms to demonstrate a degree of profitability both prior and subsequent to listing – a waiver cast into sharp relief by the current vogue for several hundred firms on the main board to confess en masse to their sins of 2015/16 and slash half or more of the book value of the ‘goodwill’ with which that era’s excesses had saddled them.
Rationale for this multi-billion mea culpa is that the recognition of heavy losses NOW comes safely ahead of the potentially protracted sapping of profits (and hence the foreseeable peril of stock exchange expulsion) made possible if new rules about that most insubstantial of accounting categories’ mandatory amortization come into force, as is widely rumoured soon to happen.
Great Chaos Under Heaven
Finally – and here is where you really DO need to affix your tin-foil hat firmly to your skull – the central bank has just announced – while everyone was conveniently distracted by the ongoing Lunar New year celebrations – a major internal reorganisation.
After a close textual analysis of the kind that only Communists undertake, now that the mediaeval scholastic era has passed and Alan Greenspan has retired, some knowing local parsed the accompanying press release to argue that what this in fact entailed was the close subjection of PBOC chief Yuan Gang to the whim of Xi Jinping’s main economic fixer, Liu He. Of trade negotiation fame.
Lending a certain credence to this, the main emphasis of everything said about this reshuffling in the mainstream press has since focused on the Bank’s according of heightened priority to enacting ‘macro-prudential’ measures (aka: to the bolting of doors on empty stables) along with an even heavier stress on a mandate to ensure ‘financial stability’ – something very much within the bailiwick of Liu He, of course.
Given that President Xi has lately taken to harping on about ‘grey rhinos’ – that class of widely-acknowledged, yet still greatly under-appreciated risks to one’s plans and aspirations – and also, in very graphic terms, to the ‘unimaginable tidal waves and terrifying tempests’ which he says the nation now faces, one might be wondering if all of this activity is not aimed at weathering the mighty flood of financial collapse which threatens to sweep away the whole forty years of ‘reform and opening up’.
What our friend, Sun Guofeng thinks of all this, I cannot say. But be aware that he has been vocal in his contention that – contrary to sound common sense and practical experience, both – negative interest rates ARE an effective response to economic decline – but only if banks pass their burden good and hard on to their retail depositors in manner which they did NOT do in Draghi’s Europe but which presumably will be done absolutely without qualm in his bosses’ Middle Kingdom.
In a similar vein that temple of West Coast Wokery, the San Fran Fed, has just released its own endorsement of this same folly. Silvio Gesell – the Ur-proponent of ‘free’ land and time-stamped money – truly lives!
Completing this trinity of decidedly Unwise Monkeys, last week the ECB posted a ‘research’ paper – presumably straight out of the marketing department. – which purports to ‘prove’ that there were absolutely no Cantillon Effects – that is to say no arbitrary redistributions of wealth – associated with its pursuit of Quantitative Easing – though one does wonder at the logic there advanced that it did not in any way ‘increase inequality’ – one of the cardinal sins of the Modern Age – in part by helping to boost house prices?!?
All in all, it is hard to resist the inference that our beloved technocrats – whether in the Apparat of the CCP, or the bowels of some Western central bank echo-chamber – are trying to reassure themselves that the cocktail of Hermetic potions and alchemical elixirs with which they treated us the last time around will instantly restore our health, the next time we catch an ague, but only if forthrightly administered and in a much stronger dose.
So, perhaps that strange scent in the air which we mentioned at the start of this discussion is the smell of exotic volatiles bubbling from the gleaming alembics to be found in the laboratories of our good Doctor Faustuses as they make their preparations to distil up another batch of their cure-all physick of even easier money and even more mispriced capital.
Here, in the Year of the Pig, it may well be that the first re-rerun of the grand experiment will be ordered by an anxious Beijing and that, when it is, we will all be told to expect stocks and bonds, oil and gold, real estate and ‘alternatives’ instantly to rally, on and up into that soaring blue empyrean where so many of those same pigs will doubtless be found, winging their way oh so effortlessly by.
