Banking; the sexy kind

Disclaimer: the author knows nothing, has no insider knowledge and has done no research to speak of.  The opinion is shallow, ignorant and likely very very wrong.  Following the advice contained herein is insane.  Even reading this long ramble is pretty silly.  I just had to do it………….sorry…….ravens tomorrow.

Been reading about Complexity theory.  Offspring of Diminishing Returns Principles.  Kind of a cousin to Chaos Theory.  Basically it states that things get more and more complex and at the same time become less and less effective and more and more inefficient. Duh!  Did you not read about my Honda’s electronics?

All these recent authors, however, are basically talkin’ politics or politics-related topics.  Not Honda motors.  But, to me, the principles still apply.  When the governing gets complex, the results eventually get disappointing.  In the latest iteration of this concept, James Rickards is talking about the complexity of currencies (Currency Wars).  My last blog was about Honda electronics.  Same thing.

Just to disclose: J. Richards is a gold freak.  He believes in gold, sells and trades in gold and basically shares a Henny-Penny view of the world with gold as the answer.

But let’s focus on the bigger picture for a bit:  When money was simply nickels and dimes used to make exchanges between neighbours, the money system worked well.  And people cooperated with it.  The system seemed to treat everyone fairly if not necessarily equally.  But as money became more complex (Federal Reserve, Bretton Woods, on-and-off the gold standard, the advent of financial instruments of mass destruction, M1, M2, and M3, Sovereign Wealth Funds and Special Drawing Rights (SWFs and SDRs) well, things got complicated and, consequently, more prone to abuse and, perhaps, collapse.

Worst of all, people didn’t feel the system treated them fairly anymore.  I.e.: disparity in incomes, unemployment and underemployment, having to bailout Goldman Sachs!?

Except, perhaps, in a bad way.  The additional trend towards globalization meant that any one structural (national) collapse would likely be shared amongst a number of others.  When Japan suffered a Tsunami, their currency was affected and their economy was assaulted.  All the G7 countries responded to put Japan back on it’s feet financially speaking. In that sense, ‘globalization to the rescue’.  Japan was treated somewhat fairly (out of self-interest on the part of the other ‘G’ countries).

The lesson:  The US dollar is the current backbone of the entire world’s currency system.  It’s health and our health are inextricably linked.  For better or worse.  But it is also an unequal burden/privilege on the American economy.  In a sense this unequal monetary burden manifested again (in Japan’s favour) but it was at too high an operational level for the American taxpayer to understand.

The sub-prime mortgage failure and financial instruments debacle made Americans more aware of the primary role of the US dollar but not by much.  Normal people don’t generally understand the financial system in which their lives are so dependent. Neither do we Canadians.

The real point of bringing all this up  – right now – is to question whether the Euro can withstand the assault on it’s currency structure.  Iceland, Ireland and Greece are in the toilet and almost flushed down.  Spain and Italy are standing just outside the cubicle awaiting their turn.  The worry: the Euro is too complex, too interelated, to interdependent and too poorly managed to survive. Plus there is simply too much inequality for them all to share the same currency.

The solution?  More US dollars?  Not really.  The US is already ‘tapped out’ in so many ways.  More Euros?  From whom?  Will the creation of SDRs (basically IOUs) be a solution or just buy time?

And if the euro fails, it is the Euro-peons who will not be treated fairly.  Not in their eyes, anyway.

The G7 (sometimes G8) and the G20 are working diligently to make it all work.  But the house of cards is several stories high and the wind is picking up.  In other words: THE STRUCTURE IS TOO COMPLICATED.

Worse, they seem to be following recipes that aren’t working.  Low interest rates didn’t help Japan over the last decade or so.  Not helping anyone now, either.  Government incentive programs aren’t helping the US.  Loans, subsidies and grants aren’t helping the ‘southern’ European community.  For the most part, all the twiddling of the knobs is not getting a different result.  And the economists are worried.

The REAL problem (I think) is psychological.  We all have a dearth of confidence.  We have lost faith in the larger system and that includes the smaller ones, too.  From currency systems to defense, health, education and even justice.  We just don’t have the confidence.  And that shows up everywhere.

‘Aging’ doesn’t help.  Older people are more cynical.  They don’t believe their politicians.  Nor do they have the hope or ambition that comes from that confidence.  Old people don’t ‘buy in’ nearly as much as they once did.  It’s an aging thing.  And lots of the G7/8 are aging.  It is psychological and demographical. 

“Geez, Dave, what the Hell do you know?  And why are you not writing about ravens?  You promised!”

I’ll get back to the ravens.  But, in the meantime, you should all know that when things start to show up like they are (and they call this kind of out-of-balance-thing a currency war and it has, in fact, shown up in history many times) things go awry.

Truth is, the only times financial systems were stable was when they were on a gold standard.  It was simple. But being on a gold standard no longer makes any real sense.  Still, money being based on something tangible, real and confidence-inspiring does make sense.  No one seems to trust credit default swaps anymore – that is for sure.

The challenge: to simplify that which is complicated without suffering complete destruction in the process.

Of course, the average person is not trading in credit default swaps or enjoying special drawing rights (SDR) or managing a sovereign wealth fund (SWF), they are just trying to get their Honda fixed.  But make no mistake – the average person is already ‘sensing’ something is a bit stinky in the monetary system and they are already – subconsciously – taking steps.

“What does that mean?”

You are asking me!!!???

Well, I think you want to pay cash when you can. Having your money in ether space is not such a good idea.  Hell, in Greece and in Spain, having your money in the bank is not such a good idea and people have been making small runs-on-banks to get it out for months. And nowadays money in the bank is the same as money in ether.

Plus the Russians and the Chinese are taking more and more payments in gold or by direct swaps of commodities (skipping the dollar as a transaction medium).  That does not bode well.

And at a local level, people are shopping more local.  The hundred mile diet is an indirect way to keep wealth in the community (it may not be the primary purpose of the movement but it satisfies in more ways than one).  And local people are bartering for goods and services more all the time.  Everyone – governments and people are looking more to the tangible.  

“Are you saying the sky is falling?”

Rickards is.  And he cites a few scary stories.  To kickstart the US economy during the great depression, FDR did a number of drastic things.  One of them was to declare hoarding gold illegal.  Everyone was obliged to sell their gold to the government.

Government, it seems, can still do those drastic things but they are more subtle now.  They have to be.  No one trusts them.  We in the western world are already 80% invested in non-tangible money.  We have mortgages, use credit cards and automatic debit, etc.  We are actually more vulnerable to wealth confiscation than ever.  It is much easier to control the wealth of a nation when it is all recorded digitally.  The sky may not be falling but the ceiling has already definitely being lowered.

“What should I do?”

The doomsday financial guys say ‘buy gold’.  But I don’t think that is realistic.  The price is too high for most people, the means of using it in exchange too cumbersome, the use of it as a commodity too limiting.  I am not a gold person but billions are.  So, I don’t know.  Not really.  Strangely, I am more of a silver person – simply because the commodity is more easily purchased and, though cumbersome, not so much as gold.  And silver has a lot more practical uses as well. Or so they say………

But I am not really a silver person, either.

Frankly, I think it boils down to this: get rid of securitized debt (like mortgages).  Pay them off.  You can hold unsecured debt – the stuff that has virtually no ramifications if you can’t pay.  Remember: for decades the banks have not sued anyone for less than $50,000.  Costs too much.  They write it off.  So, day-to-day credit is OK.  But keep it low.  For ethical reasons – YOUR ethics.  Put bluntly: expect more volatile currency and price fluctuations.  Soon.  They are inevitable and overdue.  But, I am sure you knew that.

Just sayin’……………..

4 thoughts on “Banking; the sexy kind

  1. Where has all the money gone? Too many folks are house rich and cash poor. Too much middle class money sits tied up in home equity and not enough money is circulating in the day to day economy to fuel a greater rate of growth. Usually the middle class is able to spend us out of recessions but not this time. Canada has yet to experience the realestate bubble but it is looming. Government austerity only slows the rate of growth aka Britain thus deepening the chances of recession. Britain has entered a double dip recession and so can Canada with the current policies. Conservative governments for ideological reasons are pathetic at dealing with recessions. They are loathed to simulate. But if you have a sovereign currency, low inflation, frozen credit then a stimulus is warranted as happened in the ‘New Deal’. The “New Deal’ worked. Old Conservative ideas about money no so much.


    • Stimulus hasn’t worked for Obama but his stimulus went in all the wrong places. To put cash in ordinary pockets, you need real work, not paper-shuffling and financial transactions. Obama and Canada should ‘stimulate’ in real work, not selling tar sands. US and Canada infrastructure desperately needs a makeover. Look at our trains vs Europe, China, Japan. Look at China’s engineering vs ours. Hell, look at our hospitals and the waiting lists. We need to invest in infrastructure. We sell fish and trees and oil. It is time to get past that.


  2. Part of Obama’s stimulus went to the auto bail out and “there are 1.45 million people who are working as a direct result of the $80 billion bailout, according to the nonpartisan Center for Automotive Research, both at the carmakers and associated businesses downstream in the economy”. Inaddition “…a mammoth $1.2 trillion in loans to banks left tottering at the peak of the recession on December 5, 2008 was shelled out to help preserve the status quo on Wall Street.
    While assuring the public they were healthy, the banks took tens of billions in emergency government loans.” I agree that the infusion of cash did not produce 8% an unemployment rate but it did recapitalize banks on Wall Street and increased the pace of loans to the middle class. Some claim the stimulous should have been bigger. So far four million jobs have been created since late 2008. You are correct about infrastructure loans but Congress has blocked infrastructure stimulous.


    • That may be true but making Chevies is not going to do it. Especially Chevies like the old ones. And saving the banks without reforming them is good money after bad. To me, that stimulus was like bailing out a wayward teen from jail, fixing his car and saying, “Now you smarten up, eh!”
      Better the kid stays in jail, goes to court and ‘feels’ the pain a bit. Then….maybe a bailout………
      And the stimulus did not increase the pace of loans to the middle class. Show me the consumption figures. Houses are still flat. New cars are bought by fleets. And Walmart and food banks are doing BoxOffice. The banks are still playing it close the vest. They are afraid to lend and they should be. 30M Americans are out of work. Probably another 30 are underemployed.
      That stimulus plan may have had enough ‘juice’ but it went to the wrong place. To my mind, it has to go to bricks and mortar to have any enduring impact on their economy.
      But don’t forget……………I know nothing……….Geithner doesn’t call. Neither does Bernanke. I’m out of the loop.


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