"zombie banks" refers to banks that refuse to lend to the private
sector. They are run by fearful bankers who do not trust other
bankers. They do not trust many potential borrowers. According
to legend, zombies survive by eating the brains of their victims.
It seems to me that zombie bankers must be limiting their diet
to brains of other bankers and investment fund managers.
are ready borrowers of money lent by zombie banks. Zombie bankers
think that their banks' money is safer with sovereign nations'
IOUs than with other forms of IOUs. The governments siphon off
the money that could have been lent to the private sector.
in Europe keep lending to PIIGS governments whose leaders promise
reforms. Politicians promise to cut spending Real Soon Now. So,
bankers lend them more money. PIIGS' sovereign debt interest rates
then fall below panic mode, which is usually regarded as 7% or
higher. When rates fall, investors then buy European stocks, because
they believe that the financial problem in Greece is almost over,
despite evidence to the contrary. All that investors care about
is that government debt will be rolled over, somehow. This, European
bankers are pleased to do for as long as they can borrow at 1%
and lend at 6%. They love leverage.
Central Bank is providing the basis of this leverage. It is inflating
the eurozone's money supply. It is loading up on IOUs from commercial
banks in the eurozone. This is a subsidy to commercial banks.
The ECB assumes that commercial bankers will lend at high rates
if they can borrow at 1%. The ECB is subsidizing zombie banks
and vampire governments. It is killing two birds with one stone:
If it loaned
money directly to PIIGS, this would only indirectly benefit zombie
banks. The PIIGS would make interest payments on time. But, by
lending to the banks, the ECB directly benefits banks. The leverage
restores their profitability. Best of all from everyone's point
of view, there is no legal showdown between the EU and the ECB.
PIIGS governments continue to issue IOUs at a breakneck pace.
There is a market for their IOUs because of the ECB. They can
run up the bill with ease. The zombie banks are flush with digital
ECB: "DIGITS R US"
2011, the European Central Bank's officials made the expected
assurances that they were not planning to inflate the money supply
in order to buy PIIGS debt. In early January, the head of the
an audience of German lawmakers that "Monetary-policy responsibility
cannot substitute for government irresponsibility." That message
was for the rubes.
believed it. On September 8, The
"At the least, this new tone suggests that interest rates will
not move up again this year, as had once been feared. Whether
the ECB will swallow its pride and lower them soon, as some hope,
Mario Draghi replaced Jean-Claude Trichet.
faithful kept the faith. One of them wrote this in November.
Over the past week, we've heard all sorts of propositions that
the European Central Bank (ECB) "must" begin printing money to
bail out Italy and other countries, because "there is no other
option." There are three basic difficulties with this idea. The
first is that ECB buying might help to address immediate liquidity
issues of distressed European countries, but it would not address
long-term solvency issues, and would in fact make them worse.
The second is that the ECB, under existing European treaties,
has no such authority, and the prohibitions against it are very
explicit. Changing that would be far more difficult than many
market participants seem to believe, because it would require
an explicit and unanimous change in the EU Treaties that AAA rated
countries such as Germany and Finland vehemently oppose.
focus: the legal issue of whether the ECB could legally buy sovereign
nations' debt under the European Union treaty. He concluded:
Investors are not likely to be treated with a "surprise" announcement
that the ECB is going to expand its purchases of distressed European
debt. Any significant ECB intervention would likely follow a formal
revision of EU treaties that trades greater ECB flexibility in
return for more centralized fiscal control.
In a "surprise
announcement," the ECB lowered the rate from 1.5% to 1% on December
9. I would call this a surprise only for people who are easily
surprised by the fact that central banks inflate whenever the
value of large banks' portfolios of government bonds start falling
because interest rates are rising.
next surprise announcement came on February 29. It announced a
new policy: lending over $700 billion in euros to banks at 1%
for three years.
analyst had focused on a very narrow issue, namely, whether the
ECB would buy the IOUs issued by PIIGS. He offered legal reasons
why it would not. This is a case of looking at the trees and ignoring
the forest. He ignored the obvious: the ECB would lend to banks,
which in turn would buy sovereign debt. It does not matter that
there are zombie middleman involved. The ECB has increased the
monetary base. The vampire governments are borrowing.
in the London Telegraph got
it exactly right later on February 29.
ECB president, Mario Draghi, has effectively transformed the eurozone's
toxic banks into zombie banks, addicted to his supply of cheap
credit to keep them alive.
Europe hundreds of banks open their doors every day only because
of Mr Draghi's intervention. These lenders may look like banks,
call themselves banks, and, to their customers, feel like banks,
but they are in reality wards of the ECB, going through the
motions of banking.
banks can make little impact on the real economy, and their
main purpose in life is merely to survive and maintain the status-quo.
They cannot afford to make loans and be the agents of Europe's
economic recovery as they remain too bloated with toxic debt
and are, to all intents and purposes, insolvent.
latest round of monetary base expansion pushed the balance
sheet of the ECB to over 3 trillion euros, which is $3.9 trillion.
This is higher than the FED's $2.8 trillion.
analyst offered an economic reason why the ECB would not inflate.
difficulty is that even if the ECB was to buy the debt of distressed
European countries with printed money, the inflationary effects
would likely be far more swift than anything we've seen in the
United States. This would not "save" the euro, but would simply
destroy it by other means.
now have an opportunity to test his theory. We will see if this
will destroy the euro. So far, it has not.
the euro, the ECB's policy would have to be visibly more inflationary
than the other major currencies. Cumberland Associates publishes
of the balance sheets of the four major central banks: FED,
ECB, Bank of England, and Bank of Japan. They are all sharply
higher since the summer of 2008, but the Bank of Japan is the
most restrained. The ECB is the loosest.
the four nations is experiencing price inflation above 5%. So,
to argue that the move by the ECB will "destroy it by other means"
is to argue that mass monetary inflation will produce mass price
inflation. I define "mass" as 15% to 25% per annum. Monetary base
inflation has been in hyperinflation ranges in the USA, the eurozone,
and Great Britain, yet price inflation has been modest. It is
about 2% in the USA. It
has been down slightly in Japan. The rate was above 5% in
Great Britain in late 2008. It has fallen slightly since then
banks are not lending. They are building up excess reserves with
their central banks. The fractional reserve process has ceased
to function as it had prior to 2008. The money multiplier has
We are not
seeing price inflation in the West. Yet the central banks are
adding to their monetary bases. They have been able to do this
because of central bankers' fear of lending. This has enabled
central bankers to reap praise for their bailouts of large commercial
banks. The large commercial banks have preserved the confidence
of the depositors who count today: other bankers and fund managers.
will inflate the monetary base as surely as the Federal Reserve
System will inflate. Whenever the interests of the largest banks
are threatened by a recession, the central banks inflate. Whenever
the largest banks stop lending to each other, due to fear they
have regarding each other's solvency, the central banks inflate.
that they can do this safely, because monetary inflation has not
been translated into price inflation since 2008. Excess reserves
reduce the fractional reserve multiplication. The public does
not get upset. The politicians do not get upset. There are no
base keeps rising, but interest rates are low. This means that
the borrowing non-PIIGS governments do not face a sharp increase
in cash outflow as a result of rising debt. The politicians are
not sent a red ink alert by the Treasury. The solvent governments
can easily make their interest payments.
for PIIGS governments is severe. The higher that interest rates
go, the larger the budget deficits. This pressures them to cut
spending. They resist this. So, they borrow more. The governments
have become vampires.
For as long
as PIIGS governments can avoid a budget crisis, they will borrow.
Whenever they do begin to face a budgetary crisis, the ECB inflates.
assume that the bills for this added debt will come due after
they are out of office. They do not put on the brakes. They do
not cut spending. They increase it.
kabuki theater. Politicians swear by everything they hold dearer
than being re-elected that they will impose austerity. They will
cut spending. Bankers then lend money at high rates because they
can get all the money they want at 1%. The ECB provides the money.
ECB offered no explanation for its actions on February 29.
It issued no press release. No official gave a speech.
expansion of the monetary bases of the central banks zooms into
hyperinflation territory. The debt-to-GDP ratio of the governments
goes above 100. Yet prices are stable and government bond rates
are low. It looks as though this can go on indefinitely.
absorb capital out of the economy. But this capital is of a peculiar
nature. It is wealth that is being funded by the expansion of
digits, not an increase in thrift. No one in the society is foregoing
consumption. Central banks are providing the economies with digits,
but commercial banks are either keeping this as excess reserves
or else are lending to governments. If this newly created fiat
money had been lent to businesses at low rates, the boom cycle
would be visible. Capital would be allocated to the private sector,
but only because lenders (bankers) believe that the recovery is
real, meaning they will be repaid.
begin that Austrian theory of the business cycle. It is a misallocation
of capital. It leads to a future bust.
of another boom, we are seeing the transfer of wealth to governments,
which keep issuing IOUs. The lenders of digits are providing the
vampire borrowers the money necessary to bid resources away from
the citizens who are not borrowing at low rates. The citizens
who are not on the receiving end of government money are forced
to cut back on their purchases of goods and services. Think of
the unemployment rate for people 18 to 25 in Spain and Greece:
over 40%. They are paying for the profligacy of their governments.
of central bank funding of governments, either directly (USA,
Japan) or indirectly (eurozone), reallocates the flow of funds,
and therefore the flow of wealth, toward governments and their
transfer involved in fiat money production counterfeiting
by the central banks quietly undermines the private sector.
The structure of production favors the holders of money. This
money is not earned when central banks create digits called money.
It is spent.
governments are like Draculas that fly into the night looking
for victims. They extract wealth from the victims in a painless
way. The victims sleep soundly, unaware that their life's blood
is slowly being drained.
of legends, this makes for more vampires. The allocation of wealth
lowers people's real income. They are more likely to lose jobs
and income. They are more likely to become dependent on the state.
state says "austerity will kill the recovery." Or "austerity will
produce larger deficits." In the bust phase, government spending
rises. In the boom phase, tax revenues rise, but spending keeps
pace. The vampires still borrow. They still run deficits.
And so it
goes, decade after decade. The vampire state gets more bloodthirsty,
and the zombie bankers keep lending to them.
is addictive. Zombie commercial banks use the funds provided by
the ECB to buy IOUs from vampire states. The mainstream economists,
who seem to have had their brains eaten, call for more spending
by vampires and more accommodative injections of fiat money. The
process does not reverse. It accelerates.
come a day when interest rates on non-PIIGS IOUs will rise. That
will be the day of reckoning for the vampires. It will also be
the day of decision by the zombie central bankers. Accommodate
or not? Mass inflation or the Great Default?
mass inflation. Only when hyperinflation (above 25%) is the next
stage will central bankers make a serious attempt to cut off the
funds. That is years down the road. The game of kick the can will