The following is the content of an e-newsletter I received today. I think the story is very important and needs to be understood much more widely than simply the recipients of the email. I fully recommend others getting the e-newsletter regularly also. It has some excellent comment that needs to be understood widely. For those who do not get the point, here is a simple summary: When banks are doing well, it is because its customers are in debt to the hilt. Our world economic woes were caused by indiscriminate indebtedness by those who could ill-afford to be in debt, for causes that are not wealth-creating, such as a home loan. If banks are on the mend, it is because they are on another loan bender, re-inflating the debt bubble, getting us ready for another round of economic down-turn. If banks were operating in a godly way, they would only be loaning for those things that are wealth-creating, and to those people who have a proven track record in financial responsibility.
Saturday, 1 August 2009
Don't Believe the Mainstream Lies About Deleveraging
By Kris Sayce
If you take a look at the banking sector it looks like a scene from Brewster's Millions. As much as they try, the banks can't create and give away money fast enough.
All the talk in the mainstream press and amongst mainstream economists about deleveraging is absolute nonsense. Let's set the record straight once and for all...
There is no deleveraging, there is only re-leveraging.
And don't just take my word for it either. In a moment I'll show you the stats from those that claim deleveraging is taking place, even though their own statistics prove otherwise.
But first of all, take a look at the banks and their balance sheets. Remember that the cash you deposit in a bank is actually a liability to the bank. It's borrowing the money from you in return for you receiving a miserly amount of interest.
But guess what? The bank can only pay you that interest if it is investing your money somewhere else. That's where the bank has to loan money out to borrowers and charge them interest. As soon as the bank does that then it can add the loan to the assets side of the ledger.
And here's the problem for the banks.
If they don't invest the money then they are immediately missing out on revenues and profits as they'll still need to pay at least some interest out to depositors.
It means they can't stop lending out money to enable them to make their balance sheet stronger.
Take a look at ANZs 2008 annual report. Net interest income for the year was $7.8 billion. That sounds like a lot. But when you consider that net interest income represents almost half of the ANZs gross profits, and the bank's net profit was just $3.3 billion, they don't have that much room to move.
Besides, the banks also need to take into account the competition. They can't suddenly cut their deposit interest rates unilaterally otherwise they are in danger of not attracting new depositors and potentially losing existing depositors.
And that would mean giving back money which they've supposedly loaned to borrowers. In reality it would mean drawing down on their capital requirements.
Of course, like any ponzi scheme, once it starts it's very difficult to stop. The assets on a bank's balance sheet are only as strong on the property market that's propping it up.
So, like Brewster's Millions, the banks have to keep giving out money. Only, as quick as they give it out, more keeps flooding in the door.
And they're too scared to turn off the tap. Because as soon as the tap is turned off on the property market - which it will at some point - the assets on the bank's balance sheets will no longer be propped up by property. Instead they will be propped up by the ability of borrowers to repay.
There's your problem. If history is any indication of what the future has in store, the 30% plus gain on the stockmarket shouldn't be viewed as a sign that the economy is strong.
The unemployment level is still closer to the low than it is to the forecast peak. And rising prices as indicated by yesterday's numbers from the Melbourne Institute indicate that times will get even tougher for those who lose their job and the cost of living continues to rise.
But what about the deleveraging nonsense that I alluded to earlier? Well, let's take a look at the Reserve Bank of
In the RBAs table of financial aggregates released yesterday there has been no deleveraging at all... With the exception of personal credit, every type of lending has reached a new record during the last financial year.
Even more than that, most of the record lending has been achieved during the last six months - exactly at the time when we've been told the world economy is going through a period of massive deleveraging.
The facts singularly point to the opposite. The banking system is more leveraged to debt than it has ever been. And you can bet that if this is what the banks are showing on their balance sheets, the exposures from their off-balance sheet trading will be back to pre credit crunch levels too.
The claims, not just locally but internationally, that the global economy has seen the worst of it, and that green shoots are appearing, couldn't be further from the truth.