“Zat is alrairght, I der not work zair any moowerr”
…and US money supply becomes a mass suicide waiting to happen.
Eighteen months ago, former French Finance Minister Christine Lagarde said that France would “grow at 2% per quarter in 2010, and then accelerate again during 2011”. Throughout 2010, she was wrong by a factor of 80%. Growth finally peaked at a miserable 0.9% in 2011 Q1, and today figures were released showing it at zero.
Ms Lagarde, who now runs the International Monetary Fund, also dismissed France’s deficit as “something we have entirely under control”. Earlier this week, close ally and French President Nicolas Sarkozy demanded an inquiry into how and why France’s finances had become “a mess”. He could always ring the IMF and ask.
Talking of the IMF, this newly august and DSK-free body released a paper last week with little or no fanfare. Perhaps it feared that publicity for the paper might evoke mass hangings of all those US bankers lying through their teeth about how safe their banks are; I don’t know, but the findings are terrifying. The study was about what big multinationals gaining huge cash mountains via ZIRP and QEs are doing with the ill-gotten gains that were meant to be spent on investment and hirings…as opposed to shareholders and bonuses.
One thing’s for sure: they aren’t using bank accounts – because they’re smart, right? Instead, they sought alternatives that were almost as liquid….but safer than uninsured bank accounts. I won’t go into these in any detail: suffice to say I never understood why corporate accountants did this, because most of the products are ‘guaranteed’ by banks anyway). But the point is that – literally – trillions of dollars which ought to be in the M2 (ie cash) banking system money-supply aren’t there at all. Thus making even the idea of QE3 somewhat daft.
Once again we see the backwash from lunatic *anker activities, in that nobody trusts the banks any more: not even their erstwhile partners in crime. (Go back to your A-level Economics and you’ll see that, um, banks use trust to persuade people to deposit money with them).
To be exact – and I’m pretty sure I’ve got my numbers right here – over 60% of ‘cash’ in the US corporate sector is now no longer available for what it’s supposed to be doing: freeing up bank loans to help small businesses expand, and the housing market recover. But even dafter, rewind now to the previous paragraph, and note that banks are supposed to be guaranteeing the sort of investment products where the corporate cash hoards are sitting…..and you will get that same old feeling of being at the Mad Hatter’s tea party.
One possibility and one weird effect emerge from this. First, panic will set in among the dingbats who haven’t spotted the inner illogic of what they’re doing, when they work out that the banks cannot possibly pay out to the investors whose money they insured….because their own money is uninsurable. (Yes, it truly is THAT mad).
And second, those with a brain who aren’t doing the money-markets thing are…guess what? That’s right, buying US debt on a low-yield basis for its safety. In other words, flooding into Treasury Bills.
I feel much better having learned this: not because it’s anything but bad news, but because until I read about the US debt outlet for the money, I’d been thinking for a week or two that I was monumentally thick. How come, I kept asking myself, if the US is in such deep sh*t here, their Treasury Bill sales are still so healthy? And the answer is the oldest business rule in the Book of Mammon: supply and demand.
So just to summarise, what you’re left with is this. The dumber corporate finance directors are buying packaged products they think are safer than bank accounts, but those products are insured by the same banks they fear to be with. And the icing on the cake is, this keeps money away from the recovery it’s supposed to be funding.
Meanwhile, the wiser bean-counters are buying US debt because they think it’s safe. But as things get worse, they’re going to see it isn’t safe at all. (After last week, it’s highly likely the penny has already dropped).
The range of ways in which the mammories on all this could be pointing skywards within a year or less are mind-boggling. I’ve already thought of five, but it’s Friday night and just not fair to send you all home obsessing about them.
Enjoy the weekend.
The Slog 