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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Bill Buckler
November 5, 2008
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The global sell-off in the stock, real estate and commodities markets is well documented. The huge deflationary effects this has had are enormous - forcing the global credit money system to contract its volume of credit money in circulation. This is a literal monetary deflation.

Failures Expand From Lenders - To Systems - To Nations:

This credit money contraction is now rolling into its second stage. Today, it is the lenders right around the world who are going broke. That is accelerating the monetary contraction and deflation to an even greater extent than before. Early in this second stage of the credit contraction, it was individual lenders being rescued. More recently, it has been entire national financial systems which have been rescued. Ahead lies the rescue of entire nations on the edge of bankruptcy. The Ukraine, Hungary, Pakistan and Iceland are now talking to the IMF for bailout loans.

And in the face of all this, the US Dollar is soaring?!! It is climbing because the act of deleveraging means that earlier loans have to be paid back. Most of these loans were made in US Dollars. That means that the US Dollar has to be bought before the loan can be repaid. When the global leverage was being piled on, it was the US Dollar which fell as it was being sold to acquire other assets. Now, in a global reverse, it is the US Dollar which is being bought - so it is going up in value while the leverage is brought down as all these earlier loans are being paid off.

The Very Temporary US Dollar Upside:

The present upswing in the international value of the US Dollar will last as long as the deleveraging that is taking place around the globe. Once that ebbs away, the loans that have now been repaid will have the effect upon the US credit money system of contracting it even further, aggravating all the second stage effects of a literal credit money deflation. That's the stage where huge numbers of lenders go broke.

When events get to this next stage, the world will see a fast falling US Dollar while at the same time, many of the US medium and smaller-sized commercial banks will go to the wall. At present, many holders of US Dollar financial assets are using this US Dollar rally to sell out of their US investments. They stand ready to sell the US Dollar when the rally peaks. Foreign banks hold $US 12 TRILLION in US Dollar assets and liabilities. Their records now show that they are in the process of deleveraging.

The Literal Word From On High:

The blunt truth was stated in purely conversational tones, but the words were deadly and they could not have come from a more important person. The Bank of England's Governor, Mervyn King, said that the UK banking sector had been "close to collapse" . Earlier this month, the UK banking system was closer to collapse than at any time since the start of World War I, Mervyn King had warned. That is systemic.

Global Monetary Double Jeopardy:

Two interlocking financial events are currently taking place on a worldwide basis. One is deleveraging, which has massively increased the global demand for US Dollars. The other is a second stage credit contraction which the monetary authorities in the US, Europe, Japan, the UK and Australia are fighting tooth and claw in increasingly desperate attempts to rescue their entire financial systems.

Unlimited US Dollars From The US Fed:

Bank of England Governor King's remarks nail the issue. But the real situation is in fact very similar in most of the West's banking and financial systems. As part of all the efforts to flood the financial system with cash, the US Federal Reserve made unlimited funds available to other major central banks early on Monday, October 13. The Fed did this so that the other central banks could inject money into banks in their countries and ease the shortage of US Dollars they face. But that set up the next problem. No sooner are unlimited US Dollars in the hands of these other central banks than they re-lend them to their commercial banks. Then, these new unlimited US Dollars are used to de-leverage the credit money systems as the huge overhang of earlier loans are paid off. THIS CONTRACTS CREDIT! The Fed is now in the strange position where the more unlimited US Dollars it pumps out, the more it assists the deleveraging which is sending the global credit money system into credit contraction. These are now transforming themselves into genuine second stage credit DEFLATIONS. If the Fed had NOT done this, many of these earlier loans would have defaulted, tearing the lenders' balance sheets apart. That would have brought about an instant second stage credit deflation and sent all the lenders broke.

The Same Credit Money Problem On A Smaller Scale:

Today, even in the popular press, terms like "Billions" and TRILLIONS are thrown about with abandon. But what is today an interlocking sequence of global financial problems can also intellectually be seen in the small, so to speak. In principle, it is the same problem which any credit money system always has.

Keep in mind that when any borrower walks into a bank and pays his loan off, not only does he cancel the amount that was earlier credited to his account but he also cancels a liability of the bank - the sum it had earlier credited to his account. Repaying the loan contracts the total sum of credit money which the bank has issued as a loan. It also deprives the bank of the income it earned on the interest paid on the loan. Cancelling his liability lowers the size of the bank's total

liabilities. That makes the bank financially safer than before if it keeps the same amount of capital behind its loans. But if many people start repaying their loans to this bank, they would contract the credit MONEY it had earlier issued as loans. When that goes far enough - it amounts to a credit money DEFLATION.

For example, if over a period of a few months, a bank's sum total of credit money issued contracts from a fictional 1000 to 700, that would have a genuine economic effect. It would leave some local prices too high to clear in the area where the bank's customers live. Some of these prices would break on the downside in an attempt to find the new lower clearing price. That would take valuations of all other like economic goods down with them. If some of these other economic goods have been put up as collateral for other loans from this bank and if their value falls below the size of the loans issued against them, the lending bank faces write-offs on its balance sheet and losses of its capital. If a lending bank loses all its capital - it goes broke. If it goes broke, it makes all its other deposits VOID!

Pumping Madly Against The US Deflationary Tide:

We live in unprecedented monetary and economic times. Consider, for example, the tally of what the US has already tried to pump into its monetary and financial system since the global credit crunch began back in August-September 2007. US funds have already been committed for everything from the bailouts of Fannie Mae and Freddie Mac to Bear Stearns and the US insurer American International Group (AIG) to the $US 700 Billion financial rescue package approved by Congress to providing guarantees to backstop other selected US financial markets. So far, the total comes in at an estimated $US 5.1 TRILLION! Add another Congressional "Stimulus Mark-II" package estimated to reach $US 300 Billion and the Fed's package of support of $US 540 Billion for the money market mutual funds.

Where is all the spending money to come from? Simple – new BORROWING.

The US money market funds broke down after a US fund named the Reserve Fund had to tell its customers that they would get less than a full US Dollar back on their investments. The US money funds hold about $US 3.45 TRILLION in assets. For decades Americans have seen them as THE place to park their ready cash, to be called upon as needed. But the failure of one fund led to a flood of redemptions which eventually reached about $US 500 Billion, according to the Fed. The huge outflow forced the Fed's hand, it had to interpose itself in the financial gap with the new package of $US 540 Billion.

If anybody is wondering about where the Fed's money is coming from, it is being PRINTED.

A Closer Look At The US Federal Reserve:

If the Federal Reserve was a bank like any other, it would be shut down. But it is not. The Fed is a reserve bank and for them, the rules are different. The latest data published by the Fed itself is hair raising. It shows that "new" Federal Reserve credit surged by $US 245 Billion in a week to reach a new record of $US 1.740 TRILLION. This is fantastic enough, but the Fed has increased its credit issuance in the last five WEEKS by $US 851.8 Billion. In the process, it has doubled its balance sheet!

Fed "new" credit has expanded $US 866.6 Billion so far this year, that's a 123 percent annualised rate!

What the Fed is desperately trying to do here, using all the means at its disposal and new ones it invents by the week, is to stave off the "second stage" deflation where literally tens then hundreds then thousands of small and medium banks and other lenders start to go broke. In doing so, they undercut, in the sense of making extinct, all the other depositors they have on their books.

In effect, the Fed knows that the US financial system has already had a version a bank run, though in this case it was a $US 500 Billion run out of the money market funds. As best as it can be measured at this time, most of the $US 500 Billion hauled out of the US money market funds flowed straight into US Treasury short-term paper for "safety". With this illustration of the mood which the American public are now in, it wouldn't take much more before some fragile US commercial banks face bank runs. This is what the Fed fears the most. This would signal the fatal "stage three" deflation. In a fractional reserve banking system, only a fraction (in the US case at most 10 percent) of the depositors' money in the banks is there in cash to redeem a customer closing an account in cash. The other 90 percent would get nothing.

In terms of plain and simple logic, any fractional reserve banking system is inherently unsafe. It is financially unsafe because for every cash Dollar the public has deposited in the bank, the bank thinks itself free to issue loans - credited to borrowers' accounts - to the tune of another nine Dollars. These other nine Dollars only exist on the books of the bank! Obviously, it would only take two of the bank's customers to demand a cash Dollar each to break the bank - proving its financial insolvency. That is bad enough. But to superimpose on top of the fractional reserve system a credit money system in which the money lent by crediting it to customers' accounts IS THE MONEY is the height of insanity.

Ó 2008 – The Privateer

(reproduced with permission)


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