Wednesday, 15 September 2010

It's the economy. And confidence. And banks.

QE will only work up to a point, we're told; the point at which actors in the markets continue to have confidence in it. Once that confidence is lost, you can pour billions into expanding M with little or no effect.

And without consumer confidence, investment may outstrip demand and lead to overcapacity. Goods and services need buyers, and reasonable credit and money transfer arrangements oil the wheels of commerce. But now the IMF is fearful that a growing wealth gap within all Western economies is driving down confidence and consumer demand. We're told the last time the wealth gap was so large was in 1928 - 1929.

Now I've mentioned on here before the global derivatives total of some $500 trillion created by the banks and described it as 'worthless'. In fact, as one of the few well-informed rather than well-opinionated fellow bloggers has pointed out, it's only partially worthless.

Latest estimates suggest that UK banks are holding only about $10 trillion of worthless derivatives. A modest total, just four times the UK's entire annual GDP. And they didn't accumulate those worthless derivatives by running current accounts and administering direct debits for gas bills; the $10 trillion is the result of their buccaneer banking activities.

Now there are two ways of getting rid of this problem. They can wait until inflation erodes away the value of the liability, or write it off. But at the same time, they need to maintain share value and investment in the banks. That their retail banking activities are tied up in the same firm that holds the $10 trillion of shite, and it's unthinkable that anyone would let the retail banking sector fail, helps keep confidence and investment. This is why there are petulant screams of outrage from everyone in the financial sector every time anyone suggests splitting retail banking from the dirty stuff.

But the problem is, the public as a whole, as opposed to the narrow world of the stock market, doesn't have confidence in the banks. And doesn't see why they should carry the liability of the $10 trillion of shite that has funded billions in bonuses for the sector each year.

The collective wisdom is that bankers are the villains, and that view is unlikely to change.

1 comment:

Weekend Yachtsman said...

"you can pour billions into expanding M with little or no effect"

Little or no effect except, of course, for rampant inflation.

Which may well be the plan: it works to rob the prudent and reward the feckless; since the prudent have the money and the feckless have many votes, the State often favours this "solution".

Buy gold. Or rather, you should have bought gold three years ago.