muses of the moment

May 26, 2010

Excellent video from Sprott

Groovygirl gives three cheers for this excellent video!! This video has it all, why we should care about Europe crisis, the coming impact of sovereign debt, and why you should own gold. Excellent….(2 videos at 10 min. each). Click here. Listen to this video twice, three times. All the information you need is there to understand what is happening and will be happening in the next 5-10 years.

groovygirl says: you do not have to be a financial economist to understand what is going on, it is common sense. What you do have to understand: what we have been taught about how economies work will be blown away. How you have been taught to invest (by the financial industry) in the last 30 years will not work in the next 20 years.  A major paradigm shift is happening now.

Side musing: As always, Max Keiser articulates our anger for us : Jim Richards makes an appearance to talk about fraud. Click here.

7 Comments »

  1. Hey GG,

    You always provide good reading materials! Keep up the good work.

    Check out: Youtube – Chinese dumping worthless currency for gold

    Take Care//RS

    Comment by Anonymous — May 26, 2010 @ 4:30 pm

  2. Thanks for the video! In the last three minutes of the interview, Eric explains a banking system matter that I have really wanted to know. He speaks about the 20-1 ratio of loans to cash on hand, and what happens if asset valuations go down by 5 percent. Then he goes on to observe that the Friday night bank failure show reveals that underwater banks have lost that 5 percent many times.

    Groovy girl, could you comment or explain further? It’s at the 9-minute mark of this link:
    http://watch.bnn.ca/squeezeplay/may-2010/squeezeplay-may-20-2010/#clip304448

    This is my rough transcript:

    “I’ve always believed that the structure of the banking system is incorrect, that they’re too levered. They all have minimum 20-1 assets, which means for every dollar they have, they’ve got 5 cents of capital. And of course they’ve got a dollar of liabilities in terms of deposits that they’ve got to pay. Now if that dollar of assets falls by 5 percent, they’ve got no capital. There were certainly times during the last few years when absolutely for certain, EVERY bank’s assets were down 5 percent, I mean whose kidding who? Some stocks were down 40, Bonds might have rallied. Any commodity, any loan, any mortgage, whatever, if you tried to sell it, you were going to lose more than 5 cents.

    So I’ve always worried about the structure of the banking system. On Friday “bank failure night” in the U.S., we only look for two data points. What were the assets that the bank had, and what did it cost the FDIC? Typically if the assets are X, and they used to have .5X [did he mean .05X?] of capital but that’s gone, obviously. And then they say it cost the FDIC .25 of X. So they’ve lost their capital 6 times over. All these banks that have failed. And they just go down the line. I don’t know how many more there are out there, but it’s a problem.

    God forbid that the market starts going down here. God forbid if the U.S. interest rates went up and people started losing money on bonds. That would really be a problem for the banking system. We have the markets going down, we have the bonds still hanging in there.”

    Comment by C. D. — May 27, 2010 @ 8:27 am

  3. C. D.

    Yes, he meant .05 mot .5. I am not sure where he gets “losing their capital 6 times over”. Maybe he is looking at the bank’s overall assets, with fees and such, as it’s financials actually look as it is turned over the the FDIC/sold to another bank.

    What he is saying is that the banking system is insolvent…..all banks are insolvent because the assets have contracted more than 5%. There are 2 reasons why the banking system has not fallen off a cliff: the government changed the rules for accounting and the banks can make up the value of their assets and people don’t understand that the banks are broke and have not taken out their money en masse (or a bank run). The fractional reserve banking system did not start out at 5% reserve, it was more like 50% and slowly made it’s way down. Sprott would probably feel more comfortable at 20%, I know I would.

    “God forbid that the market starts going down here. God forbid if the U.S. interest rates went up and people started losing money on bonds. That would really be a problem for the banking system. We have the markets going down, we have the bonds still hanging in there.” THIS WILL HAPPEN. The governments possible reactions will be print more money to feed banks and/or bank’s depositors, control the amount of cash one can withdraw, deny there is any banking problem, and nationalize the banking system.

    “Any commodity, any loan, any mortgage, whatever, if you tried to sell it, you were going to lose more than 5 cents.” This is why the only buying going on right now is the government buying mortgages or other debt ridden investments. Everyone (individuals and companies) are either going into bankruptcy because they can’t keep up with the debt interest or they are just hanging on hoping that asset prices will go up and they can sell.

    The banking system as it is not is not working. The Friday failures do not show the whole picture. The banks stress tests that the government did in 2008-2009 are based on growth in the economy, not happening. It is a shell game right now. At some point someone will lose. The only thing that is holding it together right now in the US is a demand for bonds in USDollars because it is the least worse investment compared to Europe. That will not last forever.

    I hope this helps, please ask more questions if I did not clarify,

    Thanks for reading,
    gg

    Comment by totallygroovygirlfriday — May 27, 2010 @ 9:18 am

  4. Yes I thought he mean .05X also. So you add the .05X “reserves” to the .25X additional losses, and you have .30X. That’s my guess about the six times factor.

    It sounds to me that he is using the 20-1 ratio as a starting point to illustrate how thinly stretched the entire financial system is.

    Somewhere over the past winter I read that 50-1 ratio has become common. Like Switzerland, Italy. So that must be the case for the “too-big-to-fails” also, no? For me this corresponds with the allegations over the silver market fixing and Jim Sinclair’s “quantitative easing to infinity.”

    Thank you so much for your common sense alerts. Your column is required reading for me, a non-financial person.

    Comment by C. D. — May 27, 2010 @ 9:59 am

  5. C. D.

    Yes, you are probably right about the way he got to the 30%. Thanks for reading C. D.! These very low ratios will not be a problem until people start trying to get their money from their banks, from their mutual funds, from their 401ks. Then we have a big problem. Expect major spin from the media/government when this happens. It is happening in Greece/Italy right now. That’s why you can’t have more than a $5000 euro transaction at a time.

    There are actually silent bank runs happening all the time now, that’s what lead Germany banning naked shorts. But it is on a much larger level in sovereign debt. So if it doesn’t effect people withdrawing cash from their ATMs, it is not a concern for the average joe.

    gg

    Comment by totallygroovygirlfriday — May 27, 2010 @ 12:05 pm

  6. Again gg, thanks. Eric Sprott’s observation compels me to think that the high powers have gone all-in for liquidity, regardless of cost. Maybe infinite liquidity is why Martin Armstrong argues not to expect the 1929 depression. – C. D.

    Comment by C. D. — May 29, 2010 @ 12:55 pm

  7. C. D.

    I agree with your conclusion.

    gg

    Comment by totallygroovygirlfriday — May 29, 2010 @ 5:02 pm


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