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Digging Into The Mother Of All Grande Enchiladas

Posted in Cryptojournalism, economics, politics with tags , , , , , , , on June 30, 2011 by The Cryptojournalist

And God said he should send his one begotten son to lead the wild into the ways of the man – Tupac Shakur

All along, I should have known it could inevitably come to this.

2pac saw this coming years ago

Before we get to Hobo With A Shotgun or the Bank For International Settlements Annual Report, it’s time for a trip down memory lane.  To Boston, at the beginning of 1999.  It was the second semester of my freshman year, and I was about to take a class that would blow the port holes out of the submarine deep within my id.

Topics in Myth was the class and it was the stuff of legends.  One of the luxuries of studying communications was a lot of semantic get out of jail free cards.  Rather than taking a drab English class, Topics in Myth would suffice as an English requirement.  Score!  I didn’t have a clue what I was getting into.  Let’s start with Scorpio.

Whoops, wrong Scorpio

One of the grand perks of Topics in Myth was the class was taught once a week in a three hour block.  First day of class, we watch Dirty Harry.  Kids, if you were born after 1987, it’s Clint Eastwood at his best.  His evil foe is a no-goodnik by the name of Scorpio.  One scene in particular was forever seared into my mind from that film.

God bless YouTube, cause here it is.

As you watch it, seems pretty straightforward.  Scorpio hired this guy to beat him up (to frame Harry, but that’s not important now).  Only after the film, when Professor Ruck (Boston University students, take his class.  Mind blowing doesn’t begin to describe the experience) begins explaining thematic qualities, did I realize what I really saw.  Or, what I should have seen.

I can remember his explanation clear as day.  “Note the glove.  Highly eroticized, akin to fist fucking.”

This will only hurt for a minute

Flabbergasted downplays how far that came out of left field.  There were about ten people I knew all sitting in one row together.  The bewilderment that struck everyone was a sight to see.

Without venturing too deep into my college studies, the class was captivating.  For a while, it ruined my movie watching experience (and anyone unfortunate enough to be watching alongside) thanks to constantly picking out Ruckian themes.  Most of which were actually Jungian themes, from Carl Jung.  Ruck had his own unique twists, but it was a lot of Jung from Man and His Symbols.

Anyhoooo, that brings us to Hobo With A Shotgun.  All I can say is thank you Nova Scotia.  Trailer Park Boys, and now this?  Amazing.  For those who put any stock in the notion Americans are the funniest people in the world, give me a second here.  I’m getting a little choked up and emotional having to say this.  *Deep breaths*

OK, I’m here.  Canadians are really the funniest people in the world.  There, I said it.  But people just lump us all together.  Y’know, like how white people generalize anyone from Latin America as Mexican.  People see a funny white guy who speaks understandable English (Lookin’ at you, Great Britain) and they assume he’s American.  Bigots.

Putting on my Ruckian cap to analyze Hobo With A Shotgun, it turns into a hysterical warning.  This is the police state, sans government.  Or so the legend goes.  There is a hospital in Hope Town, but the staff is summarily executed by mercenaries in Thunderdome gear.  One could joke, if they were a cryptojournalist, it’s the equivalent of Mad Max getting an MBA, then getting a job at the World Bank.    A skewed lampoon of what people think is the worst case scenario of the future, that’s Hobo With A Shotgun.  And hysterical.  Quite hysterical.

Which brings us to the BIS Annual Report.  We’re finally there.  If you have not read the recaps of the General Manager’s speech or the Per Jacobsson speech, shame on you!  Go read ’em.  Don’t worry, I’ll be here.

[Smoking a cigarette]

You’re back?  Good.  Before I get into cryptojournalizing (is that a word?  It is now) the annual report, I want to sum up important points.  The BIS in a nutshell.

Take it as you will

Am I saying our money has become nothing more than a vending machine trinket?  Are we all trapped in a virtual plastic vending machine egg?  Will we ever get hoverboards, like promised in Back To The Future II?

There are a few major points the BIS tries hammering home.  Implementing Basel III (which aims to boost capital requirements globally, coupled with stronger regulation), improving macroprudential global financial regulatory infrastructure, taming interest rates and warnings for central banks and sovereign governments to reduce the debt they’re holding is the acorn-sized nutshell.

Some of the macroprudential infrastructure is beginning to take form.  The Financial Stability Oversight Council is America’s player in this game.  We’re locked in and ready to go.

Here I need to note the Bank for International Settlements Terms and Conditions from their website.  There is a 400 word limit on how much can be taken for reproduction, and I respect that.  I’m going to work through as much of the report as I can in 400 words.  We’ll get to the rest in due time.

This is taken sequentially.  If you have the patience and a pot of coffee brewed, here is the entire report.  I should also mention I am not an economist, I’m a cryptojournalist.  If I misrepresent any salient concepts or do not properly frame some policy, please point out in the comments section where I am wrong.  My grasp of mark to market and other technicalities of the financial system are shoddy.  Hopefully I don’t fuck this up royally.

Do you want to know what people in the biz are forecasting for the global economy?  I know you really don’t, but humor me:

…global economy has continued to improve…emerging markets, growth has been strong, and advanced economies have been moving towards a self-sustaining recovery…would be a mistake for policymakers to relax. From our vantage point, numerous legacies and lessons of the financial crisis require attention. In many advanced economies, high debt levels…burden households as well as financial and non-financial institutions, and the consolidation of fiscal accounts has barely started.

I’m not sold.  On any of this, save the fact the fiscal accounts consolidation hasn’t begun.  The most recent unemployment numbers betray a self-sustaining recovery in the United States.  Three straight months of the American economy losing 400k jobs a week is not an economy moving towards self-sustained recovery.  The first steps towards this consolidation is taking place in slow motion.  Remember how I quipped central bankers would be encouraged concerning the news of Public Employee Federation layoffs in New York State?  That’s the prescription when the prognosis calls for consolidation.  Fat trimming.  Loose end tying.  Bud nipping.  You see my point.

Even stranger is the next action point, which runs counter to everything I assume to be true about banking:

sooner…advanced economies abandon…leverage-led growth…sooner they will shed…destabilising debt accumulated…return to sustainable growth…time for public and private consolidation is now.

Abandoning leverage-led growth?  While we’re at it, how about fish stop swimming in water?  Grass can begin to eat cows.  The whole of all banking worldwide is based on fractional reserve banking, which is in essence the leveraging of money.  Were advanced economies (most notably Britan and the United States) to end the practice of leverage-led growth, there would be nothing left.  That’s my rampant hyperbole peeking out.  There would be very little left.

I cannot even think of an equivalent aside from Galileo.  Galileo.  We are not prepared for heliocentric banking.

Shedding that debt is another interesting theoretical proposition.  Sounds great on paper.  But where’s the buyer?  I’m not even asking that rhetorically.  If governments and central banks looked to sell these assets, who would, err, could emerge as a buyer?

At times, the report hits the nail on the head:

…current monetary policy settings are inconsistent with price stability…

They know the U.S. and China are in a long, slow, deliberate showdown over the currency peg.  The renminbi should appreciate, the dollar depreciate, but either making a move jeopardizes both economies.  Instead, they dance.  There’s an illuminating video documenting the nuanced back and forth between the two powers.

If you’re confused, Fat Joe depicts China; Young Weezy, the United States.  Scott Storch is the IMF.  He lays down the beat.

Don’t think the financial realm has been static:

resurgence of financial innovation, with strong growth in new instruments and vehicles such as synthetic exchange-traded funds, commodity linked notes and commodity-based hedge funds.

Wait a tic.  You’re telling me after a savings and loan internet housing bubble, investors are inflating commodities?  Fuckin’ A.  Bubbles: the rhythm of our time.

Julian is not amused at the news out of Basel

Oooooh, sorry.  Jumped the gun on my punchline:

For several commodities, low inventories exacerbated upward price pressures, while increased investor interest in commodities as an asset class may also have played a role.

From the horses mouth.

Where’s Wonder Woman and the Lasso of Truth when you need it?

Mr. Bernanke, are you into S&M?

Can you spot the contradiction in this statement?

Central bank accountability for monetary policy actions is now heavily based on transparency…transparency will also be needed for financial stability functions. Disclosure of financial stability decision-making and reasoning is therefore essential, though delay in disclosing some elements of the decisions may be necessary if immediate disclosure risks triggering destabilising behaviour.

Of course not.  No contradiction there at all.  Until bad news arises.

Ready for another truth bomb?  Duck and cover!

the financial system will continue to evolve, not least because of business requirements, innovation and efforts by financial institutions to circumvent costly regulations.

In case you’re curious how exactly financial institutions circumvent regulations, Dylan Ratigan provides a great explanation, with Panama as the example,  in this interview with Lori Wallach.  Large institutions search for the most lax locales with the most secrecy.  Which is part of the game.  Leverage and hiding debts and assets is the game.

Ready for another truth bomb?  Make sure you’ve got the children in the bomb shelter:

Some of the (physical and human) capital put in place during the boom years is less useful than originally thought.

Ouch.  Hurts just to type that.  I was chatting with a friend the other day, while still reading this annual tome.  I brought up this point, and he mentioned how he’d never heard the phrase human capital.  Who thinks of humans as capital?  Aside from slave owners in the antebellum South. Aside from being a devastating indictment on the general track of the last decade, it once again highlights the borderline daft language of economics.

Which I adore, but has got to be intentionally confusing, crafted to obscure meaning.  Why use the word invariant rather than constant?  What value comes from subtle word games?

This is one of those cuts deep moments.  Like asking a girl who gives the duckface in every photo why she gives a duckface:

The principal need in deficit countries is an economic recovery strong enough to allow for tighter macroeconomic policies.

Hmmmm….what’s the most grotesque analogy I can come up with for that?  How about……..going through in vitro fertilization to eventually get an abortion.  Is that terrible enough?  Definitely grotesque, but I don’t know if that’s correct.  Although pumping money into a uterus to rip the fetus out down the road does sound apropos.

Hopefully that analogy fosters outrage.  Building an economic recovery in the hopes of squashing the gains is just as outrageous.  And that is the hope.  Destroy and rebuild?  More like rebuild and destroy.

Don’t fret, there’s always brighter news:

…a more positive note, the traditional monetarist concern that the expansion of central bank balance sheets might cause inflation receives little empirical support…..correlation between central bank asset expansion and broad money growth has been even weaker…

Awww, dammit!  I was expecting a positive note.  That is supposed to be good news?  It’s not even close.  Here’s where I hope my economic ignorance does not flare up.

Investopedia explains broad money this way: Broad money is used colloquially to refer to a broad definition of the money supply. Obvious.  Now here’s the problem.  If central banks have huge balance sheets, where’s the parlay?  Ahem, fractional reserve banking.  Am I misguided by believing asset expansion should spur broad money growth?  Or do I have it backwards, and they’ve taken these assets ‘out’ of the market, in a manner of speaking.

Either way, that does not sound like a positive note.  There is either a glut of assets waiting to flood the market (great for buyers, but buyers are scarce) or money is on ice, not finding its way out of bank vaults off the computer monitor.

This recap (or analysis, or farce for that matter) is not meant to merely be a fatalist whistle, weakly piercing the silence.  It’s mostly for the laughs.  Trust the BIS to provide gems, if you’re willing to go mining:

…geopolitical concerns and supply disruptions in North Africa and the Middle East are putting additional upward pressure on energy prices. Although these adverse supply side effects should subside when weather conditions normalise and the political landscape in energy-producing countries becomes more stable, conditions in particular markets may continue to have an effect.

Stable political landscapes in energy-producing countries…..classic!  Try as I might, pearls like that aren’t coming from the keyboard of a cryptojournalist.  I’m not even going to make a Libya joke.

[One Second]

[Two Seconds]

Ba-dum-chee!  Thank you, thank you.  I’ll be here all week.

Besides the gut busters like stable energy-producers, I’m a sucker for broad vagaries.

More research is needed to better understand the impact of financial investments on commodity prices

That speaks for itself.  Sooner the better, but we know that’s pie in the eye.  NOT pie in the sky.  Pie in the eye.  In other words, embarrassing.  My guess?  Regulators get around to this in, oh, 2014.  Earliest.

Think you felt like ish being boiled down to human capital?  Hope you don’t work construction:

large investments that took place prior to the crisis, eg in the construction sector, may prove to be much less productive than was originally expected

Again with the oblique language.  What exactly does productive mean in this instance?  Buildings don’t build themselves.  It’s a hard truth for a lot of people.  You’re taking a bath on investment properties, renovations, speculation….in fact, the only sector of the construction industry that’s booming is the relative niche of soup kitchen fabricators.

Joking.  People don’t care that much.

Time to draw that last bit of blood from this fine hunk of Swiss quartz.

…statistical measures may overestimate the speed of closure of the output gap, structural models may underestimate it.

The output gap is a fictional metric.  Perfect.  It’s a measure of actual vs. potential.  Theoretical money left on the table.  And guess what?  Even that fictional metric is so malleable and ambivalent to reality there is no consensus on how it is to be gauged.  Sounds like a sports book.  Angling national economies towards a hypothetical number where estimates and models generally apply, but are not gospel. Angling betters towards a line where estimates and systems generally apply, but are not gospel.

That was a rambling mess.  Hopefully, it’s been a help in making you more aware of the strange, semantic, rhetorical world of central banking and global finance.  But we’re not quite through yet.  We’ll be back shortly to wrap this baby up.  Till then…