Why are the financial markets shivering again?

The financial district of the City of London. Audiovisual service presse.audiovisuel@consilium.europa.eu. © European Union.

The financial district of the City of London. Audiovisual service presse.audiovisuel@consilium.europa.eu. © European Union.

The major central banks of the world are currently in the middle of a precise but of dubious results surgical operation on capital markets. On the one hand, the monetary authorities aim at supporting the real economy by injecting more cash into the financial system. On the other, they try to mitigate the risky super relaxed monetary policy, by either charging some more interest on the trillions they have already handed to the banks or cut down this perilous liquidity.

On the first account, it’s the European Central Bank which still walks on the monetary relaxation path, while the American monetary authorities, the Fed, now attempts to control the $4.5 trillion which it has injected to banks over the past six years. The other major central banks are divided between more accommodation like the Peoples’ Bank of China and the Bank of Japan and the Bank of England which follows a mid-way policy path between the US and Eurozone.

Markets thirsty for cash

Turning to the market realities of the last few days and weeks, we have seen clearly what the financial giants want. As long as the monetary policy agenda was on the restrictive side, the stock markets in New York, Europe and Asia right from the beginning of the year kept losing trillions off the wuthering highs they had reached one month ago. It became obvious that the super inflated market evaluations of the end of 2015 couldn’t be supported any more. However, between the amazing highs and a complete crash there is a lot of room and the central banks seem to aim their policy at that space.

Supporting the super high prices of stocks was not any more possible, because the bubble had reached its limits and more zero cost money from the Fed would have soon driven the entire system to the abyss. As a result, last December, the Fed started charging something for its money and at the same time contemplating a reduction of the $4.5 trillion liquidity it had fed to banks since 2008. As a result, the losses in the stock markets were hard to believe starting from China. This market has always been prone to exaggerations because it’s largely unregulated. In view of the Wall Street alarms at the beginning of the year though, the Fed rushed to reassure everybody that the $4.5 trillion will stay there and on top of that it left to be understood that the expected new increases of interest rates will be rather restricted.

Mario did it again

Still, all that proved not to be enough to support a controlled deflating of the stock and other markets and last week the oil prices reached $26 a barrel. Unfortunately, or rather in effect, the Fed is unable to again reverse its newly decided rather restrictive monetary policy. So, it was the turn of the ECB to do its duty vis-à-vis the money sharks and feed them with something. To this effect, last Thursday 21 January, Mario Draghi told them that the ECB may inject more almost zero cost liquidity into the banking system.

In detail, while reading his introductory statement at the Press conference after last Thursday’s Governing Council, Draghi said: “The decisions taken in early December to extend our monthly net asset purchases of €60 billion to at least the end of March 2017, and to reinvest the principal…were fully appropriate…Yet, as we start the new year, downside risks have increased… In this environment, euro area inflation dynamics also continue to be weaker than expected. It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March, when the new staff macroeconomic projections become available which will also cover the year 2018”.

Uttering the magic words

This indirect but obvious reference to more cash to banks acted as magic words and stock and oil prices stared gaining a lot of grounds in Europe and elsewhere. This is clearly a game of ‘puff up puff out’ in the balloon of stock and every other related market, including oil and other commodities.

The whole thing is undoubtedly a precision surgical operation aimed at avoiding an uncontrollable burst of the stock market balloons that can send again the global real economy to a new Armageddon. However, the main instrument in this operation is our money handed to banks. It is ‘ours’, in the sense that the real value of all newly printed money has to be supported by the hard labor and the relative poverty of the working population. This is the system’s method to avoid an inflation burst. In reality, it’s a miracle that inflation is kept close to zero, despite the fact that during the past six years the central banks from Beijing to Washington D.C. and from Tokyo to Frankfurt and London have printed and delivered to banks at zero or close to zero interest rates a good number of trillions.

The banks usurp our money

On several occasions this Newspaper has proved that the banks are making hundreds of billions out of ‘our’ money, in quite a magical way. This is how it works. The monetary authorities are vying to revive growth and help the real economy create jobs by injecting all that money into the financial system. However, the only way to do this is through the banking system. Theoretically, the banks would forward this money under the form of cheap loans to the private sector (consumers and businesses) making a reasonable profit. Theoretically again, those loans would revive the stagnant economy.

In reality though, only a fraction of it goes there, because the banks are free to ‘invest’ that money – on their own account – to all and every grey or straight market. In this way they create bubbles all the time all over the global economic system, be it in the stock, commodity and every other market. On this canvas Draghi’s promise of last Thursday for more free of charge money to banks, directly supported the stock and oil prices.

Creating bubbles as usual

In this line of thinking, one may even suspect that in the past the banks had created a super bubble in the oil market. It’s questionable who has pocketed the huge oil super-plus values of the past fifteen years, when the crude after the turn of the millennium was traded at close to $100 a barrel. Certainly the wages of the oil workers didn’t quadruple in that period.

One may also recall that in 2012, that is only a few years after the financial crash of 2008-2010, prices in the market of cereals (wheat, maize, barley) and rice skyrocketed. As it was revealed afterwards, this bubble was also created by the banks, which over-exploited the options and futures tools in the commodity markets. Obviously, after the bankers received some trillions from the monetary authorities, they went out in the staples market to make money in order to replenish their emptied own capital accounts. Certainly, the Thai and Indian rice producers didn’t receive any extra bonus for their produce.

Still they don’t kill them

As things stand now, the only way to restore some order in the economy is to reinstitute the strict controls, monitoring and restrictions in the banking system, starting from breaking the banks in two. Bernie Sanders, the US Democratic presidential candidate said that, “If a bank is too big to fail, it is too big to exist”. Banks had always been closely and firmly regulated but they were ‘freed’ during the last twenty years.

The idea is to break them in two. One part will be good old bank taking deposits and giving loans and not being able to invest on its own account. The other part will be an investment company which will be free to invest its own and other peoples’ money, but will not receive free liquidity from central banks and will be left to rot in a crisis. All financial institutions should also be banned from the commodity markets, as it was always the case in the past.

All in all, until the day the banks return to their normal role, the world financial system will be heading from one bubble to another. And the cost of those disasters is and will continue to be borne by the real economy, the citizens and the small and medium enterprises, which have no alternative for financing than the bank in the corner, which doesn’t exist anymore.

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