November 30th 2011 – Being economical with the economic truth

This is the statement that appeared on the websites of all six central banks earlier today.

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.

And if you believe that you’ll believe anything. What they really mean is that the global financial/banking system is at the edge of the precipice or, in the case of large parts of Europe, already over it in true Wile E. Coyote fashion. If this were to be just a liquidity crisis and if the additional liquidity they intend to supply did end up in households and corporations then all would be just fine. But it isn’t and it won’t.

Most of this liquidity injection is for the benefit of European banks who can’t borrow to fund their day to day liabilities in the interbank market. The banks don’t want to lend to each other, even overnight, because they are terrified that one or more of them won’t be there to repay the loan in the morning. And why is this? Because most of them are insolvent. Fractional reserve banking almost guarantees insolvency when things get tough without the additional burden of holding large swathes of European sovereign debt of dubious quality.

So now that the central banks have provided yet another temporary back stop the equity markets are on a tear – “risk on” in the jargon – and the Santa Claus rally is off to a flying start. All that new liquidity that was supposed to find its way into loans to households and corporations ends up in the markets as was always the intention. This swap arrangement has been extended until February 2013 so they are buying some time but all the fundamental ills remain; sovereign debt, bank solvency, derivative obligations, economic growth, voter dissatisfaction and ever increasing government control over our daily lives “for our own good”.

When Jean-Claude Juncker said that, “When things get serious we have to lie”, maybe he should have said that we have to be economical with the economic truth. Anyone who gets a regular ear bashing from Nigel Farage deserves a miniscule degree of sympathy but certainly no more than that.