Koos Jansen
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Koos Jansen
Posted on 13 Feb 2014 by

Guest Post: Opinion On Capital Flows

The flows of economic and financial capital determine who is poor or rich (prosperous) at any given moment. Capital, travels around the world in search for profits and always comes back home. Let us focus on one particular aspect of capital in the financial globalization. There is too much capital for too little physical economy. This disproportion rises systemically just like the growing mismatches of global debt (and stock markets capitalization) versus GDP. These masses (XX trillions) of debt capital (hot money) are systemically backed by less economy and more finance. High net worth Individuals have to manage a fast rising volume of already +/- $ 50 trillion.

Today, there is a massive flight to liquidity, driven by the fears of capital safety. For the time being, the dollar capital flows are not yet showing any signs of loss of confidence, when leaving fertile grounds and coming back home. The $ bonds are not yet declining! Forward guidance is still in control of dangerous volatility and debasement risks (expectations). The world’s gigantic capitals can still move (refuge) into ever expanding $ debt paper.  $-bonds can keep up the appearances of quality.

Economic capital is still increasingly flowing into the giant pool of financial capital! Evidence that there’s something rotten in the global debt-driven economy. We are heading for a depression if this has to continu. All the exuberant monetary expansions never fully reached the physical economies.

Confidence in the pool of financial capital has to remain  in high spirits, because there is no alternative. A very uncomfortable and depressive catch-22 situation. The more so as the volume of financial capital is growing (inflating) disproportionally versus tangible real assets. Where will the next capital flight go to?

At present gold prices, the physical gold market is much to small to receive any inflow from the enormous volumes of financial capital. How can financial capital possibly buy significant amounts of physical gold if China is accumulating the scarce available metal. Financial capital is forced to stay in finance (financial industry)  and remain confident that this market stays liquid and safe.

The exact name for the present situation is SYSTEMIC DEBT CRISIS. How long can the present liquidity-confidence and safety beliefs in the economy & finance, possibly be maintained? The enormous mismatches are not declining.

The relentless rising mismatches and disproportions will non-stop erode and undermine the much needed confidence in the system. All capital will increasingly feel un-safe and experience it the hard way, without any possible escape route.

What if the gold price rises significantly ($ xx,xxx/oz) and the physical gold market becomes an alternative for 1% of financial capital inflow… Then a GOLD VALUE STANDARD is born and maturing.

Will the gold paper market soon become too small for financial capital to flow through…

Written by 24 carat

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  • Pain d’Or

    Spot on !
    Without even taken into account the OTC – Derivatives,
    who are dwarfing still up north of the $ 1,5 Quadrillion.
    When it starts moving, history will be written.

  • Michael

    Excellent

  • Michaelprotects

    Yes, gold should assume its rightful place as the world’s only true money and be revalued accordingly. 10k is only a start when this takes place, and the majority of the world’s population wants it to occur.
    Not to leave out silver, which would serve as currency, while gold represents wealth. Both are worth 50X their current paper price.

  • hambone

    Given that the pendulum of “foreign” / Fed vs. domestic (US non-Fed) purchases of Treasury debt has become so skewed and so dependent upon these “foreigners” to maintain their purchasing in the wake of the Fed’s taper, seems a good time to determine who will buy the new issuance and who will rollover all that existing debt. And why.

    Background

    US has $17.3 T in Treasury debt.

    $5 T is in intra-government debt (SS and the like). This portion is barely increasing as SS surpluses have ceased but the government will continue to roll this over without any issues.

    That leaves $12 T in public outstanding debt.

    Nearly $2 T is in ultra short duration Bills that can be viewed almost as a cash substitute. These are held by institutions and the like and although yielding nothing to next to nothing (and very vulnerable in an interest rate shock) are likely to continue to find a home as a cash substitute.

    That leaves $10 T in Notes / Bonds (plus TIPS) comprising all the medium to long term (over 1yr to 30yr) Treasury debt. This debt was primarily held by domestic buyers up to ’00 (pensions, insurers, etc.) but since that time to now, this has radically changed.

    Reliant on the good will of “Foreigners”

    While the public outstanding debt has increased from $3 T in ’00 to $12 T+ now, the total amount owned by domestic sources has remained relatively unchanged. So, if $9 T in debt was added and relatively no more was purchased by American sources, who bought it? “Foreigners” and the Fed combined to purchase approximately 80%-90% of the increase of Notes / Bonds. “Foreigners” now hold $5.6 T and the Fed $2.25 T in Notes / Bonds…or in other words, they hold $7.85 T of the $10 T medium/long term US debt.

    The Fed’s motivation is clear but why “foreigners” have bought and continue to buy and hold ever greater amounts of ever lower yielding US debt that is sure to be paid back in devalued US currency is a vexing question.

    Some may do it to weaken their currency or park large dollar trade surplus’. However, Luxemboug, Belgium, Ireland, Singapore, etc. etc. are truly mysterious gigantic holders of Treasury debt.

    Now that the Fed has begun it’s taper and for sake of argument will continue to fully taper to zero monthly purchases and ultimately will stop rolling over the $2.25 T in Treasury’s it currently holds. Who will buy these $10 T and still growing US Treasury Notes/ Bonds? Domestic buyers have shunned these Treasury’s due to their extremely low yields and purchased relatively more attractive options. Absent yields moving up significantly above inflation, domestic buyers will maintain their boycott.

    This leaves “foreigners” to rollover their $5.6 T and buy nearly all new issuance ($500 B + annually @ the minimum) and subsequent to the Fed’s taper, begin buying up the $2.25 T of notes/bonds the Fed will not continue rolling over. What is being suggested is that “foreigners” will grow from the current 50%+ and become 80% to 90% owners of all medium/long term US debt. And the suggestion is they will continue to buy despite yields remaining low and despite the $ becoming an ever lower % of global trade as Euro and Yuan based trade continues increasing.

    Who are these benevolent “foreigners”? According to the Treasury’s TIC report, ”foreigners” is simply the term TIC applies to Treasury’s purchased / held in “overseas custody accts”, the data is provided by US based “custodians”, data “may not be attributed to actual owners”, and ”data may not provide “precise” accounting”… (see TIC FAQ #7 at: http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticf…).

    In essence, the TIC report explains how many Treasuries are purchased and when and where they were purchased (Belgium, HK, China, Canada, etc.) but does not claim knowledge of “who” (or that who’s nationality) purchased the Treasury’s. To wit, a German or Japanese or American can purchase Treasury’s in Canada or Luxembourg or the UK and these purchases are attributed to the country where the purchase occurred, not the nation of the purchaser.

    So What???

    The “red flag” in this was the Fed tapering. The Fed in it’s recent QE3 were buying nearly all medium term Notes / Bonds issued (up to their 70% limit) plus significant % of rollovers. But on their stated exit from QE, “Foreigners” who double the Fed’s total holdings, should have seen rates would be rising and prices falling absent this buyer…typical “investors” would have been selling to front run the Fed’s exit. The Fed would have known this taper would cause a rate shock. But no selling…no yields to the moon. Rather “foreign” holdings have hit a new record high as of December. Seems these “foreigners” are not typical “investors” and upon the exit from the “market” of a buyer of 70% of issuance, they are unconcerned. Typical “investors” would be concerned w/ the likelihood of losses.

    I have a sneaking suspicion that debt ravaged Ireland did not buy $106 B in Treasuries since ’08. And Norway did not add $77 B, nor did Belgium add $244 B since ’08…and on and on. I don’t doubt the Treasury’s were purchased nor that the purchase occurred in these locations…I simply question where the money came from and who actually owns these?

    I have a nagging feeling there is a shadow QE at least as large as the on the books QE and maybe this shadow QE is double the size of “QE”. Whether this is via currency swaps, ESF, Fed authorized agents, or whatever manner…there are likely many more dollars than acknowledged to maintain a “market” for ever more US treasury debt @ ever lower yields. This would also seem consistent w/ collapsing velocity of money since new money isn’t loaned or multiplied…just conjured and retired.

    Tell me why this is crazy, impossible, unlikely, or whatever.

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