The Legalized Accounting Frauds Continue

Some day we will stop this crap.  For now, there’s this.

Bank of America Corp., the lender that has bought back debt to strengthen its balance sheet, said credit downgrades in a hypothetical scenario may trigger demands for about $6.2 billion in collateral.

A two-level downgrade of long-term senior debt ratingswould have prompted the bank to post about $5.1 billion of collateral tied to derivatives contracts and other trading agreements as of March 31, the Charlotte, North Carolina-based firm said yesterday in a regulatory filing. It would have had to post an additional $1.1 billion of collateral if trading partners opted to tear up contracts in a two-level cut.

Moody’s Investors Service, which is reviewing banks and securities firms with global capital markets operations, has said it’s considering downgrades of lenders including Bank of America, ranked second by assets in the U.S. While ratings cuts typically raise borrowing costs and force banks to increase collateral, analysts have said the change was expected.

Give me a break.

There should be zero impact from this because you shouldn’t be able to take on a position you cannot clear, in full with cash, at any point in time.

The only way you can do that is to be able to issue credit to someone unbacked by anything.

Functionally that is identical to counterfeiting $100 bills on your office copier.

Think about it folks.  The VISA card in your pocket spends exactly the same way as does the roll of quarters.  They’re identical in commerce; indistinguishable in fact.  Yet one of them is your past production; you obtained it by performing some sort of service for someone.  The other is a naked promise, unbacked by anything, to get up tomorrow and go to work.

There is only one way you should be able to do the second — someone should have to put actual capital at risk if you fail to perform, and lock up that capital until you do perform, at which point it is released back to them.

Anything other than that is nothing more than counterfeiting the currency of the nation!

This is where the “gold bugs” get it all wrong.  A hard metallic monetary standard does exactly nothing to prevent this from happening.  Nor does “redeemability.”

There is only one way to prevent the economic dislocations that come from intentionally issuing credit unbacked by anything, and that is to prohibit the practice in the official currency of a nation. 

It’s perfectly ok (and in fact desireable) to remove legal tender laws while you’re at it, since that serves as a check and balance on the above behavior.  If I can negotiate debt in whatever I’d like (oranges of a given grade and type, if I so prefer) then I have options available to me if the policing of the monetary function is corrupted.

But the fact of the matter is that until and unless the national currency — defined as whatever taxes are denominated in — is rendered stable in economic terms, which can only be the case if nobody cancounterfeit it — there is no economic or currency stability.

This outright and outrageous fraud is the root of all economic bubbles and their ultimate collapse.  The lending of money that does not exist against nothing but hot air always is inflationary in the monetary sense,always leads to malinvestment, always leads to price appreciation unbacked by actual future prospects for business and always ends in the same way, with collapse of the bubble in question.

There is exactly one way to stop it.  I dubbed it “One Dollar of Capital” a number of years ago.  You can call it anything you want.  But the fact is that until we solve this problem there will be no economic stability and there will be no actual growth in real terms.

We spent close to a literal decade covering up outrageous debasement of purchasing power in real terms — from 2002-2009 — during which there was not one quarter where you had less than a 5% annualized loss of purchasing power against your income in real terms, with the arithemetic average close to 10%!

A 10% annualized decline in real purchasing power over eight years is enough to literally reduce the majority of the population to destitution and starvation!

Thus the housing bubble, the stock bubble of the 2000s and the government bubble on the back of Greenspan’s bubble of the 1990s.  All of the actors involved, including especially Ben Bernanke, know good and damn well that my math is right on this and that if the general population understood what they had done to them they would all be run out of town on a rail.

The worst part of it is that in their outrageously puerile attempt to obfuscate what they did and prevent its recognition in the market they continue to transfer the damage from the private sector, where people took this on and deserve to take the hit from it, to the government where the risk is not one of collapse of a business but rather the collapse of civil society.

It isn’t going to work.

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