April 2013 - Richard 'Jerry' Haworth: "When the mouse and cat agree, the grocer is ruined"

Or my simple modification, when the mouse, cat and grocer agree, the shop is ruined.

Governments and banks are normally mortal enemies, the cat and mouse of a financial economy. Governments regulate banks and banks regulate governments (bond vigilantes). When they conspire with each other we are in peril. Governments, especially Western ones, have massively overspent their budgets and have built up a massive debt or credit or promise to pay in the future. Banks have overleveraged themselves and have unwittingly got themselves in the same position as governments. They have too much credit and too much leverage largely as a result of relaxed government oversight and regulation.  The cat and the mouse have ended up in the same predicament. Roll past 2008 and governments and banks have a massive need for money to prop up their respective credit edifices.  In order to put a pin in the quantum of debt outstanding and to ensure no default, interest rates have been reduced to near zero. This would be the setup for a 20 year deflationary wind-down of a bubble as we have just witnessed in Japan; the cat and mouse agreeing but the grocer (central banks) still trying to walk a moderate line. But in the Western world post 2008 solution, not only has the cat and the mouse agreed to conspire, the grocer has too!

The grocer’s role is to keep the whole shop working, to keep the cat and the mouse regulated and more importantly, not agreeing! His role is to ensure that banks are adequately capitalised and realistically levered and that interest rates are put at levels that discourage governments from using too much debt in their funding mix and encourage savers to save to ensure capital stock.  But the grocer bought into the conspiracy when he looked back at the storeroom and saw how bad the situation had gotten. Not only had all the supplies been eaten, promissory notes were piled high to the roof as well. He facilitated the cat and the mouse agreeing by allowing banks to buy increasing numbers of government debt in spite of their rising credit risk. (e.g. Spain’s current debt yield) He facilitated the increased leverage and lack of “regulation with teeth” by allowing banks to not only remain leveraged but in some cases to increase this leverage (by not attaching a risk weighting to government debt they allow banks to accumulate massive amounts of it.) The mouse and the cat don’t chase each other around anymore because they are being fed by the grocer!

he grocer still had a dilemma; clients expected goods at stable prices when they came into the store. The grocer, being an amateur psychologist, knew that his clients didn’t really understand the price mechanism so he simply gave them less and less stock for more and more money. He also decided to extend credit to all his clients who now could eat properly so they became more and more indebted just to get the same amount of “trolley” as they had used to. They didn’t complain however as they survive at the whim of the grocer’s good grace.  One particularly clever grocer decided to give food stamps to clients that couldn’t pay by deducting it from the clients on his book that paid promptly and obviously still had money. And so the shop was eventually ruined as eventually the clients revolted as they more and more reached the point where they could not feed themselves.

And not one client in a thousand blamed the cat or the mouse…