Our Financial Buffers Are Thinning

While buffer has a specific meaning in chemistry, I am using the word in the broad sense of a reserve resource that absorbs the initial destructive impacts of crises or system overloads. Marshland along a sea coast is a buffer against destructive storm waves, for example.

A savings account acts as a buffer against financial drawdowns or losses of income that would otherwise quickly cascade into a full-blown crisis.

Redundancy of resources can act as a buffer. If an airline maintains an aircraft in reserve, this reserve plane acts as a buffer against the disruption to the airline’s scheduled flights should one of its aircraft be unexpectedly removed from service by a mechanical failure. The reserve aircraft can replace the plane that was withdrawn from service with minimal disruption.

Stockpiles act as buffers against supply disruptions. A storage tank of oil buffers a refinery against any delay in its incoming shipments of crude oil. Supplies of food and water buffer against severe natural disasters that disrupt regional water service and food deliveries.

Credit can act as a financial buffer against unexpectedly high expenses or declines in revenue. If a tire on our vehicle goes flat during a road trip and we only have a few dollars cash, a credit card buffers the disruption by funding the replacement tire and labor.

But over-using credit can end up thinning our financial buffers. If someone starts using their credit card not as an emergency buffer but to augment their cash income–in effect, acting as if the borrowed money was a pay raise rather than a loan–their credit line diminishes to near-zero and when they actually need credit for an emergency, it’s no longer available.

A key feature of buffers is that it’s difficult for observers to tell if they’ve been thinned to the point where they can no longer stave off disruption. Outside observers can’t tell if the oil storage tank is full or empty, or if an individual’s credit card is maxed out or has a completely untapped credit line.

In terms of our economy, there are indications that our financial buffers are thinning to the point of failure. Millions of households have less than $500 savings–an essential, basic buffer against unexpected expenses.

Millions of households have borrowed money to make up for stagnating or declining income. Charting master Lance Roberts of Real Investment Advice published this chart showing how debt has been used to maintain households’ standards of living:

Central bank balance sheets acted as buffers during the 2008-09 global financial crisis. But instead of rebuilding this buffer by letting balance sheets slowly decline (i.e. as bonds owned by the central bank reach maturity), central banks have thinned the buffer by rapidly expanding balance sheets during the current slow-growth expansion:

The ability of governments to borrow and spend during recessions is a key macro-economic buffer. But instead of slowing fiscal borrowing and spending, the U.S. government has ramped up borrowing immensely, thinning the buffer available for future fiscal stimulus:

If we survey the financial landscape for fully intact buffers, we find none. Every buffer has been thinned by the past eight years of extreme monetary and fiscal policies and financial leverage, that is, debt piles ever higher on an unchanged foundation of collateral.

All the buffers that absorbed the shock waves of the 2008-09 Global Financial meltdown have been drained or thinned to the point that they no longer have the capacity to absorb the next global financial crisis. From the outside, the “tank” may appear full, but it’s almost empty.

The fragility of our financial buffers will only be revealed when they fail in the next crisis. 

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  • “Who controls the issuance of money controls the government!” Nathan Meyer Rothschild

    June 13, 2016 Which Corporations Control The World?

    A surprisingly small number of corporations control massive global market shares. How many of the brands below do you use?

    http://www.internationalbusinessguide.org/corporations/

    “Control the oil, and you control nations. Control the food, and you control the people.” Henry Kissenger

  • animalogic

    The US government debt is an issue: but as a monetary sovereign the debt is – per se – manageable. The real problem, because it can not be completely managed, is the approaching situation where the US dollar effectively loses its “reserve” status. It’s the world demand for US dollars that props up the US economy; cut that demand, & at some point the US will suffer devaluation & inflation beyond imagination.
    (Note: US antagonism against China & Russia is seeing these counties pull out of US dollars as quickly as they can. China, I believe, is trying to negotiate to buy Saudi oil with Yuan — a very significant step. The petro-dollar has been the foundation of the “reserve” status since the early 70’s)

  • cstahnke

    If you use “normal” standards of economic analysis your argument is spot on. But we don’t live in “normal” times. Something deep happened to the world after 9/11. If we remember 9/11 caused law to moved to an largely phony and hysterical focus on “terrorism” in the U.S. and this allowed the FIRE sector license to break laws with impunity as long as they went along with the permanent-war agenda that the National Security sector wanted to make up for the loss of the Cold War as a cash-cow. After 2008, something had to be done about the criminality in the FIRE sector from a systemic point of view and, at the same time, allow all power-players to keep their hold on power. International bankers and the international finance bureaucracies, central banks, international organizations built on top of the already sophisticated measures built up through the ever more sophisticated artificial intelligence systems that dominate financial tradings a new virtual system of buffers that had nothing to do with economics as such. To put it another way, the international financial system took matters in hand to control the world economy and are now proud owner of a rigged system that grows in robustness every day so they have no use for the buffers you describe. To put it yet another way–they have developed, through technology, a clear way to control the world’s political economy not just through misdirection, slight-of-hand and smoke and mirrors but through changing the entire paradigm of economic life.

    If I’m wrong, I don’t think I’m far wrong. This could never have been done without computing-power, neural nets of tightly interactive and connected links within the virtual world and the corruption, from the POV of the non-rich, of the power-elite in the “free world” as it’s labelled–free for the oligarchs that is. So I’m not saying that these lack of buffers does not indicate a coming crisis only that there will have to be a political crisis first to break up the system as we know it and that is why there is so vehement an opposition to Donald Trump.

  • Zartan

    There is more to credit than most realize.

    First, the US government “sweetens” the deal for bankers to lend. Banks would never give people unsecured credit without deals to repay defaults from government. Bankers have always been bailed out.

    Second, The Romans Invented Credit, as it is used today, to make Slaves of Citizens. Something you should think about before applying for a loan or credit card.

    Third, the US government owns the market. All the Nations, ( slave nations) and their banks,OBEY the US government, or else? They cannot downgrade US government credit or do anything else that would indicate a national security risk by the US government. Central Bankers have been made Riggers of the US and Global Economy by buying JUNK DEBT … Nobody is going to blow the whistle, because they are all involved in the crime.

    Nothing will ever BUST again, because the US government and its servants, will hide the reality and print money until JESUS returns … Nothing will Stop them!

    NO more Market Crashes, Shocks or Downgrades … America is in Total Control.

    Now, if American economists “had brains,” ( I am only being fair) then they would comprehend that the Word is held hostage by the US War Machine and Nobody will ever question the USD or they will end up like Omar Gaddaffi! Americans must be DUMB, because this would entitle them, and rightfully so, to a FULL BENEFITS PACKAGE! However, due to their stupidity … TRILLIONS will be SHOT into the Sand instead! And, then, people wonder why I dislike Americans! Who could like a bunch of anti-socials who want to self-mutilate for government?

    Hey, Even GOD Says I am Right! Revelation 18 … Read it!

    How many more warnings do you need, America?

  • ICFubar

    If in the next financial crisis the debtors cannot meet their obligations then the creditor forecloses on the assets under law and becomes the mortgagor in possession and any deal making on writing down the debt leaves them in the position to write the details of the new contract. This most likely leaving the debtor as tenants to that which they had some former claim to rights of use and profiting under the asset title. If the form of money collapses with the debt then a new form of money is simply created by the creditor to describe the new situation. Sounds like a plan to gain untold control of assets built with labour and added value from resources but with the flick of a pen.