By sharon kayser | 23 November 2007
|
The story of the upcoming world crash is hidden in plain sight. Even mayor Bloomberg has jumped on the gloom and doom bandwagon: a global economic downturn was looming, triggered by the "lunacy" of public debt, he declared last month. Meanwhile denial continues. Although nearly 70% of Americans fear a recession, the possibility of a major crisis is not considered. A crisis? Not in my backyard, most of them think. It all boils down to faith. To be fair, the 'empire mentality' was born with history. Eventually, people wake up to the harsh reality that the 'empire' lied to them. The only successful government programs are wars and economic crises. When two or three decades of prosperity end with a crash and geopolitical crisis, what does this mean— frankly? Once again, the numbers tell a very different story than that we are being told. Yes dear Readers, you're not hallucinating. There is currently at least a $1,000 trillion dollar black hole in the world economy. To get the full picture, please keep on reading.
We have 600 trillion in world liabilities plus more than a 400 trillion-derivatives neutron bomb, all of which will go off when the Westerners (from EU and US) will no longer be able to borrow. The credit crisis could be just beginning according to, the Calcutta-born Australian Satyajit Das, a derivatives specialist who speaks of nearly $500tn in just derivatives. Das doesn't mince his words: "... Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game," he says. "Those loans were invented so that hedge funds would have high-yield debt to buy..."
In America, the clock is dangerously ticking for consumers: the party's over, they are are truly tapped out. While it is difficult to make sense of mega-digits such as 1,000 trillion, this amount doesn't even include consumers' debts. Although it is kind of tricky to say when the credit soufflé will flatten, those grasping the dangers of a negative savings rate are already taking action. Well, anyways, the smartest— they are a strict minority at this stage. Some among the most 'cash-strapped' Americans are raiding their 401(k)s. Not knowing what is really going on, many might be prompted to turn to the $2 trillion in credit, pre-approved when times were booming, in the form of credit cards. To give you an idea of the dire situation, last May and June saw spikes in the amount of revolving debt, 12.2% and 8.4% respectively. The consumer credit 'is' the next bubble to blow without a doubt. There are a growing number of debt-laden homeowners preferring to save by using plastic first.
Delusions, survival and credit. People would rather keep accessing credit when they cannot make it financially, instead of cutting spending drastically or doing whatever it takes to stay solvent, e.g., finding an extra job. Talking of jobs, did you know that real wages peaked in 1972? Today, wages are nearly one-fifth lower— inflation adjusted!
Beyond The Climax
Now even an infusion of cash doesn't move the market anymore. The Dow Jones behaves irrationally. The economies as a whole have been rather stagnant in the West. Major European economies are on life support. They cannot overcome their costly social programs and the flood of (clandestine) immigration which is as bad as that in the U.S. [[not to mention the soaring value of the euro and the concomitant decline of European exports.: normxxx]] In a Forbes article we read that France has been in chronic deficit for 15 years. In 2005, Standard & Poor's said it may downgrade the credit ratings of Germany and Italy, two of Europe's largest economies, unless their governments reins in spending and cuts debt. In 2007, German unemployment remains stuck at 16.5% and in 2006 Berlin was reported as bankrupt. Italy was described as the 'real sick man' of Europe by The Economist in 2005. The credit crunch has also taken hold in Australia, where personal debt is worse than during Great Depression. The situation is equally dire in Britain, where house prices are even more overvalued than in the US. A financial crash cannot be ruled out, the IMF warned last month.
It Is Going To Get Worse Before It Gets Better
The latest report by Goldman Sachs makes it crystal clear: the global economy has hit a 'crunch'. The IMF predicts that the impact will be worse in 2008. The IMF and Goldman were seconded by the US Treasury Secretary acknowledging that we must prepare for a prolonged turmoil. Debt deflation is a nasty beast.
Forget about the Dow 14,000 and ask yourself frankly if you feel better off today than last year— or two years ago. That consumers must now resort to their credit cards just to pay their monthly bills while banks are tightening their standards is a bad omen. As to why they have preapproved $two trillion dollars in credit in the first place? On the one hand they try to appear wary about further credit deterioration and on the other hand they continue their reckless marketing. Their latest targets are minority homeowners on the brink of foreclosures, and college students whom they recruit as credit-card pushers to circumvent the restrictions banning credit card solicitations on campuses. Meanwhile the sin of usury continues to bankroll Congress. The US Senate okayed the debt increase to $850 billion, ignoring the remark of 'Bubble Man Greenspan' himself, when he said that the U.S. debt demand may be at the 'limit' of world resources. Cynicism knows no boundaries: the same man who just warned Congress has denied that regulators could have anticipated the problems which has caused the global credit crunch. This didn't preventing him from applauding the performance of the housing market-bubble as it was occurring! But, by early October 2007, he warned that the fate of the world economy lay with US housing.
As foreclosures skyrocket across the US and threaten to bring down real estate prices by 50% in some cities according to Yale University professor Robert Shiller, more and more we read about the unfolding world credit-liquidity crisis. Truth to be told, central banks face a liquidity trap. Only a few anchors and sound economists see the bad 'Omens' ahead as Goldman announced this very week that leveraged lenders might cut back their lending by as much as $2 trillion. We are so debt-inflated that such an outcome is going to strangle the economy.
Whether we'll be witnessing bank runs in America such as the British just witnessed (with their third largest bank— Northern Rock) remains to be seen. In the Financial Times of 2 September 2007, the following could be read:
The current turmoil in the financial markets has all the characteristics of a classic banking crisis, but one that is taking place outside the traditional banking sector, Axel Weber, president of the Bundesbank, said at the weekend... Some Federal Reserve policymakers also privately admit that comparisons between the current distress in credit markets and the bank runs of the 19th century, in which savers lost confidence in banks and demanded their money back, creating a spiraling liquidity crisis for institutions that had invested this money in longer-term assets, are valid... Weber's comments came as Frederic Mishkin, a Fed governor, argued for a rapid and aggressive monetary policy response to any [continued] fall in house prices. His diagnosis of the financial crisis was echoed by other experts... Paul McCulley, managing director of Pimco, said there was a “run on the shadow banking system”. He said the shadow banking system held $1,300bn of [defective] assets that now had to be put back onto the balance sheets of the banks... |
Weren't we told the Federal Reserve was created in order to avoid precisely this type of financial hazard? Where is the point to finding out that we're now in worse shape than before the inception of the bank in 1913? Yes, back then panics were a common occurrence, although the common man was probably unaware that they were linked to the periodic overreach by bankers' reckless speculation [[and the periodic 'adjustment' of money velocity and a (relatively) fixed currency under the gold standard, resulting in the inevitable deflation of any preceding inflation: normxxx]]. Much the same behaviors occur today on Wall Street. Blaming the 'gold standard' was a myth invented for the ignorant masses, which embraced the Fed like a savior [[not true: normxxx]]. What should have been implemented is putting Congress in charge of regulating the money supply, just as stipulated by the US Constitution. Inflate or die[!?!] There is no other choice, my friends.
Irrationality plagues debt-based economies since they are backed by consumers' confidence. The willingness to take on debt goes hand in hand with the optimism that one will be able to repay in some distant future. This explains why the moral hazards linked to paper money are enormous. Most of the people [[politicians?: normxxx]] think that printing more money is the solution to all problems (e.g., Allan Greenspan), as are are 'bailouts.' But what can a 'bailout' achieve when the interbank lending business itself has broken down almost completely? In the Financial Times of 9/04/09, we read the scary headline:
Unicredit analysts say: 'The interbank lending business has broken down almost completely.... it is a global phenomenon and not restricted to just the euro and the dollar markets... if this situation continues, it could potentially have very serious implications... |
Do those at the head of our monetary institutions have a plan? Considering the current state of global finance, which is pretty well documented on http://www.moneyfiles.org, it is indeed a difficulty to make sense out of the credit market's near shutdown. Here is a NYTimes excerpt, from 9/04/09:
|
Flash back. In his 9/05/07 article, Stephen King, an HSBC banker and regular columnist at the http://www.independent.co.uk/, notes several ugly truths when admitting that in order to save the innocent, we may need to bail out the guilty. Reward for failure is a typical elite thing. It is how the powers-that-be and their cheerleaders have always colluded to save their own hides. However, this sums it up pretty well. The bailout logic is borrowed from a collectivist concept that the government is the ultimate wealth creator [[socialism for the rich; 'sink or swim,' laissez-faire capitalism for the masses! : normxxx]]. Though there is something faulty in this particular case: why can't the government just make sure that its citizens are provided with an adequate financial education instead, so the guilty can be rightfully prosecuted? On http://www.Bloomberg.com, the columnist Mark Gilbert takes a radical stance by arguing in favor of easing the money-market crisis by letting banks go bust [[unfortunately, attractive as such a course might seem, it falls under the heading of "cutting off one's nose to spite one's face!": normxxx]]. Bailouts though, merely postpone outcomes [[in the usually vain hope that something will turn up or things will get better, in the meantime: normxxx]] while frequently making them worse. 'Helicopter Ben' and the boys, by concentrating on the immediate panic as usual, seem to have chosen a course likely to completely implode the world economy. Meanwhile, the boys at Treasury are promoting a super-duper bad-loan bailout scam, as Bill Fleckenstein concludes. The truth is that Citigroup Inc. and JPMorgan Chase & Co., are just 'Enrons' waiting for their day of reckoning. And the game goes on and on. As the monetary engineers try to improve on their old tricks to save themselves from disgrace (and worse) by raising more than $60 billion, some already wonder if the 'Banks’ Stabilization Fund' will work:
|
|
Doomed Profits
What has happened over the last decades is that the world financial institutions have learned how to 'shift risks' far better than they ever have before— they think. The result of this untested assumption is that our financial security systems have remained dormant, allowing the 'easy money binge' [[of nearly unlimited credit: normxxx]] to perpetuate the illusion of wealth.
Even Chinese investors are betting all they have on a dead cat bounce. They are so infatuated with their shares that they don't hear their own lawmakers sounding the alarm:
|
This insane credit expansion fuelled by unethical speculation will cost China dearly. Damages are already showing: rivers are so polluted that they are described as on the verge of collapse. In turn, heavy pollution is blamed for soaring birth defects and other diseases ravaging the countryside. This only on a human level. The economic fallout will be unprecedented.
It is all a matter of psychology and the perception of endless good times. Yet nothing can prevent the world economy from eventually falling off a cliff. Hard data always wins in the end. One does not wipe out $1,000 trillion in world liabilities just like that, even if it is only electronic or 'virtual' debt. Strangely, it is rare to see 'super bulls' and 'perma-bears' converge: the bulls by calling for bailouts and the bears by nodding in pessimistic agreement. The profits of doom will be soon causing the next shocks to the broad market.
|
Both groups now envision the perfect storm coming our way.
Now comes the nasty 1,000 trillion dollar question: what will credit granting institutions say after the crash, when increasing scrutiny will quickly focus on them as the culprits chiefly responsible for all of the wanton speculation?
Lethal Collusion Exposed
In the FTimes last month again, one could read that credit rating agencies were being investigated for their symbiotic relationship with investment banks in the EU.
“What we are seeing is basically what we see underlying all banking crises.” In America the response has been less sharp but critical nonetheless, the same FTimes columnist reports. Of course the rating agencies deny any wrongdoing. This shouldn't come as a surprise. They have always done so. The sleeze just became more blatant during the subprime debacle. Now that the damage is done, the S.E.C is probing the ratings agencies' subprime role. According to CBS, last September, the federal agency still hasn't come to any conclusions about the rating agencies' explanations for 'unexpected losses' on those [AAA rated] assets. Remember Enron? How many people are currently jailed? And they will be repeating the charade once again when the consumer credit bubble pops. How is it possible that they turned a blind eye to the build-up of a $1,000 trillion black hole, do you think? |
Ellen Brown has probed a 300 year-old scheme maintained in place (despite the boom-bust cycles) with the complicity of the man in the street who views the government and central bankers as 'wealth' managers. The cliques at the top, which have long profited from the ignorance of the masses, are now themselves faced with boomerang effects. For them too, chickens have come back home to roost.
Do you believe me now when I speak of a 'financial detox' whose consequences may be as severe as the great depression? We didn't get here because of a plethora of regulations, but rather through a lack of regulation and enforcement which allowed 'exotic' financial products, instruments, and institutions (credit derivatives, mortgage backed commercial paper, CDOs, CDSs, SIVs, hedge funds, etc) to flourish. A way to recycle debts, good or bad [[mix a little of the 'toxic' stuff with everything else, and who will notice? Except that they did! : normxxx]]. I don't know how most of these instruments work, but in the Asia Times, James Cumes, describes this financial addiction quite well:
|
Back To The Basics
Optimism doesn't encourage one to worry much about piling on debt, and until the loan is spent, generally a feeling of invincibility may be experienced. But credit happiness is short-lived. Just as with drugs, there is a withdrawal.
Although consumer borrowing is a very important part of the equation, debt monetization (or recycling) between banks might be even more so. Currently lending between banks has virtually ground to a halt. In the EU, we're talking of $100bn that should have been dealt with last August. In the UK it was a matter of 70bn over the next 10 days (in a article written in August). More alarmingly, ECB made 269-billion euro refi offer as market tensions persisted as of 09/12/07. Not only have banks created a monster in the first place; now they want us to believe that just printing money to pay debt is the safest bet on earth. The Bank of England Governor must be sweating heavily though. He recently declared that markets are 20% overvalued and poised for severe fall.
On September 9, another HSBC executive endorsed 'the credit squeeze' on CBSMW but with a much gloomier tone. The worst is not over. According to him it is all about damaged confidence among the market players that needs to be restored. Confidence is broken and the outcome will be 'the crash of the millennium' that Dr. Ravi Batra described:
|
Investors and non-investors alike will learn the hard way that seduction is the root of all evils. Indeed, how seductive is it to entice people to save via 401ks and IRAs in order to avoid taxation. Or, encouraging the use of credit cards to buy most anything and making plastic a way of life. Or, the use of super 'performance' bonuses which entice CEOs into cooking their books. All forms of short-term financial gambling that promotes the 'pump and dump' mentality. (It is interesting to note that while the average CEO's salary was about 25 times more than the average worker in the 70's, by 2005 it had shot up to 465 times more! But this was largely due to the fact that in the modern corporation the CEO largely controls his own salary!) The worst form of seduction is without a doubt the cheap interest rates set by the central banks which provide everyone with nearly cost free credit (or actually free, sometimes, when the inflation rate is subtracted to arrive at real costs— indeed from time to time the BOJ was actually paying banks to borrow money!) Credit which spends just like real money (until there is a 'crunch'). Moreover, like any form of 'easy' money, cheap interest rates tends to promote corruption and predatory financial practices.
In short, providing everyone with 'free' or 'nearly free' money (credit) promotes a speculative frenzy in which morality tends to be lost (there ceases to be any virtue in frugality or the efficient use of money/credit). And this looks very sordid when the story behind a boom is finally revealed during the next bust. Such trends may go away the day the average investor will understand that becoming a 'fat cat' in a short period of time is generally the result of good luck and an easy virtue— often at the expense of the gullible being lured into various kinds of schemes. And, asking the government for more 'protective' regulations, does not address the fundamental problems.
Something Fishy
Every year, worldwide, thousands of college students in economics are recognized by their peers. A distinction they welcome proudly as the door to brilliant career opportunities open. If they have the right connections or graduate from the right universities, all the better: many will end up working for big financial firms or at top government posts or centrals banks. Although it surely is amazing that our fate lies in the hands of these 'prominent' people, one does not need a PhD in economics to understand why the obsession with economic growth dominates all political debates, and why lawmakers (whose jobs depend on the 'well being' of the voters) make employment a high priority of theirs. To grasp the rhetoric behind the numbers, however, one has to look closely to see why 'growth and GDP' are in fact a tale concealing one of the most blatant fallacies ever.
Although this is a constant in the so-called rich countries, let's use the example of the USA. How does it come about that the twin deficits are ever increasing, and the national debt just went past 9 trillion dollars? Finding items 'made in America' has become a veritable treasure hunt— despite the boom in the US! The problem is that the word 'economy' is an abstraction. The American 'economy' is something sustained by Americans, and is largely the result of the American state of mind.
Basing the GDP largely on an ever increasing level of consumption is likely to prove fatal since it is impossible to live beyond one's means forever. If you want to find an explanation to the business cycles, here it is.
The End Of Conventional Wisdom
The GDP fairy tale has been conventional wisdom for decades. Anyone having a good sense of logic can see the hoax of a model based on unlimited debt expansion and unlimited consumerism. Spend or die is economic cannibalism in the end as we increasingly consume/spend our resources for useless doo-dads. One does not need to be a rocket scientist to ponder the origins of our $1,000 trillion liability. To be fair, there are other ingredients contributing to the mess we find ourselves in today, but since economics is the principal way to gauge our current Western society, for the sake of our survival we must reject the theory of unlimited, exponential growth. Dr. Ravi Batra may not be a dreamer after all.
Normxxx
______________
The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.
No comments:
Post a Comment