In
September 2008 the US came to a fork in the road. The Public Policy
decision to not seize the banks, to not place them in bankruptcy court
with the government acting as the Debtor-in-Possession (DIP), to not split
them up by selling off the assets to successful and solvent entities, set
the world on the path to global currency wars.
By lowering interest rates and effectively guaranteeing a weak dollar, the
US ignited an almost riskless global US$ Carry Trade and triggered an
uncontrolled Currency War with the mercantilist, export driven Asian
economies. We are now debasing the US dollar with reckless spending and
money printing with the policies of Quantitative Easing (QE) I and the
expectations of QE II. Both are nothing more than effectively defaulting
on our obligations to sound money policy and a “strong US$”. Meanwhile
with a straight face we deny that this is our intention.
Though prior to the 2008 financial crisis our largest banks had become
casino like speculators with public money lacking in fiduciary
responsibility, our elected officials bailed them out. Our leadership
placed America and the world unknowingly (knowingly?) on a preordained
destructive path because it was politically expedient and the easiest way
out of a difficult predicament. By kicking the can down the road our
political leadership, like the banks, avoided their fiduciary
responsibility. Similar to a parent wanting to be liked and a friend to
their children they avoided the difficult discipline that is required at
certain critical moments in life. The discipline to make America swallow a
needed pill. The discipline to ask Americans to accept a period of intense
adjustment. A period that by now would be starting to show signs of
success versus the abyss we now find ourselves staring into. A future
that is now massively worse and with potentially fatal pain still to come.
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The
critical issues in America stem from minimally a blatantly ineffective
public policy, but overridingly a failed and destructive Economic
Policy. These policy errors are directly responsible for the opening
salvos of the Currency War clouds now looming overhead.
Don’t be fooled for a minute. The issue of Yuan devaluation is a political
distraction from the real issue – a failure
of US policy leadership. In my
opinion the US Fiscal and Monetary policies are misguided. They are wrong!
I wrote a 66 page thesis paper entitled “Extend
& Pretend” in the fall of 2009 detailing why the proposed Keynesian
policy direction was flawed and why it would fail. I additionally authored
a
full series of articles from January through August in a broadly
published series entitled “Extend & Pretend” detailing the predicted
failures as they unfolded. Don’t let anyone tell you that what has
happened was not fully predictable!
Now after the charade of Extend & Pretend has run out of momentum and more
money printing is again required through Quantitative Easing (we predicted
QE II was inevitable in
March), the responsible US politicos have cleverly ignited the markets
with QE II money printing euphoria in the run-up to the mid-term
elections. Craftily they are taking political camouflage behind an
“undervalued Yuan” as the culprit for US problems. Remember, patriotism is
the last bastion of scoundres
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European Union divisions widened over how to contain
the debt contagion that threatens the euro, limiting a
summit starting today to agreeing on a crisis- management
mechanism that takes effect in 2013.
Spain faces a key test of investor confidence in its
economic survival plan as it seeks to raise money from
bond markets a day after ratings firm Moody's rekindled
worries about the country's ability to service its debts.
Bank of America, after vowing to fight requests that it
repurchase certain loans, has begun potential settlement
discussions with some of its largest mortgage investors, according
to people familiar with the situation.
Having written so much
about what's wrong with our current economic/financial/political
system, what specific actions do you think need to be undertaken
to fix things? Is an all-out collapse avoidable?
This is a question that we ask ourselves every
day, and no matter how we spin it, we fail to see how an unwind to
a previous “restore point” to borrow a computer analogy, is
possible at this very late stage in the global Ponzi scheme.
We tend to simplify the world: When everything
else is stripped, the only two things that matter are
a) where is the money
coming from? and
b) where is it going?
And never in the history of the world
have so many assets created so little cash flow.
To a big extent, this is due to the fact that a
bulk of asset purchases in the past three decades have been due
not to asset turnover, but as a result of cheap
credit resulting from an explosion of credit money through the
quadrillion dollar derivative boom. As a result, most incremental
dollars go not to organic business growth and economic output, but
to satisfying what has become the biggest debt burden in the
history of the world, whereby the labor and intellectual output of
most goes to fund the living standards of a very few.
Indicatively, when looking at total exchange
and OTC traded derivatives, which eventually are converted into
some form of credit money, the total tally at last check is just
over $1.3 quadrillion. This is about 20 times the total economic
output in the world each year. It becomes very clear why the
current status quo is unsustainable absent a major global
corporate and sovereign liability restructuring: In the bankruptcy
business, this process is known as “growing into your balance
sheet.” Yet the main reason why the kleptocratic elite has been so
opposed to this act is because no debt impairment is possible
without eliminating the
equity tranche below it. And in an ironic twist in which the
Fed supports both the debt and equity markets, there is now about
$13 trillion in equity capitalization in the US, which is backed
by debt that for all intents and purposes needs to be impaired.
As a result, unless stakeholders in the
liabilities of corporate America realize that the assets that
collateralize these liabilities are woefully insufficient and come
to a compromise in which either they alone or in combination with
the
creditors come to a consensual “restructuring” of the
underlying claims, there is no other possible outcome than a
free-fall bankruptcy. However, this will not be some Chapter 7
filed in the bankruptcy court of Southern District of New York.
This will be the end of the current financial system.
This is also what some consider a "deflationary
death spiral." And yes, no matter how much paper the Fed prints,
this outcome is inevitable: All the Fed does through money
printing is dilute the claims on both sides of the ledger. The
best the Fed could then hope for to counteract the deflationary
outcome is to generate hyperinflation through a collapse in the
reserve currency (i.e., the Zimbabwe outcome). And since this is
far more palatable to the Fed, we believe that one way or another,
whether by fire or ice (to paraphrase Robert Frost), the existing,
very unstable financial system will reach a point when the global
systematic reset is inevitable.
"Gold as money is incompatible with
unlimited majority rule and scoffs at the idea that money is just
'credit'. It negates any rationale, however farfetched, for the
existence of central banks. It precludes 'fractional reserve
banking' or any other method of debasing its utility as a medium
of exchange. Last and most important, it SEVERELY curbs the power
of government to interfere in the lives of its citizens. No
assembly of national “leaders” brought together to “modernize” a
financial system will ever agree to its use as money. But let one
nation anywhere implement it, and the lid blows off."
Gordon T Long is not a registered advisor and
does not give investment advice. His comments are an expression of opinion
only and should not be construed in any manner whatsoever as
recommendations to buy or sell a stock, option, future, bond, commodity or
any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a
qualified investment advisor, one licensed by appropriate regulatory
agencies in your legal jurisdiction, before making any investment
decisions, and barring that, we encourage you confirm the facts on your
own before making important investment commitments.ont>
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Gordon T Long
is not a registered advisor and does not give investment advice. His comments
are an expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, we recommend that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
we encourage you confirm the facts on your own before making important
investment commitments.
