Written by Glenn Van Lendt
“A comparison between two things that are similar in some way, often used to help explain something or make it easier to understand…”
Castro Refuses to Die
Disturbing News: A person is admitted to hospital and the situation gets worse by the hour. Monitors are attached to every part of the body, but the gauges break as readings are off the chart. Doctors report the worse and gather the family around for the bad news. They agree that they’ve never come across anyone that’s recovered from such a hopeless state and rumours of the patient’s imminent death begin to circle the neighbourhood.
Everyone gives the patient a week at best and doctors begin to prepare the family for the worse. Beneficiaries of the Will hope for a quick death, but so far Castro refuses to die!
Weeks turn into months and everybody starts to lose interest. After many more months, Castro is eventually spotted puffing on a thick Cuban and is soon to be discharged to the care of his family. He eventually ends up winding his life away, all be it at an unhealthier pace.
P.I.I.I.G.S ‘r’ Us
In this article, we’ll try to look at what the theory says the likely outcome will be for a world riddled with all sorts of financial imbalances, and also look at how irony and paradox may impact the theory to produce the most unlikely and unintended outcomes.
More than Three Little Pigs: For those who are not familiar, the heading above stands for Portugal, Ireland, Italy, Iceland, Greece and Spain (They are the PIIIGS) and I’ve extended it to include the US. I also hope you’ll spot the ambiguity.
Crushing debt; at consumer, corporate and government levels is the result of a long period of credit expansion, reckless lending practices and the abuse of fiat currency. Note I said abuse of fiat currency, as I do not think that you can have a more practical medium of exchange than fiat money and economic expansion through credit, as long as it’s not abused.
Fiat currency has not failed; it’s the abuse of the currency by governments via the printing press as well as the creation of excessive new money via bank credit, that’s been the real failure.
The public debt clocked up by PIIIGS ‘r’ US is astronomical and in the US alone is about $16 trillion and counting. Unfunded liabilities (no money put aside to pay obligations falling due) are even uglier and estimated at north of $100 trillion, depending on who you believe. I somehow suspect that when a figure is so large nobody really knows, but fussing over an exact figure is like someone noting that you’ve eaten your 21st hamburger for the day and you know it’s just your 20th, so you defend your position. Either way, you’re a pig at serious risk of bursting at any moment.
Hook-Me-Up…..Scottie!
Discussions about linking paper currencies to Gold sound great as it seeks to restrain reckless currency printing and create stable currencies. However, within a world that has seen its population grow from about 1.7 billion in 1900 to about 7.0 billion now (and growing exponentially not just in numbers but in needs), I’m not sure you can design a workable (expansive) currency and credit system which keeps pace with such growth rates and its accompanying needs, whilst fully linking it to a finite and tightly held currency such as gold. For one, no one really knows how much actual physical gold is available and how much of it is phantom gold.
In a world which needs exponential growth to feed its masses and help lift hundreds of millions out of poverty, you need a controlled and sustained expansion of your credit and monetary base, and linking your monetary base to a currency like gold may not be the answer (not for the masses anyway). If you believe that it’s in the ordinary man’s interest to link paper currency to gold (especially above a 10% link), then you are rather mistaken.
Readily available funds through credit are vital for the masses trying to give their families the basic necessities of life. Fully linking paper currencies to gold will only enrich those who control this metal as they would have to revalue it (gold) skywards should governments choose to leave the same amount of paper units in circulation.
There are other more practical ways to accomplish currency and credit restraint and they are through well designed taxation policies and responsible banking lending practices. Don’t misunderstand me, not more taxation legislation and more bank lending rules, just ones that force borrowing and especially lending restraint.
Common Thread
Most G20 countries and their banks have such a web of debt and IOU’s between them that nobody dare blink first. The world is so linked that everybody is holding everybody else hostage and nobody can make a radical move in an attempt to solve problems without shooting themselves in the foot first.
The same threads are holding the entire financial system together. If this was not the case then less indebted (or creditor) countries would not care too much about what happens to their neighbours as they pull the rug from beneath their feet. Why should they, altruism is not the hallmark of modern societies, not in practice anyway.
Whilst this diagram, published by the Bank of International Settlements (BIS) is more than a few years old, it’s mainly to illustrate the inter connectedness of debt across the EU countries.
Click to enlarge
Mind blowing debt webs across many countries have made us hostage to each other and great adjustment will be needed over time to fix this situation.
Seppuku
If you think the US cares about its debt, you’re sadly mistaken. They are the guys who owe the bank trillions of dollars, so the bank has a problem, not them. Cute little phrases like “fiscal cliff” are merely designed to create an opportunity to pay lip service to an issue which is essentially unsolvable. There is only one way out of their mountains of public debt, and that’s through default, be it now or ten years from now, they will move inexorably towards this destined hour.
Those who run the US empire are blissfully aware that the entire world (more so the west), has some form of economic fever. They know that a foul wind has arrived and will blow for awhile. This is mainly because they are the chief engineers of this foul wind and are now actively promoting it at all levels (through buying their own debt and endless money printing), to accelerate its demise despite speaking to the contrary. They will push hard to find a break point which leads to some form of collapse and then they’ll initiate suicide by defaulting on their debt (for example) and in so doing, “rubber stamp” the GFC.
Paper Swap
The Chinese are on an investment and consumption buying binge across the world and one of the main reasons for this action is to swap US dollars for real assets as they no longer see the USD as a store of value as it’s obvious that the US hopes to decimate or extinguish its currency as one way of rubber stamping the GFC. The Chinese know that the paper swap (out of USD) will take many years to negotiate and achieve, and sooooo does the US. By the time the Chinese and others (largely) divest from US paper assets such as bonds and currency, the US would be well on its way up and it will be time to wish Castro happy birthday…..once more!
Come to Jesus Moments
When the US had its Lehman moment, that was about the best opportunity to drive a nail into its coffin, but the rest of the world froze with fear and instead of seizing the opportunity, a flight of capital (from everywhere) went running into the arms of Uncle Sam. The US is a war nation and strategy is their game, so it would not be a surprise if they let Lehman go, with the sole purpose of creating fear and promoting a “come to Jesus moment” (no prizes for guessing who Jesus is)
US Printing Press (hic!)
Glasses are raised to the US printing press which has allowed them to breathe for years especially since the official start of the GFC, and they are getting stronger each day (believe it or not). Nobody is remotely close to knocking them off, mainly because they have no idea how to go about doing so without taking massive pain themselves. Maybe now you can understand why so many got the timing of Castro’s death so-wrong-for-so-long.
As a result of being the world’s strongest and most advanced economy for a very long time, and as a result of issuing the world’s official reserve currency, they have afforded themselves a strong all-round position, a position that despite their dire economic circumstances, they still hold (if only psychologically)and intend to keep at any cost.
They will, and have, taken the easiest path to hell (via the printing press), but they are not going alone; they will take everyone along with them. They simply need to ensure that they are “oner-top” when the foul wind settles.
You do not have to strain to see apparent “mistakes” they are making. Theoretical mistakes, for sure. Intentional?……….. absolutely! Life support for them, for sure. Death for many of us?……. almost!
I See You or I.C.U.
Look close enough and you’ll see subtle games being played to collapse the system such as making March 2013 cuts to the US Federal budget worth about $82 billion dollars over 7 months. None of these cuts are to the silent killers of Medicare, Medicaid, Social Security and interest on debt which collectively gulps the bulk of their annual budget.
This sad attempt to fix the US budget deficit can best be described as “political comedy” and is evident of a government that does not really care about its fiscal position as it knows that it’s beyond solving. “Fiscal cliffs” are clever attempts to create chaos and hopefully bring the system crashing down so that the justification exists to usher in a new one. So far they’ve failed (to create collapse) and are still viewed by others as a safe haven (how ironic!). Maybe their plan to kill Castro simply needs more insanity sprinkled over it. Whether default takes place now or in ten years, it will hang over their heads like the sword of Damocles.
Once hell is in sight (as a result of GFC mark II, possibly because of Japan), they will see an opportunity to create a final collapse, perhaps by defaulting on a substantial part of their debt. Just knowing that the US is free of a substantial part of its debt, will attract capital to it like metal to a magnet, and happy days will be with them again until the next crisis years into the future. If you think that rating agencies will crucify them making it difficult to attract debt, you’re wrong. The US has been bankrupt for many, many years and the rating agencies still afford them a star rating for a bankrupt economy. All you have to do is drag everyone down with you and be slightly higher after the collapse; you’ll still be on top. DDD+ could be your rating then, but if everyone is below that, you could wear the rating as a badge and unimaginable amounts of money would flock your way.
If the Chinese or anyone else could do something about relegating the US to economic third world status, they would have taken that opportunity by now, but they can’t, they need a long time to achieve this and the US knows it. Unless the Chinese or anyone else can pull the rug from under the US over night, there will be no topping of the US as the world’s economic superpower (bankrupt or not)! Unless there’s a major surprise factor, and there aren’t many surprises anyone can pull quickly enough (four plus years into the GFC) that would not result in suppuku too, Castro will stand economically supreme for many years to come.
In any case, there may be more Lehman moments and we’ll all be welcomed to a new round of global fear, but the closer we get to total collapse, the quicker the arrival of a new and exciting dawn for the well prepared.
The world’s second great depression, or Global Financial Crisis (GFC), call it what you want, has already happened in 2008. Your view may lead you to believe that the worse is yet to come, but what is still to come is the “rubber stamping” of a great financial debacle based on massive global debt at just about every level. If the rubber stamping occurs today, the VIX (volatility index) will become a household word again, but if it happens slowly over many years it will have the impact of someone being handed a pain-killer tablet just before being hanged.
I think the imminent economic death of the US ranks right up there with; the Mayan predictions, John 3.16 and Y2K. Unless death comes through their hand or as a massive unforseen event, then winding away at an unhealthier pace is the most likely outcome of the US and the GFC.
Premature Obituaries
“Weeks turn into months and everybody starts to lose interest. After many months, Castro is eventually spotted puffing on a thick Cuban and soon to be discharged to the care of his family. He ends up winding his life away all be it at an unhealthier pace”
Everybody (including the US) knows the theory about what should happen during this crisis, but irony, unintended consequences and paradoxes are more likely to rule the outcome. It’s all about survival tactics and more a question of behavioural psychology than economics.
Castro’s death has been greatly exaggerated so far and the longer he (presently) survives, the more likely he will end up winding his life away, refusing to die (just yet)!
Years later, when he inevitably dies, few will send flowers or attend the funeral. For those who do attend, they light firecrackers as the coffin sinks and cannot wait to go back to the Wake to celebrate his passing and lay their hands on his stunning collection of Cognac and Cuban cigars.
Please note that this article is written for the purpose of information sharing and no responsibility is accepted for any misinterpretation as a result of the author’s opinion.
