by Doug Krieger
This article will or should substantiate all your economic fears once and for all. Dene’s read is not for the faint of heart. You thought it was bad – you’re not even close. Prepare? Well, it’s like getting ready at a seaside hotel for a 9.8 earthquake and subsequent Tsunami. Do your best – but like the 20-Foot surge from Hurricane Sandy that swept away Staten Island…HOW DO YOU GET READY FOR SOMETHING LIKE THAT?!
I don’t know if you can really handle an article so straightforward that tells it like it really is. It is actually absurd to think that taxing the 2% and bringing in an extra $80 Billion is going to save us from the economic cliff – or letting the Bush tax cuts for the so-called middle class lapse – no, not when American banks are radically playing the commodities markets, raising the price on everything from oil to corn. Worse yet, our vaunted pension funds are investing your retirement and mine in sovereign debt like there’s no tomorrow – thinking, as they are wont to do: ”Hey, let’s buy them Greek bonds from the EU folks…we can get 25-27% because they’re a bit risky…Yeah, that’ll keep our pension funds fat and sassy.”
Duh! Why financial genius thinks that European sovereign debt is a safe bet? You’re fired! But it’ll be too late – we will have sold our soul for a mess of pottage thinking our balance sheet look so great but then POP GOES THE WEASEL – and another bubble goes down the tubes!
Peering Over the Fiscal Cliff
by Dene McGriff
Most people, including the politicians, do not understand what it means to fall off the fiscal cliff. They think it is the loss of a few million jobs because the Bush tax cuts are not renewed or the alternative minimum tax comes back with a vengeance affecting many more people. And then there are the extra taxes related to Obamacare. Oh, and don’t forget the trillion dollar deficits going out for the next four years. And finally there are millions more jobs lost because of the so-called “sequestration” causing massive cuts in the military and defense industry. The pundits warnthat debt will cause the interest rates to rise, currency to devalue and surging out-of-control hyperinflation.
They are all wrong. We are going off the cliff whether the Democrats or Republicans agree or not about taxes, cuts and spending. First, a trillion and a half in cuts is a drop in the bucket because these cuts are spread out over ten years. Meanwhile, Obama is still proposing trillion dollar deficits (entitlements and spending) each year. So that does nothing to solve the debt/borrowing crisis.
Even the Ryan Plan wouldn’t have made a dent in the debt or its rate of growth. Second, Obamacare accelerates health care costs. Third, it ignores the real crisis which is the out of control banking sector which is creating one bubble after another, bailouts and another bubble until we reach the “end game”. More taxes are not the answer. If you tax the rich at 90%, you won’t bring in enough money. We have a spending and borrowing problem. It is a worldwide phenomena. So what are the consequences of debt and more debt? It is too big to ever be paid off. The global financial system will fail. Derivatives have caused debt to balloon to over one and a half quadrillion dollars, thirty times the GDP of the entire earth! It can’t be swept under the rug and ignored!
What Happened to All the Money?
In the ‘90s the markets and banks hyped technology and created a stock market bubble. This led to the loss of $8 trillion in stock market wealth, principally in pension funds and individual 401Ks and IRAs. Then they hyped real estate with the help of the Administration which encouraged the lending industry to lower underwriting standards so more people could experience the glories of home ownership. This led to the infamous “liar loans” (declared income that was never verified).
The financial institutions exacerbated the losses by bundling loans and selling them as derivative packages or insuring them as “credit default swaps” (insuring the derivatives – thus the AIG bailout). Home owners used their houses as ATMs and took out equity loans which drove them deeper under water. Then we had the crisis of 2008 which nearly brought down the whole banking system, but trillions were poured back into the system to shore up the banks.
So what happened to all that money? Why is credit so tight? Why can’t individuals and businesses get loans? There’s no money to be made in loans when the banks can buy up commodities and keep leveraging it with more derivatives. Banks have been buying up commodities such as oil, wheat, corn, soybeans, coffee, sugar, etc. creating artificial shortages and driving the prices up. You may wonder why food and fuel prices keep going up? Pure speculation! Commodities will be the next bubble to burst.
Likewise, manufacturing in places like China has outstripped demand and the ability to find buyers with real money to buy their goods.
China is one gigantic bubble based on markets that can no longer afford their stuff.
The Downfall of the Euro
There is one other piece to this puzzle and that is European “sovereign debt”. Since the Eurozone has its own Central Bank, the individual countries can only fund their governments with sovereign debt or bonds issued by the government and bought by the major banks in Europe and America. The more they borrow, the more desperate they become; the more they cut programs, lose jobs, raise taxes – the more the economy slows to a crawl.
The whole world is awash in money. They have been following what they consider to be good Keynesian economics stimulating economies with more and more debt by printing and borrowing, printing and borrowing but John Maynard Keynes would turn over in his grave if he knew what people were doing in his name. He never meant stimulus to be permanent but temporary and the debt paid off quickly once the economy was jump started. Instead, most nations of the world have made it a way of life. Just ask “helicopter Ben” Bernanke who has enabled the government’s hungry appetite for more and more debt.
The pundits and economists are continually warning that these policies will lead to hyperinflation and the ruin of our currency. Government and banking have worked together to create more and more debt and debt instruments to create more money/debt. I know this is complicated and hard to wrap your mind around but this is not going to lead to hyperinflation. There is so much money and debt sloshing around the world, the destruction of money supply will mean deflation – falling prices for commodities, housing (yes, it will go down even more), bank failures, unraveling of derivatives, default of government debt. I know that food and fuel have been going up, but we are going to see both coming down. When asset prices (such as business and real estate) fall and commodity prices go down, this is called deflation. And DEFLATION IS ANOTHER WORD FOR DEPRESSION. Let’s take a look at these things one at a time.
“Sovereign Debt” refers to bonds issued by a foreign government. European countries belong to the EEU (European Economic Union) and do not have their own central banks so they can’t print money like we do, so they issue bonds. The chart to the right shows the bank exposure to Sovereign debt. If a country such as Greece defaults, it doesn’t hurt just the country but all of the banks in different countries that hold the debt. To make matters worse, the debt has been compounded by putting it in derivatives increasing exposure by from ten to a hundred fold or more. There is no agreement on solving the crisis in Greece, for example, but Greece’s economy is about the size of Philadelphia’s. If they can’t save a country the size of a city, how are they going to save huge economies such as Italy and Spain? The question is: Can the Eurozone be saved at any price, and if it falls who will it bring down with it? The World Bank warns that it could spark a global crisis. So-called “bailouts” don’t bail out the sovereign nations. They cover the interest the country owes to the banks. This can’t go on forever.
So why do U.S. banks and pension funds invest in European debt? The worse the credit rating of the country, the higher the interest rate they have to pay. It is over ten percent, a great return in today’s world, but will the money ever be repaid? As long as there is a stomach to bail out banks (we never bail out the country), the banks are safe but maybe not your pension fund. Greece is looking at ten year bonds that yield 27%. This is a great investment if they don’t default (which they probably will).
Then they add insult to injury by packaging “Sovereign Debt” into derivative packages which are sold and resold, mainly to other banks, countries and hedge funds. JP Morgan’s total derivative exposure is $90 trillion dollars, more than the GDP of the entire world. The same article says that the total U.S. debt is $350 trillion which includes debt, unfunded liabilities and old derivative debt. This whole mess is like a giant ball of yarn about to be unwound. If the original bonds, mortgages or other loans defaults and the derivatives package is now worthless even though it has been sold, repackaged and sold again and again. Whoever holds the debt down the line will never be paid. What may have started as a package with a value of $50 billion could end up in the trillions. It’s no different than going to a bookie and giving him $100 to cover a $1000 bet on the horse at the race track. If the horse loses, he owes the bookie the $900. No one ever pays the full value for a derivative. That is what leveraging is all about. But if the bet fails, the debt comes due.
I use JP Morgan as an example because it holds more debt than any other bank. It illustrates the fact that all of the major banks have trillions of dollars of debt. It exceeds their assets by a thousand fold or more.
The total world derivative debt is now one and a half quadrillion dollars – a number so large, few can even conceive of its enormity. We treat that number as if it were just another little item like an ice cream cone or a hamburger. We seem to think it doesn’t matter. It’s just a big term economists use. No it is much more than that. It is a house of cards that will bring down the entire global economy. It is just a matter of time! Society is built on value, not debt and there isn’t enough value in the world to support this number. When it unravels, someone and everyone will be hurt.
The Commodity Bubble – Banks Are Speculating with FED Money
The US Federal Reserve has been pumping money into the economy by the trillions. The Fed is buying up bad debt and letting banks borrow as much money as they want for virtually nothing, but the banks aren’t loaning much. What are they doing with the money they can get freely at the Fed trough?
You may have noticed that energy prices are high and keep spiking. Food is going up too. Why are oil prices going up when demand is going down? Another article titled Oil Market Itself Proves Gas Prices Are All Speculation-Driven says it is investor (read “bank”) speculation and derivative brokerages (read “bank”) manipulating the price and supply. This is the dirty little secret you never hear about. Forbes estimates speculation adds $23.39 to the price of a barrel of oil. Banks and pension funds are putting their money into “hedge funds” who speculate in oil and many other commodities. Let’s look at some of them.
The price of corn, for example, is way up not just because of bad weather or ethanol requirements (a terrible and costly idea). All food prices are going up drastically. This is another dirty little secret. The same speculators that learned how to make money on oil have discovered you can do the same thing with any commodity. This is the next bubble that is already starting to burst, and when it does, the bankers will be coming hand in glove for another bailout. The banks are pouring their money into this latest speculation which will surely be popping in an outlet near you. The good news is prices will go down. That’s called deflation, and yes “depression.”
We have to understand the fiscal cliff we are facing. It is not just a matter of Bush Tax Cuts or the Alternative Minimum Tax coming back. It’s not about sequestration and military cuts. By the way, that is a drop in the bucket. According to the House Budget Committee sequestration mandates a trillion and change in savings over the next 10 years! Big deal! So they cut a hundred billion a year while they are racking up trillion dollar deficits! We know Obamacare is going to be much more expensive than previously budgeted. If we continue with tax increases at the federal and state level (as we are here in dear old California), the economy will slow even more. America now has the highest tax rates in the world, but beyond that 40 percent of the Federal budget is money borrowed from other countries.
The more the public sector takes, the less the private sector has to grow and invest. The problem in America and Europe is spending. Spending is out of control. The government’s answer is to tax more and resort to spending cuts only when forced to. The problem we have seen is that cuts don’t go over well with the people – thus, rioting in the streets. The administration believes that rioting can be avoided if the government allows money to trickle down to the “entitled ones” who elected him. Trillion dollar deficits are to continue for the next four years.
The average American does not understand how serious national debt is, especially when it is $16 trillion, equal to our GDP on the order of Greece and Italy. The U.S. has historically been considered a worthy credit risk, a country that pays its bills. As a result, the long term interest rates are about as low as they can be. Debt is currently about 6% of the Federal Budget at about 2% interest. The politicians know that the only way to pay it back is to weaken the dollar. The rating agencies have lowered our rating twice in the last year and threaten to lower it again if Congress doesn’t get its house in order. China, Japan and other countries have been willing to loan us money on the cheap, but are now becoming more reluctant to feed our debt habit. Do you know what will happen if they refuse to lend us more? Do you know what will happen if the interest doubled or tripled as American debt reaches $20 trillion by 2016 as it has in Europe? It would be catastrophic! Shakespeare warned us “neither a borrower nor lender be.” Why? America is living the illusion of being its own master.
But the real fiscal cliff is the cost associated with debt and the amount the government is paying out on its own non-productive operations. It is good to have a safety net, but the cost of that safety net diverts resources from the productive economy. It is the “safety net”, early retirement, and long holidays, free health care, etc. that has driven European countries into the poor house. So we want to follow their example? What an idea! Go Obama!
Neither party has shown any sincere desire to cut spending. The answer is not more tax revenue, but less spending. Forty percent of the federal budget is in the form of money borrowed from other countries. This doesn’t count billions in balance of payments owed from importing far more than we export. This also has nothing to do with the trillions of unfunded liabilities – social security, Obamacare, pensions, etc. You can go bankrupt. A business can go bankrupt. A country can go bankrupt! In this case, the whole developed world is going bankrupt!
People demand more and more services and benefits and the government tries to comply by taxing those they can. The prognosis is not good. Ever since Plato wrote in The Republic: “Dictatorship naturally arises out of democracy, and the most aggravated form of tyranny and slavery out of the most extreme liberty.” Once a democracy begins to degenerate into the “tyranny of the masses” the process is never reversed. Class warfare is on! The “have nots” want to take from the “haves”. Everyone wants their “fair share” (and by the way, who is John Galt?).
What Happens to Debt?
Although there seems to be a turnaround in the stock market – and housing – it is the result of government stimulus, not real growth. Earnings are down. Investment is down. Hiring is down. The uncertainty over new taxes and Obamacare is causing the economy to screech to a halt. You will see unemployment go to double digits. Housing will continue to go down as banks are finally forced to write off their loans at the true market price. Housing is going up in some markets like here in Sacramento because speculators are scooping up low-end houses for rentals. But the slide continues. Housing cannot go up if unemployment and wages go down. We are in a deflation – depression. Americans are making $4,000 a year less than they did a few years ago and they are about to take home even less as they pay an extra $4,000 more in taxes.
It is just a matter of time before speculation in oil and commodities implode, causing another banking crisis. Banks and hedge funds that have speculated in commodity derivatives will be wiped out. Derivatives will unwind and there won’t be any more money to bail them out.
The Eurozone will fall apart. There isn’t enough money in the world (especially Germany) to save the PIIGS (Portugal, Italy, Ireland, Greece and Spain and eventually England and France). Obama may want to follow his socialist dream, but it isn’t working out too well in Europe. This will cause banks to fall like dominoes. Banks and pension funds buy “sovereign debt” because it is the highest interest around, but for good reason. It is also high risk and any thinking person would realize these loans will never be paid back.
Every central bank in the world has been playing the money game. There’s hardly a politician or central banker that has the guts or integrity to do what is right, have an honest currency and honest taxes and expenses. More tax and spend will only depress the economy even more. We may want to ignore the immutable laws of the economy. We may think debt will save us. We may think more spending is just what we need. We may think that taxing the rich and giving to the poor will solve our problems. We may think more and more government is the answer. We may vilify the private sector as greedy, terrible people and the poor as noble, suffering saints. We may think government can go into debt indefinitely. We may believe it can borrow, print and spend money because government is the creator of wealth. But debt must be paid. If the lenders view it as risky, they raise the interest rate because of the greater risk. This causes the borrower even more stress as the debt payments become less manageable.
We can continue in our delusion until we finally step off the cliff, but delusions won’t save us. Debt has to be paid. Can you afford to go into debt by $10,000 a month every month year after year? Of course not, and neither can a government. Interest will kill a productive economy. Government spending may stimulate temporarily but it is not producing anything. It may be redistributing wealth, but it is not producing. The sad truth is that most people are selfish and don’t really care about their children and grandchildren as the politicians proclaim. Otherwise, they wouldn’t be so destructive in their behavior. To say that the direction our economy is going is unsustainable – is an oxymoronic understatement! And there is no end in sight.
Today the world is globally interdependent. There was a time when it didn’t really matter that much to one part what was happening in another. Today the world is intertwined like never before whether we look at food and energy, trade, production, ideology, war or the economy. The various parts are not working together. There is no common goal. Soon people will be crying out for a leader to unite the world.
We may indeed be heading toward a one world government and we may not be happy with the result. From our point of view, we will never find our answers here in this world but only in having a relationship with God through Jesus Christ. This isn’t meant to condemn or preach but to share the real hope in a world that is slowly imploding being driven to the inevitable conclusion.
I attended a memorial service last week and was encouraged with the reminder that this world is not our home. This life is not the end – all there is. I know that we here at the Tribnet seem to offer up quite a bit of gloom and doom, but there is a glorious eternity once we have shed life’s mortal coil. The world is hurtling through to the end of time, to a dramatic conflict and conclusion. The financial cliff will lead to a one world currency and government. The political cliff will start and end in Israel. But it is not the end. It is just the beginning.
Copyright Dene McGriff, Sacramento, November 2012
Presented with permission of the author.