The ever wise Dennis Kneale, in the video below, quotes "most
economists" as saying the cure for today's debt crisis is "the hair
of the dog that bit me", or "load up on debt", "the
A shot of whiskey in the morning? Is this the $IMFS
in a nutshell?
Yes indeed it is.
Nassim Taleb, on the other hand, calls our mountain of debt a tumor. He says
we must remove the tumor and do to everyone, including the US, what we
did to the Greeks: force austerity. But he goes on to point out this is impossible
in a democracy. It is only possible when you are doing it to someone else.
So, he says, we will proceed into hyperinflation. And this hyperinflation
will be brought on one day by people "buying gold", or
"running to currencies without a government". Nassim also mentions
that "Larry Summers seems to be treating the US economy the way he
treated Harvard, with his bogus projections". (Please see: "Harvard
Swaps Are So Toxic Even Summers Won't Explain" in Gold: The
Ultimate Hedge Fund for more on this
Here is the interview...
Did you notice Nassim's body language at the end of the interview? He was
leaning far away from the hosts. I think the phrase "don't shoot the
messenger" applies well to theoreticians like Nassim Taleb who try to
warn us that some big event is coming, unmistakably, unavoidably, inevitably.
Some time ago I wrote, "There is an important difference between
practitioners and theoreticians both in science and economics. Practitioners
have always ridiculed the warnings of theoreticians and philosophers
in almost all areas of human endeavor. Their attacks usually begin by
pointing out the lack of practical experience of the theoreticians. But it is
a very important role that theoretician play in society, to point out things
that have been overlooked by the practitioners.
"The problem today is that our markets are built, run and enforced
entirely by former practitioners with a clear disdain for theoreticians and
their warnings of low-frequency, high-impact inevitable events. This dynamic
sets us up for catastrophic failures every once in a while."
You probably noticed that Nassim is not only a theoretician, but also a
practitioner. (Join Nassim's 12,590 followers on Twitter here.)
I would like add that I agree 100% with Nassim Taleb here. I have been
following him and writing about him, Benoit Mandelbrot, Black Swans, Chaos
Theory, Fractals, hyperinflation and inevitable high-impact events ever since
the market crash in 2008. Please note from above that Taleb says things are
worse now, and then watch this interview that I first posted on October 24,
Nassim's job as a theoretician is to take the "Black" out of
"Black Swan". It is to show us that the collapse of the entire
system is a normal event. This is important. Systemic collapse is normal.
Hyperinflation is normal. Resets are normal. In this case, normal does not
mean common, it simply means inevitable.
James Aitken in his May 10, 2010 newsletter, "Notes from a Small
In September 1999, Charles Perrow of Princeton published Normal Accidents:
Living with High-Risk Technologies.
Mr. Perrow uses the term “normal accident” in part as a synonym
for "inevitable accidents." This categorization is based on a
combination of features of high-risk systems: interactive complexity and
Normal accidents in a particular system may be common or rare
("It is normal for us to die, but we only do it once."), but the
system's characteristics make it inherently vulnerable to such accidents,
hence their description as "normal."
A normal accident occurs where systems are sufficiently complex to allow
unexpected interactions of failures to defeat the best safety measures, and
sufficiently tightly coupled to allow the failures to cascade into an even
larger disaster, such as the one still unfolding in the Gulf of Mexico.
Hair of the dog, Dennis, really? Here is something Philipp Hildebrand,
Chairman of the Governing Board of the Swiss National Bank, said during
opening remarks at the High-Level Conference on The
International Monetary System in Zurich...
“Arguably, much of the debate surrounding the international monetary
system boils down to the following question: how sustainable is an
international monetary regime, in which one national currency serves as the
international reserve asset? Over the past few decades, this question has
been examined under different perspectives.
“A first perspective was the so-called “Triffin dilemma”,
discussed in the context of the Bretton Woods fixed exchange rate regime.
This discussion highlighted that increasing indebtedness of the
reserve-issuing country would in time undermine the very confidence
that forms the basis for the reserve asset status.
“A second perspective refers to the alleged “exorbitant
privilege” of the reserve-issuing country. It highlights the asymmetry
in the adjustment to shocks, as the reserve-issuing country has the privilege
of not being under much pressure to adjust to current account deficits,
at least over the short and medium term…”
I have been saying this for a while now. What the US federal government and
the Fed have done is transfer systemic debt risk into the currency, making it
more explosive than anyone can imagine. Europe is undergoing this same
transfer of risk right now. But there is still a subtle difference between
the euro and the dollar. Here is an extract from my post, No Free Lunch...
There are some clever deflationists that will tell you that the dollar is
going to rise in value giving Ben, Tim, Barack and the entire DC gang a
lengthy free lunch, all because of the giant debt overhang in the economy
that backs the US dollar. The thinking goes something like this. The world is
full of debt. The dollar is backed by this debt, and is therefore balanced by
it. As long as the debt remains, it must be serviced with dollars which
drives up the demand for dollars, and therefore the value of dollars. If the
service of the debt starts to fail then the dollar will start to fall making
the service of the debt easier (with cheaper dollars) and the service will
then resume, raising the dollar back up. I call this the see-saw theory...
The problem is, you see, the biggest debtor of all is the very printer of the
currency all that debt is denominated in. And this debtor is now picking up
ALL of the slack left behind by everyone else. Only his debt service will
never fail, because he can print that service with the click of a mouse. And
since he doesn't have to seek dollars on the open market, his debt has the
OPPOSITE effect of all other debt. Instead of driving up demand for the
dollar, it drives it down (and drives up supply at the same time)!
Normal debt = dollar demand up, dollar supply down.
US Fed Gov't debt = dollar demand down, dollar supply way up!
As the dollar starts to fall in value, this has no effect whatsoever on the
ability of the world's biggest debtor's ability to service it, and therefore
has no see-saw-leverage effect that raises the value of the dollar back up.
Instead, it has the exact OPPOSITE effect... once again. Because now this
biggest debtor must print even MORE dollars to suck in the same SUBSTANTIAL
AMOUNT of the real economy at ZERO cost.
And here is another way I illustrated this effect in pictures...
This first diagram shows how private debt service, private reinvestment and
productive enterprise normally act as a counter-cycle to credit-based
inflation. But the only way it works under the global dollar reserve system
is for the debt hole to grow infinitely deeper while the accumulation of
paper bonds and bills is piled infinitely higher. There is no balance or
reset mechanism in place. Only catastrophic collapse:
This next diagram shows in a simple picture what happens when the private
debtor fails to keep up with infinite expansion. This is Greece as well as
your neighbor that lost his house. Once you remove the private counterbalance
the Fed must pick up the slack. Notice that there is no longer a counter-rotational
This next diagram shows about where we are today. We are monetizing the
failing debt. We are replacing credit money with base money, and the US
federal deficit is the enabler of this process. As FOA said:
My friend, debt is the very essence of fiat. As debt defaults, fiat is
destroyed. This is where all these deflationist get their direction. Not
seeing that hyperinflation is the process of saving debt at all costs, even
buying it outright for cash. Deflation is impossible in today's dollar terms
because policy will allow the printing of cash, if necessary, to cover every
last bit of debt and dumping it on your front lawn! (smile) Worthless
dollars, of course, but no deflation in dollar terms!"
At some point soon, in between the above diagram and the next one, the
markets are going to repudiate any more dollar debt in recognition of what is
unfolding. This event will propel us into this last diagram as the Fed will
be forced to print every last dollar spent by the US federal government, and
that's a lot of dollars. This diagram represents Weimar Germany in the 1920's,
Zimbabwe in the 2000's and the USA in the 2010's:
(The above diagrams came from my post Greece is the
A little "hair of the dog" I'd say. Or maybe a little too much
"hair of the dog".
As regular FOFOA readers know, I believe the BIS (the Bank for International
Settlements) is prepared to manage the clearing of international trade after
the inevitable collapse of the dollar. And the preferred clearing mechanism
at the BIS? Gold, of course, at a much higher value than today. A
The IMF would of course prefer to be the "global banker", using
SDRs which are mostly dollars, but who do you think will win the confidence
game this time? The IMF encourages more "hair of the dog", just
like Dennis Kneale! What about the BIS?
Here is what the BIS thinks...
The Western world
keeps spending its way to disaster
by Neil Reynolds
The Globe and Mail
Published on Wednesday, May. 12, 2010
The Swiss-based Bank of International Settlements (BIS), the oldest
international financial institution in the world, has functioned as the
central bank of central bankers for 80 years. In a working paper written by
three senior staff economists (“The future of public debt: prospects
and implications”), released in March, BIS warns that Greece isn't the
only Western economy with hazard lights flashing.
Indeed, it names 11 more: Austria, France, Germany, Ireland, Italy, Japan,
the Netherlands, Portugal, Spain, Britain – and the United States.
Without “drastic measures,” BIS says, all of these countries will
hit a wall of debt.
When the senior economists at BIS warn 12 of the richest countries on Earth
that they must take drastic action to reduce debt, you know that it’s
time to check the air bags. The only thing you don't know, that you need to
know, is the precise time of the crash. The lesson is already obvious:
Governments can't drive recklessly, use only the accelerator for braking and
not eventually crash.
The BIS paper notes that the public debt of 30 OECD countries will (on
average) exceed 100 per cent of GDP within the next year, “something
that has never happened before in peacetime.” But it warns that
conventional debt-to-GDP ratios are misleading – missing
“enormous future costs” that are already authorized by past
fiscal commitments, that will inexorably inflate public debt further still.
By the end of 2011, the BIS economists calculate, U.S. government debt will
have risen from 62 per cent of GDP in 2007, not quite three years ago, to 100
per cent. Britain’s debt will have risen from 47 per cent of GDP to 94
per cent. Italy’s debt will have risen from 112 per cent of GDP to 130
per cent. All together, the public debt of the 12 countries will have risen
from 73 per cent of combined GDP to 105 per cent.
At this debt level, the risk of sovereign default rises rapidly. But the BIS
analysis says this unprecedented debt level will itself increase
“precipitously” in coming years. It will not, as each of these
countries separately insists, fall.
For one thing, the BIS report says, countries that proclaim spending
restraint generally do not actually do it. Normally, they hold the line
– temporarily. Normally, they slow the rate of increase –
temporarily. All pronouncements aside, the BIS report says, these 12
countries have made such grandiose spending commitments that they are
predestined for higher debt. The U.S. debt-GDP ratio will hit 150 per cent in
the next decade. Britain’s debt-GDP ratio will hit 200 per cent.
Japan’s debt-GDP ratio will hit 300 per cent.
These increases in debt, the BIS report says, are untenable. The financial
markets, of course, won't permit them. The only mystery, the BIS report says,
is exactly when the markets will intervene. History shows, the report says,
that when the markets do rebel, they often do so instantaneously and
decisively – often without much warning.
“When, in the absence of fiscal actions, will investors start demanding
a much higher compensation for the risk of holding the increasingly large
amounts of public debt that [these countries] are going to issue to finance
their extravagant ways?” the BIS economists ask. “The question is
when will markets start putting pressure on governments, not if,” they
When the markets do require a much higher risk premium, the consequences will
be felt around the world – on rich and poor countries alike, on the
thrifty as well as on the profligate. These consequences will certainly fall
on Canada as well. If it takes Europe to save Greece, what will it take to
save Europe? Emerging economies have done a better job than the rich
countries in controlling debt. Asian government debt stands at 40 per cent of
GDP; Central European government debt stands at 28 per cent; Latin American
government debt stands at 37 per cent.
In its most spooky, mind-boggling analysis, the BIS economists try to
determine the share of GDP that interest rates would require –
assuming, across the next 30 years, that the 12 governments kept spending as
they are spending now. In the case of the United States, interest payments
would cost 22 per cent of GDP in 2040. In the case of Britain, interest
payments would cost 27 per cent. For Britain, this would shove the
government’s share of GDP close to 80 per cent.
Prime Minister Stephen Harper and Finance Minister Jim Flaherty are right to
press the more profligate countries for an exit strategy from stimulus
spending. But what the rich economies actually need is an exit strategy from
too much spending of all kinds and a return to some pragmatic recognition of
the limits of government.
The writers of the BIS report are Stephen Cecchetti, head of the BIS monetary
and economic department; M.S. Mohanty, director of the BIS macroeconomic
analysis department; and Fabrizio Zampolli, BIS’s senior economist.
Their report deserves both attention and action.
© Copyright 2010 CTVglobemedia Publishing Inc. All Rights Reserved.
Presented here unmodified under the Fair Use Doctrine of
International Copyright Law
And just because I find it so darn intriguing, I present this excerpt from a
letter written by a retired financial analyst in his eighties,
Mr. Johnston of Houston, Texas to his sons and posted on the
Gold-Eagle.com website back in 1997...
"The BIS, the Central Bank's central bank, was formed in 1930 to handle
the collection of German war debt following World War I. Its members are the
central banks of the industrial world, such as the Bank of England, the
German Bundesbank, the Federal Reserve Bank, the Bank of Japan, and so on. It
is almost certainly the most powerful financial institution in the world.
Never once in its long history has it ever had to ask for help from any
A definite coolness exists between the BIS and the United States. This goes
back to the Bretton Woods Conference in 1944, held to set up the machinery
for resuming world business after World War II. Even though this conference
established the gold-backed U.S. dollar as the only reserve currency, the
U.S. did everything it could to torpedo the BIS and give sole power to the
American sponsored International Monetary Fund. The war was not over in 1944,
but the combatants still got together and defeated this U.S. grab. In the
final showdown, the Europeans and Japan never completely trusted the U.S.
As the years went by, the BIS suspicions were justified. The U.S. began to
abuse its reserve currency role by simply printing dollars. American
companies began to buy control of businesses all over the world. In 1971, President
Nixon took the dollar off the gold standard, and introduced the novel idea of
floating currencies. Meanwhile, the U.S. national debt began to increase each
year, until it now stands at about $5.5 Trillion, an astronomic amount that
can ever, ever be repaid. It was clear that the U.S. was out of control.
Along about 1972, I began to spend a great deal of time and effort in
studying the BIS and its agenda. The first thing I found was that although
the U.S. had turned its back on gold, the BIS were aggressively buying it. By
1990, the BIS were by far the largest holder of gold, with more than one
billion ounces. This amounts to an outright corner on gold.
The next thing I learned is that the BIS are extremely closemouthed. It keeps
a low profile. Its favorite M/O is the sneak attack. They have their own word
for this – "coup". Their ideal coup is one where the victim
is taken by surprise, and does not even know what hit him. The BIS tries to
leave no fingerprints. Thus their coups often become perfect crimes.
The third thing I learned was that the BIS had two ironclad objectives. Both
were so bold that they would take your breath away:
1) To destroy the Soviet Union, as a threat to world peace.
2) To destroy the dollar as the worlds reserve currency.
We all know that the Soviet Union collapsed in 1989. This was done by the BIS
without firing a shot. They simply loaned large sums of money to the Soviets,
and then called the loans. Just a routine castration! A simple foreclosure.
This is how they got the Russian gold.
The second goal, of bringing down the dollar as a reserve currency, has not
yet been reached, but I believe it soon will be."
I'll also remind you of this Q&A I posted in "The Gold
Man" (not Goldman) at the BIS:
Q: **One other item you might clarify for me is "Who is really behind
A: Perhaps, "who control them"?
Q: **The Swiss?
Q: **The eurocentral banks?
Q: **Who does BIS really represent?
A: "old world, gold economy, as viewed thru modern eyes" or "
way to move from US$ without war".
Q: **Why was Saudi Arabia just included in BIS?
Q: **Has Saudi Arabia gone with Europe?
As you ponder the above while choking down the bitterness of more "hair
of the dog that bit you" being forced down your throat by the
politicians, I'll leave you with this tasty morsel from financial advisor and
Zero Hedge contributor, Michael Krieger today...
"I feel very bad for the German people. Not only do I feel bad for them
but I can empathize. I too am being forced to sit back and watch this comedy
of errors as a corrupt, inept and increasingly dangerous class of elitist
political and financial oligarchs destroys my nation.
"On Sunday night an ex-client that I have remained in contact with since
my days at Bernstein sent me an email with a simple question: “What do
you think of the bailout.” I didn’t have time to answer it during
trading Monday but when I finally sat down I wrote the following.
"Basically, it’s a total joke as is everything else the
politicians have done. No one and nothing is allowed to fail and this relates
to the fact that the global monetary and financial system is a complete house
of cards. It’s insanely bullish for gold. If Germans rioted they would
be in the streets today. They totally got sold out beyond belief. But it
doesn’t seem to be in their nature to riot so rather I think they will
dump their Euros and buy gold. That’s how Germans riot.
"With every passing day and every new bailout of the global banks (which
is all this is, all TARP was, and all everything has been) more and more
people awaken to the fact it’s all a total scam. This will just
accelerate the process of dumping the paper currencies we use today in favor
of hard assets as this system is obviously coming down.
"A lot of people keep asking, is this the same as post Bear Stearns? I
mean here is the biggest difference in my mind. Back then people believed in
the system, the market and what we have going generally. Not now. Not
anymore. Thousands more people every day figure out it’s rigged and
it’s a ponzi scheme."
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