“There is a current set of delusions that is powerful
and dangerous: that monetary debasement can be infinitely pursued without
consequences; that the financial system is now solid and sound; that the low
volatility and high prices of stocks, high-end real estate and bonds are
real; that bonds are a safe haven; and that large financial institutions
which get into trouble in the future can be unwound in a much safer way than
they could be in 2008."
-Paul Singer
We had
the “not necessarily” storm of the century in San Francisco. The following
day, I went to the local gas station to top off the fuel for one of our
vehicles. I noticed that the credit card system was down. The attendant said
it was a ‘satellite thing’.
Suddenly,
it became clear to me. A small glimpse of how quickly things can and probably
will spiral out of control. Once one realizes the incredible lack of
redundancy that supports payment systems and the flow of credit - the shock
of just in time modern society sets in.
Whether
imposed by authority or by accident, a true banking holiday would make the
value of necessities skyrocket in price relative to the sudden supply
shortage.
If
people don't have cash, no fuel gets pumped. No fuel deliveries crash the
pumping stations. One by one - in a real life daisy chain - thousands of low
margin cash-or-credit churning businesses shut down; each one a small domino
in a closely knit system of distribution.
There
is no use predicting when these nodes will break down. The warning signs are
all around us.
According
to the Boston Consulting Group, between household, corporate and government
debt, the developed world has $20 trillion in debt over and above the
sustainable threshold by the definition of "stable" debt to GDP of
180%.
$20
trillion is more than the world’s largest economy. And no, that does not
include ongoing and future social obligations to the tune of many many more
trillions.
There
is no way to eliminate the excess.
All
attempts have failed thus far. All of them will. We are living through the
mother of all poisonous interventions — a truly barbarous and destructive
implementation of policy - and in a supposedly civilized society.
And
where is collective policy? Call it a “Global Coordinated Debt
Restructuring”.
In
other words, a self-imposed jubilee is being crafted. Self imposed by the
banks and for the banks - in the name of the people.
Because
this big write down is going to cost something. It’s going to need some sort
of collateral to save the banks and to prevent ‘collapse’.
For the
moment, we are paralyzed by analysis. We are caught up in the interpretation
of the toxic entrails of modern finance while reality smolders below.
Constant
analysis of a false reality is like the wake of a boat that is driving the
boat. Mesmerized by the wake, but headed for an ice berg. Just a temporary
impression — soon to fade if you look back far enough. Unaware of the
direction we are headed.
We
can’t do anything to stop it — only prepare for the likely outcome.
One of
the chief consultants of the BCG author, Daniel Stetler put it this way
recently:
"You have to think about a huge tower of debt on shaky
foundations where central banks pump concrete in the foundations in an
emergency effort to avoid the building from collapsing and at the same time
builders are adding additional floors on top".
"Today central banks give money to institutions, which
are not solvent, against doubtful collateral for zero interest. This is not
capitalism."
"It is the explicit goal of central banks to avoid the
tower of debt to crash. Therefore, they do everything to make money cheap and
allow more speculation and even higher asset values. It is consistent with
their thinking of the past 30 years. Unfortunately, the debt levels are too
high now and their instruments do not work anymore as good. They might bring
up financial assets but they cannot revive the real economy."
"In my view [Piketty] overlook the fact that only
growing debt levels make it possible to have such a growth in measured
wealth. Summing up, Piketty looks at symptoms – wealth – and not on causes –
debt."
"We need to limit credit growth and make it
tax-attractive to invest in the real economy not in financial speculation.
This will happen automatically if we return to normal interest rates. The key
point is that we as societies should reduce consumption which includes social
welfare and rather invest more in the future."
"We all are in a Ponzi world right now. Hoping to be
bailed out by the next person. The problem is that demographics alone have to
tell us that there are fewer people entering the scheme then leaving. More
people get out than in. Which means, by definition, that the scheme is at an
end. The Minsky moment is the crash. Like all crashes it is easier to explain
it afterwards than to time it before. But I think it is obvious that the
endgame is near."
More
than three years ago the BCG suggested that a one-time 30% ‘tax’ on financial
assets would be needed to put banks back into ‘solvency’. The low hanging
fruit will be picked first.
Because
rather than go door to door looking for actual physical items, of which very
few actually exist, they will make it easy by handling the transfer gently,
electronically.
The
initial sound will probably be muffled. But the effect will be destructive on
a geometric scale as it unfolds and infiltrates every crevice of
civilization.
“Nowadays people know the price of everything and the
value of nothing.”
― Oscar Wilde, The Picture of Dorian Gray
