|
Themes
And Analogies: Kondratieff Winter; Supercycle;
Interconnected Financial Defaults; Bubble Bursting;
Financial Dominos Falling; Financial House Of
Cards Collapsing; Financial Nuclear Reaction;
Financial Meltdown; Contagion; One Hemorrhaging
Patient Giving Blood to Support Another Patient
Who Is Hemorrhaging Even More; Financial Hurricane
- Leaving The Eye And Entering The Second Part
Of The Storm.
For the
past 80 years, governments around the world made
a series of financial mistakes. They detached
their money from gold and silver, enabling more
and more “money” not backed by anything of value
to be issued.
For the
past 30 years, many governments in the developed
world lived beyond their means. They ignored the
warning that debt can cause very serious problems
(the rich rule over the poor, and the borrower
is servant to the lender - Proverbs 22:7).
They ignored the principle that every 50 years,
during the Year of Jubilee, the debts of the people
of Israel were forgiven and the financial system
was reset. To finance their over-spending, they
issued debt. National levels of debts have steadily
accumulated until they are at critical levels.
Now there is danger of default.
Adding
to the financial instability, highly leveraged
banks bought the debt of these nations. If enough
smaller nations default on their debt, or if a
larger nation defaults on its debt, the banks
may collapse into bankruptcy.
Adding
to the financial instability, in response to the
first part of the financial hurricane, the FASB,
the Financial Accounting Standards Board, along
with most governments, allowed banks to over-value
their assets. That means that those banks are
weaker than they might appear.
Adding
to the financial instability, governments promised
trillions of dollars worth of pension and health
care benefits which can never be paid.
Adding
to the financial instability, hundreds of trillions
of dollars worth of derivatives, which function
as a kind of insurance, have been bought and sold.
If interest rates make a sudden move up, or if
government debt or banks collapse, derivatives
claims will be activated. And, if an issuer of
derivatives is under-capitalized and can’t meet
its obligations, that might cause the parties
it promised to insure to fail to meet their obligations,
and a chain reaction of derivative failures can
ensue.
Adding
to the financial instability, the gold and silver
markets are very small compared to the amount
of money and credit that have been created. As
this less-quality money seeks safety, there can
be an explosive move upward in the price of the
best money - gold and silver. That can cause a
crisis of confidence in governments and their
non-gold-and-silver-backed currencies.
Adding
to the financial instability, some governments
created moral hazards by responding to previous
crises by lowering interest rates, loosening credit
and bailing out companies. That encouraged people
and institutions to take on additional risks and
make more bad investments.
The US
government responded to the bursting of the stock
market bubble in 2000 and then the bursting of
the housing bubble by creating money, lowering
interest rates, loosening credit, deficit spending,
issuing more and more bonds, bailing out companies,
guaranteeing money markets, and buying bad debts
at too high a price. That created another and
bigger financial bubble - a government debt and
currency bubble. That gave a little temporary
relief (the eye of the hurricane) but made the
situation worse. Now the US government is in a
weaker and more precarious financial position.
All of
these errors and instabilities have created a
situation in which the government debt and currency
bubble has started bursting. It started in the
most indebted of the European nations. Since the
US made the same mistakes and went to the same
excesses, expect the US government debt and currency
bubble to burst. Expect everything that is “too
big to fail” to be bailed out with more “money”
and credit. Expect real things to get more expensive
when measured in most fiat (non-gold and silver
backed) currencies. Expect a much lower standard
of living.
How Governments Respond
To Severe Financial Crisis
When governments
have been spending too much, giving too many perks
to too many people, and are unable to sell more
bonds and pay off their debts, they have the following
options (or combination of options):
Raise taxes significantly.
This may be hard to do.
Cut spending significantly.
This may be hard to do.
Declare
bankruptcy. This causes immediate, serious
financial and political consequences and is hard
to do.
Create
more money and pay off the debts with increasingly
worthless money. This is easier to do than
declare bankruptcy, since it buys time, but it
is worse to do because it destroy the currency
and much of the economy and the confidence of
the people in the government. Since it is easier
to do, and most people can’t easily see it happening
or understand the implications, and since it delays
the day of reckoning, most governments tend to
choose this option. That is what the European
governments choose to do the weekend of May 8-9,
2010. That means the most likely outcome to the
current financial crisis is a hyper-inflationary
depression.
80 years
ago Ludwig von Mises understood the choices and
outcomes to a credit bubble: “There is no means
of avoiding a final collapse of a boom brought
about by credit expansion. The alternative is
only whether the crisis should come sooner as
a result of a voluntary abandonment of further
credit expansion or later as a final and total
catastrophe of the currency system involved”.
Who Is Responsible
For Allowing This To Happen?
Flawed
economic theories (Keynesian); stupid or corrupt
(or both) political leaders from both parties
over many years; negligent regulators; an uninformed
and uninvolved citizenry; financial predators
that took advantage of the growing disaster.
How To Respond
The way
to respond to a government debt and currency crisis
is to buy real tangible goods that will maintain
value - especially gold and silver (and especially
silver, which is undervalued compared to its traditional
relationship to gold). The precious metals have
a long history of being able to store wealth in
inflationary and deflationary depressions. |
