How Obvious Does It Have To Get?

William (Bill) Buckler
Captain of The Privateer
Posted Jan 9, 2012

In what follows here, the example used is the US. This is not to imply that the same conditions are not to a greater or lesser extent a global phenomenon. They are - for the very simple reason that the world uses credit-based money and that governments everywhere hold their people in thrall to the “public debt” which is the underpinning of this credit-based money.

In the US, we have a situation in which nearly 50 million people are dependent on food stamps while the majority of the population is reliant on government for their day-to-day living expenses. On the other side of the coin, there are a handful of people who blithely go about losing $US Billions every year through the financial institutions they control while their annual “compensation” is an inconsiderable fraction of the losses they preside over. We have a banking system - in both the US and Europe – where the money created out of thin air (through fractional reserve practices) which used to be to lend to individuals and businesses is now being created to buy the debt of government.

The amount of that debt continues to increase everywhere - even in nations (like Japan) in which the “tax base” is shrinking as their populations age and their birthrates fall. Everywhere, the idea of a government actually reducing let alone paying off its debt is deemed grossly irresponsible because of the “recession” which would be the inevitable outcome. US ratings agencies downgrade European sovereign debt on “concerns” that the nation in question might not be able to pay off their debt while blithely ignoring the fact that this same debt is the ONLY foundation available to the credit-based monetary system.

As the “guardians” of the system, the central banks prattle about their indispensable role in maintaining “monetary stability”. To maintain this monetary stability, they decree non-existent interest rates, create ever larger mountains of new “money” to keep companies, banks and governments “solvent” and go to any length to prevent the paper “assets” involved from being genuinely priced in any form of MARKET.

There are only two minor problems with the entire system. The first is that a perpetual credit expansion is clearly and obviously unsustainable as anyone who bothers to give it even a cursory examination can see. The second problem is stated by (Herbert) Stein’s Law: “If something cannot go on forever, it will stop.”

The Year Of The “Black Swan”?

Investopedia defines a “black swan event” as: “An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict.” In that context, it is helpful to recall that the title of Sinclair Lewis’ book published in 1935 was - It Can’t Happen Here.

The statement that an event deviates beyond what is “normally expected” immediately generates the question - “expected by whom?” Every major financial event stretching back to the dawn of the Global Financial Crisis (GFC) in 2006-2007 goes beyond what was normally expected. The caretakers of the global economy have been unanimous throughout the GFC in their claims that nobody expected or predicted what would take place. The truth is, of course, that MANY people did both. But none of them were in the establishment or the “mainstream” at the time of their predictions and few of them have achieved such status since. The housing crash and inter-bank lending freeze was the easiest thing in the world to foresee. So was the inevitable onset of the “sovereign debt crisis” which followed. What was a bit more difficult was to articulate the precise reasons why such an outcome was inevitable. This newsletter has undertaken that task. So have many other individuals and publications, the vast majority of them on the internet. But in the US political sphere, there is only ONE person who has and continues to attempt to cut through the self-imposed mental blindness of most of the victims of the GFC. That person is Ron Paul, the “unelectable” candidate who will only gain the Republican nomination this year if the pap being churned out by the “mainstream” is recognized as the nonsense which it is. If you are still considering making a new year’s resolution for 2012, try this one. Repeat after us - “If it makes no sense - IT’S NONSENSE!” And so is most of what is “normally expected” by the mainstream in any nation.

Propping Up By Grinding Down:

In late 2008 as the global inter-bank lending system was freezing solid, the Irish government jumped out of the pack and announced unconditional guarantees on ALL deposits of whatever size in their banking system. Within 24 hours, every major government in the world had followed suit. As they saw it, they had no choice. Any government that did not follow Ireland’s lead was risking an instant and catastrophic bank run with its inevitable consequences. Those would have included a prostrate REAL economy and a drastic shrinkage in the government’s “tax base” (see Paul Krugman’s quote in the Global Report). This action by governments everywhere exposed the denied connection between the financial system and the real economy as nothing else could have. Now, the public plan changed and so did the rhetoric. The financial system HAD TO be saved for the sake of the REAL economy.

The method used to accomplish this has been the same everywhere. Any market valuation of the paper assets which form the foundation supporting the system has been cut off. In extremis, these “assets” have been absorbed onto the balance sheets of the central banks at the equivalent of 100 cents on the Dollar. The US Fed has repeatedly entered into “swap” agreements with other major central banks to prevent non-US banks from having to raise capital by selling assets (especially US Dollar denominated assets) on the markets. The equivalent of $US TRILLIONS has been doled out in loans and guarantees to US banks to prevent them from doing the same thing. Before and especially since late 2008, the entire valuation structure of global financial assets has been nationalised by government.

And meanwhile, what of the “assets” of the people whose “solvency” is not vital to the survival of the system? The value of their assets has plunged. No private mortgage holder has been bailed out by being paid 100 cents on the Dollar for the house he or she can no longer afford to finance. Nor has he or she been given the opportunity to borrow at 0.25 percent and put the takings in another asset paying 2-3-4- percent. Only those happily ensconced inside the system have been able to do that. The goal has been to preserve the system which props up the power of government and those in government. The method has been to prolong the agony by preventing the liquidation of the huge malinvestments built up over the course of the preceding credit expansion. The greater the pressure on the valuation of the collateral, the more credit money has been created and funnelled to those who held it on their books. The result is that in place of the deep recession which would and should have happened in 2008, the world faces a potential financial collapse in 2012 - or not long thereafter. The system has been propped up by grinding down the economy and the people who depend on it.

Pay Me Now - Or Pay Me Later

The fatal investment anomaly in today’s world is that nobody knows what anything is worth anymore because nobody is allowed to meet in an unfettered market to determine it. Valuations on every class of asset or investment have been systematically falsified in a doomed attempt to prop up a system in which the only “collateral” is a promise to pay. When the means of payment can be and is created out of thin air in ever increasing quantities, the promise is worthless.

“Pay me now or pay me later” is a famous advertising slogan used for decades by Fram, a manufacturer of oil filters for cars. The message is simple - you can pay a little bit for the filter now or a whole lot more for a new engine later. The principle remains the same in the field of finance and investment. It has been ninety years since the US government allowed the people to “pay me now” for a previous boom brought on by credit expansion. None of the methods of staving off recession which have become economic orthodoxy was used in 1921-22. But they have been used with ever increasing zeal ever since. The inevitable bust which followed every boom has been met by a new surge in government money printing, deficit spending and interest rate tampering. Obvious malinvestments (otherwise known as the “too big to fail” contingent) have been kept on monetary life support. The result is the financial world and the so-called “markets” which confront us today. It’s much too late to change the oil filter when the engine has already seized up. Blow that analogy up to the size of the entire global financial system, and the problem should become clear. It is becoming clearer slowly but surely to more and more people.

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William (Bill) Buckler
Captain of The Privateer
email: capt@the-privateer.com

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