Finance, Fuel Prices, Economics, Markets

Default is the Answer

The question is, how do we get out of this mess? The truth is, we won’t. Political expediency will lead it where it has always led.

There will be no recovery of the U.S. economy because of the pervasive belief in the free lunch theory of economics that has led us down the same road as Japan. Let’s consider that nation, like the United States once considered an economic powerhouse. Just this week it was announced that Korean automaker Hyundai has exceeded Toyota in auto sales. Japan’s once invinceable car makers are now on the ropes and hurting badly as China gears up to take over from the fallen giant.

The Japanese economy collapsed in 1989 due to an enormous real estate bubble financed by excessive credit fostered by its central bank. Sound familiar? In 1990 the Nikkei reached an all-time high of 39,000; today, twenty years later it sits 75% lower right at 10,000. Japan has been in recession/depression for two whole decades, and the reason why is that the massive defaults from its collapsing markets were never recognized, never written off. They were carried on the books by the banks as good loans all these years when, in fact, the loans were not being repaid.

Why did they do this? Because they thought they could cheat the laws of math, have their cake and eat it too, and cover up the losses of dead banks indefinitely and they’d somehow miraculous resurrect themselves. The laws of math can’t be cheated any more than you can sit on fire and not be burned.

This is the same “solution” adopted by Barrack Husein Obama and his merry band of theives occupying the White House, as well as his predecessor. In addition to throwing a couple trillion of borrowed and printed money at the now bankrupt banks, they determined to sweep all the bad debts under the rug by changing the accounting rules so that banks could keep bad loans on the books as good loans. By the numbers, this makes the banks look solvent when, in fact, they are not.

As most readers know, the banks are not really lending, other than to hedge funds to speculate in the stock markets. The money lent by the Fed to the banks to keep them afloat was itself a new form of Ponzi Scheme. I apologize for the overuse of that term, but a rose by any other name . . . . . anyway, the money lent to the banks was for the purpose of the banks buying Treasury bonds since Uncle Sam was in acute danger of not being able to borrow nearly infinite amounts of money, so Bernanke & Friends cooked up this scheme, whereby the banks could deposit those bonds at the Fed as “excess reserves” on which the Fed would pay interest. As of May 2009, excess bank reserves totaled $840 billion; today they stand at $1.064 trillion and growing. But the banksters still are not lending despite the highest recorded reserve ratios in history. Why not?

Well, for one thing the banks are not really solvent due all those bad loans they carry on the books, and secondly there are no longer many credit worthy entities they would like to lend to. For some odd reason, the banksters suddenly became very prudent about lending. Apparently being broke has that effect on some people!

The banks are in this position because they have been insanely pushing credit down everyone’s throat with goading of our government in order to keep the Ponzi scheme economy going. A debt based money system is one that requires endless and infinite credit growth. Of course the flip side of credit growth is debt growth and only an idiot would think that debt could grow forever without disastrous consequences. This, naturally, has a lot to say about the general intelligence and integrity level of banking and politics. To wit, there is none.

Without bank lending, credit is shrinking dramatically; money is created by credit, so when credit shrinks, so does money supply. In saner times this is known as deflation, but that is a devil word not to be spoken by righteous men. So, when credit shrinks, the economy does likewise. To repeat, there are two reasons why the economy will remain trapped in depression. The first is bankrupt banks with trillions of bad loans on the books; the second is a populace that is hopelessly in debt and cannot repay those loans, or at least a too large percentage of them cannot. Ultimately, the bad debts on bank books will grow and grow, and loans will increasingly not be made, businesses will be starved for capital in an environment where the consumers are retrenching anyway, and on and on it will go just like Japan continues to do. Like flushing the toilet, it all spirals down the tubes.

There is yet a third element to the US situation that Japan does not have, which is the U.S. dollar as world currency. Like Japan, the US will try to bail itself out of this viscous circle by government stimulus . . . . borrowing and printing ever more money. The hope here is that inflation will erode away much of the debt overload. Unfortunately, this will not work because the end result will not be price inflation but dollar depreciation that ultimately must result in an international currency crisis and the death of the dollar, which will amount to the same thing as inflation, only in this case will be hyperinflation as the dollar looses upwards of 75% of its value. And when that transpires, any notion of the government engaging in deficit spending comes to a sudden end.

There is virtually nothing the government can do to fix the economy, any more that Bernie Madoff could extricate himself from his scheme; they can only succeed in making it worse. They merely rearrange the deck chairs on the Titanic while goading the band to play louder.


October 23, 2009 - Posted by | Uncategorized

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