Introduction
Debt bubbles eventually pop and when the bubble bursts, there is an implosion of debt, which turns an orderly retreat in prices into a “crash” with devastating consequences.
The debt bubble is about to burst creating a debt cemetery
Jeff Nielson writes in Bullion Bulls Canada writes of the Debt Cemetery:
A normal debt scenario implies that debt is being accumulated gradually – and that the inability to service such debt is also a gradual process.
This is not the case with the US Economy, and more particularly, with the U.S. government. In the case of the U.S. government, not only has it been recklessly amassing “unfunded liabilities”, but it has plundered $5 trillion of government “trust funds”
In other words, while U.S. government obligations for its extremely bloated “entitlement programs” are increasing exponentially rather than arithmetically, the U.S. government has been hollowing-out this “debt bubble” by stealing the money which was supposed to pay for these entitlements. Like a hoard of termites devouring the foundation of a house, the U.S.’s political parasites have eaten-away the U.S.’s fiscal foundation.
This not only ensures the bankruptcy of the U.S. government, but it creates an ugly, “future shock” scenario, where tens of millions of Americans who are totally relying upon these programs to maintain their standard of living in their old-age will, at best, get paid-out pennies on the dollar versus what they were promised by the U.S. government.
The U.S. government’s most-recent estimate of its own “unfunded liabilities” was about $70 trillion. Given that this amount bounces around (due to economic fluctuations), and given that this huge sum greatly exceeds global GDP, the precise number is almost irrelevant. The U.S. government is not only totally broke, but already burdened with a national debt which it is only capable of servicing by keeping interest rates frozen at 0%.
The only way that the U.S. can/could make payments to the beneficiaries of these programs is through hyperinflationary money-printing: printing trillions and trillions of dollars “out of thin air”. Given that such hyperinflation must take the value of the U.S. dollar down to near-zero, it becomes virtually irrelevant whether the nominal amount of these “benefits” is $1 trillion or $70 trillion, since the real-dollar value of these “entitlements” will be near-zero.
Part of this $70 trillion debt-bubble is “Social Security” obligations. In the case of this social program, it is quite easy to understand the repercussions of beneficiaries only receiving pennies on the dollar: regardless of the nominal amount of the “benefit”, its real-dollar value will be almost nothing
Even though these state/local debt bubbles are proportionately smaller than the federal debt-bubble, they are arguably “worse” – because state and local governments don’t have their own “printing presses” (even though some state Governors are already acting like they have one). Again, these two levels of government are totally broke, and up-to-their-eyeballs in debt. This means that for the “beneficiaries” of unfunded, state and local social programs, with the exception of the minority at the “front of the line”, “unfunded” means zero benefits.
It is also important to remember that much of the $5 trillion stolen from U.S. government “trust funds” was plundered during years when the U.S. government was bragging about the “strength” of the U.S. economy. In other words, this wasn’t the case of “well-meaning” politicians being “forced” to encroach upon these funds due to “unforeseen crises” or “economic slumps”.
Instead, the vast majority of squandered, trust-fund money was thrown away, simply so that whatever Democrat or Republican was in charge of the White House could pretend that U.S. “official deficits” were trillions of dollar less than what these politicians publicly claimed. Simply, they stole money in order to be able to successfully lie about the U.S.’s finances (temporarily). Meanwhile, the other half of the two-party dictatorship would cover-up this stealing (and lying), by never alerting the American people to what was (and is) taking place.
These “leaders” have literally run the entire U.S. economy as a “Ponzi-scheme”. The ring-leaders of the Ponzi-scheme (the Wall Street Oligarchs) have not only been stealing government revenues as fast as they are received, but have ordered their political servants to incur trillions in new debt – so they could steal even more.
Demographically, the “little people” (80% of all Americans) now only hold a tiny, 15% of all U.S. wealth. At the other end, the “filthy rich” (the top-1% of all Americans) hold roughly 40% of all wealth. Let me quantify those numbers a little more – to make sure they sink-in.
Approximately 300,000 Americans hold 40% of all U.S. wealth, while 250 million Americans must divide-up only 15% of the wealth. Put another way, each member of the filthy rich holds more than 0.000001% of all U.S. wealth.
There is an obvious debt-bubble in U.S. commercial real estate. The value of U.S. commercial real estate (of what was once a $6 trillion market) has already plummeted by 30% (with much more “plummeting” to come). Meanwhile in the fantasy-world of U.S. debt-markets, “extend and pretend” is still the operative phrase.
For those who aren’t familiar with yet another U.S. dead-beat colloquialism, “extend and pretend” is where (for the last decade or so), trillions of dollars in U.S. corporate debt has been automatically “rolled-over” (i.e. “extended” under similar financing terms). This mountain of debt has been rolled-over while totally ignoring the value of the “assets” which (supposedly) secure this debt.
While the total value of the assets in the commercial real estate market has shrunk from roughly $6 trillion to a little more than $4 trillion (just in the last 18 months), these rapidly diminishing assets (supposedly) “back” not only an equal amount of debt, but a greater amount of debt, since not only has all this mortgage-debt been “rolled over”, but U.S. corporations have continued to increase their indebtedness. The ultimate result of this financial-suicide has been to dramatically ratchet-up the leverage in this sector.
What makes this market an example of a “debt bubble” rather than an “asset bubble” is that the “bubble effect” is not being produced by soaring prices leading to a grossly over-valued market, but rather where simply the (debt) leverage has been rapidly ramped-up. In other words, this bubble doesn’t even have the (faintly) redeeming quality of being added leverage used to “chase high returns”. Instead, this has been a deliberate ramping-up of leverage on debt, where it has been obvious the whole time that all that has been done is to delay debt-defaults and the re-pricing of this debt “today” – at the expense of creating a market which must implode (tomorrow).
Of course, since all “bonds” are (by definition) merely a type of loan, the U.S. Treasuries market is primarily a “debt bubble”.
As with the commercial real estate debt-bubble, the Treasuries debt-bubble is a “bubble” because the ability to “service” this mountain of debt has been severely impaired. While the commercial real estate market has become radically more leveraged due to falling asset-values, the U.S. Treasuries debt-bubble has become much more “leveraged” due to the collapse in government revenues (the largest plunge in U.S. government revenues in recorded history).
The morally and intellectually bankrupt members of the Obama regime would have Americans believe that the “stimulus” debt being added to the national-mountain is the equivalent of bailing-out the Titanic (except they would use some ridiculously optimistic euphemism). As the chart above clearly displays, each new dollar of government debt is like blasting another hole in the “hull” of the Titanic: it must (as a matter of simple logic/arithmetic) cause the Titanic to sink sooner.
While many Western economies are creating their own “debt bubbles”, and moving toward economic cataclysm, none can match the lemming-like fanaticism of U.S. government “leaders” (i.e. banker-servants). Today it is blowing-up (i.e. inflating) these debt-bubbles, while tomorrow they will blow up: a “debt cemetery”, of a magnitude which has never been seen before, and hopefully will never be seen again.
Might a credit boss arise to issue and manage credit as the debt bubble implodes and the economy shatters ?
I believe that “Credit Bosses”, that is credit seigniors, will oversee the disbursement of credit both in the US and Europe as the debt bubble implodes and the economy shatters.
Here in the US, I envision, that out of a coming credit crisis, where there is no credit available, a Financial Regulator, will exercise Discretionary Governance, and announce a Home Leasing Program administered by the banks on their REO properties and those of Freddie Mac, Fannie Mae and the US Federal Reserve.
Mortgage lending and securitization of loans will cease, and leasing of homes will be a public private partnership cooperative endeavor. Companies that have done servicing mortgage-backed securities, such as Anworth Mortgage Asset Corporation, ANH, and Annaly Capital Management, NLY, will quickly disappear from the economic landscape, as mortgage bond funds such as Goldman Sachs Mortgage Bonds, GSUAX, tumble in value. I also envision that this Credit Seignior, perhaps in public private partnership with American Express, AXP, and Capitol One Finance, COF, will provide seigniorage for credit. He will issue credit mostly to those companies which serve strategic national needs.
In Europe, I see a new role fo the President of the ECB. I envision that in response to severe credit contraction and banking ill-liquidity, that he also will be the “Eurozone Credit Seignior”, as he accepts sovereign and other debt and issues credit to Eurozone member banks thereby keeping some degree of money liquidity flowing.
I also believe that “framework agreements”, that is gentlemen’s agreements will be announced in Europe as various crises arise, providing seigniorage and establishing global corporatism and state corporatism as economic governance. I foresee a greater fiscal union where the Eurozone evolving into a region of global governance where national sovereignty is a concept of a bygone era.
When the debt bubble bursts, the world will see “the end of credit” as it has traditionally been known, where credit credit coming from the seigniorage of sovereign nations issuing sovereign debt and financial institutions securitizing bonds will no longer be done.
Governments will become seignior, that is they will exercise seigniorage and become the first, last and only provider of credit. Then only food stamps and strategic needs will be financed.
A failed Treasury auction may prick the debt bubble causing it to burst
A shadow banking system has been creating credit, that is money, alongside the sovereign debt central banking system to effect seigniorage. The plunge as seen in the Annaly Salvos’s chart of the shadow banking liabilities vs traditional banking liabilities communicates the end of its seigniorage, and an end of credit, that is money, in the shadow banking system.
Zoltan Pozsar’s Fed Paper is the basis of Tyler Durden’s article Will The Record Plunge In Shadow Liabilities Impair Current Account “Shadow” Deficit Funding And Guarantee A Double Dip?. Mr. Durden writes on the critical Landesbank function in the shadow economy stating: “As major investors of term structured credits “manufactured” in the U.S., European banks, and their shadow bank offshoots were an important part of the “funding infrastructure” that financed the U.S. current account deficit,” the proper functioning of the Landesbanks is crucial to maintaining a stable and efficient market funding structure.”
Like forever, the Landesbanks, starved for yield in low-yield Germany, had been buying US home mortgages. Then with the repeal of Glass Steagall Act, Wall Street began securitizing mortgage loans, that is packaging them in CDOs and offering them as highly leveraged investment vehicles. These had spectacular reception which were gobbled up by the Landesbanks as the rating agencies gave them and the underlying loans the very best of ratings.
Then came the subprime crisis and an explosion of delinquencies on the mortgages followed by a rating downgrade (after the fact) which made the securities impossible to trade.
So the Landesbanks took the mortgages off balance sheet and placed them in SIVs; and now are declining to publish details of their investments, as well as the details of the stress tests. This obscurity and opaqueness is the equivalent of a financial black hole at a time when transparency would be most helpful. Tyler Durden of ZeroHedge asks a very important question: Will The Record Plunge In Shadow Liabilities Impair Current Account “Shadow” Deficit Funding And Guarantee A Double Dip?
I believe that the plunge in Shadow Liabilities may be the major contributing factor in a bond market collapse led by US Treasury bonds failing at auction; then also, there simply may be a lack of demand for US Treasury Debt. It is as Nassim Taleb relates: ”We Are Going To Have, At Some Point, A Failed Auction.
I think Greenspan had full knowledge of the Landesbank shadow banking system.
Ben Bernanke came along and appraised the US and international banking situation and seeing the plunge both in the Landesbank shadow banking system liabilities and the traditional banking systems liabilities, decided to integrate the US banks, KBE, and the too-big-to-fail-banks, RWW, into the central bank via the Fed’s QE TARP Facility.
This constituted a financial and banking coup. This “nationalized” the banks, and in the process of capitalizing them with 1.2 Trillion of US government bonds, which now reside as “excess reserves” at the Fed, privatized the nation’s wealth into the hands of the bankers, and socialized the losses of the bank’s toxic debt to the taxpayers.
The value of the excess reserves, can be observed over time by following the ETFs EDV and TLT. When the bond market does turn down, the 1.0 Trillion in excess reserves will simply rot away, that is deteriorate. I do not believe the banks will pull their US Treasuries out of excess reserves and sell them and go short the stock or bond market or buy gold or silver.
The value of the toxic assets residing at the US Fed, can be approximated by observing the mutual fund FAGIX as it has a balanced portfolio of distressed securities. Yes, one can us FAGIX as a proxy to determine the value of the Federal Reserves holdings at any point in time.
The failure of debt will mean the start of Kondratieff Winter, and eventually the introduction of a world-wide credit system where one will be issued a mark, that is a charagma to conduct economic transactions.
The failure of debt and the economic system as a whole was foreseen and recorded in Bible prophecy.
The Apostle John, was exiled to the Isle Of Patmos, where in his 90s, had a dream, that is a prophetic vision, of today’s events, where he saw a Beast System rising to rule mankind. The beast is a world-wide system of global governance Revelation 13: 1, consisting of ten regions as called for by the Club of Rome in 1974, rising from the sea of humanity; one of these regions is the Eurozone, another is the North American Continent, and another is the ASEAN trading group. The beast mentioned Revelation 13:1-4 is the same one as mentioned in Daniel 7:7, when fully formed it will be world government ruling over humanity in ten regions of global governance. Through global corporatism it will direct mankind’s seven institutions.. The sea he referred to is the sea of humanity being tossed about in all of its economic, political and governmental activity, by the process of globalization and Milton Friedman neoliberal inspired economic activity where currency traders are “free to choose” whatever currency they desire to speculate in.
The beast’s characteristics and the world’s response to the beast is found in Revelation 13:2-4: ”The beast which I saw was like unto a leopard, and his feet were as the feet of a bear, and his mouth as the mouth of a lion: and the dragon gave him his power, and his seat, and great authority. And I saw one of his heads as it were wounded to death; and his deadly wound was healed: and all the world wondered after the beast. And they worshipped the dragon which gave power unto the beast: and they worshipped the beast, saying, Who is like unto the beast? who is able to make war with him?”
One of the beast’s heads, apparent suffers an apparent mortal wound: this is the global financial system experiencing a breakdown; which will according to the prophecy, be healed, that is have a recovery and able function to some degree. The world’s population will be amazed by the recovery; and accept and provide allegiance to the beast system.
Perhaps the recovery will come through an international currency system, that is a global currency system, being provided by a Global Seignior.
Bible prophecy of Revelation Chapter 13, foretells that a Sovereign arise to rule globally (Revelation 13:5-10). He will be complemented by a spiritual leader who has a unifying vision for humanity; this individual will also be the Seignior, an Old English word meaning top dog banker who takes a cut (Revelation 13:11-18). He will direct the 666 credit system (Revelation 13:17-18), which is the seigniorage system whereby one will be given the charagma, or mark, necessary to conduct commercial activity.
Suggested reading
Tyler Durden, ZeroHedge article Will The Record Plunge In Shadow Liabilities Impair Current Account “Shadow” Deficit Funding And Guarantee A Double Dip? … and
Ezra Klein of the Washington Post article 5 Places To Look For the Next Financial Crisis … and
Annaly Salvos, SeekingAlpha article NY Fed’s Paper On The Shadow Banking System Of Vast Importance … and
Possner Pinch Minyanville article Liquidity in Economy Never Higher, Yet Banks Growing More Illiquid relates: “Liquidity in the overall economy has never been higher, yet banks are growing more illiquid as they reach for yield. Loans aren’t liquid. Hedge fund investments aren’t liquid. CRE holdings aren’t either. Which leads to some interesting questions. If, as David Merkel suggests (rightly, in my view) that in this day and age monetary policy is synonymous with credit policy, how much looser can policy get? And given the implosion in lending that has happened in this economy, will anyone care?” …. I care because I am concerned the liquidity squeeze could like to liquidity evaporation thereby creating systemic risk ….. and
Andrian Ash, Daily Reckoning article Credit Deflation Lands In Britain relates how the UK is going to recapitalize and re-liquify its financial institutions: “UK banks will soon be able to post raw loans – rather than securitized loans that have been bundled into asset-backed bonds – as collateral against short-term liquidity aid from the Bank of England. This will mean lending central-bank cash against the commercial banks’ major assets. securitization of UK consumer, mortgage and business debt has all but collapsed. Net-net, there haven’t been any sizeable securitizations of UK bank lending for six months running – the longest period since 1998.
The two months before that actually saw securitizations paid back, and at the fastest pace on record, down by £26 billion. Which is a pity for the UK’s formerly go-go-crazy-bones credit bonanza.
In the 10 years ending Dec. 2009, securitization added £325 billion to the growth in UK bank lending, expanding new credit by more than 20%. And why not? Securitizing bank loans, by parceling them up and then selling the debt to investors both foreign and domestic, gave banks the chance to lend the same Pound twice, skimming a profit both times. It also gave insurance and pension funds the chance to invest in Britain’s record debt bubble…a boom which ended with more people working more hours to service more debt than ever before in history.
That bout of collective insanity has now got the DTs. Because second, and as a result of securitization’s collapse (or so we guess here at BullionVault), private-sector UK loan growth overall last quarter did what it’s never done before (not since records began in June 1963, at least) and actually turned negative.
The Bank of England’s decision thus looks timely, if ineffective against the credit deflation already underway.
To repeat: UK bank lending to the private sector has never previously shrunk, not in the 47 years of available data. And lending cash to commercial banks Walter Bagehot-style – albeit by accepting their debtors in turn as collateral, and not charging that “high rate” the 19th-century economist recommended either – is what central bankers are for, after all.
Unlike the Bank’s failed attempt to inject cash into the UK economy via Quantitative Easing, this latest wheeze to underwrite the credit-supply will at least keep the Old Lady’s cash onshore. Because the raw loan’s end-borrower “must be UK-based.” Which should stop the tabloids screaming about “foreigners stealing” this particular chunk of Britain’s monetary easing when it begins.
Whether it stems the UK’s credit deflation remains to be seen. And whether that deflation ever gets to stem the ongoing inflation in prices still awaits history’s verdict, too. Because while private net lending shrank between April and July, quarterly consumer-price inflation meantime rose to 1.3%, knocking 3.3 pence off the purchasing power of each Pound Sterling compared with 12 months prior.
Deflation in credit but inflation in prices? With the fastest GDP growth in four years coming in at 1.1% at market (i.e. unadjusted) prices across the quarter?”
Commentary
The Chart of Debt shows investors have been seeking the “safe haven of bond” from the stock market since April 1, 2010
keywords: shadow banking, shadowbankingsystem, europeancreditseignior, eurozonecreditseignior, debtcemetery, debtbubble,wonderafterthebeast, followafterthebeast, mortalwound, beastsystem, fiscalfederalism, globalcurrency, globalcurrencysystem
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