The dishonesty of the mainstream financial media manifests itself in hiding the terrible prospects for our future. Bankruptcy for 90 per cent of humanity, enormous profits for a handful of oligarchs. Your wealth will not be lost – it will just have another owner. The global financial system, built on the total exploitation of the peoples of this planet through a Ponzi scheme called paper “money” comes to an end. Every Ponzi scheme fails when the money coming in is not enough to compensate for the money going out. In a macro economic context it means that the wealth production in goods and services is not enough any more to compensate for the extraction of wealth through debt expansion including fiat money creation.
The Trump administration still spreads the propaganda that it can achieve three percent plus growth this year and forever and ever, thereby outgrowing the debt accumulation. Alan Greenspan refuted this beautifully in pointing out that the US needed at least two percent productivity growth per year.
Staring bankruptcy into the face, there are only two options: A soft bankruptcy via inflation and a hard bankruptcy via a cessation of payments. The Federal Reserve appears to do everything to bring about a hard bankruptcy with its insistence on two or more rate hikes this year, four next year, accelerated balance sheet reduction and a strong Dollar policy. Where is the weakest link in the daisy chain of the global financial system? Is is emerging markets, the US consumer or a blow up somewhere the Eurozone?
The main effects of a solvency crisis is felt in credit. Once abundant it can soon become unavailable. Here are a few thought on this:
1. Almost all business transactions rely on credit. What happens if credit dries up almost entirely? Who will still have currency to buy or pay?
2. The next recession will be different from all previous ones due to the unprecedented high levels of debt. High indebtedness ruins credit, thus ruins the ability to borrow. Who will be left with enough credit to borrow when the downturn comes?
3. If borrowing fails and cash up front becomes the norm, what part of the private sector will survive? What company has the resources to pay staff and suppliers in cash?
4. Banks will not lend if the counter party has no credit. Will the pledging of assets as collateral work if the market for selling the collateral will be gone due to a lack of funds?
5. What will happen to the global banks that dominate the financial world if the lack of credit shuts down other nation’s economies and the world economy as a whole? Massive rises in loan defaults would destroy their balance sheets. Governments and central banks can save them from collapse and keep them alive as zombie banks. Will this rekindle the bank lending that is needed to save the private economy?
6. In such a scenario cash would be extremely valuable and central banks around the world would produce it in unlimited quantities to fight the crisis. Worldwide, less than 10 per cent of all currency exists in bank notes and coins. How many months or years will it take to produce enough bank notes and coins for a cash based economy?
7. Events could unfold so quickly that any plan to revive the economy will come too late. How many meals is a nation away from mass insurgency and revolution?
8. What is the value of a Dollar if the private sector that produces the goods and services that back it has gone? If the shelves in the supermarkets are empty? If petrol stations have run dry of fuel because global trade has come to a halt?
9. Electricity is indispensable in today’s world. What happens if power stations shut down because they have no cash to pay for the fuel they need to generate electricity? Can you imagine what a world without electricity will look like?
10. What happens to hundreds of millions of pensioners if pension funds stop paying because they sit on piles of illiquid assets?