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Sunday, 26 October 2008

Diving off the USS America

In these days of rapid changes in the Political paradigm, it's becoming obvious that the U.S. has overestimated the confidence it expects from the rest of the world. The fragmentation had already begun but is now accelerating as each country realizes the damage that faith in Uncle Sam's integrity, both financial and moral, can unleash.

From Taipei to Dublin, Governments which are by their nature the largest investors, are abandoning the ship as they realize that their own economies are being dragged down by the biggest economic grift in modern history perpetuated by the United States of America. The past confidence in US backed Bonds and securities is fast deteriorating as the rest of the world realizes that, a country, being an economic entity just like any large corporation, is only as valuable as it’s assets and liabilities.

We have seen this realization come along as Iceland Hungary, South Africa, Pakistan and South Korea are knocking on the IMF front door and looking for a helping hand, much the same as Banks have been doing to their governments ever since the consequences of their insane and greedy actions were finally realized. Leverage, Leverage, Leverage. It has been the new mantra in the Alchemy of creating wealth where there is none. Leverage only signifies risk and risk by it’s definition is not something that you want to pay your grocery bills with every week. Imagine that you would eat or not eat, sleep in your house or on the street, clothe your children or have them freeze all on the turn of a dime in the nefarious and manipulated Ponzi scheme that is the “Investment” world ?

You would not, as your family is your biggest priority and you reduce to the absolute minimum the potential risks to which you are exposed to ensure that they are safe, warm and well fed.

It’s unfortunate for us that Governments the world over were only too happy to go along with the crazies that were running the investment banks, the Hedge funds, the Mutual funds etc etc. Doing so guaranteed them corporate donations and a cushy place on one of their boards after they left the equally corrupt political arena. The revolving door has been spinning ever since there was a government and a merchant.

It was a given that Asia, especially China and Japan, and the Middle east oil kingdoms could not dump the dollar as their foreign reserves and thus their real value was joined at the hip to a Fiat currency. This relationship, while it kept industry flowing and brought forth the industrial might of China and Japan, was always one that was subject to the health of the U.S. and the soundness of it’s economic plinth. The destruction of that plinth and it’s rendering in to dust by deliberate policy decisions by the U.S. financial/government elite has now arrived like a tornado in the faces further East.Japn is now on the brink of collapse as their exports have plummeted and their Yen has also priced itself out of a viable export market as other currencies decline.

From the Asian Investor Online..

“Taiwan's financial regulators reportedly have ordered that nation's insurance companies to pare their holdings of the debt and mortgage-backed securities of Fannie Mae (ticker: FNM), Freddie Mac (FRE) and Ginnie Mae securities, according to a report on the Internet site of Asian Investor magazine.”

The U.S. government has poured billions of its taxpayers’ money in to these institutions for nothing. The value of the securities from these agencies relies on the state of the US housing market which is in its last death throes before ending up as a stain on the carpet. But this is a seminal illustration of the fallacy and bizarre investment logic that is the root core of the mess we find ourselves in today. And deserves an explanatory tale that does not have a happy ending…

Imagine your employer proposed to you that your wages, to feed your family and sleep under a roof, would be based on how many apples his orchard produced every year would you accept the offer Sure there would be years where the sun would shine and the frost go away before the blossoms appeared but there would be other years where the harvest would fail through uncontrollable circumstances.

If you signed up to the deal, your boss is happy and you mistakenly are happy to take the risk because this could mean extra wealth and comfort for your family. You would indeed be crazy to go for an arrangement like this but foreign Governments have been doing it for years because it’s not THEIR money or livelihood that is at stake but that of their “Family” which they are honor bound to protect but have forgotten completely about.

Slowly the realization dawns that the Apple grower has been secretly removing the topsoil from his orchard and selling it to his neighbor at a good profit. The orchard starts to suffer and the crops begin to fail. The apple farmer is still OK because he pays lower wages and makes a profit by selling the topsoil. Since the wages of the employee have been falling, his purchasing power has been falling along with it. Reduced Purchasing power ie consumer spending results in less demand for goods. The healthy response to this should be that prices reduce to enable sellers to continue to operate and purchasing power returns to the consumer.. But what the government has been doing is to interfere in this basic process and pump more liquidity in the form of easy credit in to the money supply. This restores the prices to higher levels as inflation kicks in. So now, the Boss’s employees have to pay for their groceries with borrowed money with its accompanying interest and soon finds himself living beyond his means. The credit companies are happy, the boss is happy but the consumer has just been raped. That happy feeling that the credit companies feel is based on the fact that if the consumer fails to meet his repayments, they can just force him to sell his house and then recuperate their money along with the interest. The Boss is happy that he has used his business to make a lot of profit for himself and his family out of his exploitation of his workforce and no matter what happens in the real economy he will be fine as he has stashed his nest egg away for the rainy days to come. But his hubris is about to be destroyed by his nemesis as his trust in the system of greed and leveraging will come home to destroy him in the form of a Stock Market Crash. Sound familiar yet ?

When you multiply this arrangement 10 million times with the resultant reduced consumer spending, the increased housing inventory, the increased number of people who cannot afford to buy any of this inventory, the increased unemployment because of the reduced demand for goods, the only results are falling house prices and increased poverty. Still not too bad as the creditors can just swipe up the properties and put them on their asset sheet. But as time goes on the value of these assets drops lower. When they were actually high during the real estate bubble, created by the Fed and Treasury working in concert, the Investment companies came up with the most brilliant and the at the same time the most insane virtual wealth creation in financial history. Mortgage backed securities and derivatives which are basically an insurance sold on the value of the underlying asset, in this particular case (and there are many more) the value of property. The extra leverage they could achieve on these creations is on an order of 30% or more. What his means is that the Credit Companies, and by these we are talking about Banks and investments houses etc, have inflated their assets by 30% of their actual value. Now if the real value is the value of a property then what happens when the house price plummets ? The actual loss on the asset sheet is 30 times greater as it would be if they had not leveraged the mortgage in the first place. But greater leverage when times are good means huge profits and bonuses so who are they to complain.

We have seen this asset unwinding over the last year as reality set in and the underlying asset value has deteriorated dramatically because of rising unemployment and poverty. It does not seem a long stretch to say that the Government has deliberately impoverished their own population. But that’s another matter for later..

But back to Taiwan and it’s shunning of “Government backed securities” The Taiwanese government had invested heavily in the latter in the uninformed belief that the American economy was sound and their investments were safe. Just goes to show, you don’t have to be a genius to be a central banker. Governments all over the world bought the same snake oil from Uncle Sam, in part helped by the Godzilla of corporate propaganda and Wall St.. In my own opinion, I think them calling foul now and casting the blame, no matter how well deserved, on the U.S. speaks to their own lack of intelligent forward planning and concern for the welfare of their electorate.

So what we are seeing here is the inevitable disappearance of trust which started out as one between banks, investors and corporations and now has spread to a disappearing trust between nations.

We have seen France call foul on Ireland over Bank deposit guarantees (see and ), China call foul on the U.S.saying it has destroyed the world economy with it’s Fiat based currency and trade subsidy arrangements, Germany complaining of France’s plan to assist in Industry directly by buying preferred shares to ward off the wealth funds of Asia and the Oil Kingdoms, the UK chasing after Iceland , Axe in hand, to recover the savings of UK depositors. This hasn’t broken out in war yet but as the situation becomes inevitably worse, tensions will continue to rise and we may be entering an era of isolationism and concurrent smaller regional alliances.

This weekend, Asia and European nations are sitting down to try and work a way out of the mess between themselves, deliberately excluding the U.S for the moment. Well let’s face it , who would want Uncle Sam at the table ?