Thank you for your interest in my posts. I did not see your post until recently or would have responded earlier.
I was attracted to the thread because of the quality of the posts by AHHAHA and others and posted in the hope of establishing a beneficial dialogue; but as time went on, responses to my posts became less and less to the extent that I wondered if anyone indeed read them. In addition, I observed that those who used to post on the thread were no longer doing so such that I was about the only one posting. Therefore, for this, as well as having less time available for posting, I elected not to continue posting.
However, I particularly appreciate your complimentary recognition in finding them of value.
In the event you may not have read the following dated article, which I believe I picked up at Kitco, I am including it as a recommended read. The conclusions may be argumentative, but the premise is worthy of considerable thought - particularly in view of present global events.
PS. Those who contend (i) that "Gold is Dead" as a monetary asset have to explain, if gold is indeed dead, why it has performed remarkably well in its role as index metal (monetary asset) in predicting the current deflationary consequences and if it has been so remarkably accurate in predicting the present, why indeed it will not be equally as accurate in foreshadowing an increase in general price when conditions warrant as it has done in the past - and (ii) those who contend that the POG is politically motivated, if not controlled by CBs to maintain it at a low price, have to explain why historically Western CBs buy, and not sell, gold when "conditions warrant" an increase in the POG, as during the 93-94 rise - as well as to how in fact CBs are capable of controlling, as opposed to influencing, the price of a very actively traded metal such as gold and w/o CB dissenters which may have a vested state interest in seeing it rise in price.
"Currency Chaos and Financial Collapse Nov 97"
Question, why has Japan not grown when as since 1990,the world has witnessed a large economic expansion in the U.S., explosive growth in South East Asia and China, and moderate growth in Europe. Within Japan,short term interest rates were decreased to .5% and the government hs reportedly initiated the largest fiscal stimulus program the world has ever seen. Why is it that the second largest economy in the world,with all of its major trading partners having substained growth,with the lowest interest rates the world has ever seen,with the largest fiscal stimulus package the world has ever seen,has not grown and now the economy is contracting at an annual rate exceeding 11% ?
And why is this deflation, and the Asian deflation, good for gold.
To understand the world financial situation is to understand the difference between reality and illusions of reality.It is to understand that the basis of all financial failures is the inability to pay debt.Debt is repaid from income or profits.When income or profits are insufficient to repay debt default occurs .Occasionally,new debts are provided to repay old debts,but this will only increase total debts and future losses.
Since 1990,the world has witnessed a large economic expansion in the U.S.,and explosive growth in South East Asia and China.Within Japan,short term interest rates were decreased to .5% and the government initiated the largest fiscal stimulus program the world has ever seen.Has anyone questioned why the second largest economy in the world,with all of its major trading partners having substained growth,with the lowest interest rates the world has ever seen,with the largest fiscal stimulus package the world has ever seen,has not grown and now the economy is contracting at an annual rate exceeding 11% ?
To begin to answer this question,one must return to pre-bubble Japan,when the Nikkei was near 40,000 when land values at Ohtemachi and Toranomon in central Tokyo would have bought all of Canada or all of California,and when Tokyo was worth more than the United States.On the basis of these valuations,trillions of dollars were lent by the Japenese Banks,making them some of the largest corporations in the world.These loans were not supported by the income of the borrowers,but by the assets they pledged for security.Today,the Nikkei is below 16,500 and dropping,and commercial land prices are down 70% and dropping. The size of total losses is unknown.However,during November/95,Japan's finance ministry announced that non recoverable loans at the Osaka based Kizu credit co-operative were 960 billion yen representing more than 70% of total loans.A further 230 billion yen were thought to be doubtful leaving less than 10%of Kizu's loans as performing assets.Does this tell us anything about how the balance sheets of the large banks really look? The loss of net worth representedby the collapse of the Japanese stock and real estate markets represents manytrillions of U.S.dollars.At the height of the bubble,Japanese land values were estimated to be between 16 to 20 trillion U.S. dollars.A 70% decline represents a $11 to $14 trillion dollar loss in the real estate market alone.
When the banks start selling real estate to repay bank loans,look for the market to drop even further.Add this to the losses totaling trillions of U.S. dollars on the stock market and the potential loss exposure of the Japanese banks is staggering. When the bubble in Japan burst and banks were facing massive loan losses and negative growth prospects,a new source of revenue had to be found.This led to a large increase in lending to South East Asia which helped fuel a bubble in these economies.In addition,exposure to derivatives increased to trillions of dollars. We have recently seen the bubble burst in South East Asia which will further add to the loan losses that the banks cannot report as they do not have the capital to do so.
It is estimated that when the Nikkei dropped below 16,500 many banks capital fell below the 8% minimun required by Japan's Finance Ministry.This does not include the losses on loans to the Japanese and South East Asia bubbles that are real,just not reported.
When the Japanese bubble burst,the Japanese government began a series of fiscal and monetary stimulation to get the economy restarted.Total government debt rose to between 87% to 89% of GNP at the end of 1996 and could be as high as 97% of GNP by the end of 1997.The government budget deficit has been running over 7% of GNP.Significantly,despite record low interest rates,interest payments now absorb over 60% of total tax revenue.In addition,their is Japan's Fiscal Investment and Loan Program,a system that draws money from public pension and postal-savings systems and lends to 57 government agencies.Total borrowings are about 374 trillion yen,and when combined with official borrowings could see Japan's debt inflate to 150% of GNP.
Japan's life-insurance industry reportably holds 25% of the U.S.12 trillion dollars in household savings.As highlited by the failure of Nissan Mutual Life Insurance Co., this industry is also in need of a life line.When Nissan Mutual collapsed, liabilities exceeded assets to such a degree that the industry's entire 200 billion yen emergency reserve covered only 2/3 of the loss.These company's have promised returns as much as 5.5% while earning only 2.9% on investments in 1996.For 1997,with bond interest rates decreasing and the stock market declining,returns on investment will likely fall below 1996 levels. According to Standard & Poor's,the level at which hidden profits on stock holdings disappear are as follows:
Toho Life 19327 Mitsui Life 17167
Kyoei Life 19006 Dai-Ichi Life 14948
Nippon Dantai 18835 Meiji Life 13181
Chiyoda Life 17876 Nippon Life 12894
Sumitomo Life 17485 Taiyo Life 9757
Despite near invisable interest rates and hugh fiscal stimulus programs,the Japanese economy continues to implode,contracting at a rate exceeding 11% in the last reported quarter.Problems will only increase with the financial turmoil in South East Asia where 44% of Japanese exports go.
The question that no one dares ask is what does the Japanese government do? The economy is imploding, government direct and inderect debt is 150% of GDP,the government budget deficit is large and unsubstainable,and the banks and life insurance companies appear to be insolvent and will need substantial capital infusions to remain viable.The answer is that the Japanese government cannot repay present loans and that borrowing additional funds to bail out the banks and insurance company's will only speed the road to bankrupcy.The banks are large holders of government debt,and while it could be argued that the government could borrow even more money from the banks and then turn arround and give this money back to the banks to improve their equity positions,this simply amounts to transfering debt and does not address the central issue that neither the banks or the government are financially solvent.In fact we have the situation where an insolvent government is borrowing from insolvent banks who in turn rely on the backing on the insolvent government.Loans now far exceed the capacity of debt repayment,and compounding interest and an imploding economy will seal their fate.Basically,it is simple mathamatics
How long will this continue?Like any bankrupt person,until the credit cards are cut off.It is important to realize that this will take much longer than in a normal commercial situation.Japanese banks must be willing purchasers of Japanese government bonds at all times,reguardless of fundamentals.Should a government default on its debt,the value of its currency which reflects the credit of the government must approach zero.Currency is simply another unsecured promise to pay,and currency issued by a bankrupt government will have no value.Generally speaking,the bank's assets are financial ( currency based ) and will also fall to zero if the currency collapses.The banking and financial industries are dependant on a functioning government bond market.It is for this reason that governments which are insolvent can continue to borrow
For clarity,let me repeat the initial question. Since 1990,the world has witnessed a large economic expansion in the U.S.,and explosive growth in South East Asia and China.Within Japan,short term interest rates were decreased to .5% and the government initiated the largest fiscal stimulus program the world has ever seen.Has anyone questioned why the second largest economy in the world,with all of its major trading partners having substained growth,with the lowest interest rates the world has ever seen,with the largest fiscal stimulus package the world has ever seen,has not grown and now the economy is contracting at an annual rate exceeding 11% ? These are all conditions which over an extended period of time should produce explosive growth,expecially in a country like Japan with a hard working,well educated population with a high level of national savings. The fact that they have not can only mean that debt levels are so high that they are consuming more than the country can produce.If unreported bad debts at Japanese banks were only say $500 billion U.S.,over the last 7 years,the effect of world wide growth, .5% interest rates, and trillions of U.S. dollars spent on government stimulous programs would have easily solved the problem.The fact that none of these measures has solved the problem can only mean that bad debts are much larger than anyone realizes. Bad debts must total trillions of U.S. dollars.
Over the last several years South East Asia and China have expanded manufacturing capacity at a furious rate,much of this financed by debt.Over capacity is driving down prices,with Asia's export prices falling 4% over the last year.With recent currency depreciations,this trend will likely accelerate.Falling prices mean falling profit margins which further reduce debt payment capacity.Over capacity and high debt have now infected Japan's neighbors.In Korea,company after company has gone bankrupt,threatening the stability of the banks and possibly the entire country.In 1996,net profit at the 30 largest chaebols fell 90%.Due to the size of its economy,should the Korean won continue to fall,it will add to deflationary pressures within China and Japan.Thestory is the same in almost all countries within the Pacific Rim.Even China is affected with bankrupt state company's and insolvent banks,where 25% of bank loans are non-performing.
Over capacity financed by debt leads to falling prices which leads to the bankrupcy of first the borrower and then the lender.Problems accelerate when banks make loans on overpriced real estate or for stock market speculation,as income from these assets is often only a fraction of debt service requirements.When the market revalues these assets based on their ability to generate cash flow,losses are huge.When these events occur in countries where governments have borrowed far beyond their capacity to repay,then bond markets and the value of the currency are destroyed.
In China,consumer price inflation is virtually zero,down from 24% three years ago.Japan,Indonesia and Vietnam are similar .Asset values,from real estate to stock markets are in a major deflation.
In the United States,during the last 3 to 4 years,foreigners have purchased over 2 trillion U.S.dollars in debt and shares.These funds have driven up the value of the U.S. dollar in spite of a large current account deficit.They have kept down the level of interest rates,driven the level of the stock exchange to new highs,and propelled the economy to strong growth.Price deflation in Asia and a strong U.S.dollar have kept inflation at a very low level.It has been the best of times for America.Some even call it a paradigm shift.
"In equity markets, continual upward revisions of longer term corporate earnings expectations have driven price-earnings ratios to levels not often observed at this stage of economic expansion" "It is difficult to believe that our much higher than expected income tax receipts are unrelated to the huge increase in capital gains which, since 1995 have totalled the equivalent of one-third of national income" "Today's Central Bankers have the capacity of creating or destroying unlimited supplies of money and credit." "Clearly,how well we take our responsibilities in this modern world has profound implications for participants in financial markets." These are all quotes from Mr.Greenspan,head of the U.S. Federal Reserve.Mr. Greenspan cannot tell us that Asia is insolvent and will collapse.He is giving us a warning that we must heed.Price deflation and a collapsing economy in Asia will decrease U.S. corporate profits.Lower profits and a lower price to earnings multiple will significantly reduce the level of the U.S. stock markets.
The U.S. budget deficit has decreased because of capital gains taxes. When people report capital losses,the budjet deficit will balloon. When Asia collapses,money and credit will be destroyed.Japanese banks and insurance company's will be forced to sell U.S. assets to help finance losses in Aisa.So will the Chinese.For years,China and Japan have exchanged their goods for U.S. paper.When Japan's economy collapses,they will convert this paper for tangible assets. The U.S. is the largest debtor in the world,much of it owned by foreigners.They have the largest current account deficit in the world.These factors have caused major financial problems for every country where they have existed. When the Japanese are forced to sell U.S. Treasurey debt,it will cause a panick out of treasury's which will sharply increase U.S. interest rates.In addition to other factors already mentioned,higher interest rates will accelerate falling U.S. corporate profits,will accelerate the drop in the U.S. stock market and will accelerate a move to a much higher U.S. government budget deficit. When foreginers sell treasury's,Americans must buy them,which will take money out of other economic activities.Future government budget deficits will have to be financed by Americans,and Americans may find that they may not be able to run large current account deficits. When Americas banker goes broke,we may see another paradigm shift.
The problems of large debt levels in a deflating economy are very real.Deflation reduces both income and asset values,which leads to the bankrupcy of both borrowers and lenders.Japan has been deflating for the last 7 years.With the rest of Asia also deflating,deflation in Japan can only continue.
Japanese households have about U.S.$12 trillion in savings.The banks have gambled these funds on real estate and stock market speculation,and over-built manufacturing capacity.The government has spent it attempting to kick start the economy.Some day,everyone will realize that the real value of the assets backing these savings is only a small fraction of this U.S.$12 trillion dollars.Already,some of this money has moved to safer destinations like the United States.While the U.S. financial position is much better than Japan's,fundamentals are still very poor and will deteriorate rapidly when Japanese banks and insurance companys are forced to sell U.S. assets. When the Japanese panick in an attempt to preserve their wealth,their only choice will be an asset that is not someone's liability.The asset that best describes this property is gold.
In 1997,the world wide demand for gold will be the highest in human history,and
will far exceed mine production.Yet the price of gold has fallen to 12 year lows.
As the world watches the first tremors to the world wide financial
default,speculators are adding to huge short positions.Experts in the financial
markets will tell you that gold has lost its monetary value and their is the
continual threat of Central Bank selling.Central bankers in Austraila and
Switzerland claim that gold is no longer a suitable investment.Austraila's actions
appear totally unreasonable.
Gold is a major employer and export earner for
Austraila.Even if it were true,why would you tell the world that it has little
value?The funds obtained from the gold sale have now been lent to Thailand and
Indosneia?Are loans to bail out bankrupt countries a more suitable investment
than gold?Even the Swiss announcement appears to be more geared to lowering
the price of gold than maximizing the price of an asset you may wish to sell.Gold
has nothing to do with the trillions of dollars in bank loans outstanding that are
not supported by either the income or assets of the borrower.It has nothing to do
with the trillions of dollars in government bonds that are supported by no assets
and which interest costs now take up large amounts of government tax
recipts.
The only thing holding world wide financial markets together is
confidence.Confidence that governments and bankers will not let things get out
of hand.Confidence that requires the price of gold to remain low. Yet all of the confidence one can have does not change the fact that the direct
and inderect liabilities of the Japanese government total about 150% of GNP,it
does not change the fact that liabilities at Japanese banks and insurance
company's likely exceed realizable assets by trilions of U.S. dollars ,it does not
change the fact that the Japanese economy is contracting,and does not change
the fact that Japan and Asia are deflating at an accelerating rate.Some may say
these problems are managable.I would only ask,"How"? In the end,finance
comes down to simple mathamatics,nothing more nothing less.
A little over 300 billion U.S. dollars buys every once of gold in every central
bank in the world.When Japan crashes,none of this will be for sale.Gold miners
have sold forward about two years production and speculators hold large short
positions.How high does the price go when the U.S. $12 trillion in household
savings starts chasing an asset their is so little of?
By Aya Takada |
