I am loudly thinking what happens when people refuse (For whatever reason, usually inflation. I haven't heard about collapse of the paper money in deflation/depression scenario) to accept paper money.
Succo on Suckers:
minyanville.com
Something to watch is the net interest component of the trade deficit. When the U.S. begins paying out interest on our debt significantly over and above the interest we receive from foreign investment, Asian central banks may begin to believe that financing consumption in the U.S. is no longer in their best interest as the cumulative debt begins to work against the effect. This so far has not occurred only because foreigners earn only a paltry sum in interest on the vast debt they own, while the U.S. enjoys high capital returns (risky) in investments in foreign markets. This difference will slowly grow as debt accumulates or quickly expands if our foreign investments begin to actually lose money, such as the Japanese market going down.
It is very evident that it is all tied together in one vicious cycle where risk is very high.
Lets look at some similar themes in history:
Buffet said we are selling off the farm - he says the massive trade deficit is the most important thing to be concerned with
bankdersysrisk blog guy:
During the 1920’s England refused to deal with their negative trade balance and provided money for their welfare state as unemployment skyrocketed. English sovereign debt and money supply went into to steep rise. Overextended as the English were, they continued to inflate their currency, but still kept their currency overvalued per agreements they had made with other central banks. This situation finally collapsed upon itself when England went off of the gold standard right before they had exhausted their supply of gold. This caused massive inflation in England.
So, as history dictates, countries will gladly sacrifice the value of their currencies buying power in order to pay for the social programs and government expenditures. Even though the banks are very very powerful, they cannot compete with the voting populist. This is because politicians are elected and not by banks, but by people. And politicians generally get elected by promising the what ever it takes to win an election.
American also has a negative trade balance. This means that when we buy goods from other countries, we receive these goods and they receive dollars. They have so many dollars that if they were to trade these away to other countries the value of these dollars would devalue.
This is not that bad, however, the US dollar is also the world’s reserve currency. This means that many countries use this currency as a hedge against fluxuations in their own currencies. If the dollar devalues, than their core assets devalue, this can lead to a banking crisis in their own countries.
In order to prevent this situation from happening, these countries buy US debt in the form of our sovereign debt, corporate bonds, and MBS’s. This causes these countries to obtain even more assets that are terms of the US dollar.
If the US monetizes this much debt as to save the banking system from the housing debt, then the US dollar shall devalue. This will cause all financial instruments based on the US dollar to devalue. Therefore other countries banks to go into crisis as their core assets devalue.
Why the hell should we care anyway? Screw those losers.
When lending institution goes into crisis they must get rid of assets in order to maintain their fractional reserve. This means that they must shed corporate bonds, stocks, and other assets. They are also likely to not honor their debt with other banks throwing these banks into crisis.
Hedge funds, which borrow billions from banks, leverage their investments 20 to 30 to one. Even small changes can destroy these investment institutions. This will cause the hedge funds to become insolvent and bankrupt.
Now, since the US has saved the housing crash by monetizing the debt, it has now gone back into crisis as other outstanding debt is not honored due to global insolvency.
Remember, the US is not the only country with a housing bubble, most of the G-8 countries also have housing bubbles. All of these bad debts just boomerang back at you through the equities and derivatives markets. There is just no way to avoid it.
There comes a point where too much money is at risk. At that point, due to the mechanics of the fractional reserve system, there is no way to save the banking system. If the banking system goes the currency goes.
The Big Question
How many bankruptcies and foreclosures on a world wide scale will it take to endanger the derivatives market, causing an international banking crisis of historic magnitude.
With 90% of all derivatives exposure located in the eight largest banks and 99% of all exposure through the 25 biggest banks on the planet, the question becomes, did we really move the risk onto the counter party, or just fool ourselves into thinking we did.
At this time there is 45 trillion to 55 trillion dollars worth of derivatives exposure. With a major banking crisis forming due to bankruptcies and foreclosures, is their really any way to escape the damage in a heavily leveraged monetary system?
In Germany, 1923, they printed new Reichmarks against the Reich's lands. You have to have something tangible (doesn't have to be gold) backing the paper.
Right.
Why do you assume status quo in credit/money circulation.
I don't assume status quo - why do you assume if the banks implode we will go back on a gold standard? I am saying if the banks implode - CPI goes up for j6p - he might get mad and vote some new people in and some bankers thrown in jail - but the institutions invented, created to keep the world going after the reset/implosion is not gonna be all that different from what was imploded.
Maybe we will not have any credit after the bust but CASH only. New or old cash, doesn't matter. Is this possible?
Right - this goes with mish's scenario - M3 will be destroyed and go to money heaven - asset prices collapse as the viscious cycle reverses - fed no longer gonna report M3 - but the lower m's will not be destroyed and people shove money into the mattress.
"all the bankers, economists, politicos, wall street"
They also owned the world in 1929 also. Why couldn't they stop the depression that wiped them out too.
You must be confused in my meaning, I am not saying a global credit crisis is not before us - what I am saying however is that even after if/when it goes BOOM - and J6P cant buy his pokeman cards on Ebay because of massive inflation or killing deflation - he is not going back on a gold standard. In answer to your question - Bernanke says the fed was the problem in 29, didn't pump enough money into the system soon enough. Or from the hoover article I posted - the richies bought up assets at FIRESALE prices - there was some senator in 1932 talking out against this - that they had ENGINEERED a collapse to get billions for the bankers and debts for the people - loan terms went from 5 or 7 years out to 30 - several assasination attempts were made on this senator - hehe.
I tell you why, because you can play Russian roulette/speculate wildly only for so long, then you get that single bullet in your head. This is where we are heading IMO.
Even so, until you put a bullet in the head of hundreds of thousands of policy makers and financial people all over the globe - we are not going back on a gold standard.
Bad example. Zimbabwe is a fascist dictatorship. You don't like Mugabe, you get shot. What would you prefer 2100% inflation rate or bullet in the head?
Inflation - I don't want to die, and I have posted for years now why swat teams with 20 sniper rifles will also make MOGAMBO GURU and his DREAMS of a world gold standard also choose inflation - he does not want bullet in head either.
Are you suggesting that this might happen in the States too? Dictatorship, 2100% inflation, bullet in the head, etc.
I am not certain that will happen, but I am CONVINCED short of ww3 - we are not going back to the circumstances that make a gold standard RIGHT for todays world and trade. We are in the age of Neo and the Matrix - I used to play a game by sid mieir - Pirates on my C64 - it made sense to have gold in the 16th century - it does not make sense today - did you read the Andy Kessler piece I posted about why both banks and gold are obsolete in todays information society world? I would also add representative gubbment to that list - but we have to tackle one defunct institution at a time - hehe. |
