Survival 2000
What will we gain from knowing all the details of future events, if we are not prepared to live through them?
In researching this article, I have accumulated numerous financial reports, all describing the collapse of worldwide financial markets. There are no alternatives and no policy that can alter this financial collapse. The end result will be the economic marginalisation of billions of traumatised people.
The cause of this event is clear. False concepts of wealth were introduced, principally that fiat (paper) currencies and government bonds are wealth. Subsequently, a massive credit bubble was created. The collapse of the credit bubble will destroy government bonds and currencies. The cumulative effect will be the greatest destruction of wealth in world history.
Have these events happened by chance, or are these events part of a well thought out plan? Understanding the answer to this is critical for comprehending what is and will happen in the world.
The deflationary collapse will destroy the profitability of highly indebted companies, bringing down banks, government bond markets, and government currencies. Reduced production will diminish the demand for commodities, thus decreasing their value.
Owners of any asset class that rise substantially in value during the deflationary collapse, will gain and wield tremendous economic and political power.
This begs the question. In the event a powerful interest group sought to control the world economy, would they not create a situation, whereby all assets collapse in value - except for a particular asset class that they alone own or control? Should ALL assets collapse in value, there would be no major economic advantage to this powerful interest group. Therefore, it logically follows that one particular asset class must rise substantially in value for this interest group to obtain control of the world economy.
In a hypothetical world of falling stock markets, accompanied by government currencies and bond markets being wiped out, the only asset class that could rise substantiality in value would be gold, silver, and diamonds -- which have traditionally been a store of value in times of war or severe economic upheaval.
If the current deflationary deterioration - now spreading through world economies - was indeed planned by a powerful interest group, then as they are causing world economic collapse, they will be simultaneously be driving up the value of gold, silver, and diamonds.
We are all well aware that gold, silver, and diamonds are not essential for the survival of mankind. Nevertheless, should this asset class rise substantially while all other asset classes are falling, it will be due to the promotion of a powerful interest group - which has altered our perception of value of the asset group that they control.
Is the methodical maneuver occurring now? Will the large gold demand/supply imbalance and a short position estimated at 8,000 tons (which physically cannot ever be covered) be the eventual springboard to much higher gold prices?
Deflationary Forces At Work
Should we view the International Monetary Fund's (IMF) policies in Indonesia, Korea, Thailand and Russia as unintentional blunders, or are they deliberate and premeditated attempts to destroy the economies of these countries? Should we view the financial deregulation of Japan as a constructive move to a more transparent economy, or will it be in reality the needle that popped the bubble by allowing local savings to flee Japan, causing the eventual collapse of the Nippon banking system?
Can we believe that the Bank of Japan is serious about defending the Yen, when it buys a few Yen on world markets, while simultaneously creating vast quantities of Yen internally? The results of the actions are contradictory. both ends pulling against the middle. Consequently, the BOJ's real objective remains unknown.
China has about 200 million people in coastal areas who are still productively employed. Approximately one billion people in the interior scrape for bare existence, and nearly 100 million are squatting in coastal cities looking for work. Consequently, the Sino-State desperately needs high levels of economic growth. However, the Central Bank of China survey of 5,000 large industrial enterprises for the first quarter of identifies a severe deterioration in the economy. Total sales of these 5,000 enterprises fell by 9.5%, while output dipped 1.7% (the difference led to a large increase in inventories). Combined profits for the 5,000 enterprises were negative. At the end of this year's first quarter industrial goods inventories and unsold real estate totaled 35% of the GDP -- or 35% of domestic credit.
Chinese banks are technically insolvent. Nonetheless, they continue to finance both bloated inventories (that no one wants or needs) and companies that are already bankrupt.
During the second quarter of 1998 economic growth amongst China's Asian trading partners (where 40% of exports go) has contracted significantly. In particular, exports to Japan have fallen, all while the Japanese Yen devaluation causes further deflationary shock to China.
China will most likely experience further increases in inventories during the second quarter of 1998. Moreover, sales will most probably decrease as operational losses mount. China can no longer afford to lose money producing goods that no one wants.
In a worldwide deflationary environment characterised by contracting demand, Chinese companies will NOT be able to return to profitability and manage their burgeoning inventories, IF THE EXCHANGE RATE REMAINS STABLE.
Fixed capital formation has risen to about 34% of GDP in China. However, banks are now insolvent - and are using available credit to finance rising inventories and business operating losses. With Asian neighbours (who were large investors in China) no longer having the money to invest, it would appear that money for new capital investments will be hard to obtain. Additionally, current returns on investment have become very marginal, and possibly even negative, creating a disincentive to invest. Good returns on Chinese investments will not be restored to satisfactory levels without a major devaluation of the currency (yuan). Furthermore, maintenance of the present exchange rate will inevitably lead to a major contraction in fixed capital formation.
If China's economic woes were not enough, it also suffers major social problems. At the current exchange rate China is about to implode. The more the Japanese economy contracts, and the further the yen falls, the greater the pressure China's fragile economy is forced to bear.
The Japanese economy is now contracting at an annual rate exceeding 5%. A study of Washington-based Paul H. Nitze School of Advanced International studies by David Asher and Andrew Smithers indicated that in 1996 the Japanese government's direct and indirect borrowings would be 150% of GDP - and that if the IMF's estimates for unfunded state pension plan liabilities were included, it would exceed 250% of GDP. In 1997 the government ran a significant deficit - and for 1998 Nippon government borrowing will be about U.S.$780 billion, thus significantly increasing debt over 1996 levels.
We are now told the technically bankrupt Japanese government can solve its economic problems by borrowing more money in order to give greater tax cuts. That by borrowing more money, it can increase government spending - that by borrowing more money, it can bail out the banking industry. WELL, they have already tried that. and it did not work!
When will someone recognise that there are very significant losses that someone is going to have to take? Apparently, no one is prepared to lose anything, so an illusion has been created. SURE, Japan has U.S. $12 trillion in savings, but how much of this is just an illusion? After you subtract the value of government bonds, subtract the bank deposits that are not covered by quality loans, and subtract funding deficits of the insurance companies, how much is really left? If anything.
The Japanese government cannot solve its financial problems by creating more losses (debt).
Former U.S. Federal Deposit Insurance Corp Chairman, Bill Seidman recently stated that Japanese banks have U.S. $1 trillion in bad loans. Realistically, the bad loans are most likely a large multiple of this amount. Some private estimates now speculate that bad loans will reach 80% of GDP.
Many Japanese companies can no longer afford to even make interest payments. And as the deflationary collapse gathers momentum, more and more companies will swept into the same rat hole. With loans being unable to be repaid from cash flow, banks must rely on security (collateral) for loan repayment. Since 1990 Japanese banks have been extending new loans to finance the operating losses of corporate Japan, wishing for a turn around in the economy. These loans are unsecured advances which will be eventually written off.
During the bubble years, Japanese banks lent extensively using shido nenshos (letters of awareness). These nenshos were unofficial letters stating that the company was aware that its Asian subsidiaries were borrowing money. The paper has no legal significance - and the banks are not legally protected if the loans go bad. Insiders claim that this type of lending could exceed U.S. $1 trillion, which is in addition to any bad loan estimates. (Mr. Seidman, now it's Two Trillion Dollars. and counting).
In the deflationary collapse now engulfing all Asia, most of these loans will not be recoverable. When the Japanese banks did require security, commercial real estate was often used as collateral. Unfortunately, commercial real estate values have plummeted 80% from their 1989 peak - and will fall further as security for bad loans is sold.
Many of the loans of Japanese banks have little or no security - and those that were secured have seen the collateral values plunge as much as 80%. It is possible that only 20% or less of the deposit base is covered by quality loans -- with the balance of the deposit base having to be written off eventually to reflect its true value.
Japan is presently hiding behind fabricated financial statements, with many losses hidden off the balance sheet - and asset values being displayed that are in excess of market value.
Not surprisingly, most Japanese bankrupt financial institutions to date had up to 10 times the audited bad debts.
To help understand some of the potential problems, consider the Indonesian situation. In Indonesia it is expected that more than 100 million people - half the population - will be below the poverty line by the end of 1998. Specifically, this means family income per person will fall below U.S.$3.60 per month. YES, you read correctly, Three Dollars and Sixty Cents. If a person's monthly income is more than the cost of one cheese-burger in America, he is considered above the poverty line in Indonesia.
The Indonesian stock market is irrelevant because there is negative equity overall. Soon, the banking system may be irrelevant as well. Early estimates put the cost of recapitalizing the banking system at U.S. $20 billion. While no one knows the true cost, some are now speculating that costs could reach U.S. $70 billion. In addition to bad loans that are on the books of Indonesian banks, off balance sheet multi-currency derivative instruments and large amounts of loan repurchase agreements represent huge losses. (Loan repurchase agreements are used by banks to raise cash and hide questionable loans.) For example: In these transactions, Bank A sells a loan to Bank B, but agrees to repurchase the loan from Bank B in the future, paying Bank B a profit. However, if Bank A is unable to repurchase the loan, Bank B ends up with a questionable loan that it may have to write off. When Bank A represents an Indonesian bank and Bank B represents a Foreign bank, unless someone gives Bank A the money to buy back the questionable loan, then Bank B is stuck with the loss. With the Indonesian government and people having no or little money, the only source to recapitalize the banking system must come from foreign investors, which they may not be willing to provide.
The Indonesian example demonstrate how some problems might be hidden from view within the Japanese banking system. It also is testament that foreign exposure to Indonesia loses will be much higher than presently disclosed.
It must be stressed that economies are suffering severe stress in many countries worldwide. Russia's fragile economy is again contracting. Since the Asian Contagion began, it has spent U.S.$ 14 billion defending the rouble. While it claims to have $14.5 billion in reserves, almost all of this money is IMF handouts and short-term borrowings. Net international reserves are a mere $500 million. Worst, the Russian government has to redeem $5 billion of Treasury Bills every month. If the IMF starts lending in late summer, some of these outstanding obligations might be paid. Otherwise, we could be looking at a government default, and currency devaluation that could collapse the already unsteady Russian government, banking sector, and economy.
Although the Korea's economy only began contracting in the first quarter of this year, the Korean Central Bank is expecting a sharp contraction in the third quarter. Most Asian counties face similarly grim scenario.
We are now witnessing world financial markets and currency movements that have been disconnected from and are inconsistent with economic fundamentals. This is because currencies are an imaginary creation of governments and banks. As governments and banks move closer to insolvency, the value of currencies must fall. The interplay between the U.S. dollar and the Japanese Yen is a great illustration. Japan has a large trade surplus and is a capital surplus country. However, despite its industrial strength, the Yen has depreciated by 70% over the last two years - and is about to fall further. Holders of Yen are concerned about the solvency of Japanese banks and possibly the government itself. With interest earning potential almost non-existent, holders of Yen are moving to safer foreign currencies where they can also earn several times higher interest than in Japan. This is making Japanese companies extremely competitive and has brought a large deflationary shock onto world markets.
This deflationary shock has already been felt by most countries in Asia who were unable to keep their currencies pegged to the U.S. dollar in the face of a major devaluation of the Japanese Yen. As discussed in the beginning of this paper, the deflationary shock is also affecting China (and Hong Kong), which will soon be forced to devalue their respective currencies (i.e. the yuan and HK dollar).
In light of the insolvency of the Japanese financial system, investors will continue selling Yen, driving its price down further. This will only increase the deflationary shock on world markets. As the Yen falls further, and China is forced to devalue, there will be a major impact on U.S. and European Corporations - as they will be unable to compete with Asian competitors whose currencies have plunged.
Accompanying economic contraction in Asia, there will be major stock market losses globally. U.S. and European corporations will suffer both falling markets and declining prices for products and services - a lethal combination that ultimately leads to bankruptcy.
In a highly indebted and inter-connected world, you can not have a major depreciation of the currency of the world's second largest economy without it affecting the entire international financial system. This is particularly true when the currency is moving in a direction that is NOT consistent with economic fundamentals.
In viewing the U.S., we must remember that its strong economy is the direct result of trillions of dollars coming in from Europe and Asia since 1995. Adding fuel to the U.S. economy has been the 50% increase in consumer debt over the last four years. Consequently, the seemingly strong U.S. economy is not about robust fundamentals. Just the contrary. Americans do not save (savings rate is less than 3.5%). And the U.S. habitually runs a huge trade deficit - and owes a large percentage of debt to foreigners.
The Asian deflationary virus will soon be hitting U.S. shores. American corporations will lose markets and profits, which will result in job losses. Consumers faced with job losses, and falling stock markets will pull back spending, which will send the U.S. economy into a tail spin. This will then lead to a vast outflow of funds from the U.S. - thus accelerating economic contraction within the 50 States.
There is a tremendous adverse interplay of forces now acting on world economies. Currency movements that have been disconnected from economic fundamentals are now accelerating the economic collapse, and spreading its effects globally. Ultimately, this will lead to the absolute necessity to establish a currency that is NOT dependent on governments or banks, but one based on gold.
At this point it will be imperative to understand the true value of a currency. indeed the very essence of it. A currency is valuable because it allows for the division of labour in the economy. It provides a measuring stick to help determine the viability of a business. A currency assists in developing the most productive use of resources in the economy. It is not wealth, but only a means to assist in creating wealth - which is society's ability to produce food, goods, and services. Remember this when powerful interest groups push the value of gold, silver and diamonds to unrealistic levels.
It has been said that only a small group of people understand the process of reasoning, and has the ability to see to the core of the problem as opposed to passing an opinion on it. In this manner, irrational thinking is elevated to a high level of public consciousness. Manipulators can then play on this to undermine and distract the grasp of reality governing any situation. What we end up with is the absolutely inconsequential opinions of masses of people, molded by skilled manipulators that assume the position of scientific fact.
John Kutyn
8 July 1998
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