The Lessons of History
According to the September 5-11th edition of "The Economist" magazine, while there are some similarities between now and the late 1920's (such as falling commodity prices and an overvalued stock market), the world should be able to avoid a 1930's depression due to some big differences. Specifically, In the 1920's, country's were on the gold standard, which restricted their ability to ease monetary policy as economies went into recession after the Wall Street crash of 1929. Secondly, governments compounded their tight money mistake with tight fiscal policies. Rather than allowing taxes to fall automatically as incomes declined, Americans raised taxes in 1932 to balance the budget .The claim is now governments have a better understanding of macroeconomics, and with public spending taking up a much larger share of GDP, their ability to stabilize demand is greater. The third difference between today and the 1930's is that there were no organizations such as the G7 or the IMF to oversee the world economy.
These are the thoughts of many of our economic leaders and certainly the thoughts of one of the more respected financial publications in the world. Each one of us must challenge these thoughts, for these are only thoughts, not facts, and they are thoughts not based on truth, but illusion. The first claim is that easing monetary policy can reverse a deflationary spiral. Deflation is caused by excess capacity leading to lower prices, leading to falling profits, leading to reductions in output and wages. When excess capacity is financed by debt, the need to generate cash flow will lead to predatory actions resulting in a much faster collapse in prices. When prices are falling, investors are unwilling to borrow to buy something that will cost less next month, even at 0% interest. With excess capacity, and small or negative returns on marginal investments, there is no incentive to further add to capacity, even at 0% interest, thus putting a brake on investment. Japan is a good example of this effect. Interest rates have fallen to as low as ¼ of 1% and still the economy continues to contract and has now entered into a deflationary spiral.
Another way for the government to ease monetary conditions is for the government to print money. This is now happening in Russia and many have advocated that Japan does this as well. Throughout history, whenever a country has printed money, it has lead to hyper inflation and the collapse of the economic system .It will be no different this time .The printing of money destroys the value of money resulting in the return to a barter system .A barter system is extremely inefficient which further contracts the economy. During the depression of the 1930's, money was sound, which will not be the case in today's economic contraction.
The second claim is that we now have a much better understanding of macroeconomics and with public spending taking up a much larger share of GDP, their ability to stabilize demand is greater. My previous articles have analyzed the "lies" of current macroeconomic theory and I will concentrate my discussion on how a large government sector affects the response to a deflationary contraction .The essential question is which government is best able to act to stabilize demand, a government with a large share of the economy ,which is running a financial deficit and has a large debt load ? Or a government with a small share of the economy which has a balanced budget and minimal debt .The first case describes most of the governments in the world today, the second case describes many of the governments in the late 1920's.
When an economy enters a deflationary spiral, profits and incomes fall, which in turn reduces tax revenue .The greater the governments role in the economy, the greater is the fall in tax revenues, and the greater the government deficit must rise as a percentage of the economy. In order for the government to stabilize demand, they must increase expenditures or reduce taxes. This is much easier done, the lower the deficit level is prior to the economic contraction. Today's governments, which are entering the deflationary contraction with large deficits and a large involvement in the economy, will see their deficits as a percentage of the economy be much higher than the governments of the late 1920's. This will more severely restrict their ability to stabilize demand. Again consider the Japanese economy .On September 14, 1998, the governor of Kanagawa, the prefecture just south of Tokyo, warned that a steep tax revenue shortfall may force the prefecture to declare bankruptcy, with a revenue shortfall approaching 64 billion yen."Our finances are in a terrible mess", Gov. Okazaki said;" We will have to reorganize our services and put brakes on spending."
The other consideration is the large debt levels most governments now have, as opposed to the minimal debt levels of the governments of the late 1920's. First, it is much easier for a government with little or no debt to borrow, than it is for a government with a large amount of debt. More important, when an economy in which the government has a large debt and is running a deficit enters a deflationary contraction, the holders of this debt seeing an increase in the government deficit now have concerns regarding the governments ability to repay the debt .The resulting sell-off of this government debt, pushes up interest rates, both to the government and business sectors. This, the increase in interest rates, only adds to the fall in profits, employment, and increase in the government deficit, all of which only adds to the deflationary contraction. Brazil is a good example of this effect. With a government deficit of 7% of GDP, and the economy in a deflationary contraction due to the Asian crisis and the fall in commodity prices, interest rates recently reached almost 50%. Interest rates of 50% would add another 9% to the government GDP deficit bringing it to 16%, while punishing an already hard pressed corporate sector, with both effects only adding to the deflationary contraction. Some may point to Japan as a country with a large government debt and deficit where interest rates have gone down and not up. This is the result of confidence. Most investors fail to understand the powerful forces acting on world economy's and fail to see the danger that exists. If Japan, with the second largest economy and the greatest exporter of capital were to fail, they ask what would be left of the world economy? The huge government deficit of the Japanese government is about to get much larger. Tax revenues are imploding while calls to stimulate the economy and bail out the banks are heard daily. There is no mathematical way for the Japanese government to repay its debt (besides printing money). Once investors reacquaint themselves with elementary mathematics, Japanese interest rates will skyrocket and the Japanese economy will implode into the abyss.
The third claim is that organizations such as the G7 or the IMF are now able to oversee the world economy. Look at the IMF, its policies of double digit interest rates and government fiscal contraction have devastated the economies of South Korea, Thailand, Indonesia, and Russia. Countries that have followed its advice such as Malaysia and Brazil are experiencing a similar fate. While I make the point that not even 0% interest rates can get countries out of this deflationary contraction, these double-digit interest rates advocated by the IMF ensure a quick death. In Korea, domestic demand is imploding, exports shrinking and the whole country is headed for bankruptcy. Domestic consumption has plunged 28% during the first half of this year from levels one year ago. In 1931, during the midst of the Great Depression, the U.S. posted only a 13.4 percent decline in consumption. In August 1998, exports fell 10.8% while imports fell 37.5% from year earlier levels. In Indonesia, it is estimated that two thirds of the population will be below the poverty line in 1999. One must certainly question what secret agenda that the IMF aspires to.
Lies and deceit, mirrors and illusion, have we lost our ability to see the truth?
To date, the 10 Billion US dollars the worlds' banks have written off of their Russian debt has resulted in minor financial tremors. With US $40 billion under payments moratorium, write-offs will soon increase. However, there is another $180 Billion of corporate and government debt which has not come due for repayment, but for which there is no source of repayment. While bankers now pretend that this is a quality asset, it will also one day be written off. With Russia having to import grain due to the worst harvest in 41 years, finding money to feed its people may be impossible. Any thoughts of debt repayment only a distant dream. Russia's GDP contracted 8.2% year-on-year in August, a trend that is clearly accelerating. This contraction of GDP will only add to the massive funding deficit. Much of hundreds of billions in debt to Southeast Asia are in a similar situation. Rescheduled or not due, there is no source of repayment leading to eventual default.
Japan continues to struggle with their banking crisis. With losses form loans and derivatives likely to exceed trillions of U.S. dollars, there is no solution as the Nippon government continues in self-denial as the economy implodes.
The crisis is now spreading to South America and will soon destroy the economies of every country in the region. The certificates representing Brazil's US $290 Billion is domestic debt may make expensive wallpaper, because soon this will represent their maximum value as a collectors item.
Around the world, the pattern is similar. Banks create vast sums of money. This money flows into countries creating credit bubbles. Then this money is pulled out of these countries collapsing their bubble economy. Doesn't anyone see this pattern?
The last great bubble is in America - and watch out because it is now beginning to crack. The savings rate is below 1%, there is a massive trade deficit, foreigners own a huge amount of their debt, the stock market defies any rational sense of valuation, and there is literally trillions of U.S. dollars floating in the world -- which serve as the world's reserve currency.
When the stock market falls, Americans will cut back on consumption and increase savings, bringing about a severe contraction in demand, both internally and externally. The flow of money into the U.S. creating the credit bubble will reverse, and as foreigners sell U.S. stocks and bonds, interest rates will rise and the dollar will fall. A crisis will then be created where the holders of the trillions in U.S. dollars circulating around the world, will no longer see the value of holding them, and they will be returned to America as a debt, with payment demanded.
"You know, by the time you become the leader of a county, someone else makes all the decisions. You may find that you can get away with virtual presidents, virtual prime ministers, virtual everything" - said Bill Clinton during his recent trip to Ireland.
With the Lewinsky affair, Bill Clinton is being set up. Why now is the question? The unresolved deaths of Vincent Foster. Rob Brown and over 100 other bodies, drug – smuggling through Mena airport, Whitewater, Travelgate, drug use, FBI files, illegal campaign contributions, technology transfers to China, Gennifer Flowers, Paula Jones, Kathleen Willey, and the list could continue. Even Bill Clinton may be wondering, "why now?" -- and all for what is likely one of his lesser transgressions. Only time will reveal the "Why now" -- though it is likely that Bill Clinton is being set up to take the fall, indeed become the scapegoat for some major event.
On September 18,1998, the Senate failed to override President Clinton's veto of a measure banning a type of late-term abortion. The procedure involves the partial, feet- first delivery of a child and the draining of its' skull contents.
America used to stand for Life and Liberty. America used to care about the morality of its leaders. America used to care about truth and justice. Americans used to have strong personal beliefs and defended these beliefs to the death. Many Americans no longer have beliefs, only opinions fed to them by their corrupt political, economic and religious leaders. Many Americans no longer care about truth, and have become manipulated. Many Americans no longer care about the morality of their leaders. As long as they feel good and have an imaginary stock bubble, this is now what is important.
Many Americans have stopped defending the life of the most innocent and precious of its citizens, their children. They have become blind to the truth. They now fail to see the illusions in economics, in politics, in religion. When the "One World People" take over their country, when Americans are headed into concentration camps, will they then see the truth? Many Americans have stopped defending Life -- and for this they will soon loose their Liberty.
Behind the scenes, the One World People continue to plan and manipulate. Recent rumors have Australian mining giant BHP being split up and sold. Shell Oil would take over the oil and gas properties. Rio Tinto would take over the mining properties, there- by consolidating its control on the majority of the mineral wealth in the world. Such a move would give Rothchilds, through their influence on both DeBeers and Rio Tinto virtual control on the world diamond market.
In October 1998 BHP/ Diamet's Ekati mine will commence production. The Ekati mine hosts world class Kimberlite pipes with diamond grades and quality that rank amongst the highest of any mine in the world. The economics are superb with the mine likely to supply 4-5% of the world diamond market. However, the real gem is the Rio Tinto / Aber, Diavik project located only a few short kilometers away. As world-class as the Ekati diamond pipes are, they pale in comparison with two of the pipes on the Diavik project. The value of the top layer of Pipe 418A is US $408/ ton while the top layer of pipe A1545 is $328/ ton, several multiples higher from the Ekati mine.
By purchasing the Ekati mine, not only would Rio Tinto be consolidating control of the diamond market, but they would be in a position to begin mining the high grade Diavik pipes as soon permitting allowed, using the equipment and infrastructure just completed. Moreover, the cost of doubling the production capacity of the Ekati mine from 9000 ton/ day, to 18,000 ton/ day is estimated at US $ 80 million, just a fraction of the cost of a new mine. With cash costs of $40 / ton, mined at 9000 tons/ day, the daily cash flow of pipe 418A is US $3,312,000 / day and for pipe A1545 it is US $2,592,000 / day. These construction costs would be recovered in just days. Cash flow per share for the 40% joint venture partner, Aber Resources would be Cdn $1.36 / month for the top layer of Pipe 418A and Cdn $1.06 / month for the top layer of Pipe A1545. With a recent price around Cdn $9.00, Aber appears under – valued to an extreme, especially compared to the average stock on the NASDAQ which recently traded at a P/E ratio of 85:1. Moreover, with the price of diamonds about to explode as all investors sell their worthless paper financial instruments for the tangible illusions of gold and diamonds, cash flow from these pipes will be multiples of those projected. With the earnings of the stocks on the NASDAQ about to implode, as the values of gold and diamonds rise to unbelievable heights, master illusionists could only create the present imbalance in valuations.
Gold and diamonds are cold and lifeless. Our life, our existence, our physical well being does not depend on their existence. Gold and diamonds are not life, they are not love, they are not liberty, nor are they truth and justice. Do we aspire to the higher gifts? Or do we follow the desires of the One World People?
John Kutyn
23 September 1998
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