Tuesday, February 4, 2014

Why the Quick Exit?

Why the Quick Exit?
Within the past week three high executive bankers have all committed suicide.  I've been asked to give my commentary on the situation.
Economies run on one thing and one thing alone: trust.  People must trust in the value of the money, trust in the loans being made, lenders must trust they will be paid back, trust that the balance sheets say what they say.  When trust leaving economy, when it leaves the political and economic institutions of that society the economy end.  The question to ask right now is do the people of America trust their political and financial leaders?  Do the people of other nations trust their political and financial leaders?
Link here is a wonderful video "How An Economy Works, In 30 Minutes".
For those of you that want the cliff notes version and the points that are most critical about what is happening today here you go.
When you use credit you spend more then you have today and create a future version of yourself that has less money because that future self has to pay off the debt.  If you make $100 a day but  today you spend your $100 plus $100 of credit you create $100 of debt and a futures self that is $100 poorer because has to pay the debt. (not counting interest)
Now if that debt makes you more economically productive the debt pays for itself.  If not it just makes your future self poor.  This is true for people, business and governments.
Because of the credit markets we have debt cycles.  Time when people can borrow a lot (booms) and times when people have to pay their debts back. (Busts or recessions). This is the short term debt cycle and takes roughly 5-10 years.
The short term debt cycle takes place on a long term debt cycle (LTDC) that lasts 80 - 100 years.  What needs to be noted here is that the crest of the borrow phase of the LTDC to the trouth of the "call on all debts" phase only take 2-5 years of that 100 year cycle.  That is a very fast decline.  This process is call "deleveraging". They are times of great upheaval, suffering, and war.  The video give several historical examples.
What else do you need you need to know?  
Fiat Currency
This is one many of you maybe familiar with and will not spend a lot of time on it.  The value of our currency is not backed by gold, silver, oil or any tangible asset.  It is only based on trust.  Note: every world currency is a fiat currency and they are all tied together in various fashions through the Brettenwood agreement. Please also remember that every fiat currency in history, without exception has failed.  (On average a fiat currency has a 40 year life cycle... The dollar became fiat under Nixon)
I would argue that the degree of deleveraging we are looking at is greatly out of wack for two reasons 1) the engorged credit markets and 2) we are over do for a normal deleveraging.  Several time when the markets would have deleveraged to a healthy level it was interrupted by various Keynesian schemes. Instead of a managed decline and healthy recovery we were pushed straight into a new bubble.
Another critical point that must be recognized is how the world markets are moving together. Since 2000 the marked have become more synchronized and since 2008 are nearly lockstep... i.e. globalization will give us global deleveraging.
What to expect:
In the past few months I have become familiar with the work of Mike Maloney.  Here are three poignant video to our discussion I could find from Mr. Maloney.

Predictions Come True From 2005 | Mike Maloney (16 min)

Fed to Explode QE Next Downturn - Can't Control Velocity (7 min)

Deflation, THEN Inflation (3 min)

Here is the cliff notes
This is a little off topic but Mr. Maloney covers it... when a fiat currency/and credit is in retreat or dying people cling to commodities, what they can hold.   What commodity has the most value for its size, will not rot or corrode, can be divided and not lose value, has a stable  supply, and has been used as money historically? Gold and silver.
The point we need to pay attention to that Mr Maloney gives us is this. Deleveraging is deflationary ... as credit fails, cash is king.  People will only part with cash when they find the best price.  This causes prices to fall.  To stem the deflation money will be pumped into the system. And here is the problem... while that has "worked" before (see above: trends). We are at a point of critical mass.  The money printing to stop the deflation will lead to a collapse in trust and ultimately currency collapse and/or hyperinflation on a global scale.  Mike Maloney called this more than 10 years ago.
Why the quick exit?
Setting aside all thoughts of clandestine meetings and a cloak and dagger world. The markets have been moving into a retreat which I believe if the beginning of this deleverging period and given the gross instability of the global markets, possible systemic collapes collapse.
I hope I am wrong
Jason Rivers

"I am of an older fashion, much of what I love has been destroyed or sent into exile."       - G.K. Chesterton