2011 had been touted as the year that everything would change. Massive paradigm shifts would rock our world and many a prophecy was made regarding financial crises, currency crises, wars, rumors of wars, and there was even one fellow who said the world itself would end, although he later retracted his predictions, but not before his followers had spent their life savings putting up billboards. Such hysteria is certainly the hallmark of times such as these, but we have to keep in mind that just because some of the predicted events didn’t happen yet, we’re a long, long way from being out of the woods. There is an old saying that if you do what you’ve always done; you’re going to get what you’ve always gotten. If we continue to sow the seeds of false fixes and faulty economics, we’re going to continue to reap financial and economic crisis. It really is that simple.
One needs to look no further than Europe and its ongoing (no it isn’t over) debt crisis. The factoids have been around for a while now. Italy’s need to borrow roughly 300 billion Euros just to service its debt in 2012. The absolute failure of Greece’s austerity programs. And to top it off, the installation of shady leaders in both of these countries whose intentions should be questioned from the outset of their tenure simply because they are clearly establishment technocrats. Many of you have soundly criticized me for being ‘extremist’ because I suggested several times last year that what we’re actually seeing are economic coup d’ etats. What else can it be called when an organization enables a country to get into trouble with debt, then offers its own solution (more debt), then installs one of its operators as the country’s leader to make sure the solution is carried out? How would you feel if you had credit card debt that exceeded your yearly income and your friendly bank rep called you and said they’d bail you out by giving you even more credit, then sent a rep to live with you and control your budget when you balked or didn’t make enough spending cuts? Sometimes complicated things make sense when put in simple terms and that is exactly what is going on here.
Austerity is a cruel joke, and the national riots, strikes, and other discord that have resulted from attempts at austerity must be given our attention because it is all coming here. There is no point defined in time when a debt crisis will blossom. Many will argue that America is immune from a Euro-style debt crisis because we have a federal reserve that is willing to buy every single bond if it needs to. They will tell you we are immune because our currency is the ‘gold’ standard (sarcasm mine) of all the world currencies, and it is backed by the full faith and credit of the USGovt. If you’re still able to read this with a straight face, then you know what all this means. It is a paper promise based on an even shakier perception of ‘trust’ in an institution that deserves none. While it is true that we may not get the social anxiety and discord because of austerity, we will certainly get it because of the total loss of confidence in a currency that really died more than 40 years ago. In the worst case, we’ll get both.
As we move into 2012, the European mess has been tabled for the past month so as not to interfere with the traditions of overconsumption and debt accumulation that normally accompany Thanksgiving through the New Year. I find it sadly ironic that the same Bible that speaks of the birth of Christ also speaks of the consequences of debt and the accumulation thereof. Yet each Christmas we spend well beyond our means not to shower gifts upon Christ as was done in the Bible, but on ourselves and then spend the better part of several months trying to pay it all off. Some never do. This might seem irrelevant, but when you think about it, this is precisely what we’ve been doing on a national scale for decades now. Borrow and spend to fund the current ‘party’, and then push payments well into the future. As Europe is just beginning to find out, the ‘buy now, pay later’ paradigm has become a dog that won’t hunt anymore.
A German Solution
The biggest story so far of 2012 is the negative yields on German debt. Monday’s 3.9 billion Euro auction sported an average yield of -0.0122% .We had a similar situation here in the US in the fall of 2010 when negative yields were achieved on 3-month treasury bills for a short period of time. Obviously, these are not novice investors that are making the decision to pay a government for the privilege of lending it money. These are financial institutions: banks, brokerages, and hedge funds that are conducting these types of transactions. They’re willing to take zero interest, and in fact, pay a small premium for the ability to park their money somewhere they feel is ‘safe’. What is interesting is the fact that anyone considers Germany to be safe. Germany is essentially the Daddy Warbucks of Europe, spreading around the hard work and savings of the German people to the rest of Europe, which can easily be described as the biggest welfare state in the history of mankind. Any sane person would at this point be questioning the continued willingness (forget for a second the ability) of Germany to continue in its role as the piggy bank that never runs dry
So scared are professional investors that they’re willing to pay someone else for the privilege of lending money to them. I’ve heard several analysts comment that these negative yield auctions are merely a social engineering tool that is being used to condition the rest of us to accept near-zero interest rates ad infinitum. This may well be accurate, but just in case it isn’t, we need to consider the naiveté of even pro investors in terms of selecting ‘riskless’ assets. While it is true that in absolute terms there is no such thing – as we’re now learning the hard way, there are certainly better means of lowering your beta than just piling money into a country that is filling its role on borrowed time. Yet the same people who dove into subzero rate auctions in Europe are the same ones who dove into our subzero auctions just over a year ago. Such folly underscores the need for the re-emergence of hard currencies; meaning those backed by gold and/or silver. Resource-backed currencies such as that of Canada aren’t bad, but their value is still at the whim of policymakers, not nailed down to underlying wealth and the ability to consistently balance payments in the long run.
The willingness and even zeal of investors to accept negative rates is a ringing endorsement of the need for a new gold standard. I am quite sure that it would end up being perverted over time as all prior ‘standards’ have, but in a time of extreme crisis such as where are currently situated, having a bit of financial bedrock certainly wouldn’t be a bad thing. It certainly beats the quicksand we find ourselves trying to navigate today.
The Second Biggest Story of 2012
Buried under the headlines of Presidential politics and ‘who said what about whom today’ is the fact that the current administration has formally requested that Congress increase the debt ceiling by another $1.2 Trillion. I say the following only to point out the acceleration of the debt cycle in the past several years, not to pin the blame on any politician; they’re all responsible. In early 2009, the national debt was roughly $10.6 trillion. The most recent request to take the limit to over $16 Trillion will last the government less than another year if Congressional Budget Office projections prove to be accurate. Our actual debt just passed 100% of GDP. Exhausting this new increase will push it well past the breaking point of the Eurozone. Does anyone really think there will be no consequences for this flagrantly irresponsible fiscal behavior?
While there is no way to pin a date on when the current Keynesian debt paradigm will end, what we can be 100% sure of is that it will end. Will it be at 100.3% debt/GDP or will it be 200.3%? We don’t know for sure, but at some point, the weight of the mistakes of the past will be too much for the future to bear and it will all come crashing down. The system is too big to fail, yet at the same time it is already too big to save. The actions of policymakers to date give little reason for optimism as much of the emphasis is on kicking the can down the road and pushing the inevitable far enough into the future so that it will be someone else’s problem. What is particularly disturbing is that most of the election year rhetoric focuses on attacks rather than on solutions; so much that you can almost hear the fiddles playing as Rome burns.