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Dire Straits – A rant on global finances

by Colin Maxwell

DIRE STRAITS… A RANT ON THE GLOBAL FINANCIAL SCENE

Ah yes… behold the thieving parasitic money changers and their millennia of antics in various guises, bases, and proxies, as they continue to this day to ply their trade on Mainstreet.

Methinks not for long, and oh my word, such poetic and ironic justice if the final killer contagion was to emanate from its old European base, and in particular from the historical lairs of Rome, Venice, and the City of London to then domino across the Atlantic and on to all of Natostan and even its yapping lapdogs in the South Seas?

And now to attempt to assemble just some of the multitude of bright red warning flags… how long do you/me/we have?

HISTORICAL INDICATORS

– The fact that fiat currencies by definition have a finite life. They all eventually revert to their inherent value = a big fat ZERO.
– The global rot set in when the key currencies of the world came off their gold backing in 1971. This led to the growing divergence of the globe’s productive economy from that of the FIRE steroid-driven casino obsession that we witness today.
– Deregulation and the abolition of Glass Steagall in the 1990s allowed the casino financial industry to reach a whole new level of chicanery and develop into one huge Ponzi scheme.< – A diet of ZIRP and NIRP cool-aid that distorted every aspect of the financial world along with, eliminating moral hazard, creating malinvestment, rentier obsession and a happy-go-lucky "Money is for nothing and the chicks for free" attitude. Savings in this environment were terminated and this opportunity to provide capital for productive enterprise and long-term wealth creation was cancelled. – All of our growth figures are also completely fictitious too since there are all manner of tricks to misrepresent GDP numbers… also the growth we brag about is always nominal. The technical expressions recession and depression are farcical too because figures are endlessly juggled and misrepresented so that economies can create the impression of being functional and not going backwards. – Just since 2008 the US M2 money supply has increased ~300%. The accompanying inflation means that wealth is being transferred from the wider population and the productive sector to the issuer and the institutions closest to it. This transfer of wealth from the engine room of the economy to central Govt, the FED, and the private banking cabal, directly distorts the market and stifles the productive economy and Mainstreet. – Any country that has sovereign treasuries that cannot find buyers other than their own central bank [via direct monetization] = solvency problems. – Huge spikes in equity markets were witnessed in crisis years like 1929 and 1987… these spikes are historical precursors to looming meltdowns. The underlying fundamentals in the marketplace today are exponentially worse than those instances. – Traditionally there were only 3 safe-haven [aka default] currencies… they were the US dollar, the Japanese yen, and the Swiss franc. If you ask me, two of these have already disqualified themselves and the US dollar remains the least dirty shirt in an extremely grubby laundry basket. EUROZONE/EUROPE

– ZIRP/NIRP in Euro countries distorted the repo market because banks could effectively borrow short-term at zero interest costs. This meant that the overnight interbank short-term markets no longer meant banks conducted their overnight book balancing by trusting each other in the marketplace. This is no longer market repo as we knew it and consequently, it is debt that has shot up to a staggering €10 trillion… this is no longer just about overnight finance… it can now hide a mountain of toxic debt. This has grown to more than the capital of the entire Eurozone… what happens when this all begins unravelling?
– What many of us fail to appreciate is the staggering level of potential bad debts.
– Regulators in some Euro countries allow these debts to be classed as performing and permit the holders of that debt to use it as collateral for borrowing from their central banks.
– Interest compensates holders of currency for the loss of possession of an asset for a period of time. But you also should expect to be compensated for the loss of purchasing power of that currency. If that currency is going down the gurgler at the very same time, then you should expect to be compensated for this too.
– The problem is that the loss of purchasing power of fiat currencies is not transitory… it is now baked into the cake.
– In the 1970s in the UK, Gilts were issued at around 15% to fix a problem in a financial system that was far less leveraged. In today’s massively indebted world no Central bank could dream of issuing treasury bonds with coupons anywhere near these levels… it would equal instant financial disaster for that country.
– With inflation now built-in, bond markets can’t operate in this fairy tale land, and yet with a flat yield curve, it appears that bond traders and investors don’t expect high inflation to continue otherwise they would expect higher nominal yields for the long-dated bonds. This makes no sense to me.
– If a 1-year treasury bill is yielding less than 1% how does this figure when CPI inflation is announced at 7%. If Europe was anything like as bad at spinning giant whoppers as the U$, and if the rate was more like the 15% that John Williams at ShadowStats calculates, then this makes the premise of the entire bond market completely farcical.
– This seems to be based on some sort of bizarre situation where the market itself appears to believe that markets don’t actually matter because the Central banks will take care of everything for investors anyway.
– Of course, none of this farce is revealed by the despotic Keynsian MSM ‘reporters’ because they would lose their livelihoods if they dared even mention the blatant nonsense of this entire situation.
– The asset/equity ratios of the Global Systemically Important Banks [G-SIBs] are a nightmare waiting to happen too, with many 20 times and up to more than 30 times assets to equity. They are in terribly precarious positions. What happens to their equity when the European winter kicks in, coupled with massive energy costs, shutdowns of businesses, manufacturing, and most of the tourist industry… and all of that coupled with a plummetting currency to boot?
– The head of the Bundesbank [the central bank of the 4th largest economy of the world], Jens Weidmann resigned in January 2022 wanting early retirement when he was seemingly at the height of a very respected career [if there even is such a thing in the CB industry] and at the age of only 56… another red flag?
– Average Govt debt/GDP ratios in the Eurozone are well over 100%. But if you net out the Govt sector and then compare Govt debt to the tax base, this can climb up into the realms of 3-400% which is completely unsustainable. Add in unfunded liabilities alongside deteriorating demographics and it is painfully obvious that the Eurozone is already a completely insolvent zombie entity before the looming winter chill even begins. Perhaps Jens Weidmann had the presence of mind to crunch these numbers and reflect on what inevitably lies ahead, instead of choosing to remain on board the financial equivalent of the Titanic. Apparently, he was asking some very pointed questions about the Target2 Settlement System and not receiving any satisfactory answers. He could see this was a disaster waiting to happen and that the Eurozone was all set to implode.

TARGET2 EUROZONE BALANCES 2018
Germany +€966 billion
Luxembourg +€213 billion
Netherlands +€92.5 billion
Italy -€480 billion
Spain -€402 billion
Portugal -€83 billion
NB… before the subprime debacle of 2008 the scenario was entirely different…Italy was at +€27.7 billion and Germany at +€10.6 billion.

Today we witness massive debt, an everything bubble, a bond debacle, and a sub-prime lurking around every corner. How on earth will the Eurozone have a snowball’s chance in hell of negotiating what is currently unfolding?
USA! USA! USA!

– There appears to be an obsession, not just on Wall Street but indeed globally, regarding if/when Jerome Powell will pivot. Apparently, because the markets are so used to sucking on FED breast milk they can’t really contemplate any financial reality without this continuing. Is this really how the markets of most of the world predicate their investment strategies?
– Also, there is a stickiness problem with addressing inflation using rate hikes. In other words, it is like adjusting an old-fashioned shower. The temp is freezing cold so you dial up the hot water [interest rates]… but there is an annoying lag… in your freezing impatience you dial up more heat… same old lag… then whammo suddenly all the heat arrives at once and scalds you… you try to cool it off by turning the heat down… once again there is this hellish lag… you are now desperately trying to dial down the heat, but there is this lag effect again… it’s the same with tackling problematic inflation. But just to confound the situation even more… this is not garden variety “inflation” as we have come to know it. This is the erosion of the purchasing power of a dying fiat currency… quite apart from the lag effect of hiking interest rates, this is not the strategy to fix the problem anyway.
– Another theory is that there may be all manner of bluff going on and maybe Powell is really only intending on hiking to 5% anyway… with a view, not to pivot back to ZIRP, but to around 2%… who knows? The long and the short… however I slice and dice this one it all equals to one inevitability and that is impending financial meltdown and mayhem for the entire Zone A Natostan club.

– To some commentators, it appears that Jerome Powell [FED Chair] seems set to model himself and policy on Paul Volker. They think it is becoming evident that he won’t pivot on interest rates and that he will let much of the economy bleed out as he continues to hike. Either way, the fact that the true inflation rate is closer to 15% than the announced 7-8% seems to have completely escaped Powell’s attention… and also the fact that in order to put the brakes on inflation by hiking interest rates you have to match or pass the inflation rate to begin to tackle it. This was the horrendous scenario in the 1980s when interest rates went past 20%, but that was when Govt debt and all other debt were exponentially lower than it is today. Raising interest rates incrementally actually feeds inflation rather than tackling it, and this destroys debt-ridden economy miles before you get anywhere near the CPI level [contrived or real] and you destroy your economy before the brakes come on from large rate hikes.

– Rate hikes also destroy the bond markets which make no sense in the beginning anyway because no one ever seems to focus on the real yields which are negative when you factor in persistently high inflation. Now that this so-called inflation is clearly no longer transitory, yields have to be far higher, but who can afford to pay these yields, and if there are no buyers who can buy these bonds anyway? The FED can’t buy them all because this is just more QE and counterproductive to the fight against inflation.
– The other gorilla in the room is that we are not really talking about inflation in the normal sense of the term. This is a loss in the purchasing power of the currency which is not caused by a lively vibrant productive economy but by the exact opposite… this is caused by a FIRE economy experiencing crippling supply chain challenges, opportunistic price gouging, and increases in the cost of raw materials, energy and financial costs. This is an economy in which every man woman and child owes around $500,000 and each taxpayer ~$800,000… these figures don’t even account for unfunded liabilities. This means that the entire US economy is technically insolvent and was in this position well prior to the FED hiking and at the same time hoping to shrink its balance sheet… which is incidentally 900% higher than it stood in 2008.
– One glance at the Bond Volatility [Move Index] graph tells me that the index is now close to its peak back in Feb/March 2020. A 150 level signals that the FED is losing control and this index currently sits at ~160.
– The FED now has a problem with an operating loss and the highlighting of ~$247 billion of distressed debt. For an operating loss, they must remit to congress on a quarterly basis but soon the GOP will be running the house… if they even have an election! Will the Treasury come in and buy up the long-dated bonds just to take them out of the market and retire them? Could they try to pretend that this is not actually QE? Either way, it seems to be kicking the can down the road.

– Meanwhile, it appears as if the market expects Powell to save the day with either another round of QE or an interest rate pivot. But as mentioned above, my info also tells me that he might rather fancy himself as a modern-day Volker and that perhaps he has no intention of doing either and therefore is the market expectation ill-founded. At the same time I hear that there is major division within the Eccles building, so who could possibly call this with any degree of confidence?

– And now … newsflash, the two biggest single budget items on planet earth are…
#1 Interest on US Govt debt
#2 The US “Defense” budget.

Once upon a time it was easy-easy money for nothin’, chicks for free
Damn…that ain’t workin’ now

PS I never even got started on the Precious Metals paper markets or the $2 quadrillion derivatives [AKA financial weapons of mass destruction] out there!

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