Wednesday, March 26, 2014

The Big Reset: Jubilee or Armageddon?

Yes, there is too much debt and not enough collateral, clean collateral that is.  The common practice of rehypothecation * (some would call it stealing but let’s not get bogged down in semantics) has corrupted a very large portion of the debt that is sloshing around out there and in the final analysis the debt simply has no backing.  And it cannot be serviced at any reasonable interest rate above the current rate of zero.  This then implies that there will be a Reset, a catastrophic Reset that will shake the foundations of the global economy.
This is not a new phenomenon.  Throughout history wealth has piled up for the few while the many were saddled with debt.  Babylonian kings recognized this issue more than three thousand years ago and would on occasion decree all debts cancelled.  Talk about risk management.  How would a hedge fund manager behave if they knew the king could wipe them out on a whim?  The kings knew that if people get hopelessly in debt, no one really wins.  (The kings then were smarter than the MiLords of today)

The Hebrews codified this practice and established a timetable of once every seven sabbaticals.  A sabbatical is seven years.  A slave was deemed to be free after serving seven years, and today we “free” our professors for a year in every seven and we give them a sabbatical.  So after 49 years, Jubilee.  Property would be returned to its original family owners.  In an agrarian society, property was the equivalent of wealth.  Without it you were either a slave or a serf.

Over the centuries we lost track of this principle and relied upon a much rougher form of justice.  If things got too out of balance the peasants would rise up and chop off a head or two to get things in some sort of alignment.  For the most part wealth remained a thing measured best in land and precious metals.  At the macro level this translated into hundreds of wars being fought over land using gold to pay the workers, I mean soldiers.

And then things became quite a bit more complicated.  About a thousand years ago we developed paper wealth in the form of demand notes that stood for gold being held somewhere.  One person was holding a real piece of gold in a vault (in Jerusalem for example), another had a piece of paper representing that gold which was then given to a baker for a loaf of bread, who used the paper to buy flour and so on.  This eventually allowed for a conceptual framework to develop that evolved into what we call money. This allows a little bit of gold to support a lot of transactions.   (along the way more than one king decided they could game the system and create paper money by decree, by fiat if you will.  However,these fiat currencies with nothing behind them never stood the test of time.)

Then along came tall ships and bigger guns and a taste for spices and silver.  Explorers came back with tall tales and international trade blossomed, fostering more use of letters of credit. This led to ever more complex contracts to facilitate land and mineral exploitation, I mean trade.  The banking industry became the power center and international banking transcended business even to the point of eclipsing the emerging nation states.  Banks learned to deal in gold and take advantage of the need to pay soldiers over longer distances.  Gold speculation was profitable but the printing press was beguiling and thus began a centuries long battle to supplant gold backed currency with fiat money that they and only they could control.

Fiat currency took a real leap forward with the innovation of using debt to back the money sometimes used in tandem with gold backing.  Central Banks were born to manage debt based currency using a fractional reserve system.  The money supply could be expanded at will.  Now wealth could be accumulated and controlled on paper and laws could be drawn up to protect the system.  Reformers worked diligently to fight this insidious bastion of power but once the wealth concentration reached a certain point legislators were put firmly in pocket and the battle was essentially over.   The Federal Reserve Bank of the United States was firmly ensconced by the time Bretton Woods came along in 1944, establishing the dollar as the world’s reserve currency.  Gold, that nuisance, was still in the picture however.

Then in 1971 Nixon took the USA off the gold standard and the party began.  The binge lasted more than 40 years with most of the world’s nations subsidizing US consumption by buying US Treasuries to hold as reserves and to accomplish trade.  Petro-dollars came along and iced the deal.  To buy oil you needed dollars.  The party was a bit over the top but as time went by and greed became infectious it started to get obscene.  Before Nixon top CEO’s earned 12 times the average worker’s pay.  Today it is 450 times or more.  Billionaires abound who have done nothing more productive than shuffle some credit default swaps or manipulated the price of commodities or packaged toxic mortgage paper.

What do we have then to bring about a correction?  No Jubilee for these two thousand years or so.  We are too civilized to roll some heads, aren’t we?  The answer being discussed these days is a Reset.  A Reset is like Jubilee but without any rules for guidance.  It is a repudiation of debt and let the devil take the hindmost.  It is confiscation of bank deposits, sort of a bail in instead of a bail out (can anyone spell Cyprus?).   A Reset might require hyperinflation to bring things in line or the issuance of a new currency to replace the old.  A Reset tells all those nations holding Treasuries in reserve to go fly a kite.

What will happen after the Reset is put in place?  Nobody knows, least of all me.  I have no idea how it will be structured or how it will go down or who will be blamed (gold “hoarders” are in the running for sure for being scapegoats).  The more pressing question for some is when will this go down and what will be the trigger?  Think China.  Think Russia.  Think India.  Gold buyers all.  When?  Think Crimean Peninsula.  Think Ukrainian debts being called in.  Think of any of the dozens of black swans that are swimming in plain view.

I have been pondering the question as to whether the MiLords**(Deep State operators) that are running things have this crisis under control and will see it as no more than a bump in the road?  Will they (think Pilgrims Society) incorporate the Chinese*** elite into their program and keep on rolling the middle class soaking up all the wealth?  I am starting to think not.  I think they really did screw up this time and they really will hit a wall.  The Yuan will be the new World Reserve Currency and Russia and India will seal the deal.  Saudi Arabia will accept Petro-Yuan.  And it will come to light that Fort Knox**** is empty.  Gold nada.  The party will be over.  And to my question of an earlier post, Are MiLords Stupid? The answer is yes.  They really are.

China will sit at the head of the table for the next Bretton Woods type conference.  And when the dust settles we must be vigilant.  Just because MiLords have failed to keep the game going, doesn’t preclude them from passing the pain down the line.  That is why it is imperative to pass this message along.  People need to understand what the Reset is all about and how greed fueled it.  We cannot let chaos hide the facts about what went down.  We need to make sure that we celebrate Jubilee not suffer under Armageddon.

*  see Rehypothecation
**see MiLords Are Not United
*** Book in progress is entitled Will The Chinese Buy The Mayflower?  Or Sink It?, the Mayflower being a reference to the Pilgrims Society.
**** Fort Knox Is Empty


No comments: