— Welcome to the Credit Crisis, Part Two. It’s been brewing for a while, but the market has been in denial mode. It thought Bernanke and co. had the problems sorted. The central banking socialists were ‘assisting’ the recovery. Sadly, the market didn’t realise they had simply stopped Credit Crisis Part One from doing its job.
— But now, like a promotional line from an action movie, the Credit Crisis is back to finish what it started!
— The global economy looks to have digested (and excreted) all the stimuli that was thrown at it in 2008/09. While that multi-trillion effort has left no sustainable growth in its wake, it has left a steaming pile of debt on top of the existing, gargantuan pile.
— This debt, created by bureaucrats and distorted money signals – not by the preferences of the market – cannot sustain itself. The assets supporting the debt can’t even pay the interest on it, let alone pay down the principle. So like a black hole consuming light, the debt is now consuming the world’s wealth.
— And it’s the equity markets that represent the world’s wealth. That’s why they’re being hammered now.
— So what comes next?
— Well, expect the Keynesian’s to start squawking about more stimulus spending. They will point to Bernanke’s non-stimulus announcement yesterday as evidence that the global economy needs another injection of newly created money.
— This crowd cannot see that it was free money and state-directed spending that caused the problems in the first place. They will eventually be discredited, but they have many supporters who give credence to their views. After all, every special-interest group likes cheap money for differing reasons.
— For example, we had a stint on Sky Business yesterday. While waiting to go on air, the host was talking to some broker. When asked about interest rates in Australia, he almost pleaded with the RBA to cut rates…business is tough in broker land. But ask a saver and they’ll tell you interest rates are just fine.
— No one listens to savers though. There’s no special-interest group representing their concerns. So expect the Keynesians, either through self-interest or economic ignorance, to start campaigning for more something or other, for the benefit of someone…or everyone.
— Here’s what should happen. Like the Markets and Money the advice is free, and therefore free to be ignored, which we’re sure it will be. But if the Bernank, Trichet or any of the brain-dead politicians who’ve been paving the road to hell for us to follow with all their good intentions are listening, here’s what you should do – Kill the banks!
— Not entirely, just in their present form.
— Let us explain.
— Excess debt is currently feasting on the world’s accumulated wealth. When a company is badly managed it generates losses. If the bankers are dumb enough, they’ll keep financing the company. Each annual loss wipes more equity – shareholder wealth – from the balance sheet. Until only debt is left and the administrators are called in.
— The excess debt needs to go. Debt restructuring must be put on the agenda before you can even think about a sustainable recovery. But guess what, debt restructuring will kill the banks.
— Just as parasites play an important role in the natural world, so do banks in the economic world. So they can’t all fail at once.
— The debt needs to be extinguished from the system in stages. Starting with Greece and Europe. The debt situation there is too overwhelming for austerity to work. And there is something perverse about pushing society to the brink to ensure creditors get their money back.
— So restructure the debt and wipe out the equity holders AND, if need be, the debt holders of the exposed banks. There’s no reason why depositors funds (which are the securest liabilities of a bank) should be at risk. Use taxpayer funds to guarantee these deposits and to recapitalise the banks.
— And they’ll need massive recapitalisations. One problem with banks – and the reason they are so fragile and demanding – is that in a credit crisis they threaten to call in good, productive loans to meet demands from withdrawals. So bad debt problems spread to good debt too.
— That’s why recapitalisation needs to happen along with restructuring (but after equity and some debt holders have been wiped out).
— Banks have turned their inherent weakness into strength. They have convinced politicians they can’t be allowed to fail. That they’re too important.
— That’s rubbish. Capitalism has never worked like that. Every organisation must be at risk of failure. It’s what keeps management on its toes and creates innovation and progress. It’s what risk and reward is all about. Instead, we’re suffering from crony capitalism. The bankers have the politicians in their back pocket.
— Debt and bank restructuring will be painful. But if you want to get back to a system of capitalism, personal freedom and kick off the shackles of debt servitude, that’s what needs to happen.
— Will it?
— We doubt it. There’s not enough political will. The politicians and the bankers will try just about everything else first. There are too many pigs at the trough, eating out on the current ‘system’. As evidence, we reproduce the timeless quote from last week:
‘The few who understand the system, will either be so interested from it’s profits or so dependent on it’s favors, that there will be no opposition from that class.’ – Mayer Amschel Bauer Rothschild.
— But at least you, dear reader, understand the unfolding debacle. Nature will take its course one way or another. To help it along its way, we repeat our advice – Kill the banks.
— As a footnote, keep in mind that debt restructuring is deflationary…which is why no one wants to press the button on it. But if central banks promise to provide unlimited liquidity to support good debt, there’s no reason why the deflationary pain won’t be short-lived.
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