|A Weekly Newsletter for Sunday, February 19th, A.D. 2012
||Between Friday, February 10th, and Friday, February 17th, the bid prices for:
| Gold rose 0.0 % from $1,722.10 to $1,723.80
Silver fell 0.9 % from $33.59 to $33.28
Platinum fell 1.1 % from $1,652 to $1,633
Palladium fell 2.1 % from $699 to $684
DJIA rose 1.1 % from 12,801.23 to 12,949.87
NASDAQ rose 1.6 % from 2,903.88 to 2,951.78
NYSE rose 1.5 % from 7,992.05 to 8,114.51
US Dollar Index rose 1.7 % from 78.71 to 79.08
Crude Oil rose 5.5 % from $99.49 to $104.96
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Debtor's Rule II—Greece Explodes
Edited by Alfred Adask
In A.D. 2008, John Williams’ (ShadowStats.com) research persuaded me that the national debt was several times greater than was reported by the federal government. If Williams was right, there was no way America's total debt could ever be repaid.
I subsequently coined the phrase "What Can't Be Paid, Won't Be Paid," and wrote several articles that touched on the idea that the US debt is too great to ever be repaid in full, and therefore must be largely repudiated. I guesstimated that at least 80% and perhaps 90% of the existing debt must be repudiated.
I've warned people ever since that the inability to repay all of the US debt implies that those who hold their wealth in the form of paper debt-instruments (like stocks, bonds, bank accounts, pension funds, 401ks, etc.) are destined to take a Greek-style "haircut" whereby they lose 80% to 90% of their assets.
The problem is that one man's debt is another man's paper asset. In our debt-based monetary system, if a debt is repudiated, so is its correlative paper asset. Thus, you must store your wealth in the form of gold, silver or some tangible property, or prepare to lose your assets.
If only 50% of the existing debt must be repudiated, then 50% of the correlative paper "assets" (promises to pay) must also be repudiated. I can't imagine any economy surviving the loss of 50% of its paper assets--and, again, I'm betting the loss will be 80% to 90%.
Since A.D. 2008, I've been fixated on our enormous debt--and the world's enormous number of debtors. Compared to our unpayable debt, all other economic issues strike me as trivial. I don't care what the inflation rate is. I don't care what the unemployment rate or the interest rate, or the velocity of money may be.
For me, the guts of our economic predicament is summed up in a fundamental question: When do we “officially” admit that the vast majority of American debt can't be paid? When that moment arrives, the consequence must be economic collapse.
When we finally admit that most of the debt can't be paid, we will necessarily destroy all of the correlative paper assets. Without those paper assets, there'll be no currency to lend, spend or invest. That loss of apparent "assets" will mark the SHTF moment.
Hell No, We Won't Pay!
In November of A.D. 2011, I wrote three articles entitled “Hell No, We Won’t Pay!” These articles explored the Greek public's power to chose to pay or not pay their government's debts, challenged the idea that the Greek people had a moral obligation to pay their government's debts, and argued that the EU was in an impossible dilemma. They can't pay the existing debts, and they can't default (admit that they can't pay the existing debts). That means' they're damned (by the debt) if they do, and damned (by the debt) if they don't. Their only option is to "kick the can further down the road" and try to postpone the inevitable.
All of this led me to increasingly appreciate the power of debtors. I started to explore that power in last Saturday’s article, “Debtors Rule?” That article explored the idea that in an asset-based monetary system (as per Proverbs 22:7), debtors have traditionally been the “servant” or “slave” to the lender—but in our modern debt-based monetary system, debtors have become so numerous and powerful that they can now contend with lenders for control over the debt. Even after the debt’s been agreed to, the payment remains negotiable. The debtor is no longer powerless.
Last week’s Greek riots supported my “Debtors Rule” thesis. Greek debtors refused to pay their alleged debts and backed their refusal with riots, bricks and firebombs. Several banks were fire-bombed; one burned to the ground. Police attempts to maintain order were overwhelmed by the sheer numbers of rioters.
The debtors are restless.
It may not be true that "Debtors Rule," but as I wrote last week, debtors are now "too numerous to fail". The moment has nearly arrived when Greece and the EU must admit that Greece has defaulted. Greece will not "rollover" its existing debt into new debts and new promises to pay "sometime" in the future. Creditors holding Greek debt instruments will lose most of their investments. Bankruptcies will proliferate.
Fractional Reserve Banking
If Greece defaults, the $500 billion in Greek bonds will be admitted to be non-performing and, most importantly, secondary loans based the "collateral" of Greek bonds, may have to be called in.
US fractional reserve banking allows banks to lend ten times the face value of the collateral in their vaults. I've heard reports that EU fractional reserve banking laws allow banks to lend up to thirty times the face value of their collateral. If we assume that the world's banks which hold Greek bonds as collateral used the 10X multiplier in their fractional reserve banking, a Greek default on $500 billion in Greek bonds might precipitate the "calling in" of $5 trillion in secondary loans based on the Greek bonds.
The economies of the US ($15 trillion GDP), EU ($16 trillion GDP) and world ($62 trillion GDP) are already fragile. The effect of suddenly "calling in" $5 trillion in loans can't be good for any of those economies and might be catastrophic.
Even if the US, EU and global economies can skate past a Greek default, that default will adversely affect Spain, Portugal, Ireland and Italy. The weight of the Greek domino may be enough to topple one or more of those other, larger dominoes. The powers-that-be may be able to hold the global economies together for another six months or six years. But it's at least possible that the Greek default could trigger a systemic collapse before the end of this year.
Last week’s Greek riots indicate that debtors DO rule--if only by virtue of their power to throw bricks and firebombs.
Too Numerous To Fail
Again, the debtors' power is based on the fact that they're now "too numerous to fail".
The massive number of debtors isn't simply a basis for the Greek riots and coming default. The massive number of debtors illustrates why a debt-based monetary system must fail.
Because most debtors have no intention of repaying their debts. I'm not just talking about the man on the street, I'm also talking about governments. For the past 70 years, the US gov-co has caused significant inflation for the purpose of paying off debts with cheaper dollars. Inflation is a means by which debtors (especially “sovereign” debtors) can intentionally rob private creditors. Persistent inflation is evidence of a governmental intent to rob creditors.
Historically, the number of voluntary debtors in society was fairly small. If you wanted to buy or build a $100,000 home, the banks might lend you $80,000—if you already had $20,000 of your own to invest. The banks insisted that you risk a substantial amount of your own money in the new home in order to guarantee that you'd pay your debt to the bank. I.e., if you defaulted on your mortgage, you'd lose your own $20,000.
But banks also insisted that borrowers put up some substantial collateral to prove that the borrower was not simply a penniless dependent but was already a bit of a creditor himself. To have acquired and accumulated $20,000 was good evidence that the borrower was prudent in his handling of money and was, already, small but legitimate creditor.
"Them that's got shall get, them's that not shall lose . . . so de Bible sez, an’ it still is news."
In an asset-based monetary system, “them's” that's already “got”—saved—some money on their own were entitled to borrow even more. By saving their own money, the would-be borrower demonstrated that he had the mindset of a creditor. In an asset-based monetary system, the big creditors (banks) were willing to lend to small creditors (people with savings). As a result, there were relatively few pure, penniless debtors in a community. The vast majority of people--lacking sufficient resources or personal discipline to save any money and become "creditors"--were deemed pure "sub-prime borrowers" worthy of charity but unworthy of access to credit.
However, in a debt-based monetary system (of the sort we've had since the dollar became a pure fiat currency in A.D. 1971), the number of debtors grows as the banking system hands out free checking accounts, credit cards, and sub-prime mortgages. Savings disappear and almost no one is a real creditor. Loans aren’t merely widely available, they are crucial to prosperity. If you can't borrow, you will almost certainly live in poverty and on welfare. Debt becomes commonplace and the number of debtors explodes.
The problem is that the vast majority of debtors—including the government—are sub-prime borrowers who have no real intention of ever repaying their loans. The fact that the vast majority of debtors have no savings is prima facie evidence that they're unworthy of credit. The penniless are more than happy to trade their promise to repay (someday) for whatever currency they can borrow and spend today. They laugh, they grin, and they get over on their creditors. They'll repay their loans as long as it's possible and convenient to do so, but if problems arise, they're default and throw bricks and firebombs at any creditor who tries to collect.
In an asset-based monetary system, people without savings were predominant but had no access to borrowed funds. Only the top 10% or 20% of the society who had accumulated some savings would be entitled to borrow more. Borrowing and lending were confined to those who were fundamentally creditors (aka "savers"). The big creditors lent to the little creditors. But if you weren't a creditor (a man with savings), you had little chance of borrowing money.
In an asset-based monetary system, when a loan was made to build a house, that "loan" was more like a partnership between a major creditor and minor creditor. The bank (major creditor) would invest most of the money for building the home. The "borrower" (minor creditor) would invest some of his money in building the home. Under the terms of this "partnership between creditors," if the minor creditor (borrower) didn't repay all of the money "invested" by the major creditor (bank), the bank could seize sole ownership of the house, sell it for $80,000, recover its investment--leaving the minor creditor (borrower) to suffer the loss of $20,000.
If you hadn't already saved enough money to prove that you were a creditor, you couldn't borrow more from a bank. That’s why people complained for years that the banks only lend to people who don't need to borrow.
Exactly. Under the asset-based monetary system, you had to be a creditor (someone with savings/collateral) before another creditor would lend to you. i.e., the banks will lend billions to Warren Buffet—a man who has so much money he is literally giving it away—but won't lend pennies to a homeless man who is desperate to find enough money to merely eat dinner. Traditionally, creditors only loaned to other “creditors”.
Thus, 1) "What Can't Be Paid, Won't Be Paid," 2) Greek riots are an expression of "Hell No, We Won't Pay!"; 3) In a debt-based monetary system, debtors do rule by virtue of their massive numbers and propensity to throw bricks and firebombs (violence) or even start wars; and 5) real creditors will be robbed in the debt-based monetary system
Can politicians sooth the savage debtors and prevent more riots? Probably not. Even if they calm down for now, debtors will eventually return, refuse to pay, and back their refusal with bricks, firebombs and perhaps even a major war.
Things to Come
It took two years of "austerity" (being compelled to pay their government’s debts) for the Greek people to riot. Greek rioters then looted stores, attacked banks and tourists. At least one gun store was targeted and robbed of firearms. Theft of firearms implies rising violence.
How long do you suppose it’ll take Americans to riot once they're subjected to "austerity"? How long before American rioters firebomb banks and raid gun stores?
American "austerity" has begun. Unemployment is high. Government pensions (at the state or local level) are threatened. Benefits are being reduced. President Obama promises that a recovery is imminent, and Americans are waiting to see if that promise is true. But how much longer will they wait?
America is much deeper in debt than Greece. It's already admitted that the US debt can't be paid without raising taxes and/or cutting benefits (“austerity”). When American “austerity” is implemented, Americans will riot. Many Americans are dependent on "entitlements" and won’t tolerate significant reductions. All Americans are equally intolerant of rising taxes.
We're at the intersection of "Rock Boulevard" and "Hard Place Lane" and there's nowhere to go other than to repudiate the existing debt.
But if we repudiate the debt, we’ll wipe out the correlative paper assets and the economy will collapse.
I can't tell you when it'll happen, but it appears inevitable that America is headed for Greek-style riots followed by a national depression and likely economic collapse. In the midst of that collapse, some people will starve, shoot and kill to survive.
It may be several years before we reach that level of national turmoil. Or it might be several months. But it's got to happen.
Others may be able to predict when we'll have that SHTF moment--I can't. However, Jim Willie recently wrote:
"Europeans do not see what is coming. Watch for February 21st and then again March 20th, as turning point dates. The United States of America could very well cease to exist in the way you have known it after that date. February 21stis to be a date where this planet will get a fresh new program downloaded. This will mark the beginning of a monumental cleansing process that will not be over until it is done. This will embrace and engulf all and everything and everyone. . . . we might see a bank holiday and/or martial law that will begin with a Greek default by March 2012."
In the past, bank holidays have taken place on three-day weekends. Our next 3-day weekend will occur on Saturday, February 18th; Sunday, February 19th; and Monday, February 20th, (Presidents Day).
That's this weekend.
Again, these predictions may be nothing but rumors. I'm not saying that there'll be a bank holiday this week, but I am saying that we live in “interesting times” when sovereigns default, debtors rule, economic collapse seems inevitable—and no one really knows when we'll see the SHTF moment.
Implication? We should all prepare now, while we can. Debtor's may rule this crazy world, but creditors (those who have savings in the form of tangible property) can survive.
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