I know you are wondering about my title but it is really quite simple. The debt (currency and derivatives) bubble starts with Johnny (and industry) on the street when he borrows for anything from a house, car, school loan or even a Mickey D’s hamburger on his credit card and will end with Uncle Sam. Everyone everywhere is a part of the current debt/derivatives bubble. Even if you have no debt, no credit cards or even no bank account…you will be affected in some way once the great unwind is over.
The “great unwind” is happening right now and right before your eyes. Emerging markets and currencies are imploding as a result of the “carry trade” unwinding. One of the most important of these “unwinds” and forced liquidations is occurring in Japan because it is so large in size. Art Cashin put it this way, “The carry trade is unwinding upon speculators who have little or even zero equity as margin.” In a nutshell he is absolutely correct on a micro basis, I wonder if he realizes how correct he is on a macro or systemic basis?
The credit bubble that we live in was built over many years, actually 100 years since the beginning of the Federal Reserve in 1913. It all started with fractional reserve banking, got a booster shot in 1971 when we went off of the gold standard and then went exponential in the 1990’s and 2000’s when derivatives took over. The problem is that there is no more collateral left…”left” that is unencumbered (borrowed against). Virtually every banking system, every central bank and every sovereign has already “borrowed” against anything and everything with “value.” In any Ponzi scheme there must always be “more fuel” coming in from new blood to feed the earlier participants…but we have reached a critical mass where there is nothing left to borrow against to create the new juice. Just watch the markets over the next month or two. The Fed has only “withdrawn” $10 billion of QE ($20 billion starting in Feb.) and we are already seeing convulsions and seizure actions. I think it’s only a matter of time (a week or two?) until we hear Janet Yellen’s first major announcement…taper off and an expanded QE?
Of all the potential “confessors” that we were arriving at “game over” I never could have been convinced that it would be a bank…a BIG bank! Deutsche Bank said on Friday, “We’ve created a global debt monster.” Please take the time to read this short piece by Zerohedge and Jim Reid, it is exactly what “we” have been saying all along. I normally would ask the question “why now?” but I think that you know why. We are clearly unraveling in one giant global margin call and there are no solutions to this. Does Deutsche Bank believe that they will save themselves with this confession? Of course not, they are one of the largest players in the derivatives market but maybe they want to be on record for whatever it’s worth ahead of time. Maybe they see the 100% probability of where this is going?
Getting back to my title, a credit collapse can, and has in the past “started anywhere.” It can start with enough “Johnnys” defaulting on loans. It can start with a corporation, a small country or a few banks (or just one). The point is, once it starts it cannot be stopped if there is no collateral left to borrow against. Does anyone believe that JP Morgan (the largest derivatives monster by far) will be able to perform on their promises while others fail on promises to them? Yes I know, they claim they have a “fortress balance sheet” but any fort can be starved out which is what unpaid “winning trades” will be to Morgan. Even a single link in this grand financial chain can and will cause the failure of everything on both sides of it.
In a week or a few weeks or even a few months this will all end with Uncle Sam being looked to save the day again. The U.S. won’t save the day because we no longer can. The size of the “game” has gotten bigger since 2008 and the “power of our punch” is much diminished as we have already looted the Treasury (in more ways than one). The world in case you have not noticed is and has been making ready for this type of event. While we have been wrecking our balance sheets (the Fed and Treasury), country after country have been inking deals between themselves that exclude the use of dollars.
It is of course too late for any country (with maybe the exception of Iceland) to avoid the initial carnage of financial collapse. This is so because dollars are held by all central banks and most financial institutions throughout the world. This is so because “they went along with the game” during and post 2008. Iceland let the tent collapse back then…which in retrospect was the correct thing to do as they are actually healing rather than getting sicker everyday as the West does.
I said that “it will end with Uncle Sam” and it will. We know for a fact that gold has been moving towards China and the East for several years now…because it has been so much more than actually gets produced each year we know that it has to have come from “somewhere.” And it has, it has come from the only obvious place that it once existed, the bowels of the NY Fed. Was it U.S. gold? Foreign held (vaulted) gold “custodian’d” by the NY Fed? Both? Yes. And this is why it will end with “Sam.” The world will collectively “gasp” at some point in the public realization that “the gold is gone.” They already know this, they have suspected for years now but Germany only receiving 5 tons of gold was confirmation.
“Uncle Sam” will be blamed. Blamed for the coming bank failures, blamed for derivatives infecting and blowing up everything (sound or unsound), blamed for all currencies’ failures and of course blamed for stealing the gold…the citizen’s gold and foreign held gold. No one wants to do business with a “cheater” and this is what “we Americans” will be seen as all over the world. We will become isolated financially and more importantly economically as we no longer have our production base with no way to pay for imports.
The entire experiment while not dreamed or schemed up by Johnny was “allowed.” It was allowed because life was “easy” so why rock the boat? It maybe was not originally “intentional” by Uncle Sam but it is now clear that fraud of all magnitudes has infested the system. It will “end” with Uncle Sam because as Harry Truman once said, “The buck stops here” though he said it in an entirely different context to today’s. The current credit unwind will expose everything “fraudulent” just as credit contractions always have…the only thing different in this instance is that we will see that the coaches, referees and even the score keepers were in on it. As recently as 5 years ago we were seen by the rest of the world as the “White Knight” to the world’s problems…the current monetary system will end in Uncle Sam’s under collateralized lap and seen for what it is… being the cause and “with intent.”
As always great stuff, and you mentioned in a couple weeks or months the US may be looked to, to save the day again. Which will be real interesting as Japan is basically falling in the toilet while it is flushing. I only mention this to buttress your point about the US not being able to solve all the world’s financial problems. In my view Japan is one of the main reason the dollar isn’t in drastic free fall. Without Abenomics printing wildly the dollar would not have enough big boys supporting “King Dollar” (by making themselves weaker like Japan is). So whether it is a coordinated effort between the US & Japan to prop up the dollar or not, with Japan tanking, my take on this is the US doesn’t have enough big partners to prop up “KIng Dollar” without Japan…..Japan’s problems are rapidly becoming too big to spend time working with a “bully with no teeth”
Bill the part about the “blame game” in the last few paragraphs is something to ponder for sure (I sure hadn’t), as some very powerful ‘countries / people’ are going to want to point their fingers at someone else to keep the pitch forks & torches from coming at them. Shame the honest citizen who played the game by the rules cant’ get a ring side seat, some pop corn, & a soda & watch from the 50 yard line. Unfortunately the honest citizen is going to be scrambling up hill face first against an avalanche of rolling “Fascism Dung”
SG
yes, the blame game is coming
Great article Bill.
“No way to pay for imports”
This is what concerns me most since we have the largest military machine in the world and who doesn’t think we will use it at some point?
History shows this and will most likely repeat itself again this time.
thanks Randy.
I agree, Randy, but have a different point of view on this. The US has given away much of its industrial base but remains a world power in agriculture. In a world filled with hungry mouths, those who can grow food and get it to market WILL have a seat at the table. I believe that the time is coming when those who have increasingly scarce commodities will not be willing to part with them unless they receive another scarce and valuable commodity in return. Because of this, oil may become available to those who have gold, silver, food, etc. to exchange for it while those who only have unbacked fiat paper will not be able to buy any of it.
What remains to be seen is whether or not a real gold-backed currency will develop that overcomes this problem. If the new currency is not only backed by gold and / or silver and is convertible to it “on demand”, then I believe that it will succeed. If it is merely backed by PMs but not convertible to them, then probably not. The world will have seen by that time that there is no fiat paper that cannot be used to cheat those who accept it and they will not be willing to go through yet another fiat experiment that ends up costing us all so much.
The Chinese are collecting a massive gold hoard. I believe that they will use this to back either their currency or their portion of a new world trade currency. Other countries will be encouraged to do the same. If they do not, then the renminbi is likely to be THE currency in the future.
The US dollar will likely still be around but it will become a mere shadow of its former self. This is why gold is likely to go to $50,000 an oz. and silver to $3,500 an oz. Not because these metals are such a strong currency, although they really are, but because the USD is so incredibly weak.
Got gold and silver? We’d better.
very good thoughts.
Another good one Bill. Funny thing is Bill, Uncle Sam is a scam name just like all the other ones e.g QE, MBS you name it. All these names are names that are not back by any real characters at all! Especially the ones that the FED came up with to handle the crisis. This is why WAR will happen because in the end some nations were believing that this PONZI was real.
not your “rich uncle”.
I’ve always preferred the title, Uncle Sugar, to Uncle Sam. It embodies the give-away tendencies of the US Gov more clearly… not an uncle but a real Sugar Daddy, as it were.
correct