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 The Fed has only “withdrawn” $10 billion of QE ($20 billion starting in Feb.)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.”