Desperately Haven Bound :: by Wilfred Hah

Listening to popular opinion, the mainstream media, some politicians and most certainly the shills for the false optimism of Wall Street, you would never know that a massive financial and economic crisis has been welling up over recent years. Like the rolling, dark storm clouds that warn of a coming deluge, the continuing financial tremors we see around the globe today point to a greater bout of difficult consequences ahead. Unprecedented developments are unfolding in every direction but very, very few people that have a solid understanding of these things are willing to speak out.

The fact that this is the case is indeed a tragedy. It is also not unusual. We apologize for once again quoting this comment from John Kenneth Galbraith’s book entitled The Great Crash: 1929. It is so apropos that we must use it again.

“Even in such a time of madness as the late ’20s, a great many men in Wall Street remained quite sane. But they also remained very quiet. The sense of responsibility in the financial community for the community as a whole is not small. It is nearly nil. Perhaps this is inherent. In a community where the primary concern is making money, one of the necessary rules is to live and let live. To speak out against madness may be to ruin those who have succumbed to it. So the wise in Wall Street are nearly always silent. The foolish thus have the field to themselves. None rebukes them.”

Were the late Dr. Galbraith still alive today, no doubt he would venture the same observation about current conditions in the broader financial community. The difference today, as compared to the 1920s, is that this “collusion of silence” is of a greater global scope; the possibility of disaster and suffering is much larger.

But surely things could not be that dire. Things just do not seem that bad, a reader may say. Indeed, many people may not identify with the difficulties that are unfolding. But that does not obviate what is happening to other people, families and societies…indeed, entire countries. In North America’s case, society has moved towards a two-tier level while the middle class becomes progressively squeezed. Well-off households face no concerns. The prices of luxury goods, art and collectibles, along with the revenues of luxury goods companies, are all firm and rising.

On the other end of the spectrum, many households are now forgoing things that they consumed in the past as income levels stagnate and even decline in real terms. Youth unemployment is soaring around the developed world to unprecedented levels (see the chart on the front page), including in the United States. Food stamp usage also continues to climb, showing no signs of decline (see Chart #2 on this page.) These are hardly harbingers of coming peace, prosperity and contentment in the future. We therefore observe that one part of the population is almost completely insensitive to unfolding financial stresses.

But back to the reality…or rather, the “soon-coming” reality for the majority of the population. Even here, people seem oblivious to the scope of disaster, theft and wealth destruction. In North America, for example, few seem to realize how much of their future retirement lifestyle has vanished. When investment returns and interest rate levels collapse, it annihilates the future value of pensions and retirement savings. As we write, interest rate levels around the world are falling to unprecedented, never-before-seen levels (long-term rates in the U.S. now at 220-year lows!). If one were to fund one’s retirement by investing in a 10-year treasury bond, one would need three times the savings today than was required five years ago to afford the same given retirement lifestyle. In other words, the cost of retirement went up three times and more in terms of required savings. That’s a form of hyperinflation though few economists would recognize this as such.

For the average middle class family, a comfortable retirement is the largest single purchase they will make in their lifetime — even greater than the cost of the average home (supposing people wish to retire as early as age 65). The impact of this massive decline in prosperity still lies ahead.

Another observation to note is that the unfolding crises today are global in scope. These involve many countries, each with different characteristic imbalances or causalities. The sufferings manifest in different ways. Consider that the unemployment rate for the entire work force in Spain today is over 22%! This is a major European country! Its unemployment rate is as high as and greater than that during America’s Great Depression of the 1930s. Is this not significant? “We’re in a situation of total emergency, the worst crisis we have ever lived through” said the former premier of Spain, Felipe Gonzalez, recently.

Japan has different manifestations again, especially as it has a rapidly-aging demographic. Italy’s economy in real terms has not grown in over ten years; it is stagnating, burdened by excessive debts and deficits. Greece, China…we could list many more and provide a more detailed analysis. The bottom line is that the world’s economies, financial systems, and imbalances are extreme and shaky. As such, money has begun to panic and take flight from Greece…even from China. Ominously, increasing numbers of protests by citizens have erupted and major political shifts have begun to take place. Consider the political tides of Greece and France, of late.

Around the world, the hunt is on for safe haven…namely, financial safe haven. In fact, people are so worried about losing their money that they are paying for storage costs. How so? In a number of countries, interest rates have become negative for short-term deposits and bonds. For example, Swiss 2-year interest rates recently dropped to minus 0.26%. Similarly, interest rates have fallen to negative levels in Germany. These are all record lows. In effect, investors are paying Germany, Switzerland and others to borrow their money. Sound crazy? All of this is evidence of how distorted and precarious financial systems have become.

What we see is that policymakers are fighting the financial deteriorations with straw structures, playing the ruse of building potential pools of rescue funds – i.e. those of the International Monetary Fund, the European Stability Mechanism and others – hoping that this capital can be used to rescue and rebuild confidence in banks and financial systems. But there are problems. There are ever-less financially-sound countries from which such capital can be raised. In the end, it is still money that must be borrowed.

If over-indebtedness and liability imbalances were the major causes of the still-unfolding Global Financial Crisis, then more debt is not the solution. Reflecting this conviction, Bundesbank president Jens Weidmann recently stated, “Just like the ‘Tower of Babel,’ the ‘Wall of Money’ will never reach heaven. If we continue to make it higher and higher, we will, in fact, run into more worldly constraints, which might include setting incentives that lead to new problems in the future.”

The ultimate outcome is clear: More monetary malfeasance on a massive scale…more lying and stealing like never before.

Admittedly, it is much easier to be optimistic and try to ignore the facts as long as possible. To “tell it like it is” in the financial world does not win congeniality contests. However, we do not think that our opinions are the product of hysteria and imagined risks. Long-time readers can attest to our record of consistent analysis, one that has been confirmed by subsequent events and developments. That is not to say that we are infallible or prophets. Hardly.

Our perspectives require little more than common sense. If that were not the case, then why are so many learned economic and financial strategists shockingly and consistently wrong? All their training and sophisticated knowledge was of little use. On the other hand, plain and common sense thinkers have realized for many decades that the world was on a path headed for ill consequences. That path now indeed is meeting with truth and consequences.

While money is looking for safe havens, where is yours? A cleft in the rock…a strong tower? These are some of the terms that the Bible uses for a spiritual haven of rest and peace. We may not be able to find such an oasis in the financial world anytime soon. Financial markets are treacherous and are likely to become more so as conditions become even more desperate. Nothing is sure and nothing is completely safe, including gold. If we have our destiny and fate sealed by the promises of God, at least we can be without fear, although living frugally and humbly.