Global Money Trickery & Malfeasance :: by Wilfred Hahn

A major secular “worldwide” turning point has been playing out across the world, having begun sometime in the 1980 to 1990 period, then progressing and cumulating to the breaking point in 2008-2009. There were numerous actors and influences that played a role; however, it is important to remain clear-eyed about these developments, to view them as a whole, and to understand their potential impact. They are momentous. You must understand that we are living in truly unprecedented times, with the scale and scope of developments so large, few can grasp their import.

At present, we continue to remain within the Global Financial Crisis (GFC) and it is not yet 100% certain how the ultimate scenarios will unfold from here. There are, however, really only two main ultimate scenarios: 1. High indebtedness becoming inflated away versus income levels; or 2. rolling debt defaults, deflation and slumping economies.

The fact that cannot be denied is that for the advanced nations as a whole, the tipping point of unsustainably high indebtedness arrived in 2008-2009. It signalled the end of the post-WWII period of economic and financial prosperity. A completely new phase has emerged which is far from having run its full course. Analysts will be misled should they continue to process data through the blinkers of post-WWII averages trends and developments. We have pointed out numerous times in our reports that virtually all of the underlying causal factors of the halcyon post-WWII economic boom period have halted or reversed.

Given the general depressants of over-indebtedness, uncompetitiveness, aging populations, and still-sinking residential real estate prices in many countries around the world, the best outcomes one can hope for are periodic rallies of economic growth and flashes of consumer confidence. That indeed qualifies as a mark of this era. The financial and economic outlook, both domestic and global, remains tentative and dependent upon the confidence-boosting measures of governments, monetary authorities and transnational agencies. It is a sad state of affairs when manipulations of “confidence” … in other words, confidence games … are the main hope.

Policymakers have been striving to reverse the natural deleveraging pressures that follow such pivotal debt-induced turning points. Effectively, large parts of the global banking system have been quasi-nationalized.

The current monetary policy of expanding central bank balance sheets as a means of rescuing the banking system is virtually without precedent. It is crucial to realize how large, reckless and desperate the actions of the world’s central banks have been of late.  Consider that about half of the bonds issued by the US, UK and the eurozone since 2008 have been acquired by the Federal Reserve, the Bank of England or the European Central Bank.

The eight largest central banks have inflated their balance sheets to greater than $15 trillion (as of October 2011), roughly representing a tripling in size since 2006. Just how big is this? It is equivalent to 23% of the world’s entire economic output (GDP). It continues to rise rapidly. Do observers not realize that this can never be reversed?

Although central banks may state that they intend to extricate themselves from these policies at their earliest convenience, it will not happen. Ultimately, their actions will serve to undermine monetary integrity. If such supposedly-august institutions are allowed to be so deceptive and dishonest, it should be no surprise that all of society has been heading down this same relativistic slope. As the Bible says, “Truth is nowhere to be found, and whoever shuns evil becomes prey” (Isaiah 59:15).

As a consequence of these and other actions, the time value of money has virtually collapsed. History likely will indict today’s policymakers as either corrupt or inept. Real interest rates (adjusted for inflation) are negative, with this burden falling heavily upon the income-dependent elderly. Moreover, various central banks have announced their expectation that interest rates will remain low into 2014.

You can be sure that massive malformation and malinvestment will be and is occurring over this period. In the meantime, the accumulation of sovereign indebtedness continues. In the case of the US, it will likely report its largest budget deficit in history for this past fiscal year.

Yes, societies are in the good hands of policymakers, central bankers and politicians. Piero Carolo Padoan, a former official from the International Monetary Fund and current Chief Economist of the OECED, recently stated that “the global outlook is still largely dependent upon policy action.” These may not offer long-term solutions or repairs, but at least offer the assurance that short-term liquidity crises might be delayed, particularly in Europe’s financial sector, much of which is insolvent.

But was it not similar policy actions that led the world to this desperate point to begin with?

For the first time in 60 years, an advanced nation — a member of the rich-country club of the OECD — has defaulted on its debt. This was Greece and it is a bellwether that there will be more … perhaps many more country defaults. As the chart shows on the opposite page, past debt turning points usually played out in as many as three successive crises. We may soon be entering the second phase of the current GFC. Of course, policymakers are loathe to admit this and moreover must deny such possibilities.

The “spin” machine is already in frenetic motion in Europe. According to Wolfgang Schäuble, there is “not the tiniest hope hat other nations would restructure their debt” (FT, March 9, 2012). Elsewhere, according to statements of the Bank of Japan, one must “clearly recognize and explain to the public that central bank bond purchases are not for the purpose of monetization.” Past history clearly shows that all central banks that have pursued this course, always intended at the outset to return the stolen cookies to the jar. Moreover there has been an unnerving inverse correlation between future outcomes and the statements of policymakers.

Yet, globally, credit creation (based on private sector activities) is now turning over. This is occurring from China to America to Europe and is a negative influence upon both economic growth and financial market valuations. It must be noted that despite the huge interventions of the US Fed, the US Shadow Banking System continues to shrink (15 consecutive quarters running from $20.9 trillion to $15.1 trillion.) This is a deflationary influence on both economic growth and financial asset valuations.

Fraud and corruption are widespread and complicity extends to the highest levels. Rapacious capitalism is widely admired as “cunningness” and “business acumen.” To top it all off we have this development: After all the monetary sorcery that has been witnessed over recent years (none of it ensuring recovery, but rather an ultimate financial apocalypse of either a massive debt depreciation or deflationary default scenario), central bank leaders are now being lauded as world saviors. Their dubious alchemy (contributing to an ultimate systemic, pandemic financial breakdown) is being celebrated for its temporary buoying effects. The Atlantic Magazine recently profiled a highly-flattering account of Ben Bernanke. Mario Draghi, the head of the European Central Bank, has been similarly feted.

We have reached the point where the largest macro risks ever known in advance by the policymaking and financial community are being complacently ignored. It could be said that we know the known problems as perhaps never before. Any sentient person knows that one cannot print wealth and create money out of thin air to cover past debts and malformations. Yet, we see a collective will to endorse bogus solutions. In this there is an implied collusion; there is an agreed-upon complicity.

Social unrest can only escalate. Short-term gamesmanship rules. We must be wise to the epic scale of the story our times. It is a globally-intertwined saga of humanistic beliefs, religion and desperation as never before. We must see this relative to history … both past and unfolding. There is no question that the “historicity” of current global developments is indeed epic. We would even say it is of Biblical significance. [We invite readers to order our most recent book which provides the basis for that statement. Please see page 4 for more details.]

What about the US? Changes in sentiment and worldwide consensus have been extreme over the past three to four years. It is worth remembering that the US was considered to be the global pariah — and an apologetic one at that — throughout 2009 and 2010. It was widely accused of financial alchemy and as the “ground zero” of the Global Financial Crisis (GFC). Japan, at the time, despite its massive debts, was considered a safe haven. Less than two years later, the tables have turned. Europe (specifically the eurozone) is the global pariah. Japan is no longer considered a safe haven as it may have hit its “turning point.” Moreover, it is expected that more chaos will ensue in Europe. What next? Anything is possible. It should not be surprising that in due time, the US will again take a turn in the spotlight of crisis.