The 2012 New Great Depression
"The great depression was produced by government mismanagement rather than by any instability of the private economy" M. Friedman
The original idea of having a central bank was to secure stability by ensuring politicians kept their hands out of the pockets of the Treasury. The reality is different. Over the past decennia politicians have tried to avoid recession at all costs by increasing the money supply through the creation of debt, which in turn serves as a reserve for (Central)banks. Now that the debt has become a bubble it becomes impossible for the economy to honor it and a natural process of debt destruction has been initiated. Greece and Lehman Bros are two excellent examples.
Dramatic is that because of the size of the debt not even a balanced budget can and will bring relief. Interest on existing debt will continue to rise as a percent of total government expenditures. The higher the general level of interest rates, the faster the total of interest charges will rise - and this is why the FED is converting short term debt into long term debt and why both the ECB and the FED are keeping interest rates as low as practically possible. If interest go up to for example to 12% it would add another trillion deficit. [Imagine what is happening in Greece where interest rates on 10 year Greek treasuries are 24%]
It is the accumulated interest expenditure which will in the end bring the system down as the only way to bring down interest expenditures is to redeem the debt. Any other popular measures like cutting spending, raising taxes, save on energy only result in a further reduction of economic activity and this in turn results in yet another reduction of tax revenues making it the Authorities even harder to pay for the interest on its debt.
As a result of the economic decline, unemployment is on the rise and people start to riot...Bankers and Politicians must at a certain point fear for their lives (Argentina).
Destruction of debt equals destruction of Money and less money chasing a same amount of goods result in lower nominal prices for Investment instruments. Most dangerous however are Treasuries (which will end worthless) and ANY investment instrument which is guaranteed by Treasuries: life insurances, pension funds, bank deposits, saving accounts, bank shares, structured products, derivatives, e.o.
Add $ 1.4 quadrillion derivatives (uncontrolled, bank manufactured and bank controlled investment instruments) and we have a financial atomic bomb. Most people don't even realize they hold directly or indirectly these kinds of investment instrument as these are usually sold as ZERO risk paper. Remember it was Derivatives which brought down Greece in the 1st place.
This poisonous cocktail will cause a lot of harm and when it all blows up there will be those who loose it all and those who loose part. Important is to be OUT of anything which appears to be safe like: Treasuries, bank deposits, zero-risk bond and stock funds, money market funds, TAK-instruments, life insurances, financial stocks, ....and to hold Real Money as well as certain well defined Real Assets (Real Estate is a HOCG and won't do unless you buy it cheap at the bottom of the market).
Dramatic is that Authorities are because of their acts punishing the very ones who have been working and saving their whole life: pensioners and savers.
Europe has a serious additional problem: society has for decennia been poisoned and brainwashed by socialism. Society is over-regulated and for this reason any natural adjustment becomes extremely difficult. If the mentality of the people doesn't change we may well end up with a remake of the Dark Ages of Europe when India became the Financial Capital of the world.
Last but not least it becomes imperative to store your savings OUT of POLITICAL reach as the Authorities will increasingly vote new legislations in place in order to TAX away as much as possible. This exercise is as important as investing properly.
Note: Money is a natural derivative of Treasury Bonds and the 1st paper money was interest bearing.
October 6, 2011
Francis D. Schutte