Sovereign Nations Will Collapse As Debt Ratings Collapse

..Back when the first crisis hit the banking system when that invisible glass ceiling was hit whereby a system couldn’t cause housing values to rise any further, I said that no housing bubble collapse ever repaired itself in less than 5 years and the bigger the bubble, the longer it takes to recover.  I also said there was no way to repair a housing bubble except via letting time pass and ultimately rising wages coupled with a fully-restored economy.  Any attempts at shortening this process is disastrous.  The main cures for this untreatable disease (collapsing housing values) are to recapitalize the banks who have huge losses from loan defaults or to hand out money like candy, in other words, to print money via the QE solution.  All these things do is speed up the overall collapse of an economy and indeed, an entire political system.

.

ΩΩThe US housing market was artificially warped over the years due to various programs many of which were set into motion to expand home ownership to people who are financially incapable of running and maintaining a property.  Interest rates were kept artificially low so it made economic sense to go into debt rather then save money.  People piled on these debts because the money was basically ‘free’ since it outstripped savings by a significant degree.  People who saved money saw no gains in value so US savings rate fell to near zero during the housing bubble.

.

ΩΩHere is a classic sob story from California, Homeowners at Risk Struggle to Find Lawyers – NYTimes.com

 

• The length of time California households spend in foreclosure, which was rising as owners pursued modifications, fell in the third quarter to 8.7 months, from 9.1 months in the second quarter. That could indicate that the absence of defense lawyers is beginning to accelerate the process.

 

• While lawyers for nonprofits like Mr. Hackett continue to represent clients, they are too overwhelmed to help everyone. “A homeowner in California is going to have an extraordinarily difficult time finding an attorney,” he said.

 

• That group includes Ms. Bell, who owned two properties free and clear and then gave in to a friend’s urging to “put your money to work.” That friend was an agent, and soon Ms. Bell owned two more properties and was making unsecured loans.

.

ΩΩThis is typical of the housing bubble.  ‘Put your money to work,’ is a good clue as to what goes wrong when the central bank keeps interest rates artificially low for an extended period of time.  Ms. Bell should have been part of the savings base that capitalizes the banking system. But not only were interest rates paid to savers kept ridiculously low, on top of this, the bankers demanded a very, very low capitalization rate, that is, the reserve ratio was dropped to nearly zero dollars because according to the bankers, they didn’t need any stinking capital.  They were all secured from losses on loans defaulting via AIG’s derivative insurance scheme!

.

ΩΩThis proved to be a hallucination.  The derivative over the counter/transfer of risk scheme was just like all of its odious predecessors: a fantasy.  Paper glued over a gaping capital hole.  The merest trifle can puncture these sorts of paper hole-covering schemes.  All it takes is for a very few people to default and then begin a panic sale.  This, in turn, causes all other prices to suddenly collapse as more people try to sell off paper assets held by investors and banking houses.  This usually can be deduced long before it happens via the amazing ‘hockey stick graph’.

.

ΩΩThis old story of mine from 2008 is a very good read:  Money Matters: OTC Hockey Stick Problems Of The Derivatives Beast

.

ΩΩThis is a graph I worked on in 2008.  It is obviously one of the worst sort of hockey stick graphs I have ever seen.  The global housing bubble was fueled by the huge growth in free trade and ballooning national overspending by the NATO countries and Japan.  There definitely was a global excess in borrowing.  On top of this, since capital was discarded in the banking system, there was a corporate take over bubble based entirely on funny money that had no capital base, too.

.

ΩΩSince these bubble collapses are ridiculously easy to spot, all we have to do is see something double in size every 8 years or less, we can stop these with only one tool: obstructions such as higher interest rates or trade barriers or cutting off access to whatever is causing the sudden acceleration in growth.  All fast-growing systems are ultimately cancers except in one area: when it is growing due to filling an empty space. When that is going on, we know the growth will naturally slow as the space is finally filled.  But with systems based purely on expectations and numbers, the sky can be the limit.  A prime example is money printing: it always itches to suddenly expand to infinity and needs very severe restrictions to prevent this.

 

.

ΩΩThis news astonished me and made me laugh:  Nouriel Roubini buys $5.5m home in New York – Telegraph

 

• Mr Roubini, who has said there is still a risk the US economy could slide back into recession, said last month that another “disaster” will happen if US home values fall again and prime-mortgage defaults increase.

 

• “If house prices are going to fall another 5pc to 10pc, another 8m households are going to be in negative equity,” the economist said in November. “We are going to have another nasty crisis. That’s going to happen unless we do something about it. Forget about subprime, look at prime.”  Mr Roubini took out an adjustable-rate mortgage that has a fixed rate of 3.625pc for five years, according to city property records. The rate on the loan, which runs through 2041, will change in January 2016 and once each year after that.

.

ΩΩHAHAHA…this news shows clearly how utterly clueless Mr. Roubini really is!  I never idolized this guy for good reasons: he didn’t understand the true fundamental basis of what was wrong with lending, banking and our economic machine.  It appears that the Chinese communists have a better grasp of what is going on.  This guy did not understand the basic concept of ‘capital’ which is a problem with nearly all of our so-called ‘economists’.  Understanding Marx’s famous ‘Das KAPITAL’ has vanished in the US and has been replaced with infantile blubbering about ‘where is the money?  Why can’t we have MORE money?’  Very silly.

.

ΩΩRoubini decided to buy a fabulous house he obviously cannot really afford.  So he took on a fatal adjustable-rate mortgage.  These instruments were created for people who were building a new home and needed to tap into the capital of an existing (not deep in debt already) home.  For example, I used this system a lot when I was building or rehabbing houses.  My core property had to have no debt and then I would dump debt on it for say, 2 years and then pay it off in full and move onto the next project.

.

ΩΩThis was NOT house flipping whereby someone adds more and more properties to one’s debt load hoping to sell at a profit. I always had to be prepared to sell at a loss if things didn’t work out for some reason.  This is called ‘keeping one’s capital secure so one can take losses and not go bankrupt.’  A concept that seems hard for many people to understand.

.

ΩΩMr. Roubini clearly doesn’t understand, you don’t buy a pretty bauble on any adjustable loans…EVER.  His house is fabulous and fatal.  It isn’t an investment, it is where he wants to live.  If he can’t sell this, he must go bankrupt since there is no way he can pay off $5.5 million all at once.  For example, he doesn’t own a business he can use as capital if he has to reduce his mortgage payments.  And why should this clown worry about this?

.

ΩΩHAHAHA…again.  It is crystal clear, the government wishes to fix this depression via printing money.  So far, much of this has not shown up as inflation at home simply because most of the money being circulated is flowing overseas still just as our jobs are also floating rapidly overseas.  This, in turn, causes both the housing and the job markets to collapse at home.  This is a negative cycle that will end violently when all the floating fiat currency trade dollars suddenly float back home again and cause the value of the dollar which is based on scarcity to shoot downwards as dollars flood into their home markets again.

.

ΩΩThe likelihood of this happening is around 100%.  The only variable is the time scale.  Will it happen tomorrow or in five years?  Since this fool locked himself into a deadly deal which allows rates to shoot upwards in five years, you can bet, the bankers are betting rates will be much higher in 5 years and Roubini imagines the depression will continue and the funny money game of cheap lending at ZIRP rates will continue.  That is, we will be Japan.

.

ΩΩUnfortunately for Roubini, we are not Japan. During Japan’s long depression, they ran a huge trade surplus with the world.  This was not paid for via the yen becoming a world FOREX currency.  Few nations held yen during this.  Japan did all of this on the back of the US dollar.  Since the busting of the US housing bubble, the dollar has dropped against the yen and other nations also are demanding trade in yen and are holding yen.  Especially China. The yen buys more internationally since it is scarce whereas the dollar is common so international commodities from oil to gold are costing us more and more.  This is ‘inflation’.

.

ΩΩRoubini will not be paying 3% or less on his very big principal loan in 5 years.  He most likely will be paying around 5%+.  If China flushes out trillions in dollars, he will be paying over 12%.  I once paid 9.6% on a loan in NYC.  But it was a very, very cheap brownstone back then (million dollars today).  I knew I could pay off the entire loan in less than 8 years and did so in less than 5 years.  There is no way Roubini can pay off his own property’s principal!  Worse, the principal barely declines during the first 5 years which is well known by the bankers so they don’t care if they get a low interest rate during that period since nearly all payments are on interest, anyway.  And so they love the teaser rates that cost them nothing in the long or even short run!  So long as the buyer is hooked.

.

ΩΩThe problem was, they did this too much and for too long and took up way too many people who couldn’t pay the real rates!  This is why there is this raging battle to reduce the rates for people with these loans.  The fact that Roubini, of all people, fell for this scam reveals how vulnerable people are to being scammed.  When we want things we shouldn’t have, we often make deals with devils to gain these goodies.

.

ΩΩBritish retirees made Britain’s economic woes much, much worse.  The ones that moved overseas to find warmer climes and cheaper labor and overhead costs fueled a housing bubble in many EU countries while at the same time, quickly drained England of a vital capital base.  That is, money flowed like crazy out of the British economic system and into other countries.  Now, this is collapsing as the British government cuts spending and the British pound is losing value relative to other currencies which makes the payments go less far in foreign lands:  Ghostly Developments Also Haunt Spain’s Banks – NYTimes.com

 

• The Bank of Spain says the banks have about $240 billion in “problematic exposure” out of $580 billion invested in real estate and construction, a situation, they say, the banks are capable of handling.

.

ΩΩWow!  Nearly 50% of Spain’s mortgages are ‘problematic’????  They probably hope that no one will notice this fact.  Spain overbuilt housing in expectation that nearly all retirees in Britain would flee their home and suck the system there dry while spending money overseas.  Too many imports are a severe problem with a nation and any nation running in the red in this sector soon collapses.  It is ten time worse when more and more retirees move overseas because they no longer spend even on penny at home and this doubles the destructive forces at work, bankrupting the nation.

.

ΩΩEventually, England must stop this outflow and they will do this by cutting government pensions flowing overseas and restricting the flow of money out of the country.  This is inevitable just as higher interest rates are totally inevitable in the US.  It is a dynamic that history tells us, always happens when a country is forced to finally defend itself.  Meanwhile, Scottish Investors Say No to Spanish Bonds Even at 5.5% Yield: Euro Credit. This means, British subjects won’t buy the debts run up by countries that used bank loans to lure British subjects to their shores, making themselves richer and the UK poorer.  These loans were often capitalized by UK bankers and investors.  Now, they are in full retreat and even higher interest rates look like a poor bet when everyone knows that there is no future flood of British retirees buying endless new homes in the EU or other places anymore.

.

ΩΩRoubini might be unable to read the writing on the wall but I am betting European investors have a much better memory.  The US has been rather insulated from really bad economic woes for the last 150 years so we are babes in the woods when it comes to ‘what will happen next’.  The Japanese are simply delusional.  They seem resigned to having a suicidal society.  And we are stupid to copy them.

.

ΩΩAlready, the British press is placing bets as to when hyperinflation hits:  Interest rates ‘will have to rise sixfold in two years’ – Telegraph

 

• The Confederation of British Industry predicts that higher than anticipated rises in the cost of living will push the Bank of England (BoE) to begin increasing interest rates in the spring. It predicted that the Bank base rate – the interest rate at which the BoE lends to other banks – will rise more than two percentage points by the end of 2012. Mortgage rates are expected to follow closely behind.

.

ΩΩThe US government and people are way too anxious to preserve the housing bubble to apply proper remedies to this mess which is to let housing fall back down to the point, a poorer, lower employment level nation can afford this housing. Keeping the principal up via cheaper and cheaper lending simply worsens this situation since the capital base has collapsed so the capital value of real estate can’t escape this collapse.  If we want mainly millionaire housing (Roubini’s level of purchase is for millionaires) then we have to have more millionaires.  We can’t turn dross into gold and the only way the average American home buyer can become a millionaire is for inflation to rage and for wages to keep up with inflation.

.

ΩΩAlas, this is utterly impossible unless we do one key thing: kill free trade.  That is, we can inflate at home to the heart’s content of all the fools who want free money printing to rage out of control (Krugman and his ilk).  But wages cannot rise if all this does is accelerate the exportation of US jobs!  As jobs vanish, the ability to buy even food and basic housing vanishes, totally!  So the main thing here is to stop jobs from vanishing and to keep them and all capital systems captive at home so inflation can fix the housing bubble by destroying the value of money to the point, it finally matches the true value of housing when figured out in terms of the value of say, gold.

.

ΩΩThis is why I want a return to the gold standard: it cuts to the chase.  Either we have a much less open economy and we kill the systems that have allowed banking to move offshore, then corporate headquarters to relocate offshore and then for all our jobs to exit except for export jobs that are allowed to stay…someone has to farm the grains we export!…and this is why I am also a protectionist.  The free trade/free money model has collapsed and there is no fixing this. The more we do this, the worse things will be until we finally figure out that protecting our homes and country is more important.

.

ΩΩAs I predicted in the past based on knowledge of history, the next thing to collapse after the housing markets, the stock markets and the private banking sector would be the entities that bail all of these things out of trouble.  That is, governments are now struggling with deep debts, huge bail out costs and a loss of jobs and reductions in production as well as higher energy costs.  Even as governments cut social spending, all this does is accelerate the collapse of the economy so the UK government borrowing hits record high this quarter.  We know from looking at Japan, protecting exporters and the core housing markets leads to a ZIRP economy that leads to huge government overspending.

.

ΩΩUnlike Japan but very much like the US, the UK runs perpetual trade deficits.  On top of this, like the US, over 20% of the economy of the UK is banking/finance.  So saving this sector and recapitalizing it has been extremely expensive.  The government didn’t take over the banks when they failed, the government floated the banks and then handed them back over to the idiots who wrecked them in the first place, resuming exactly the same policies and systems that caused the crash in the first place!  This idiocy has been the US solution, too.

.

ΩΩThis is due to government corruption.  The bankers basically own the government and work with the media to blunt public outrage and to resume business as usual.  To this day, the average UK or US citizen dreams of becoming a millionaire via either gambling or winning a TV reality contest so they work along with the very rich to keep this system going despite the obvious flaws in it.  Worker unity has nearly vanished in a haze of gambling and hopes for free loans.  Why risk fighting in the streets for higher wages when all this does is remove jobs to Asia?  Best to side with the idle rich and try to  become one, too.  The lady in the top story about real estate games was hoping to flip houses and get rich this way, all on the bank’s dime.

.

ΩΩNow, she fears homelessness and bankruptcy!  Duh!  She is only slightly older than I and I am not in debt and according to the NYT story, she was out of debt by 2003.  And then decided to go deep into debt at 60 years of age so she could make easy money!  She became a gambler.  This system works only if interest rates are cheap.  The UK is exiting the ‘cheap lending’ regime era and the US will definitely be forced to exit this, too.

.

ΩΩThis week, the wholesale destruction of the national asset base begins in ernest in England:  Channel Tunnel rail link sale begins UK’s big sell off – Telegraph

 

• Philip Hammond, the Transport Secretary, on Friday called the deal “great news for taxpayers and rail passengers”. The £2.1bn price is above analysts’ estimates of £1.5bn to £2bn. High Speed One was put on the block in June and was seen as one of the most attractive assets likely to be sold by the Coalition as it seeks to reduce Britain’s national debt of £952bn. Other assets earmarked for potential privatisation are the Dartford Crossing, the Tote, the state’s 49pc holding in National Air Traffic Services – to which the Government has appointed Bank of America Merrill Lynch to advise on its strategic options – and Royal Mail.

.

ΩΩLet’s do the math here: the fees from this chunnel brought in £2.1 billion.  The debt from just this year alone is £952 billion.  So, a valuable revenue stream has been sold off and won’t be regained for the next half a century so the debt can be reduced by 2% for one year?  YIKES.  Every possible revenue stream will be sold off to pay down a one year debt. This means, the UK can’t do this again for another half a century.  Now, not one thing causing the revenue falls has been fixed so how on earth is the UK going to dig itself out of this hole by selling more fee-generating systems?  Eventually, all will be sold off.  The trade deficit hole will be fixed in a crude way: constant depression.  The Japanese solution to all things financial.  No jobs, no children, no homes, no nothing.  Just a ZIRP slow death.  Major airline collapses – Telegraph

 

• Japan Airlines became one of Japan’s biggest corporate failures when it filed for bankruptcy protection on Tuesday, January 19, 2010. The company, which is Asia’s largest airline, has debts of more than $25bn. It has promised to cut 15,700 jobs by March 2013,

.

ΩΩThe firing of workers continues to ravage Japan’s economic system.  There is no point in having expensive children who cost parents an arm and a leg to raise if they can’t get jobs.  So production of children ceases. In the US, it is falling except in the sectors where the population hopes to gain social benefits via having children.  This is true of the UK, too.  But if one looks at the stressed out middle class, child production has dropped greatly and now around 40% of the children being generated in the US are mostly for exploiting social services in lieu of working.

.

ΩΩThe opposite is happening in China.  China’s population policies prevent mothers from having children in order to gain social services.  The rising middle class is also prevented from having children but this concentrates their economic power on a select few rather than the Japanese system where parents simply have given up due to lack of hope of a child ever getting a job in a perpetually collapsing economic base.  Jobs are being offshored from Japan just as ruthlessly as from the US or UK.  And the government is OK with this for the same corrupt reasons the US and UK governments support bankers and exporters rather than the population base.

.

ΩΩAs in all major global banking collapses caused by too much lending and too much free trade, France’s AAA Grade at Risk as Rating Cuts Spread.  The paradox is obvious: the more governments cut spending, the worse their credit ratings due to the impact on the economy.  But increasing spending while NOT PROTECTING THE BASE is also no good.  You can’t have free trade and wild government overspending.  The Japanese tried this and ended up mired in a perpetual depression.  Doing this with a trade deficit leads to Zimbabwe-style hyperinflation.  The US and UK are both directly responsible for the banking collapse due to allowing a bunch of tiny Elizabeth II’s islands to operate as perpetual pirate coves, sucking away tax revenues and evading banking regulations especially capital reserve ratio rules.  This must end.  The US must invade these islands and put them all under US jurisdiction.  This is life and death!

.

ΩΩThe collapse in credit ratings is now like falling dominoes:  Portugal Bond Rating May Be Cut by Moody’s on Concern of `Sluggish’ Growth.  Next: Italy.  The Italians know this. Riots are spreading there and the people can’t stop this machine. It is impossible to demonstrate against this.  The people of Belarus are angry about the last fake election that is fake like Egypt or any despotic nation controlled by foreign powers (in this case, Russia is dominant, in Egypt, the US controls the government).  Riots will spread across all of Europe eventually and like all confederations, the EU will collapse.  Russia liked being a ‘Soviet’ which was a confederation rather than a sovereign nation.  So when the Soviet government fell, all the confederate states (the ‘Stans’ and Belarus, Ukraine, etc.) all fell instantly away.

.

ΩΩSo will all the EU states.  Internally, many of them can barely remain ‘countries’ such as Belgium which is splitting along language lines.  Or any of the Eastern states which are infamous for shattering into smaller and smaller units within the aegis of the EU system.  All of these will turn on each other with typical European violence.  Rarely can Europe float along for more than 50 years without violent eruptions at the core.  Figuring out how to stop this is very difficult!  The EU is the latest attempt and is now proving a failure.  All of this rests on Germany at this point and I don’t see Germany hauling along everyone forever unless all of Europe surrenders power, like they did one thousand years ago when the Holy Roman Empire was handed over to Otto of Germany.

.

ΩΩThe US is sinking into debt as tax revenues collapse.  No wonder, with a system that runs all things in the red, the loss of jobs, the loss of housing values, the loss of industrial systems is now crippling many cities here:  $2tn debt crisis threatens to bring down 100 US cities… In Europe, local and regional government borrowing is expected to reach a historical peak of nearly €1.3tn (£1.1tn) this year.

.

ΩΩThe EU economy is the same size, actually, slightly larger than the US.  The US is running over a trillion in the red with Fed spending and so is the EU.  The US could run in the red so long as other major economies did not.  But the last remaining creditor economy is now China and the US has chosen to be very hostile towards China this year.  The EU can’t take up the slack, it is in the same place as the US due to the interlocking international banking system collapse.

.

ΩΩLike a burning phoenix from hell, Gold Rises in London on Demand for Alternative to Slumping Euro – Bloomberg.com

 

• The euro fell against 14 of 16 currencies as the European Central Bank warned of “concerns” about Irish legislation to fix its banking system. Gold assets in exchange-traded products, or ETPs, rose 0.7 percent to a record 2,113.2 metric tons as of Dec. 17, according to data collected by Bloomberg from 10 providers. Gold prices have jumped 26 percent this year as ETP holdings climbed almost 18 percent.

 

• “Gold prices are being supported by strong ETF demand,” Commerzbank AG analyst Carsten Fritsch said in a report e-mailed today….Silver for immediate delivery climbed 6.44 cents, or 0.2 percent, to $29.2169 an ounce. Spot palladium added $7.25, or 1 percent, to $747 an ounce and immediate-delivery platinum gained $4, or 0.2 percent, to $1,703.50 an ounce.

.

ΩΩThe ETF gold market is very prone to collapse since it depends on big players not demanding real gold.  So it can merrily grow like any derivative market.  I am betting it is beset by fraud and expect it to collapse when people panic and demand actual gold to hoard.  A clue: the immediate delivery on palladium is more than double the speculative price.  Talk about a spread!!!  Yikes!

.

ΩΩAs in all previous banking collapses, the evolution of events follows very strict real rules.  Understanding these doesn’t mean one can evade events. It means, one can anticipate events and take some measures to protect one’s self.  And history is crystal clear here: the ONLY thing that can protect us is our sovereign joint powers, our strength relative to each other!  This is why the only thing that works is protectionism.  It isn’t the ideal, fun solution.  But it is the only working solution.  If there is another, I am all ears.  But history believes, this is the only solution.  Period.

 

 

Email:

emeinel@fairpoint.net

MAILING ADDRESS:

EMS NEWS

P.O. BOX 483

BERLIN, NY 12022

Make checks out to ‘Elaine Supkis’

Click on the Pegasus icon on the right sidebar to donate via Paypal.