In many matters there does exist a point of no return. Once past this point, there is no turning back. The ability to change is past, and the power of momentum overwhelms all. The most explicit example of the point of no return and the inexorable and inescapable implications which derive from its passing is that of the Rubicon. A small river in northern Italy, the Rubicon constituted the boundary between Gaul and Italy. No Roman was permitted to cross this river at the head of an armed group. Consequently, when Julius Caesar crossed this river at the head of his army, he was decreed an outlaw and traitor, and condemned to death. From this point forward, he had no option save to continue to Rome, try to seize power, and crush his enemies. In the financial realm there also exists a point of no return, we think. In fact, there are several potential points which, if forded, eliminate all possibility of returning to the "normal" course of behavior and to the normal parameters of our economic and financial system. While we have not yet reached the point of no return, it seems pretty clear that we are drawing closer to it. What we have in mind here is the growing mountain of sovereign debt, both here and in key foreign economies. We have already seen some of the consequences of the bursting of a debt bubble. The bursting of the household and bank debt bubbles has not yet generated the full range of consequences that we could normally have expected. This calamity has been averted by the massive money printing and debt assumption by sovereign states, from the US to Japan to Europe. The fundamental problem remains, however. The ruinous debt agglomeration has NOT BEEN LIQUIDATED TO ANYTHING APPROACHING the necessary degree. Yes, there has been some liquidation, particularly in residential real estate, and, currently, in commercial real estate as well. However, the great bulk of the debt has NOT been liquidated, but has merely been TRANSFERRED TO ANOTHER DEBTOR -- to wit, the United States, Japan, the EC states. There are, of course, but two ways of removing the debt which will otherwise strangle us. The first is to pay it down. This would require VERY STEEP TAX INCREASES, AND, VERY DEEP SPENDING CUTS. both for "normal" government operating costs and programs, AND for the heretofore politically untouchable ENTITLEMENTS which our society, with its particular wealth distribution and reward systems, cannot maintain for too much longer. The pay it down approach would be extremely painful and politically, exceptionally difficult: it would ACTUALIZE, in REAL TIME, the severe depression of living standards of the generality of the populace which is inevitable. Despite all the brouhaha about the need to sacrifice, to avoid loading up our children and grandchildren with a mountain of debt, to the detriment of their own future financial and economic well-being, few think THEY should be the ones to feel the pain. Bottom line: the near-term self-interest of politicians, of the upper classes, and of the little guy suggest that the debt paydown approach WILL NOT HAPPEN. This, then, mandates the alternative "solution." This is the tried and true solution pursued for millenia by kings, emperors, parliaments, and peoples: to shift the loss, the pain, the misery onto others. In simple English, to compel the CREDITORS, the SAVERS, the INVESTORS, the RETIREES to meet the obligation of the indebted. Since governments and central banks have already shifted much of the dead weight of debt onto their own shoulders, and since this can be BUT A TEMPORARY means of "gaining time," the traditional method of CURRENCY AND DEBT DEBASEMENT offers the (relatively) easy way out. The major problem here, of course, is that creditors will RESIST mightily. In particular, they will seek to pass on the I.O.U.s they hold on to others. Once this process reaches a certain point, we will be over the waterfall, in point of no return territory. The grace period for the debtors -- and, in particular, for debtor governments -- is determined by their ability to persuade, induce, and cajole the creditors to accept GRADUAL confiscation and dispersion among debtors of a large part of their wealth. The point of no return comes when jawboning, promises, and token obeisance to the principles of fiscal and monetary responsibility lose their efficacy. There is, after all, a limit in the fuel tank to how much baloney can be contained therein. Once the point of no return is reached, either drastic cuts in the living standard of both individuals and governments must be set into train, or else governments may seek to debase their way out. Even this course, however, portends a potentially FATAL CONSEQUENCE -- a massive and, at some point, UNSTOPPABLE FLIGHT FROM PAPER MONEY AND PAPER BONDS. Market interest rates will automatically skyrocket, and economies and financial systems globally will enter into the deflationary depression thus far deferred. Or, government printing offices could print ever-larger quantities of money and bonds, accelerating the flight of markets from same. In other words, we would then be poised for a hyper-inflationary depression, to be followed by a more classic deflationary depression. Hope that the Scylla of deflation and depression, on the one hand, and hyper-inflation, on the other, can be avoided is just that: HOPE. While hope may indeed spring eternal, it is hardly the raw material of sound policy or favorable outcomes. Moneysage 2009 - copyright |
|||