This is the question that astute investors are forced to ask themselves these days. No reasonable person believes that a system of ever-expanding debt can resolve painlessly. It simply cannot happen… not, at least, until 2+2 stops equaling four.
But the international money system, while deeply interconnected, can implode in sections. In fact, it’s highly unlikely that it will crash as a single unit.
So, if you have significant moneys to invest, you end up coming back to our question: Who will be the last to crash? Once you decide that, you can concentrate your assets in that place, hoping to come through the crash with at least most of your value intact.
Let’s look at several aspects of this:
#1: Background statistics:
World debt is upwards of $200 trillion, and growing steadily. World GDP is $70-some trillion, only about a third of the debt. This debt will not be paid back. Massive amounts of debt will have to be written off in losses.
US debt is north of $18 trillion. (Amazingly, *cough*, it hasn’t changed in months *cough*.) Forward promises are north of $200 trillion, meaning that a child born today is responsible to repay $625,000. And since roughly half the US population pays no income tax… and presuming that this newborn will be a member of the productive half… he or she is born $1.25 million in debt. Such repayments will never happen. Most of those debts will not be repaid.
Japan is worse off than the US. The UK is bad. Many EU countries are worse.
These numbers, by the way, are ignoring more than a quadrillion dollars of derivatives and lots of other monkey business. (Rehypothecation, *cough*, *cough*.)
#2: No one wants to rock the boat.
Informed men and women understand that the entire system is unstable. Probably a majority of them are simply hoping that it holds together until they die. A few dream that magical new inventions will kick-start the system into a new orgy of debt, blowing an even larger super-bubble that lasts through their hopefully longer lifetimes.
But informed people also know that the system stands almost wholly upon confidence. If the sheep get scared enough to run away, the whole thing ends… and no one is ready for it to end.
So, heavy investors speak in soothing tones. They don’t want to spook the masses.
#3: We’ve already had warning shots.
Last year, the International Monetary Fund (IMF) published a horrifying paper, called The Fund’s Lending Framework and Sovereign Debt. That paper, in turn, was based upon one from December of 2013, called Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten.
The December 2013 document, right at the start, says that “financial repression” is necessary. Here’s what it says (emphasis mine):
The claim is that advanced countries do not need to resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression… [T]his claim is at odds with the historical track record of most advanced economies, where debt restructuring or conversions, financial repression, and a tolerance for higher inflation, or a combination of these were an integral part of the resolution of significant past debt overhangs.
So, in order to fix debt overhangs – currently at horrifying levels – financial repression is not just an option, but required.
And of course, they’ve already had a trial run, when they stole funds directly from individual bank accounts in Cyprus.
The IMF report goes on to say:
[G]overnments can stuff debt into local pension funds and insurance companies, forcing them through regulation to accept far lower rates of return than they might otherwise demand.
[D]omestic defaults, restructurings, or conversions are particularly difficult to document and can sometimes be disguised as “voluntary.”
We have a pretty good idea of what’s coming down the pike.
But again, Goldman’s Muppets are not to be told about this. And truthfully, most of them don’t want to know.
#4: We have no view of what’s happening in the back rooms.
People make large bets on what Janet Yellen and the Fed will decide next, but when we do that, we overlook something very important:
Yellen is merely an employee of the Federal Reserve, not an owner. And we don’t know who the owners are.
We do know that the Fed is owned by private banks, and that it has a monopoly on the creation of US currency, but we really don’t know who owns the shares. The true owners are almost certainly reflected in the roster of primary dealers, who skim Federal Reserve units as they’re being made, but we don’t know much more than that.
Who are the people that Yellen takes orders from?
What do these people want?
What are their long-term positions?
Who might they protect, aside from themselves?
We don’t have real answers to any of these questions. From our perspective, the guts of the machine are hidden behind a curtain.
#5: The US is playing to win.
One thing we do know is that the US has a strong hand. Within a general deflationary situation, the Fed can print away. And they’re propping up the US markets quite well… for now.
Feeling their power (after all, they can blow up more stuff than anyone else!), the US is throwing their weight around, forcing nearly every bank in the world to play by their rules. (Think FATCA and fining foreign banks.) And for the moment, it is working.
Bullying everyone else over the long term may, however, not be viable. No one – especially people like Putin and the Chinese bosses – likes to be slapped around in public. And they are not powerless.
Conclusion: Most Bets Are on the US
Europe isn’t looking good. Japan isn’t looking good. The UK is holding, but as mentioned above, its numbers are horrible. Switzerland seems to be in-between strategies. China has problems. Russia has problems. The BRICS have never been stable.
That leaves the US. My impression is that most serious investors would rather hold dollars than yen or euros; most big businesses too. Their bets are on that the US will crash last.
So, are the Fed and the US Treasury doing this intentionally? Are they quietly pulling the pins out from under the others, making sure that they’ll be the last currency standing? I have no inside information, but I’d bet on it.
Remember, the gang on the Potomac has most Americans believing that whatever they do overseas is pure and holy. Furthermore, 99% of their serfs will reflexively obey any order they give. So, why shouldn’t they play dirty? They have the best bombs and a somnambulant public.