The other day I threw out
a great big word that is the equivalent of stealing: rehypothecation.
Then I never got around
to explaining, precisely, what that is or why it’s important. However, given
what’s happened in Europe relative to the European Central Bank and Greece this
week, I think it’s worth examining it more closely. Particularly since we, the
EU and the United States, are just like Greece, only on a larger scale.
Greece got into trouble
because its government borrowed far more than it could ever hope to pay back.
No one asked for collateral – except promises. Nothing was there, supporting
the monies borrowed. It was air and promises, smoke and mirrors. Just like the
underpinnings of the US economy – a gigantic Ponzi scheme.
Do you remember Jon
Corzine’s firm, MF Global – the one that was caught out stealing investor’s
assets that had been entrusted to it? In case you don’t, here’s the
nutshell version from the Wall Street Journal on April 17, 2015:
MF
Global filed for bankruptcy in October 2011 after customers balked at the
firm’s big, risky bets on European sovereign debt. About $1.6 billion in
customer funds were found to be missing, though customers have been reimbursed.
The firm has agreed to pay $200 million in civil fines. Jon S. Corzine, MF
Global’s former chairman and chief executive and a former New Jersey governor,
still faces civil charges from the Commodity Futures Trading Commission for
failure to supervise.
The
lawsuit had said MF Global used customer funds to meet the increased liquidity
demands of the firm’s bets on European sovereign debt. MF Global didn’t have
sufficient internal controls to deal with that, a deficiency that PwC ignored,
according to the lawsuit.
What MF Global did is
what your bank does every day of the week; except on a larger scale, with a
greater risk exposure. After all, your bank is federally insured. Brokerage
firms are not. They took investor’s money and used it to make risky gambles –
wagers or bets or whatever you want to call them – on a variety of European
countries. When the brokers at MF Global lost on the bad bets that went
south, they scrambled. They took – rehypothecated – money from other investor’s
accounts. They were chasing the losing bets with more money in an attempt to
recoup.
It didn’t work. Instead,
the money entrusted to MF Global by the individual investors was lost, gone.
So,
what’s the point of this, you ask? Simple – it’s all about Greece. Greece is a
microcosm of us, economically. It’s about the fact that the EU and the United
States is doing precisely what MF Global did, only on a much grander
scale.
We,
like MF Global, are throwing good money after bad in an effort to somehow fix
what’s broke.
What
led to the Greek banking crisis and their most recent bail-out by the European
Central Bank is the over-borrowing against non-existent collateral. This is
precisely what the US and every other government on the planet has been doing
for forever.
Governments
borrow based on future tax revenue. It’s like commodity trading – pork belly
futures and such – puts / calls, shorts / longs, all of which are common terms
among commodity traders.
Governments
do not make a salable good or provide a service that can be bought by a
consumer. They are an entity there solely to spend and to give stuff away. In
order to do that, they take in taxes and allocate it as they see fit. They’re
really good at spending but God forbid anyone ever asks or expects them to cut
costs. Instead, they bet on the Come, like any good craps player, anticipating
the next big payout.
Greece
borrowed to keep its government going and its people happy. The money was
spent, they needed more. They borrowed and they borrowed and now they’ve
borrowed some more. The problem is there is no chance in hell that they will
ever be able to repay what they have borrowed.
Their
population is aging. More people are retired or unemployed than are working.
The majority of those who are working, work for the government which is in the
business of giving stuff away, not of manufacturing or producing a salable item
or commodity. Their Gross Domestic Product – the measure of salable goods
produced to generate income for the nation – is abysmal when compared to their
expenditures. In sum, they are spending profligately while earning nothing.
This
is exactly what the United States and every single other government on this
planet is facing and doing. Some are using the mirrors and smoke more
effectively than others, but the Ponzi scheme is getting shaky.
To
keep a Ponzi scheme going, the scammer starts off by convincing one or two or
three people that he has a great idea. He’ll assure the marks that if they
trust him and give them their money, he can make them a lot of money in return.
Inevitably, in any Ponzi scheme that’s at all successful, it sounds so good it
must be true. People hand over their money – sometimes everything they have –
and the scammer uses that money to attract more people.
‘Tell
your friends. Tell your family.’ says the scammer. And they do.
The
trusting marks spread the word and, so long as more people enter the pool, the
scammer can keep the illusion going by paying out the early investors and
keeping them happy. Eventually, though, the house of cards gets wobbly.
Payments are shorted or missed.
Enough
new people aren’t signing up to keep the thing going and, ultimately, it
collapses under its own weight. This is precisely what is happening in Greece.
Not
enough young people are coming up and working to pay their taxes to support
their elders who are retired and have government guaranteed pensions. Because
the pensions are guaranteed, the government has to keep making payments on
them, and on the other social services that have been promised and are
expected. Because the government can’t generate enough of its own revenue, and
the people aren’t generating enough in taxes to support the Ponzi scheme, they
have to borrow.
They
borrowed and they borrowed and they borrowed some more. Now, where is that
money coming from? It is coming from the governments of the European Union and
the United States of America – through the Central Banking system and the
Federal Reserve.
Where
is that money coming from? Why, it’s coming from your bank and the sweat of our
collective brows.
The
little kids – Cyprus, Greece, Iceland and Ireland – have already fallen and
scraped their knees. Mommy and Daddy in the form of Germany (at the head of the
EU) and the US were there to pick them up, dust them off, kiss them and make it
better. So it’s (temporarily) all good for them. But what will happen when it’s
us, as in US – the United States? Who will be there to pick us up, to kiss our
cheeks and dust us off? It’s worth thinking about because, eventually, the buck
will stop and the only question will be: who’s holding it when it does?
Once
the buck does stop, and paper money because what it’s worth – zero – what will
happen? How will you, with paper that is worth no more than its intrinsic
value, pay for the goods and services that you need to survive?
Will
it be like Weimar?
Will
it be like Zimbabwe?
Will
it be like Iceland that told the EU to get stuffed, reverted to their Krona
currency, and is now in a hyperinflationary state?
Whatever
else it will be like, it is worth thinking about because, if you aren’t
prepared when the time comes, you will be in a world of hurt as you try to
figure out how to buy food or pay for things you need to survive.
Me,
you ask? Nope – I’m fine, thanks. I’ve already given it a lot of thought. I
started in 2006 when I sat up and started to pay attention. In 2007 my fears
were confirmed. In 2008 it was hunker down and start thinking – hard. So I’ve
already made my plans. If it never happens in my lifetime – great! If it does,
as I expect it will, I’ll be ready.
When?
Hmm, that’s hard to predict.
In
2007 I predicted something bad would happen between 2015–2016. I said, at the
time I made that prediction, that by 2016 our standard of living would look
like ‘Somalia on a good day’. Things here have worsened noticeably since then.
Unemployment is still high despite what the Bureau of Labor Statistics is
saying, salaries are still low, there’s still a huge shadow market of
foreclosed properties hanging out there, so it’s not as bad as I anticipated
but it’s still not yet peachy.
However,
I didn’t count on the determination and resilience of those in charge. Now I’m
guessing 2017 – 2018. Maybe so, maybe not but time will tell. In the meantime,
think about it. Consider your options and figure out what you’ll do if the
value of the dollar goes to zero.
Based
on this happy chat, I'm not going to say 'have a lovely day'. Instead, I'm
going to suggest you think about what you'll do if the currency crashes
and the house of cards comes tumbling down around our ears.
Best~
Philippa
Follow
me on Twitter: https://twitter.com/PhilippaStories
No comments:
Post a Comment