Okay. That’s it. I’m calling it. Everybody mark your calendars. Really, put a big red “X” on today. It’s all over. The long awaited slide for the bottom has started, and now, they can’t hide it anymore.
Which, even for this blog, sounds kind of fringe-level wacko.
However, when we look back at the events of the past few weeks, this brief span of days will go down as the tipping point, the instant at which the first car of the roller-coaster started down the big hill. And everyone could finally see.
The bottom.
Those of you who might be a bit skeptical about this dark outlook would point to the record highs on the stock markets. You would draw attention to the phalanxes of investment bankers dancing up Wall Street like a scene from a Busby Berkeley musical. You’d light up the sky with the ever-diminishing unemployment rate. “It’s all there,” you’d say. “Happy days are here again,” you’d sing as you got back into line.
But you’d be wrong.
And you just need look to Cyprus to see where the tracks stopped.
Cyprus, as you know, is that little hunk of rock situated between Greece and the Levant which has long been known for its sunny beaches and don’t-ask-don’t-tell banking system. Unless you’ve had your head up your – oops, under a rock, as I meant to say – you’ll have heard that the aforementioned banking system is in the toilet and somebody just pushed the lever.
“Help us. Oh, help us,” said the Cypriot government to the Teutonic Overlords in Berlin who, for appearances sake, passed the message on to Brussels where the EU government rolled its collective eyes and moaned: “Damn, not another one.”
“Okay,” said the guys in Brussels as Angela Merkel tugged on the strings. “We’ll give you ten-large, but you’ve got to come up with another six.”
“How?”
“Take it from your depositors.”
An idea which flew like a rock dropped from great height.
More negotiations ensued. They asked Russia for help and were rebuffed. So what happened is that “small” deposits: those under the 100,000 Euro guarantee limit got off scot free; while larger deposits are going to be slammed with a “tax” of somewhere near 60%.
The reason why the Cypriots approached the Russians was that most of the deposits in the banks were offshore tax dodges by the Russian “oligarchs”, or, as they are known most everywhere else, “gangsters”. Cyprus is the Russian equivalent of the Republicans’ Cayman Islands; a place where they could stow their ill-gotten gains without worrying about little things like taxes or ex-wives or public disclosure. I would have loved to be at the meeting between the Russians and the Cypriots.
“Nice little bank you got here.” A tie is adjusted. “It’d be a shame if something happened to it.”
“Something did. Here’s your 40%.”
The problem with the Cypriot banks?
They invested in Greece and lost almost everything.
But Greece is okay, right? The bailout happened. The austerity measures are in place? Right?
Uh, yeah, if you consider 27% unemployment acceptable. And if you consider it okay that the people who bought Greek bonds will never see a dime and if you consider that the people who bought bonds from the banks in Cyprus – which lost everything because they bought Greek bonds – won’t lose a thing to be okay. Then, yeah, Greece is okay.
Which is why on this past Monday. Greek bank stocks plunged thirty percent.
That’s okay.
Because in Portugal, things are worse. There, in an unexpected move, the courts declared the austerity measures imposed by the EU bailout conditions unconstitutional. The European Commission warned Portugal that unless they get back in line and come up with the needed spending cuts they weren’t going to get bailed out ever again. I guess they’re thinking ahead. So, Prime Minister Pedro Passos Coelho decided that unpopular programs like social security, health, education and public enterprises as opposed to public sector employee (court judges?) wages and retirement. The fallout is just starting from this one, but it’s not gonna be pretty.
(Just a late note here. The Cyprus bank bailout is now 30% higher than originally anticipated. This morning’s headline reads: “The Euro Zone Crisis Is Back — On Multiple Fronts.” Now back to the hours-old version of the blog.)
But given what’s happening on the other side of the globe, I’m surprised that there’s all this rush to European austerity since we’ve already found out that it doesn’t work. I’m, of course, talking about Japan, a country which, since 1990 has been in a recession. Despite enviously low unemployment the country had taken on a path to austerity to try and stem the flow of jobs to China and South Korea. This society of people, who collectively make the Swiss look like a cabal of disorganized slackers, were helpless as their stock exchange fell from a high of 38,000 yen in 1989 to less than 9,000 by 2002 and never recovered to more than half its 1989 high.
Then, in 2008, it tanked again – along with the rest of the world – and Japanese policy makers were at a loss how to proceed. After much deliberation, and a liberal government tossed out on its ass in 2012, the new conservative leaders of the country decided to do something about the struggling economy and they started printing money this week. This was couched in the term of “increasing liquidity” but basically there will soon be twice as many Yen out there as there are now.
Now, personally I think it would be great if – as if by magic – I suddenly had twice as many dollars as I have now. But, alas, the movie deal never came through on Fresh Squeezed so I’m out of luck. But consider that if everyonesuddenly has twice as much money then, in fact, each unit of money is worth half as much. The economic effect – what Japan is hoping for – is that the price of its exports – in Dollars – goes down by 50% while at the same time the profits from Japanese companies’ overseas operations – in Yen – double.
Where did they ever get a shit-for-brains idea like that?
Which brings us the rest of the way around the world: to the Good Ol’ USA.
As I have harped upon endlessly, here in the US the Federal Reserve Bank embarked upon a money printing scheme unprecedented in our history. Currently at eighty-five billion dollars a month, the Fed is “injecting liquidity” into the economy and has increased our money supply by about 20% since they fired up the printing presses. (I know. The printing presses are really at the Bureau of Engraving and Printing which has the fun sounding website www.moneyfactory.gov. The Fed can in fact create money just by snapping its fingers but it’s kind of a metaphor harking back to simpler times, so work with me here, wouldya?) The effect is noticeable: historically low interest rates, record high stock prices, and investment bankers dancing down Wall Street.
Now they can’t stop. The Fed has targets to reach before they do: 6.5% unemployment and 2.5% inflation; but the system is now hooked on the juice and if the Fed pulls back – or even hints at pulling back – the whole house of cards comes tumbling down.
One of the problems that was discussed – and then discounted – when the Fed started mainlining greenbacks was that as US exports increased due to their relatively lower costs overseas a currency war might start as other export dependent economies jump on the same bandwagon. We went ahead and did it anyway – going all-in this past September. Now seven months into the game Japan has placed its bet – and raised us 80%. The next question will be answered when China and South Korea decide that – thank you very much – we’d prefer to support our economies regardless of what happens to y’all.
It’s called a “race to the bottom.”
The last piece of truly disturbing news from this cycle is the revelation of who the largest holder of US debt is. Nope, it’s not China nor Japan but…wait for it… The Government of the United States of America.
How the hell does that work?
Imagine if you had three drawers. One is nearly empty but has a few dollar bills, quarters and the souvenir pesos you brought back from Mexico; stuff like that but all of it real money. This is the drawer you take money out of to buy groceries, pay the rent, and cover your expenses. This is the drawer you put all your income in. The second drawer is packed to overflowing with hundred-dollar bills – there are so many that you couldn’t fit another one in if you had to. But this drawer is off limits. This is the money you’ll need to survive in your old age. You can’t legally touch it; besides its all you’ve got. The third drawer is empty except for a tiny receipt printer. You key in an amount and a little slip of paper comes out that says: “This is Money” and then whatever amount you keyed in.
So what do you do when the first drawer – which you all realize is an analogue to the US Treasury – starts running out? You get out a Post-It note and write IOU on it. You can either stick it in the second drawer – the one stuffed with cash just like the Social Security Trust Fund – and take out real money, or you can put the IOU in the third drawer – here representing the Federal Reserve Bank – and get some of their funny money instead.
Right now nearly six trillion dollars in US debt is sitting in the drawers of the Social Security Trust Fund and the Federal Reserve Bank. Both are departments of the US government.
That’s how it works.
This is going on all over the world. In Europe, Asia, and here at home, major economies are creating money like there’s no tomorrow. And the scary thing is:
This time they’re right.