Here's to the crazy ones, the misfits, the rebels, the troublemakers, the
round pegs in the square holes... the ones who see things differently -- they're
not fond of rules... You can quote them, disagree with them, glorify or vilify
them, but the only thing you can't do is ignore them because they change
things... they push the human race forward, and while some may see them as the
crazy ones, we see genius, because the ones who are crazy enough to think that
they can change the world, are the ones who do.

Steve Jobs
US computer engineer & industrialist (1955 - 2011)

Saturday, February 7, 2015

End of Days for World Order

Our world today didn't happen in the last few months, or even years. It's the natural consequence of a financial system that in many ways can be understood as a "ponzi scheme". A ponzi scheme starts with a basic assumption that wealth can be built from nothing. The first into the scheme benefit the most, and as the scheme grows the returns diminish until finally there is not enough money going in to pay out those that are owed - and it collapses. That in a nut shell is the nature and state of our world wide financial system, and thus our civilization.

Every national currency represents a "right to consume". There are limited amounts of resources the earth can produce, so the limit to consuming them is represented by currencies. Since World War II national and international economics have been driven by debt - a promise to pay currency at some point in the future for resources consumed today. In effect the promise to pay, as opposed to actually paying,  has allowed nations to live far beyond what they can produce compared to what they consume. In other words, debt has fueled and allowed the ponzi scheme to continue. In other words, debt has become currency, and currency has become a tool to measure debt.

The greatest enabler of debt, and the supreme master of the ponzi scheme is without doubt the US stock market. As it goes, so goes the national banks in each country - and area banks like the European Central Bank. The killer if you will is that the stock market has become addicted to cheap debt from central banks. With that cheap debt the wheelers and dealers of the market place can leverage, buy, sell, and make currency. Without that cheap debt profits shrink and investors can't meet interest payments. Without that cheap debt the system collapses as company's earnings don't meet margins required to pay their debt obligations. In other words, there isn't enough revenue coming in to cover the interest costs of their debt, and they collapse.

This is where we are at today - on a world scale. The ponzi scheme is living out its last days. Central banks have lowered their prime borrowing rates to below 1%, and in many cases a half or quarter of that. Some call that "quantitative easing". "Easing" meaning the lessening of pressure to repay currency for debt. In other words, staving off the inevitable pay the piper day. The logic is that the cheaper the prime rate set by central banks, the cheaper the interest rates set by banks, which allows consumers and corporations to continue consuming at an unabated pace - and therefore allowing the world economy to do the same.

However, what happens when individuals, corporations, and countries become so leveraged with debt that they can no longer borrow to finance their consumption - no matter the interest rate? That is the proverbial "tipping point". The point of no return. Very recently the Bank of Canada, and even the European Central Bank cut back their prime lending rates - in Canada's case to .75%. What happens when it goes to zero and yet can no longer spur or maintain economic growth? It has to go to zero. There is no other way. At this stage of the game debt is so high that it would take individuals, corporations and countries decades of non-borrowing to reverse the need for cheap debt. If that were to happen for even a year the world economy, led by the stock market, would collapse into depression. Hence the end of the ponzi scheme.

We are very close to that day now. Any significant event will trigger panic in the stock market and international debt markets. A major war or a default could quite likely be the trigger point. Greece for example could be that trigger point. So could Ukraine. Both are European countries so to speak, and both are members in some way of the European Economic Community. Without a massive debt infusion within a month Ukraine will financially collapse. Its currency has already collapsed. Greece has already been bailed out, and forced into that position of non-borrowing that I mentioned above would be necessary to avoid a collapse. They're in it now, and they're looking for a way out. Will they accept a kinder, gentler bailout from Russia or China? It's quite possible. Will they leave the Euro, or be forced to leave the Euro? That's even more possible.

The thing with Greece is it represents the future for us all. At some point we are all going to reach the position Greece is in. If Greece defaults on its debt the message becomes debt is not a guarantee to control consumption. And, if it can't really control consumption, or responsibility for over consuming, then in reality it is meaningless as a control mechanism. That is where we reach the trigger point. If the guarantee to pay one's debt for currency used, and goods consumed, becomes meaningless then so does the world economic order. In reality, that is what Greece represents. The geo-strategic question remains - will Russia and/or China bail out the current world economic order by bailing out Greece, or will they let Greece implode to foster their own currencies as the bench mark?

Both China and Russia have minuscule national debts compared to almost every country in the world. They are positioned to pickup the pieces of the ponzi scheme from what can only be imagined as a desperate world. How will they change the nature of economic order? What discipline will they impose on consumption and debt to ensure a similar collapse does not happen again? All this is yet to play out, but it will. That you can take to the bank.



  1. a couple of remarks:
    - a large part of the surge of debt after WWII can be contributed to the vast increase in international trade
    - The EU can easily bail out both Greece and Ukraine and possibly others. The only trouble is the perception of this 'free money' by the electorate
    - National debt is mostly given in comparisson to GDP, but national wealth is very important too ( ) Japan being a prime example of high debt + wealthy population = sustainable
    - in the event of a global economic meltdown: China, while rapidly growing, is still too small to have a gamechanging effect on the world economy. Russia is irrelevant (on economic level).
    - A large worldwide depression isn't even necessarily bad, since it can reinforce the swing away from laissez-faire capitalism to a more state regulated economy (comparable to the 80s); less influence of investment banks and hedge funds on the stock markets (= less gambling)
    I'll end by paraphrasing my former Prime minister Guy Verhofstadt: "A politician craves stability and abhors change. He will only act when backed up against a wall with no other actors or possibilities for continuation in sight"

  2. Robbing Peter to pay Paul has been happening for centuries........also Desperate people do desperate things! Beware!

  3. "The geo-strategic question remains - will Russia and/or China bail out the current world economic order by bailing out Greece, or will they let Greece implode to foster their own currencies as the bench mark?"

    That is not the right question. Russia and China want a Greece that can stand on its own without the millstone of debt strangling its economy. Greece will be able to balance its budget and will be able to grow just fine without the debt overhang. So "bailing out" Greece is not even an option for Russia and China. The default will have to happen, one way or another.

    The right question to ask is, will the Greek people cave in and allow the extend and pretend ponzi games played by the ECB/EC to continue?


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