Posts tagged financial crisis

Another Phony Budget Debate

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Source: http://www.ronpaulinstitute.org

By Ron Paul

 

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Another Phony Budget Debate

 

Anyone watching last week’s debate over the Republican budget resolution would have experienced déjà vu, as the debate bore a depressing similarity to those of previous years. Once again, the Republicans claimed their budget would cut spending in a responsible manner, while Democratic opponents claimed the plan’s spending cuts would shred the safety net and leave vital programs unfunded. Of course, neither claim is true.

The budget does not cut spending at all, and in fact actually increases spending by $1.5 trillion over ten years. The Republicans are using the old DC trick of spending less than originally planned and calling that reduced spending increase a $5.1 trillion cut in spending. Only in DC could a budget that increases spending by 3.5 percent per year instead of by 5.2 percent per year be attacked as a “slash-and-burn” plan.

The budget also relies on “dynamic scoring.” This trick is where the budget numbers account for increased government revenue generated by economic growth the budget will supposedly unleash. The claims are dubious at best. Of course, reducing government spending will lead to economic growth. But real growth requires real cuts, not this budget’s phony cuts.

As important as reducing spending and balancing the budget is, focusing solely on budget numbers ignores the root of the problem. The real problem is that too many in Washington — and the nation as a whole — refuse to consider any serious reductions in the welfare-warfare state.

I have always maintained that the logical place to start reducing spending is the trillions wasted on our interventionist foreign policy. Unfortunately, there are still too many in Congress who claim to be fiscal hawks when it comes to welfare spending, but turn into Keynesian “doves” when it comes to spending on the military-industrial complex.

These members cling to the mistaken belief that the government can balance it budget, keep taxes low, and even have a growing economy, while spending trillions of dollars policing the world, and propping up some governments and changing others overtly or covertly. Thus, President Obama is attacked as soft on defense because he only wants to spend $5.9 trillion over ten years on the military. In contrast, the Republican budget spends $6.2 trillion over the next decade. That is almost a trillion more than the budget’s total so-called spending cuts.

If there are too many fiscal conservatives who refuse to abandon the warfare state, there are too many liberals who act as if any reduction in welfare or entitlement spending leaves children starving. I agree it is unrealistic to simply end programs that people are currently dependent on. However, isn’t it inhumane to not take steps to unwind the welfare system before government overspending causes a bigger financial crisis and drags millions more into poverty?

Far from abandoning those in need of help, returning the responsibility for caring for the needy to private charities, churches, and local communities will improve the welfare system. At the very least,  young people should have the freedom to choose to pay a lower tax rate in exchange for promising to never participate in a government welfare or entitlement program.

Last week’s budget debate showed how little difference there lies between the parties when it comes to preserving the warfare-welfare state. One side may prefer more warfare while the other prefers more welfare, but neither side actually wants to significantly reduce the size and scope of government. Until Congress stops trying to run the world, run the economy, and run our lives, there will never be a real debate about cutting spending and limiting government.

16 Signs That Most Americans Are NOT PREPARED For The Coming Economic Collapse

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Source: http://theeconomiccollapseblog.com

By Michael Snyder

16 Signs That Most Americans Are NOT PREPARED For The Coming Economic Collapse

 

Disaster-Is-Coming-300x300Sometimes I think that I sound like a broken record.  I am constantly using phrases such as “get prepared while you still can” and “time is running out”.  In fact, I use them so often that people are starting to criticize me for it.  But the truth is that only a small percentage of people out there are actively taking steps to get ready for what is coming.  Most of the country is not prepared at all.  In many ways, it is just like 2007 all over again.  There were many people that could see what was about to happen and were doing all they could to warn people, but most did not listen.  And then the great financial crisis of 2008 struck and millions of people lost their jobs and their homes.  Unfortunately, the next great wave of the economic collapse is going to be even more painful than the last one.  It is imperative that people get prepared for what is on the horizon, but for the most part it is just not happening.

A lot of it has to do with the fact that we have such short memories and such short attention spans in America today.  Thanks to years of television and endless hours on the Internet, I find myself having a really hard time focusing on anything for more than just a few moments.  And we are accustomed to living in an “instant society” where we don’t have to wait for anything.  In such a society, we are used to “news cycles” that only last for 24 hours and very few people take a “long-term view” of anything.

And another one of the big problems that we are facing is something called “normalcy bias”.  The following is how Wikipedia defines it…

The normalcy bias, or normality bias, refers to a mental state people enter when facing a disaster. It causes people to underestimate both the possibility of a disaster occurring and its possible effects. This often results in situations where people fail to adequately prepare for a disaster, and on a larger scale, the failure of governments to include the populace in its disaster preparations. The assumption that is made in the case of the normalcy bias is that since a disaster never has occurred then it never will occur. It also results in the inability of people to cope with a disaster once it occurs. People with a normalcy bias have difficulties reacting to something they have not experienced before. People also tend to interpret warnings in the most optimistic way possible, seizing on any ambiguities to infer a less serious situation.

Over the past several years, the U.S. economy has been relatively stable.  And that is a good thing.  But it has also lulled millions upon millions of people into a false sense of security and complacency.  At this point, most Americans consider 2008 to be a temporary bump in the road, and most assume that the U.S. economy will always be strong.

Unfortunately, that is not the truth.  As I have written about previously, the long-term trends that are destroying our economy have continued to get worse since 2008, and none of the problems that caused the last financial crisis have been fixed.

We are steamrolling toward the edge of an economic cliff, and most people in our entertainment-addicted society are totally oblivious to what is going on.  So they are not doing anything to get ready for the immense economic pain that is coming.  The following are 16 signs that most Americans are completely unprepared for the coming economic collapse…

#1 Could you come up with $2000 right now?  According to a shocking study that was just released, most Americans could not

Forty percent of individuals in the U.S. said they could not or probably could not come up with $2,000 if an unexpected need arose, according to research by Atif Mian of Princeton University and Amir Sufi of the University of Chicago Booth School of Business.

#2 In that same study, Americans were asked the following question…

“Do you have 3 months emergency funds to cover expenses in case of sickness, job loss, economic downturn?”

An astounding 60 percent of people that responded said that they do not.

#3 Another study found that less than one out of every four Americans has enough money stored away to cover six months of expenses.

#4 Some people are actually trying really hard to get ahead, but admittedly that is really tough to do when we are all being taxed into oblivion.  In fact, it was reported this week that Americans now spend more on taxes than they spend on food, clothing and housing combined.

#5 Right now, more Americans are dependent on the government than ever before.  In fact, according to the U.S. Census Bureau, 49 percent of all Americans live in a home that currently gets direct monetary benefits from the federal government.

#6 It is estimated that less than 10 percent of the entire U.S. population owns any gold or silver for investment purposes.  That is a stunning number.

#7 It has been estimated that there are approximately 3 million “preppers” in the United States.  But that means that almost everyone else is not prepping.

#8-16 The following are nine more statistics that come from a survey conducted by the Adelphi Center for Health Innovation.  As you can see, a significant portion of the population is not even prepared for a basic emergency that would last for just a few days…

  • 44 percent don’t have first-aid kits
  • 48 percent lack emergency supplies
  • 53 percent do not have a minimum three-day supply of nonperishable food and water at home
  • 55 percent believe local authorities will come to their rescue if disaster strikes
  • 52 percent have not designated a family meeting place if they are separated during an emergency
  • 42 percent do not know the phone numbers of all of their immediate family members
  • 21 percent don’t know if their workplace has an emergency preparedness plan
  • 37 percent do not have a list of the drugs they are taking
  • 52 percent do not have copies of health insurance documents

What do you think is going to happen to these people once the economy collapses and there is chaos in the streets?

How are they going to survive?

After all of these years of writing about the coming economic collapse, nothing has changed as far as the long-term outlook is concerned.

We are still heading toward a complete and total economic meltdown.

But most Americans continue to have faith in the system, and the mainstream media keeps assuring them that everything is going to be just fine.

And in this “dumbed-down” society of ours, most people are perfectly content to let others do their thinking for them.  In America today, only one out of every six Americans can even find Ukraine on a map of the world.  That is how far we have fallen.

In this day and age, it is imperative that we all learn how to think for ourselves.  The foundations of our society are crumbling, our economic system is failing and the blind are leading the blind.  If we do not learn to make our own decisions, we are just going to follow the rest of the herd into oblivion.

In addition, we all need to start taking a long-term view of things.  Just because the economic collapse is not going to happen this month does not mean that it is not going to happen.  When you step back and take a broader view of what is happening, it becomes exceedingly clear where we are heading.

Sadly, most Americans will never do that.

This article first appeared here at the Economic Collapse Blog.  Michael Snyder is a writer, speaker and activist who writes and edits his own blogs The American Dream and Economic Collapse Blog. Follow him on Twitter here.

 

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19 Signs That The U.S. Consumer Is Tapped Out

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Source: http://theeconomiccollapseblog.com

By Michael Snyder

19 Signs That The U.S. Consumer Is Tapped Out

 

Spare-Change-300x300You can’t get blood out of a rock.  Traditionally the United States has had a consumer-driven economy, but now years of declining incomes and rising debts are really starting to catch up with us.  In order to have an economy that is dependent on consumer spending, you need to have a large middle class.  Unfortunately, the U.S. middle class is steadily shrinking, and unless that trend is reversed we are going to see massive economic changes in this country.  For example, in poor neighborhoods all over America we are seeing bank branches, car dealerships and retail stores close down at an alarming rate.  If you didn’t know better, you might be tempted to think that “Space Available” was the hottest new retailer in some areas of the nation.  On the other hand, if you live in San Francisco, New York City or Washington D.C., things are pretty good for the moment.  But as a whole, the condition of the U.S. consumer continues to decline.  Incomes are going down, the cost of living is going up, and debts are skyrocketing.  The following are 19 signs that the U.S. consumer is tapped out…

#1 Real disposable income per capita continues to fall.  In the fourth quarter of 2012, it was sitting at $37,265.  By the time that the fourth quarter of 2013 had come around, it had dropped to $36,941.  That means that average Americans have less money to go shopping with than they did previously.

#2 In January, real disposable income in the U.S. experienced the largest year over year decline that we have seen since 1974.

#3 As disposable income decreases, major retailers are closing thousands of stores all over the country.  Some are even calling this “a retail apocalypse“.

#4 From September 2013 to January 2014, the personal saving rate in the United States dropped by a staggering 16 percent.

#5 During the fourth quarter of 2013, we witnessed the largest increase in consumer debt in this country that we have seen since 2007.

#6 Fewer Americans are applying for mortgages these days.  In fact, the MBA Purchase Applications Index is now the lowest that it has been since 1995.

#7 Overall, the rate of homeownership in the United States has fallen for eight years in a row.

#8 Many Americans are finding it increasingly difficult to afford a new car or truck.  The following comes from a recent CNBC article

A new study shows the average household in 24 of America’s 25 largest metropolitan areas cannot afford to pay for the average priced new car or truck.
 
“Just because you can manage the monthly payment doesn’t mean you should let a $30,000 or $40,000 ride gobble up such a huge share of your paycheck,” said Mike Sante, managing editor of Interest.com. “Many people are spending money on a car payment that they could be saving.”

#9 Incredibly, 56 percent of all Americans now have “subprime credit” at this point.

#10 Total consumer credit has risen by a whopping 22 percent over the past three years.

#11 In the third quarter of 2007, the student loan delinquency rate was 7.6 percent.  Today, it is up to 11.5 percent.

#12 Overall, U.S. consumers are $11,360,000,000,000 in debt.

#13 While Barack Obama has been in the White House, median household income in the United States has fallen for five years in a row.

#14 U.S. workers are taking home the smallest share of the income pie that has ever been recorded.

#15 One recent study found that about 60 percent of the jobs that have been “created” since the end of the last recession pay $13.83 or less an hour.

#16 Middle-wage jobs accounted for 60 percent of the jobs lost during the last recession, but they have accounted for only 22 percent of the jobs created since then.

#17 According to one recent survey, only 35 percent of all Americans say that they are better off financially than they were a year ago.

#18 In 2008, 25 percent of all Americans in the 18 to 29-year-old age bracket considered themselves to be “lower class”.  In 2014, an astounding 49 percent of them do.

#19 The poverty rate in America has been at 15 percent or above for 3 consecutive years.  That is the first time that has happened since 1965.

Despite what the mainstream media keeps telling them, most Americans know on a gut level that there is something fundamentally wrong with our economy.

According to Gallup, “Unemployment/Jobs” is the number one issue that Americans care about these days and the “Economy in general” is the number three issue that Americans care about these days.

Most people just want to work hard, make a decent living and take care of their families.

Sadly, that is becoming increasingly difficult to do.

And the numbers that I have shared above only tell part of the story.  For a more personal side to all of this, I encourage you to read my previous article entitled “10 Stories From The Cold, Hard Streets Of America That Will Break Your Heart” if you have not done so already.

The really bad news is that this is about as good as things are going to get for the U.S. economy.  The long-term trends that are eating away at our economy like cancer are intensifying, and our “leaders” just continue to act as if “business as usual” will somehow get the job done.

Most of them don’t even realize that time is running out.

As I discussed yesterday, there is a lot of evidence that the massive financial bubble that the Federal Reserve has inflated is getting ready to burst.

When the next great financial crisis does strike, it is going to be absolutely disastrous.  We are in far worse financial shape than we were back then, and this next round of financial trauma could truly be the “knockout blow” for the U.S. economy.

Let us hope for the best, but let us also prepare for the worst.

This article first appeared here at the Economic Collapse Blog.  Michael Snyder is a writer, speaker and activist who writes and edits his own blogs The American Dream and Economic Collapse Blog. Follow him on Twitter here.

 

 

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We Are In FAR Worse Shape Than We Were Just Prior To The Last Great Financial Crisis

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Source: http://theeconomiccollapseblog.com

By Michael Snyder

We Are In FAR Worse Shape Than We Were Just Prior To The Last Great Financial Crisis

 

Crushed-Car-By-UCFFool-300x300None of the problems that caused the last financial crisis have been fixed.  In fact, they have all gotten worse.  The total amount of debt in the world has grown by more than 40 percent since 2007, the too big to fail banks have gotten 37 percent larger, and the colossal derivatives bubble has spiraled so far out of control that the only thing left to do is to watch the spectacular crash landing that is inevitably coming.  Unfortunately, most people do not know the information that I am about to share with you in this article.  Most people just assume that the politicians and the central banks have fixed the issues that caused the last great financial crisis.  But the truth is that we are in far worse shape than we were back then.  When this financial bubble finally bursts, the devastation that we will witness is likely to be absolutely catastrophic.

 

Too Much Debt

One of the biggest financial problems that the world is facing is that there is simply way too much debt.  Never before in world history has there ever been a debt binge anything like this.

You would have thought that we would have learned our lesson from 2008 and would have started to reduce debt levels.

Instead, we pushed the accelerator to the floor.

It is hard to believe that this could possibly be true, but according to the Bank for International Settlements the total amount of debt in the world has increased by more than 40 percent since 2007…

The amount of debt globally has soared more than 40 percent to $100 trillion since the first signs of the financial crisis as governments borrowed to pull their economies out of recession and companies took advantage of record low interest rates, according to the Bank for International Settlements.
 
The $30 trillion increase from $70 trillion between mid-2007 and mid-2013 compares with a $3.86 trillion decline in the value of equities to $53.8 trillion in the same period, according to data compiled by Bloomberg. The jump in debt as measured by the Basel, Switzerland-based BIS in its quarterly review is almost twice the U.S.’s gross domestic product.

That is a recipe for utter disaster, and yet we can’t seem to help ourselves.

And of course the U.S. government is the largest offender.

Back in September 2008, the U.S. national debt was sitting at a total of 10.02 trillion dollars.

As I write this, it is now sitting at a total of 17.49 trillion dollars.

Is there anyone out there that can possibly conceive of a way that this ends other than badly?

Too Big To Fail Is Now Bigger Than Ever

During the last great financial crisis we were also told that one of our biggest problems was the fact that we had banks that were “too big to fail”.

Well, guess what?

Those banks are now much larger than they were back then.  In fact, the six largest banks in the United States (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) have collectively gotten 37 percent larger since the last financial crisis.

Meanwhile, 1,400 smaller banks have gone out of business during that time frame, and only one new bank has been started in the United States in the last three years.

So the problem of “too big to fail” is now much worse than it was back in 2008.

The following are some more statistics about our “too big to fail” problem that come from a previous article

-The U.S. banking system has 14.4 trillion dollars in total assets.  The six largest banks now account for 67 percent of those assets and all of the other banks account for only 33 percent of those assets.

-Approximately 1,400 smaller banks have disappeared over the past five years.

-JPMorgan Chase is roughly the size of the entire British economy.

-The four largest banks have more than a million employees combined.

-The five largest banks account for 42 percent of all loans in the United States.

-Bank of America accounts for about a third of all business loans all by itself.

-Wells Fargo accounts for about one quarter of all mortgage loans all by itself.

-About 12 percent of all cash in the United States is held in the vaults of JPMorgan Chase.

The Derivatives Bubble

Most people simply do not understand that over the past couple of decades Wall Street has been transformed into the largest and wildest casino on the entire planet.

Nobody knows for sure how large the global derivatives bubble is at this point, because derivatives trading is lightly regulated compared to other types of trading.  But everyone agrees that it is absolutely massive.  Estimates range from $600 trillion to $1.5 quadrillion.

And what we do know is that four of the too big to fail banks each have total exposure to derivatives that is in excess of $40 trillion.

The numbers posted below may look similar to numbers that I have included in articles in the past, but for this article I have updated them with the very latest numbers from the U.S. government.  Since the last time that I wrote about this, these numbers have gotten even worse…

JPMorgan Chase

Total Assets: $1,989,875,000,000 (nearly 2 trillion dollars)

Total Exposure To Derivatives: $71,810,058,000,000 (more than 71 trillion dollars)

Citibank

Total Assets: $1,344,751,000,000 (a bit more than 1.3 trillion dollars)

Total Exposure To Derivatives: $62,963,116,000,000 (more than 62 trillion dollars)

Bank Of America

Total Assets: $1,438,859,000,000 (a bit more than 1.4 trillion dollars)

Total Exposure To Derivatives: $41,386,713,000,000 (more than 41 trillion dollars)

Goldman Sachs

Total Assets: $111,117,000,000 (just a shade over 111 billion dollars – yes, you read that correctly)

Total Exposure To Derivatives: $47,467,154,000,000 (more than 47 trillion dollars)

During the coming derivatives crisis, several of those banks could fail simultaneously.

If that happened, it would be an understatement to say that we would be facing an “economic collapse”.

Credit would totally freeze up, nobody would be able to get loans, and economic activity would grind to a standstill.

It is absolutely inexcusable how reckless these big banks have been.

Just look at those numbers for Goldman Sachs again.

Goldman Sachs has total assets worth approximately 111 billion dollars (billion with a little “b”), but they have more than 47 trillion dollars of total exposure to derivatives.

That means that the total exposure that Goldman Sachs has to derivatives contracts is more than 427 times greater than their total assets.

I don’t know why more people aren’t writing about this.

This is utter insanity.

During the next great financial crisis, it is very likely that the rest of the planet is going to lose faith in the current global financial system that is based on the U.S. dollar and on U.S. debt.

When that day arrives, and the U.S. dollar loses reserve currency status, the shift in our standard of living is going to be dramatic.  Just consider what Marin Katusa of Casey Research had to say the other day

It will be shocking for the average American… if the petro dollar dies and the U.S. loses its reserve currency status in the world there will be no middle class.
 
The middle class and the low class… wow… what a game changer. Your cost of living will quadruple.

The debt-fueled prosperity that we are enjoying now will not last forever.  A day of reckoning is fast approaching, and most Americans will not be able to handle the very difficult adjustments that they will be forced to make.  Here is some more from Marin Katusa…

Imagine this… take a country like Croatia… the average worker with a university degree makes about 1200 Euros a month. He spends a third of that, after tax, on keeping his house warm and filling up his gas tank to get to work and get back from work.
 
In North America, we don’t make $1200 a month, and we don’t spend a third of our paycheck on keeping our house warm and driving to work… so, the cost of living… food will triple… heat, electricity, everything subsidized by the government will triple overnight… and it will only get worse even if you can get the services.

All of this could have been prevented if we had done things the right way.

Unfortunately, we didn’t learn any of the lessons that we should have learned from the last financial crisis, and our politicians and the central banks have just continued to do the same things that they have always done.

So now we all get to pay the price.

This article first appeared here at the Economic Collapse Blog.  Michael Snyder is a writer, speaker and activist who writes and edits his own blogs The American Dream and Economic Collapse Blog. Follow him on Twitter here.

 

 

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Top Adviser To The Chinese Government Calls For A “Global Currency” To Replace The U.S. Dollar

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Source: http://endoftheamericandream.com

By Michael Snyder

 

Top Adviser To The Chinese Government Calls For A “Global Currency” To Replace The U.S. Dollar

 

One-World-300x300The former chief economist at the World Bank, Justin Yifu Lin, is advising the Chinese government that the time has come for a single global currency.  Lin, who is also a professor at Peking University, says that the U.S. dollar “is the root cause of global financial and economic crises” and that moving to a “global super-currency” will bring much needed stability to the global financial system.  And considering how recklessly the Federal Reserve has been pumping money into the global financial system and how recklessly the U.S. government has been going into debt, it is hard to argue with his logic.  Why would anyone want to trust the United States to continue to run things after how badly we have abused our position?  The United States has greatly benefited from having the de facto reserve currency of the planet for the past several decades, but now that era is coming to an end.  In fact, the central bank of China has already announced that it will no longer be stockpiling more U.S. dollars.  The rest of the world is getting tired of playing our game.  Our debt is wildly out of control and we are creating money as if there was no tomorrow.  As the rest of the world starts moving away from the U.S. dollar, global power is going to shift even more to the East, and that is going to have very serious consequences for ordinary Americans.

Sadly, most Americans don’t even realize what is happening.  These comments by a top adviser to the Chinese government should have made front page news all over the nation.  I had to go to China Daily to find the following excerpt…

The World Bank’s former chief economist wants to replace the US dollar with a single global super-currency, saying it will create a more stable global financial system.
 
“The dominance of the greenback is the root cause of global financial and economic crises,” Justin Yifu Lin told Bruegel, a Brussels-based policy-research think tank. “The solution to this is to replace the national currency with a global currency.”
 
Lin, now a professor at Peking University and a leading adviser to the Chinese government, said expanding the basket of major reserve currencies — the dollar, the euro, the Japanese yen and pound sterling — will not address the consequences of a financial crisis. Internationalizing the Chinese currency is not the answer, either, he said.

And this is not the first time that we have heard these kinds of comments coming out of China.  For example, Xinhua News Agency called for a “de-Americanized world” back on October 14th…

“It is perhaps a good time for the befuddled world to start considering building a de-Americanized world.”

That particular news agency is controlled by the Chinese government, and if the Chinese government did not approve of that statement it never would have made it into the paper.

Then in November, the central bank of China announced that it is going to stop stockpiling U.S. dollars.

Most Americans don’t want to hear this, but what we are witnessing is a massive shift in global power.  China is catching up to us in a multitude of ways, and they are getting tired of playing second fiddle to the United States.  In fact, China is already surpassing the U.S. in a number of key areas…

-China accounts for more global trade than anyone else in the world.

-China imports more oil from Saudi Arabia than anyone else in the world.

-China imports more oil overall than anyone else in the world.

-It is now being projected that Chinese GDP will surpass U.S. GDP in 2017.

When the rest of the world quits using U.S. dollars to trade with one another and quits lending our dollars back to us at ultra-low interest rates, things are going to start changing very rapidly.

In a previous article, I discussed why having the reserve currency of the world is so important to the United States…

The largest exporting nations such as Saudi Arabia (oil) and China (cheap plastic trinkets at Wal-Mart) end up with massive piles of U.S. dollars.
 
Instead of just sitting on all of that cash, these exporting nations often reinvest much of that cash into low risk securities that can be rapidly turned back into dollars if necessary.  For a very long time, U.S. Treasury bonds have been considered to be the perfect way to do this.  This has created tremendous demand for U.S. government debt and has helped keep interest rates super low.  So every year, massive amounts of money that gets sent out of the country ends up being loaned back to the U.S. Treasury at super low interest rates.
 
And it has been a very good thing for the U.S. economy that the federal government has been able to borrow money so cheaply, because the interest rate on 10 year U.S. Treasuries affects thousands upon thousands of other interest rates throughout our financial system.  For example, as the rate on 10 year U.S. Treasuries has risen in recent months, so have the rates on U.S. home mortgages.
 
Our entire way of life in the United States depends upon this game continuing.  We must have the rest of the world use our currency and loan it back to us at ultra low interest rates.  At this point we have painted ourselves into a corner by accumulating so much debt.  We simply cannot afford to have rates rise significantly.

As the rest of the globe moves away from the dollar, demand for the dollar is going to go down and that is going to cause a lot of inflation – especially for imported goods.  So the days of piling lots of cheap plastic stuff made in China into your shopping carts is coming to an end.

And as the rest of the globe moves away from U.S. debt, interest rates are going to go much higher than they are today.  Eventually, the U.S. government will be paying out more than a trillion dollars a year just in interest on the national debt and all loans throughout our entire financial system will have higher interest rates.  This is going to cause economic activity to slow down dramatically.

On the global economic stage, China is playing checkers and we are playing chess, and we are getting dangerously close to checkmate.

Meanwhile, China is also rapidly catching up to us militarily.

At a time when U.S. military spending is actually decreasing, China is spending money on the military aggressively.

In 2014, Chinese military spending will rise to $148 billion, which represents an increase of 6 percent over 2013.

The balance of power is shifting right in front of our eyes.

For example, at one time the U.S. Navy reigned supreme and the Chinese Navy was a joke.

But now that is rapidly changing.  The following is from an article posted on military.com

The Chinese navy has 77 surface combatants, more than 60 submarines, 55 amphibious ships and about 85 missile-equipped small ships, according to the report first published by the U.S. Naval Institute. The report explains that more than 50 naval ships were “laid down, launched or commissioned” in 2013 and a similar number is planned for 2014.

Of particular concern is the growth of the Chinese submarine fleet.  The Chinese now have submarine launched ballistic missiles with a maximum range of about 4,000 miles…

ONI raised concerns about China’s fast-growing submarine force, to include the Jin-class ballistic nuclear submarines, which will likely commence deterrent patrols in 2014, according to the report. The expected operational deployment of the Jin SSBN “would mark China’s first credible at-sea-second-strike nuclear capability,” the report states.
 
The submarine would fire the JL-2 submarine launched ballistic missile, which has a range of 4,000 nautical miles and would “enable the Jin to strike Hawaii, Alaska and possibly western portions of CONUS [continental United States] from East Asian waters,” ONI assessed.

In addition, China is also working on “hypersonic glide vehicles” that can travel “at speeds of up to Mach 10 or 7,680 miles an hour”.  The following is an excerpt from a recent Washington Free Beacon article…

The Washington Free Beacon first disclosed China’s Jan. 9 flight test of a hypersonic glide vehicle that the Pentagon has called the WU-14.
 
The experimental weapon is a new strategic strike capability China’s military is developing that is designed to defeat U.S. missile defenses. China could use the vehicle for both nuclear and conventional precision strikes on targets, including aircraft carriers at sea.
 
U.S. officials said that, while the glide vehicle test was not an intelligence surprise, it showed China is moving much more rapidly than in the past in efforts to research, develop, and test advanced weaponry.

The world is changing, and the United States is not the only superpower anymore.  China is thriving and Russia is also on the rise.  Five years from now, the world is going to look far, far different than it does today.

Sadly, most Americans do not care about these things at all.  Most of them are much more concerned about the latest celebrity scandal or about what Justin Bieber has been doing.

In the end, most Americans will have no idea what is happening until it is far too late to do anything about it.

This article first appeared here at the The American Dream.  Michael Snyder is a writer, speaker and activist who writes and edits his own blogs The American Dream and Economic Collapse Blog. Follow him on Twitter here.

 

 

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Image credit: http://endoftheamericandream.com
 
 

The Stock Market In Japan Is COLLAPSING

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Source: http://theeconomiccollapseblog.com

By Michael Snyder

The Stock Market In Japan Is COLLAPSING

 

Stock-Prices-Have-Fallen-For-Six-Weeks-In-A-Row-300x300Did you see what just happened in Japan?  The stock market of the 3rd largest economy on the planet is imploding.  On Tuesday, the Nikkei fell by more than 610 points.  If that sounds like a lot, that is because it is.  The largest one day stock market decline in U.S. history is only 777 points.  So far, the Dow is only down about 1000 points during this “correction”, but the Nikkei is down more than 2,300 points.  The Nikkei has dropped more than 14 percent since the peak of the market, and many analysts believe that this is only just the beginning.  Those that have been waiting for a full-blown stock market collapse may be about to get their wish.  Japan is absolutely drowning in debt, their central bank is printing money like crazy and the Japanese population is aging rapidly.  As far as economic fundamentals go, there is very little good news as far as Japan is concerned.  So will an Asian financial collapse precede the next great financial crisis in the United States?  That is what some have been predicting, and it starting to look increasingly likely.

What happened to the Nikkei early on Tuesday was absolutely breathtaking.  The following is how Bloomberg described the carnage…

At the end of January 2013, Japanese stocks trailed only Portugal for the biggest rally among developed markets. Now the Nikkei 225 Stock Average is leading declines, slumping 8.5 percent last month and today capping a 14 percent drop from its Dec. 30 peak.
 
Losses snowballed in Tokyo during a global retreat that has erased $2.9 trillion from equity values worldwide this year amid signs of slower growth in China and stimulus cuts by the U.S. Federal Reserve.

As Bloomberg noted, much of the blame for the financial problems that we are seeing all over the planet right now is being placed on the Federal Reserve.

The Fed created this bubble by pumping trillions of fresh dollars into the global financial system, and now they are bursting this bubble by starting to cut off the flow of easy money.

This is something that I warned would happen when the Fed decided to taper, and now RBS is warning of a “market bloodbath” unless the Federal Reserve immediately stops tapering.

Most Americans simply do not realize that our financial markets no longer resemble a free market system.  Instead, they are highly manipulated and distorted by the central banks, and the trillions of dollars of “hot money” that the Fed has poured into the global financial system has infected virtually every financial market on Earth

On Wall Street they call it “hot money”—that seemingly endless flow of cash that goes to the most profitable country du jour—but in the real economy it’s gone cold.
 
That hot money has come mostly in the form of a low-yielding U.S. dollar, which investors have borrowed en masse to fund investments in other higher-yielding currencies across the globe. The so-called carry trade has helped fuel an investment bonanza across the world that has boosted risk assets thanks primarily to the U.S. Federal Reserve’s easy-money policy.
 
But with the Fed tiptoeing away from what initially was an $85 billion-a-month infusion of liquidity, investors are beginning to prepare themselves for a world of rising rates in which the endless cash flow to emerging market economies begins to ebb, then cease.

We never fixed any of the fundamental problems that caused the last financial crisis.  Instead, the Fed seemed to think that the solution to any problem was just to create more money.

It was an incredibly stupid approach, and now our fundamental problems are worse than ever as Marc Faber recently noted

“Total credit as a percent of the global economy is now 30 percent higher than it was at the start of the economic crisis in 2007, we have had rapidly escalating household debt especially in emerging economies and resource economies like Canada and Australia and we have come to a point where household debt has become burdensome on the system—that is, where an economic slowdown follows.”

So what comes next?

Well, unless the Fed or other central banks intervene, we are probably going to have even more carnage.

At least that is what Dennis Gartman, the editor and publisher of “The Gartman Letter”, told CNBC on Tuesday

“I just think you’re going to have a very severe, very substantive and really quite ugly correction that will probably make a lot of people wail and gnash their teeth before it’s done.”

Other analysts share his pessimism.  According to Doug Short, the vice president of research at Advisor Perspectives, the U.S. stock market “still looks 67% overvalued“.

Most sobering of all is what Richard Russell is saying.  In his 60 years of writing about financial issues, he has never been “so filled with foreboding regarding what lies ahead”

I’d be lying if I said that I wasn’t worried about the way things are going.  Frankly, I’m truly scared for myself, my family and the nation.  I have the sinking feeling that the stock market is on the edge of a crash.  If that happens, investor sentiment will turn quickly bearish.  And the bear market will start feeding on itself.  Ironically, the recent action occurred in the face of almost insane bullishness on the part of the crowd and on the part of investors.
 
Obviously smart heads and institutional money managers know that the US is semi dead in the water.  And all the talk about an improving economy is just wishes and hopes.  Bernanke’s dream of a flourishing new economy, improving without the need of the Fed’s help, is an idle dream.
 
I’ve been writing about the stock market for over 60 years and I can’t remember a time when I was so filled with foreboding regarding what lies ahead.  The primary trend of the market, like the tide of the ocean, is irresistible, and waits for no man.  What scares me the most in this current situation is that I see no clear island of safety.

You can read the rest of his very disturbing remarks right here.

U.S. stocks may not totally crash this week, this month or even this year, but without a doubt a day of reckoning is coming.  As a society, our total consumer, business and government debt is now equivalent to approximately 345 percent of GDP.

The only way that the game can continue is to keep pumping up the debt bubble even more.

Once the debt bubble stops expanding, it will start collapsing very rapidly.

Those that foolishly still have lots of money in the stock market better hope that the Federal Reserve decides to intervene in a major way very soon.

Because if they don’t, there is a very good chance that we could indeed have a “market bloodbath” on our hands.

This article first appeared here at the Economic Collapse Blog.  Michael Snyder is a writer, speaker and activist who writes and edits his own blogs The American Dream and Economic Collapse Blog. Follow him on Twitter here.

 

 

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Image credit: http://theeconomiccollapseblog.com
 

The Dow Has Already Fallen More Than 1000 Points From The Peak Of The Market

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Source: http://theeconomiccollapseblog.com

By Michael Snyder

The Dow Has Already Fallen More Than 1000 Points From The Peak Of The Market

 

Stock-Market-Decline-Photo-by-Nodulation-300x154That didn’t take long.  On Monday, the Dow was down another 326 points.  Overall, the Dow has now fallen more than 1000 points from the peak of the market (16,588.25) back in late December.  This is the first time that we have seen the Dow drop below its 200-day moving average in more than a year, and there are many that believe that this is just the beginning of a major stock market decline.  Meanwhile, things are even worse in other parts of the world.  For example, the Nikkei is now down about 1700 points from its 2013 high.  This is causing havoc all over Asia, and the sharp movement that we have been seeing in the USD/JPY is creating a tremendous amount of anxiety among Forex traders.  For those that are not interested in the technical details, what all of this means is that global financial markets are starting to become extremely unstable.

Unfortunately, there does not appear to be much hope on the horizon for investors.  In fact, troubling news just continues to pour in from all over the planet.  Just consider the following…

-Major currencies all over South America continue to collapse.

-Massive central bank intervention has done little to slow down the currency collapse in Turkey.

-Investors pulled more than 6 billion dollars out of emerging market equity funds last week alone.

-The CBOE Volatility Index (VIX) has risen above 20 for the first time in four months.

-Last month, new manufacturing orders in the United States declined at the fastest pace that we have seen since December 1980.

-Real disposable income in the United States has just experienced the largest year over year drop that we have seen since 1974.

-In January, vehicle sales for Ford were down 7.5 percent and vehicle sales for GM were down 12 percent.  Both companies are blaming bad weather.

-A major newspaper in the UK is warning that “growing problems in the Chinese banking system could spill over into a wider financial crisis“.

-U.S. Treasury Secretary Jack Lew is warning that the federal government could hit the debt ceiling by the end of this month if Congress does not act.

-It is being reported that Dell Computer plans to lay off more than 15,000 workers.

-The IMF recently said that the the probability that the global economy will fall into a deflation trap “may now be as high as 20%“.

-The Baltic Dry Index is now down 50 percent from its December highs.

If our economic troubles continue to mount, could we be facing a global “financial avalanche” fairly quickly?

That is what some very prominent analysts believe.

Below, I have posted quotes from five men that are greatly respected in the financial world.  What they have to say is quite chilling…

#1 Doug Casey: “Now is a very good time to start thinking financially because I’m afraid that this year, in 2014, we’re going to go back into the financial hurricane. We’ve been in the eye of the storm since 2009, but now we’re going to go back into the trailing edge of the storm, and it’s going to be much longer lasting and much worse and much different than what we had in 2008 and 2009.”

#2 Bill Fleckenstein: “The [price-to-earnings ratio] is 16, 17 times earnings,” Fleckenstein said on Tuesday’s episode of “Futures Now.” “Why would you pay 16 times for an S&P company? I don’t care about where rates are, because rates are artificially suppressed. Why isn’t that worth 11 or 12 times? Just by that analysis, you’d be down by a quarter or 30 percent. So there’s a huge amount of downside.”

#3 Egon von Greyerz of Matterhorn Asset Management: “Nothing goes (down) in a straight line, but the emerging market problems will accelerate and it will spread to the very overbought and the very overvalued stock markets and economies in the West.

So stock markets are now starting a secular bear trend which will last for many years, and we could see falls of massive proportions. At the end of this, the wealth that has been created in the last few decades will be destroyed.”

#4 Peter Schiff: “The crisis is imminent,” Schiff said.  “I don’t think Obama is going to finish his second term without the bottom dropping out. And stock market investors are oblivious to the problems.”

“We’re broke, Schiff added.  “We owe trillions. Look at our budget deficit; look at the debt to GDP ratio, the unfunded liabilities. If we were in the Eurozone, they would kick us out.”

#5 Gerald Celente: “This selloff in the emerging markets, with their currencies going down and their interest rates going up, it’s going to be disastrous and there are going to be riots everywhere…

So as the decline in their economies accelerates, you are going to see the civil unrest intensify.”

—–

Those that do not believe that we could ever see “civil unrest” on the streets of America should take note of what just happened in Seattle.

After the Seahawks won the Super Bowl, fans celebrated by “lighting fires, damaging historic buildings and ripping down street signs“.

If that is how average Americans will behave when something good happens, how will they act when the economy totally collapses and nobody can find work for an extended period of time?

We are rapidly approaching another great financial crisis.  Unfortunately, we didn’t learn any of the lessons that we should have learned last time.  It is being projected that the debt of the federal government will more than double during the Obama years, the “too big to fail banks” have collectively gotten 37 percent larger over the past five years, and the big banks have become more financially reckless than ever before.

When the next great financial crisis arrives (and without a doubt it is inevitable), millions more Americans will lose their jobs and millions more Americans will lose their homes.

Now is not the time to be buying lots of expensive new toys, going on expensive vacations or piling up lots of debt.

Now is the time to build up an emergency fund and to do whatever you can to get prepared for the great storm that is coming.

As you can see from the financial headlines, time is rapidly running out.

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This article first appeared here at the Economic Collapse Blog.  Michael Snyder is a writer, speaker and activist who writes and edits his own blogs The American Dream and Economic Collapse Blog. Follow him on Twitter here.

 

 

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Blame baby boomers for the financial crisis, says PJ O’Rourke: ‘We invented playing with money’ [VIDEO]

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Source: http://www.againstcronycapitalism.org

By

Blame baby boomers for the financial crisis, says PJ O’Rourke: ‘We invented playing with money’ [VIDEO]

 

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For the most part they do deserve the blame. However it was Nixon who ushered in the totally fiat dollar. Before him Roosevelt and company built the New Deal which set us on the current course to insolvency and an all pervasive state. So there’s plenty of blame to go around.

However it is fair to say that the baby boomers were particularly enamored with “living for today.” As divorce rates, savings rates, and the current trend toward mortgages in retirement attest.

It’s understandable to some extent. Living under the constant threat of nuclear annihilation would make any generation act a little crazy. Throw in LSD and disco and one has a recipe for broad societal loopiness.

Unfortunately we are the ones who are going to have to clean up after the party. Someone has got to do it.

(From The Daily Caller)
 
“Rightly, quite rightly,” O’Rourke said. “We are the generation who invented playing with money, you know. People use to save it or lose it, but mostly they spend it, not often, but if you could. We were the first t0 come up with playing with money. In fact, a lot of what has gone on in the world has to do with the baby boomers infinite, youthful sense of play. We are forever the puppies of the universe, and sometimes thats good. You know, we don’t fight for real, like grown-up dogs do, very much. We include all of the other puppies in our play.

Click here for the article and video.

Image credit: http://www.againstcronycapitalism.org


Nick Sorrentino
About Nick Sorrentino

Nick Sorrentino is the co-founder and editor of AgainstCronyCapitalism.org. A political and communications consultant with clients across the political spectrum, he lives just outside of Washington DC where he can keep an eye on Leviathan.

 

Are We On The Verge Of A Massive Emerging Markets Currency Collapse?

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Source: http://theeconomiccollapseblog.com

By Michael Snyder

Are We On The Verge Of A Massive Emerging Markets Currency Collapse?

 

Hyperinflation-300x300This time, the Federal Reserve has created a truly global problem.  A big chunk of the trillions of dollars that it pumped into the financial system over the past several years has flowed into emerging markets.  But now that the Fed has decided to begin “the taper”, investors see it as a sign to pull the “hot money” out of emerging markets as rapidly as possible.  This is causing currencies to collapse and interest rates to soar all over the planet.  Argentina, Turkey, South Africa, Ukraine, Chile, Indonesia, Venezuela, India, Brazil, Taiwan and Malaysia are just some of the emerging markets that have been hit hard so far.  In fact, last week emerging market currencies experienced the biggest decline that we have seen since the financial crisis of 2008.  And all of this chaos in emerging markets is seriously spooking Wall Street as well.  The Dow has fallen nearly 500 points over the last two trading sessions alone.  If the Federal Reserve opts to taper even more in the coming days, this currency crisis could rapidly turn into a complete and total currency collapse.

A lot of Americans have always assumed that the U.S. dollar would be the first currency to collapse when the next great financial crisis happens.  But actually, right now just the opposite is happening and it is causing chaos all over the planet.

For instance, just check out what is happening in Turkey according to a recent report in the New York Times

Turkey’s currency fell to a record low against the dollar on Friday, a drop that will hit the purchasing power of everyone in the country.
 
On a street corner in Istanbul, Yilmaz Gok, 51, said, “I’m a retiree making ends meet on a small pension and all I care about is a possible increase in prices.”
 
“I will need to cut further,” he said. “Maybe I should use my natural gas heater less.”

As inflation escalates and interest rates soar in these countries, ordinary citizens are going to feel the squeeze.  Just having enough money to purchase the basics is going to become more difficult.

And this is not just limited to a few countries.  What we are watching right now is truly a global phenomenon

“You’ve had a massive selloff in these emerging-market currencies,” Nick Xanders, a London-based equity strategist at BTIG Ltd., said by telephone. “Ruble, rupee, real, rand: they’ve all fallen and the main cause has been tapering. A lot of companies that have benefited from emerging-markets growth are now seeing it go the other way.”

So why is this happening?  Well, there are a number of factors involved of course.  However, as with so many of our other problems, the actions of the Federal Reserve are at the very heart of this crisis.  A recent USA Today article described how the Fed helped create this massive bubble in the emerging markets…

Emerging markets are the future growth engine of the global economy and an important source of profits for U.S. companies. These developing economies were both recipients and beneficiaries of massive cash inflows the past few years as investors sought out bigger returns fostered by injections of cheap cash from the Federal Reserve and other central bankers.
 
But now that the Fed has started to dial back its stimulus, many investors are yanking their cash out of emerging markets and bringing the cash back to more stable markets and economies, such as the U.S., hurting the developing nations in the process, explains Russ Koesterich, chief investment strategist at BlackRock.
 
“Emerging markets need the hot money but capital is exiting now,” says Koesterich. “What you have is people saying, ‘I don’t want to own emerging markets.’”

What we are potentially facing is the bursting of a financial bubble on a global scale.  Just check out what Egon von Greyerz, the founder of Matterhorn Asset Management in Switzerland, recently had to say…

If you take the Turkish lira, that plunged to new lows this week, and the Russian ruble is at the lowest level in 5 years. In South Africa, the rand is at the weakest since 2008. The currencies are also weak in Brazil and Mexico. But there are many other countries whose situation is extremely dire, like India, Indonesia, Hungary, Poland, the Ukraine, and Venezuela.
 
I’m mentioning these countries individually just to stress that this situation is extremely serious. It is also on a massive scale. In virtually all of these countries currencies are plunging and so are bonds, which is leading to much higher interest rates. And the cost of credit-default swaps in these countries is surging due to the increased credit risks.

And many smaller nations are being deeply affected already as well.

For example, most Americans cannot even find Liberia on a map, but right now the actions of our Federal Reserve have pushed the currency of that small nation to the verge of collapse

Liberia’s finance minister warned against panic today after being summoned to parliament to explain a crash in the value of Liberia’s currency against the US dollar.
 
“Let’s be careful about what we say about the economy. Inflation, ladies and gentlemen, is not out of control,” Amara Konneh told lawmakers, while adding that the government was “concerned” about the trend.

Closer to home, the Mexican peso tumbled quite a bit last week and is now beginning to show significant weakness.  If Mexico experiences a currency collapse, that would be a huge blow to the U.S. economy.

Like I said, this is something that is happening on a global scale.

If this continues, we will eventually see looting, violence, blackouts, shortages of basic supplies, and runs on the banks in emerging markets all over the planet just like we are already witnessing in Argentina and Venezuela.

Hopefully something can be done to stop this from happening.  But once a bubble starts to burst, it is really difficult to try to hold it together.

Meanwhile, I find it to be very “interesting” that last week we witnessed the largest withdrawal from JPMorgan’s gold vault ever recorded.

Was someone anticipating something?

Once again, hopefully this crisis will be contained shortly.  But if the Fed announces that it has decided to taper some more, that is going to be a signal to investors that they should race for the exits and the crisis in the emerging markets will get a whole lot worse.

And if you listen carefully, global officials are telling us that is precisely what we should expect.  For example, consider the following statement from the finance minister of Mexico

“We expected this year to be a volatile year for EM as the Fed tapers,” Mexican Finance Minister Luis Videgaray said, adding that volatility “will happen throughout the year as tapering goes on”.

Yes indeed – it is looking like this is going to be a very volatile year.

I hope that you are ready for what is coming next.

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This article first appeared here at the Economic Collapse Blog.  Michael Snyder is a writer, speaker and activist who writes and edits his own blogs The American Dream and Economic Collapse Blog. Follow him on Twitter here.

 


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The $23 Trillion Credit Bubble In China Is Starting To Collapse – Global Financial Crisis Next?

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Source: http://theeconomiccollapseblog.com

By Michael Snyder

The $23 Trillion Credit Bubble In China Is Starting To Collapse – Global Financial Crisis Next?

 

Bubble-Photo-by-Jeff-Kubina-300x300Did you know that financial institutions all over the world are warning that we could see a “mega default” on a very prominent high-yield investment product in China on January 31st?  We are being told that this could lead to a cascading collapse of the shadow banking system in China which could potentially result in “sky-high interest rates” and “a precipitous plunge in credit“.  In other words, it could be a “Lehman Brothers moment” for Asia.  And since the global financial system is more interconnected today than ever before, that would be very bad news for the United States as well.  Since Lehman Brothers collapsed in 2008, the level of private domestic credit in China has risen from $9 trillion to an astounding $23 trillion.  That is an increase of $14 trillion in just a little bit more than 5 years.  Much of that “hot money” has flowed into stocks, bonds and real estate in the United States.  So what do you think is going to happen when that bubble collapses?

The bubble of private debt that we have seen inflate in China since the Lehman crisis is unlike anything that the world has ever seen.  Never before has so much private debt been accumulated in such a short period of time.  All of this debt has helped fuel tremendous economic growth in China, but now a whole bunch of Chinese companies are realizing that they have gotten in way, way over their heads.  In fact, it is being projected that Chinese companies will pay out the equivalent of approximately a trillion dollars in interest payments this year alone.  That is more than twice the amount that the U.S. government will pay in interest in 2014.

Over the past several years, the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have all been criticized for creating too much money.  But the truth is that what has been happening in China surpasses all of their efforts combined.  You can see an incredible chart which graphically illustrates this point right here.  As the Telegraph pointed out a while back, the Chinese have essentially “replicated the entire U.S. commercial banking system” in just five years…

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. “They have replicated the entire U.S. commercial banking system in five years,” she said.
 
The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. “This is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial,” she said.

As with all other things in the financial world, what goes up must eventually come down.

And right now January 31st is shaping up to be a particularly important day for the Chinese financial system.  The following is from a Reuters article

The trust firm responsible for a troubled high-yield investment product sold through China’s largest banks has warned investors they may not be repaid when the 3 billion-yuan ($496 million)product matures on Jan. 31, state media reported on Friday.
 
Investors are closely watching the case to see if it will shatter assumptions that the government and state-owned banks will always protect investors from losses on risky off-balance-sheet investment products sold through a murky shadow banking system.

If there is a major default on January 31st, the effects could ripple throughout the entire Chinese financial system very rapidly.  A recent Forbes article explained why this is the case…

A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and the larger economy as well.  In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk.  Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both.  The result?  The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s.

The big underlying problem is the fact that private debt and the money supply have both been growing far too rapidly in China.  According to Forbes, M2 in China increased by 13.6 percent last year…

And at the same time China’s money supply and credit are still expanding.  Last year, the closely watched M2 increased by only 13.6%, down from 2012’s 13.8% growth.  Optimists say China is getting its credit addiction under control, but that’s not correct.  In fact, credit expanded by at least 20% last year as money poured into new channels not measured by traditional statistics.

Overall, M2 in China is up by about 1000 percent since 1999.  That is absolutely insane.

And of course China is not the only place in the world where financial trouble signs are erupting.  Things in Europe just keep getting worse, and we have just learned that the largest bank in Germany just suffered ” a surprise fourth-quarter loss”

Deutsche Bank shares tumbled on Monday following a surprise fourth-quarter loss due to a steep drop in debt trading revenues and heavy litigation and restructuring costs that prompted the bank to warn of a challenging 2014.
 
Germany’s biggest bank said revenue at its important debt-trading division, fell 31 percent in the quarter, a much bigger drop than at U.S. rivals, which have also suffered from sluggish fixed-income trading.

If current trends continue, many other big banks will soon be experiencing a “bond headache” as well.  At this point, Treasury Bond sentiment is about the lowest that it has been in about 20 years.  Investors overwhelmingly believe that yields are heading higher.

If that does indeed turn out to be the case, interest rates throughout our economy are going to be rising, economic activity will start slowing down significantly and it could set up the “nightmare scenario” that I keep talking about.

But I am not the only one talking about it.

In fact, the World Economic Forum is warning about the exact same thing…

Fiscal crises triggered by ballooning debt levels in advanced economies pose the biggest threat to the global economy in 2014, a report by the World Economic Forum has warned.
 
Ahead of next week’s WEF annual meeting in Davos, Switzerland, the forum’s annual assessment of global dangers said high levels of debt in advanced economies, including Japan and America, could lead to an investor backlash.
 
This would create a “vicious cycle” of ballooning interest payments, rising debt piles and investor doubt that would force interest rates up further.

So will a default event in China on January 31st be the next “Lehman Brothers moment” or will it be something else?

In the end, it doesn’t really matter.  The truth is that what has been going on in the global financial system is completely and totally unsustainable, and it is inevitable that it is all going to come horribly crashing down at some point during the next few years.

It is just a matter of time.

This article first appeared here at the Economic Collapse Blog.  Michael Snyder is a writer, speaker and activist who writes and edits his own blogs The American Dream and Economic Collapse Blog. Follow him on Twitter here

 

Image credit: http://theeconomiccollapseblog.com
 

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