April 30, 2014
by Simon Black via Sovereign Man blog,
Steve Jobs used to tell a very inspiring story about an article he read in Scientific American when he was a boy:
He said that the article measured the ‘efficiency of locomotion’ of various species– essentially how many calories different animals spend getting from Point A to Point B.
The most efficient of all? Not human beings. Not by a long shot. It was the condor. The condor expended the least amount of energy per meter or kilometer traveled. Human beings were pretty far down the list.
But as Jobs recounts, the authors had the foresight to also test the efficiency of a human being on a bicycle. And this absolutely blew all the other species away.
Jobs later said that this was incredibly influential on his thinking because he realized that human beings were fundamentally tool creators. We take our situation, however grim or rudimentary, and we make it better.
There’s undoubtedly a lot of bad news in the world these days. Some people realize it. Others refuse to believe it and stick their heads in the sand.
Our century-old monetary system is unraveling before our very eyes.
This absurd structure in which we award a tiny central banking elite with the dictatorial power to control the money supply in their sole discretion is now drowning the world in paper currency.
ALL financial markets are manipulated by central banks, predominantly the Federal Reserve. One woman– Janet Yellen– has the power to affect the prices of nearly everything on the planet, from the wholesale price of coffee in Colombia to the cost of a luxury flat in Hong Kong.
Moreover, politicians in some of the most ‘advanced’ economies in the world (Japan, the US, France, the UK, etc.) have accumulated so much debt that they have to borrow money just to pay interest on the money they have already borrowed.
They have indebted generations who will not even be born for decades.
They wage endless, costly wars. They spy on their citizens. They tell people what they can and cannot put in their bodies. They confiscate private property and wages at the point of a gun.
They abuse the population with legions of heavily armed government agents. They conjure so many codes, rules, regulations, laws, and executive orders that it becomes nearly impossible for an individual to exist without being guilty of some innocuous, victimless crime.
And they arrogantly masquerade the entire ruse as a free society.
This system is on the way out. It will reset.
Like feudalism before, our system will go the way of the historical dust bin. And future historians will look back (just as we view feudalism) and say “why did they put up with that nonsense…?
This reset is nothing to fear. Human beings are incredible creatures who have a long-term track record of growth. We rise. We progress.
I could not help noticing that China’s imports from Japan fell 16.2pc in December. Imports from Taiwan fell 6.2pc. The strong yen strikes again: Honda decides to build a high-performance hybrid Acura in Ohio – instead of its home nation of Japan. The firm’s continued shift in production to North American capacity signals a wider trend of Japan’s automakers to battle currency-related losses by moving operations.
Japan is on life support. The largest buyers of its debt are now sellers. Japan Post Holdings holds almost 3 trillion dollars of JGB’s and GPIF, the retirement fund, holds over $1 Trillion of JGB’s. Japan Post is the largest financial institution in the world and has 75% of assets in JGB’s and now wants to diversify. The retirement fund is liquidating $80+ billion per year to pay out benefits. I just read that the banks across Japan have 25% of assets in JGB’s. If rates were to move 1% (double), what would be the impact to the capital of the banks?
One argument is that Japan’s banks are going to step in lieu of the big dwindling pensions. I merely point out that the IMF is go to stress test the banks against a modest move higher in rates. That would discourage the banks from buying debt at current levels.
The insurance companies are big holders and the people are getting old and dying. The savings rate is at 2% and headed negative (also demographics). The trade surplus has turned to deficit. The budget for this year was to have more JGB issuance than government revenue (about 50% of spending to be borrowed), then the earthquake hit. There are projections that the end total may approach two thirds of total spending that will be borrowed for the current fiscal year. There are no new large buyers to replace the ones mentioned above, and to sell bonds outside of Japan would require much higher rates. The Japanese people have trusted their financial institutions to the government and the trust has been violated. The money is gone and the government is not fiscally responsible. This party is about to end. John Mauldin called Japan, “A bug looking for a windshield” and Kyle Bass, “A giant ponzi scheme that is running out of time”.
Japan is just one insolvent country; there are others. In tandem, the central banks of these nations hold $15 trillion plus in inflated securities, loans and sovereign securities, in one giant Ponzi pool holding increasingly insolvent debt and “liquidity” loans to banks. As defaults and more credit downgrades gather steam (UK, US, France, Germany and others), the markdowns of these $15 trillion will accelerate. It is important to remember that the capital for central banks is provided by the participating govts. For example, this is who backs the tiny $81 billion ECB capital used to lever 2.75 trillion in “assets.”
When central banks (CBs) expand their balance sheets, they buy securities and accept collateral of securities. As such they take risks, especially when defaults occur. And what is the quality of those securities?
These charts are actually dated. The CBs own these markets, use thin capital bases, and are going to be handed the losses on the fictitious capital they hold. Tattoo this on your forehead, CBs hold well over 15 trillion in securities and loans to banks of various and often dubious quality, an immense gamble. These are all ultimately the responsibility of the sponsoring country, and represents a monster contingent liability. That will be the end game.
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Pic credit: Banksy (See more Banksy pictures here, via Bruce Krasting)
- Living In A QE World (ritholtz.com)
- You: Azumi invites individuals to buy 0.18% quake bonds (japantimes.co.jp)
- IMF Urges ECB to Expand Its Balance Sheet to Tame Crisis (blogs.wsj.com)
- This Kind Of Logic Never Fails To Infuriate Us…. (businessinsider.com)
- Japan central bank downgrades growth forecast (sfgate.com)
- $A increasingly popular with central banks (news.theage.com.au)