SOVEREIGN ALCHEMY

RE: "Sovereign Alchemy Will Fail"by Ergon von Greyerz, Matterhorn Asset Management AG

"When we look at the world economy today, wherever we turn we see a wall of risk. And sadly this is an insurmountable wall with risks that are totally unprecedented in history. There has never before been a potentially catastrophic combination of so many virtually bankrupt major sovereign states (US, UK, Spain, Italy Greece, Japan and many more) and a financial system which is bankrupt but is temporarily kept alive with phoney valuations and unlimited money printing. But governments will soon realise that they are not alchemists who can turn printed paper into gold. The consequences of the global financial crisis are potentially catastrophic.

As the Austrian economist von Mises said: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

the world economy has become a time bomb waiting to explode or more likely implode. All the so called experts have declared that it is impossible to identify the problems in the financial system in advance. For example, Greenspan, Bernanke, Geithner, other central bankers and government officials as well as Blankfein of Goldman Sachs and many bank heads have all stated that they couldn’t see it coming. Either they are lying or they are stupid. Sadly, it is most likely the former. It is virtually impossible to find an honest politician. They have one major objective – Power. To attain power they have to buy votes. But to buy votes they cannot tell the truth. No politician ever forecasts bad news because bad news does not buy votes. (Yes, there are exceptions like Ron Paul in the US). And as regards the bankers, it is definitely not in their interest to worry about risks to the financial system. For every year that they issue additional toxic debt and derivatives they earn more in that single year than most normal people earn in a lifetime."

"The list of countries at risk of bankruptcy is increasing by the day. The acronym used to be PIGS (Portugal, Ireland, Greece and Spain). It is now PIIGSJUKUS and growing. The main contenders are currently: USA, UK, Japan, Spain, Italy, Greece, Ireland, France, Portugal, Baltic States, Eastern Europe and many more. On a proper accounting basis all of these countries are already bankrupt, but since many nations can either print money like the US and the UK or increase their already high borrowings, like Greece or the Baltic States, they have technically avoided bankruptcy although in reality all the countries in the list above are basket cases with very little chance of a return to normality."

"It took almost 200 years for US Federal debt to reach $ 1 trillion which it did in 1981. In 2009 the debt increased by $ 1.9 trillion in just that year to $ 12.4 trillion. In the next ten years the US debt is forecast to reach $ 25 trillion. And this doubling of the debt does not include any funds to prop up a bankrupt financial system or the spending of tens or maybe hundreds of trillions of dollars on worthless OTC derivatives. The forecast also assumes growth in GDP which is extremely unlikely especially for the next 2-5 years. Currently US Federal debt is six times what it collects in tax revenue every year. With debt exploding and tax revenues collapsing, there is no chance that the debt can ever be repaid with normal money. Also, with debt out of control interest rates will rise substantially to 10-20% per annum. Applying a 15% interest rate to a $ 25 trillion debt would give an annual interest bill of $ 3.75 trillion which would be substantially more than tax revenues."

The prosperity illusion

"When you live in the midst of history you don’t realise that you are part of making extraordinary history. Therefore most people don’t understand that the last 100 years has been an extraordinary period in history and even more so the last 20-30 years. The perceived prosperity and increase in living standards have been achieved primarily through massive increases in borrowing, both by governments and by individuals. Take away the enormous debt that has been created during this period and the world would be a lot poorer. Alternatively, apply a market rate of interest on the debt. If governments had not manipulated interest rates and set them at artificially low levels, the normal forces of supply and demand would have forced rates considerably higher, most probably in double digits. The higher rates would have reduced demand for credit and thereby prevented the credit and asset bubbles that have caused the worldwide financial crisis. In recent years, Greenspan reduced rates from 6% to 1% between the end of 2000 and 2003. And Bernanke again applied the only remedy that central bankers know, in addition to printing money, when he reduced rates from 5% to 0% between 2007 and 2008. These people seem incapable of understanding that simple laws of supply and demand would have repaired the economy automatically without their incompetent and desperate interventions. By leaving monetary policy to market forces we would have normal recessions and minor booms that would be totally self-regulating. What the central bankers instead have created is the most enormous bubble in world history. And sadly like all bubbles, this one can only end in a disaster of a magnitude that will affect the world for a very, very long time.

So the last 100 years will be seen in history as an extraordinary period when governments thought that they had invented a new economic miracle based on unlimited credit and money printing. But sadly this miracle will be seen by future historians as another failed delusional economic theory dreamed up by politicians."

With Love and Kindness,

THE HATMAN