USA & the New Great Depression
Too Big to SAVE
It is my personal opinion that we are on the knife edge of a new Global Great Depression, worse than the one of 1929. The reason for the knife edge, simply, is unregulated and unrestrained human greed, guided by a shameless and selfish financial creativity at par with the recent subprime financial derivatives.
Great banking institutions, now known as ‘Too Big to Fail’, are at the forefront of this greed and because of their impressive size they have now become ‘Too Big to SAVE’. And even if one of these banking institutions fails, it is so interrelated with the other banking institutions that it will bring down the US economy, which in turn will bring down the Chinese economy, which will then be followed by the rest of the world economies.
Those who know this do not spell out the problem, but they know it full well. Especially aware of this is the US government. How is it possible for the collapse of one banking institution, irrespective of how big it might be, to cause the collapse of the world’s economy? Simple. Are you sitting comfortably?
First consider the following:
- ·The Greek economy represents only 2% of the EU GDP and the Greek debt was originally less than €450 billion.
- ·So why did the President of the United States get personally involved several times in the negotiations to save the Greek economy?
- ·Why did Timothy Geithner fly over to Europe several times to take an active part in negotiations to save such a small economy?
- ·Why would the US even care if the economy of such a small country collapses?
- ·Why did the other EU countries ensure a ‘haircut’ of €130 billion of the Greek debt and then lent more money to the “lazy” Greeks in order to save them?
The answer is simple. If Greece defaults on its debt, the default will bring down the US economy and subsequently the economies of all nations. If you think that this is impossible, please read on.
Let us take an imaginary financial institution and let us give it an imaginary name, say… Goldman Sachs.
With inflation in developed countries averaging about 3%, how is it possible for banks to make huge annual profits by lending to Germany (for example) at 1.8%? Or even to Spain at 6%? What happens is as follows:
- ·Our theoretical Goldman, being a huge financial institution, issues its own bonds or promissory notes to borrow $10 billion from investors to lend to Greece – either in the good old days when Greece used to borrow at 1.8%, the same rate as Germany - or now at 6.2%.
- ·For the loan to Greece, it receives in exchange $10 billion worth of Greek bonds, which are essentially simply a written promise to pay back the loan at the specified time.
- ·The very next day, Goldman takes this paper-promise to the US Central Bank and, using it as collateral, borrows $10 billion at (say) 1%. (The basic interest rate charged by the US Central Bank currently is at 0.25%)
- ·The very next day, Goldman then lends this sum to France, at 1.8% and receives a paper promise-to-pay for $10 billion.
- ·Goldman then takes the French paper-promise-to-pay to the US Central Bank and borrows another $10 billion, again at 1%, which it now lends to Italy at 3% interest and the process is repeated ad infinidum.
- ·Today, Greek, Spanish and Italian bonds can earn Goldman about 6%, but Goldman still pays the US Central bank only 1%, using the Greek, Spanish and Italian bonds as collateral.
- ·However, through this creativity, the original $10 billion with which Goldman started out, has now been converted into several trillions, but the actual real, TANGIBLE collateral for these trillions is only the original $10 billion that Goldman started out with.
- ·In other words, what Goldman achieves is to earn interest of over 1000% on its original $10 billion investment! This is the shameless and selfish financial creativity I referred to above.
- ·Very simply and naively put, if Goldman collapses, it will owe trillions to the US Central Bank (and others), but will only be able to immediately meet just $10 billion of its liabilities.
- ·If even a small economy such as Greece’s fails, then the Greek debt of just €450 billion would result in a snowball effect which will evolve into an overall default of trillions, since the weakest link will actually break the chain of Goldman’s financial creativity. Goldman would only have $10 billion to pay for the €450 billion default and will collapse. Its inability to meet its obligations for the other trillions it has borrowed will fall on the US Central bank, which has lent it the trillions essentially without any real collateral.
- ·In other words, the US Central Bank will be owed trillions by Goldman, which Goldman simply cannot pay.
This is where it becomes interesting – and even more frightening:
- ·The US has a currency which is internationally accepted as a means of purchasing commodities such as oil and gold.
- ·As a result, if and when the US needs to, it can actually purchase oil and gold by merely printing its own money and pay for such goods with simply - paper (if it wants to).
- ·The US does this printing but only within certain limits it has placed on itself, in order to prevent the dollar from depreciating/collapsing in value.
- ·Because of these limits, the US borrows back some of its own dollars from economies which have managed to accumulate them through trade surpluses, especially from China.
- ·Because the US also borrows its own money from investors such as China, it does not want to pay high interest rates, so it keeps its own lending rate at a mere 0.25%.
- ·By accepting Euro-bonds when the European economy was booming, the US was essentially accepting something of value, which value was calculated on the EU’s (Germany’s) trade surplus and giving out paper.
- ·The value of the Euro is based on trade surpluses, which are now almost non-existent except in Germany.
- ·The strength of the Euro has enabled the politicians-in-charge (governments) of some countries of Europe and specifically Portugal, Italy, Ireland, Greece and Spain (known collectively by the acronym PIIGS) to buy votes through social benefits made easy by easy credit.
- ·Because of the wealth created in this fashion in the PIIGS countries, German industry was able to increase its exports to them exponentially.
- ·However, German selfishness and blind self-interest prevented Germany from having the political will to accept the creation of a common European treasury, WHICH WOULD NECESSITATE THE IMPLEMENTION OF STRICT RULES AND INSPECTIONS of itself and the PIIGS.
- ·The result is that through excessive overspending, the PIIGS are now in danger of collapse and default.
- ·Should the PIIGS default, the Euro would collapse and the US economy would be left holding trillions of worthless debt.
- ·The US dollar will be devalued.
- ·China would stop lending money to the US.
- ·The US and Europe would be unable to buy more goods from China and the Chinese economy will collapse.
- ·The Germans will be unable to export to other European countries and also to their main markets of China and the USA.
- ·The German economy will collapse, ensuring the financial collapse of the whole of Europe.
- ·To pay salaries and other obligations, the US would have to print more money.
- ·The US dollar would lose its value and be worth less than the Philippine peso.
- ·For example, one gallon of gas in the US might end up selling for $50.
- .China will end up with a bloody revolution.
- .As to the large size countries of the world, India has been used to living on very little and it will revert to doing with just that - very little. Countries which can produce their own food and energy needs, like Argentina, Brazil and Russia, will close their borders and concentrate on food production.
From here on you can add your own bullets and draw your own conclusions…
This is the reason that I advise my family and friends to buy a plot of land where they can start raising their own chickens and vegetables.
So, you ask reasonably, why do they not (USA and Germany) simply pay off the measly debt that tiny Greece owes and avoid all the possible repercussions?
The answer is again simple: They would do it in an instant, if it was not for the rest of the PIIGS who might also default. The debts of the others are much bigger than that of insignificant Greece and they count in the trillions. Therefore, it is better to make an example of the Greeks, drag them down to absolute poverty, so that the rest of the PIIGS will see what can happen to them if they default and take whatever measures they can now, to prevent default.
In other words, the other countries in trouble will realize that it is better to do with just one meal a day, rather than starve.
The result of all the above will be that it is possible that we might find ourselves in the grip of a New Global Depression much worse than the one of 1929.
Germany accepts the creation of a common European treasury, the EU decides to imitate the USA and begins printing money with which to pay off its debts and to aggressively invest in new projects for growth… (possibly even consider the temporary devaluation of the Euro). This will result in serious and painful inflation, but it will be temporary and in any case, much better than the alternative…
GOOD LUCK TO US ALL! ;-)
(Note: The above is a personal opinion ONLY and it is based exclusively on personal observations, NOT on actual scientific evidence)