The numbers
that have been bandied about is beyond the
comprehension of the average Joe Six-Packs. I
cannot even figure out $500 billion, what more
$500 trillion. Ninety per cent of government
leaders are also unable to figure out the enormity
of the global debt sink-hole.
So, I have accepted the fact that 97 per cent of
Americans will just accept whatever explanations
and excuses thrown at them by President Obama, Fed
Bernanke and Treasury Geithner for bailing out the
banks and failing to prevent the implosion of the
economy by summer of 2009.
Obama inherited the mess created by war criminal
Bush, aided and abetted by Alan Greenspan,
Bernanke and Geithner, so he can be excused for
there is nothing that he can do at this late hour
to change the outcome. But the rest should be
lynched!
In the last two
years, in several articles, I drew your attention
to the fraudulent securities that have been
peddled by the global banks and how they have
caused the present grid-lock in the global
financial system. In essence, these securities –
MBS, CDOs, CLOs, etc. were all fraudulent papers.
Whatever mortgages underlying these papers, were
over-valued and now they have shown to be worth at
the most 10 to 20 cents on the dollar.
There have been suggestions that if all these
papers were to be shredded and the debts written
off, the global banks' balance sheet would be
wiped clean of such toxic assets. In the result
the economy would restart and the good old days of
cheap credit and unrestrained consumption would
usher another boom!
This is a fairy tale.
In the old days, when the hoodlums want to kill
someone and have him disappear for good, they
would tie his legs together and attach the rope to
a heavy object or an anchor and throw the poor
fellow into the bottom of the lake or sea, never
to be seen again. A small weight, say 10 kg is
more than enough to drag the body to the bottom!
The current financial system is not unlike the man
who has been thrown overboard and being dragged
down by the heavy object. The only chance for
survival is if the man could somehow loosen the
rope and detach the weight from his legs and swim
to the surface, if he could hold his breath long
enough.
What is this small weight that is dragging the
financial system down? And why writing off
this particular debt will not save the banks?
Compared to the global derivative market which is
valued in the hundreds of trillions, the global
stock market by comparison is a midget. But it is
this midget that will cause the financial
implosion in America and Europe and reverberate
across the world.
Let me explain in simple terms.
When the Dow collapsed from the stratospheric high
of 14,000 to less than 7,000 recently (though
recovered somewhat) and other stock markets also
went south in tandem, it was estimated that at the
minimum $30 trillion was wiped out.
What are the consequences of such a drastic
collapse?
Let me explain in simple terms again.
Take the share price of Citigroup. At the height
of the boom, its market capitalization was over
$250 billion. Today, it is less than $10 billion.
Let us say that you bought the shares when it was
trading at $150. You also borrowed from the bank
to purchase the shares. These shares will have to
be pledged to the bank as security for the loan.
The shares are now trading a few dollars, say $5.
There is just no way that you can repay the loan
and or to obtain additional security to “top-up”
the value of the security pledged to the bank.
Where are you going to get the cash to buy more
shares? Shares of other companies that you may own
have also collapsed, and their value may not be
sufficient to cover the difference. You are dead
meat!
The bank is also in deep trouble because there is
no way that they can recover the loan from selling
the shares, which is worth $5.
There is the added problem that companies, whose
shares are traded in the stock exchange, are not
worth even at current values because their core
business and operations were premised on cheap
credit and were therefore highly geared! These
companies are in debt to their eyeballs!
They are insolvent, bankrupt!
Try as hard, the Fed and the Treasury will not be
able to engineer a stock rally back to 14,000
points. And even if they could, it does not follow
that the prices of the shares of specific
companies would return to its previous
high. In the case of Citigroup back to $200 per
share!
There is no way in the next 3 to 5 years for
companies whose businesses have collapsed to be
able to recover fast enough and to be profitable
enough to justify a market value of at least 50
per cent of its previous high. In the case of
Citigroup, back up to $100.
That is an example in the financial sector.
In the manufacturing sector, an outfit like
General Motors will take at least a decade to
recover. Then there are those companies which have
out-sourced and or re-located overseas. To restart
local production again would take time and vast
amount of credit. But would they be competitive,
given cheaper cost of production elsewhere?
Corporate America is shutting down.
Stimulus and pump priming will not solve this huge
problem.
Millions played at this casino using home equity.
Pension funds risked your retirement benefits
gambling at this casino and lost. Leveraging, 10,
20 or even 30 times was the norm. There is no
money left in the kitty!
Quantity easing or printing money will not solve
the problem, because a company's value and market
capitalization can only be enhanced through actual
production of goods and services. But the Western
economies in the last twenty years were skewed
towards consumption and the availability of cheap
credit.
Applying common sense, what was missing was the
creation of surplus value, which is the result of
efficient production, and savings which in turn
provide the essential capital for more production
and savings.
Nothing illustrates this problem better than the
case of a farmer who stops farming because he had
so much cheap credit, that he stopped farming. He
could now easily purchase all he needed, and
earned five times more gambling in the stock
market casino than he would earn from farming. He
mortgaged his farm to secure the borrowings. He
lived and consumed like the rich and famous!
When the casino collapsed, he could not maintain
the lifestyle and had to resort to selling
heirlooms to survive.
Until and unless the farmer starts farming and
pays off his debts, he would not be able to
accumulate sufficient capital to resume what was
once a profitable business.
In short, the farmer like all the millions of
gamblers who have been ensnared by the global
casino, are now in the debt trap and being slowly
dragged down to the bottom of the lake!
Therefore, pumping hundreds of billions to the
banks will not solve the problem.
You can bet your last dollar that when millions
are caught in the debt trap and there is no way
out, and they see billions been given to the Wall
Street fat cats, lynching parties will be the
order of the day!
The Count Down has started.
