- 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
- 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
- The bank is also in deep shits because there is no way
that they can recover the loan from selling the shares, which is worth
- 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
- 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
- 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
- The Count Down has started.
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