The sequence of global insolvency begins

[GliderGuider]

The sequence of global insolvency begins

Contrary to what political leaders and their central bankers seem to believe worldwide, the problem of liquidity that they are striving to solve by means of historic interest rate drops and unlimited money creation, is not a cause but a consequence of the current crisis. It is in fact a problem of solvency which is digging « black holes » where liquidities disappear, whether we call these holes bank balance sheets (1), household debt (2), corporate bankruptcies or public deficits. In consideration of the fact that a conservative estimation of these “ghost-assets” reaches already USD 30,000-billion (3), our team considers that the world is now facing a situation of general insolvency affecting in the first place the most indebted countries and organizations (public or private) and/or those depending most on financial services.

The difference between a crisis of liquidity and a crisis of solvency can appear rather technical and in the end not very decisive concerning the evolution of the current crisis. However it is not a simple academic dispute; indeed, according to the answer to that question, the actions taken by governments and central banks will either be useful or utterly useless, if not dangerous.

A simple example can help to understand what is at stake. If you meet a temporary problem of cash, and if your bank or your family agrees to lend you the money you need to cross over that difficult path, their effort is mutually beneficial. Indeed, you can resume your activity, you can pay your employees and yourself, your bank or your family get their money back (with an interest in the case of the bank), and the economy in general benefited from a positive contribution. But if your problem is not due to a question of cash-flow but to the fact that your activity has ceased to be profitable and will never be again because of new economic conditions, then the effort made by your bank or family becomes all the more dangerous that it was substantial. Indeed, in all likelihood, your first call for funds will soon be followed by more calls, always matched with promises (honest ones we suppose) that difficult times are about to be over. The more your bank or your family has lent you (and therefore the more it would lose if your activity is stopped) the more willing they will be to continue helping you. However if the situation worsens, and it will if it comes from a problem of profitability, there is a moment when the limits are reached: on the one hand, your bank will decide that there is more to lose in keeping supporting you than in letting you down; on the other hand, your family ends up with no money left because you have siphoned its entire savings. Then it appears clearly to everyone not only that you are insolvent or bankrupt, but that you dragged down with you your family or your bank (4). You have thus dealt a severe blow on the economy around you, including on your close relatives (5). It is important to highlight the fact that all this could take place in all sincerity because you were not aware of the impact on your activity of a sudden change in the economic context disrupting the conditions of your profitability.

(T)his simple example illustrates perfectly the situation prevailing today throughout the entire global financial system, a large part of the world economy and all the economic players (including States) who based their growth on debt in the past years. The crisis translates and magnifies a problem of global insolvency. The world is becoming aware of the fact that it is a lot poorer than it used to believe in the last decade. And 2009 is the year when all the economic players must try to assess their real level of solvency, knowing that many assets are still losing value. Moreover a growing number of investors no longer trust the traditional instruments and indicators of measurement. Quoting agencies have lost all credibility. The US Dollar is just a fiction of international monetary unit and many countries are striving to get away from it as quickly as possible (6). Thus, quite rightly, the entire financial sphere is suspected of being a giant black hole.

According to LEAP/E2020, the trend is clear: the sequence that has begun this year is a sequence of global insolvency.

So, will we see a national bankruptcy somewhere in the world in 2009? Will the movers and shakers of the world financial system admit it if it happens? Or will they try to keep the lid on at all costs to prevent a failure cascade, as they did by not permitting Bear Stearns to go bankrupt? Would such a subterfuge perhaps be the right thing to do for the sake of the innocents of the world?

2009 promises to be a true "annus horribilis".

[OnceUponTimeOnTheNet]

1. Rec. nt

[marketcrazy1]

2. and so it begins

10,9,8,7,6,5,4,3,2,1...................... BOOM!!!!!

[Possumpoint]

3. I Doubt

that there will be an admission of national bankruptcy in the first year of the Obama Administration. There is an admitted willingness to throw whatever money they can lay their hands on, borrowed or printed, as a show of doing something to solve the financial problems the United States faces. The state of bankruptcy may already exist or be very close but until forced, no politician will admit it occurred on their watch. By bankruptcy I mean the debt level has reached a point where it cannot be repaid.

How will all of the money used be repaid? When and if we return to the "good times" and the economy is anticipated to grow at a rate of 2.3%, we won't even be able to pay the interest on the additional debts. Our children, grandchildren, etc. will suffer diminished lifestyles based on this debt load. Add on top of that the problems that being on the wrong side of the bell curve on oil will cause.

[marketcrazy1]

4. well we already had iceland,

very small country to be sure! ( test case? ) next will be an eastern euro country.

[FunkyLeprechaun]

5. No I think it'll probably be Ireland

It's already looking really bad at the moment.

[bhikkhu]

8. So far its been like an "all for one one for all" thing

When a crisis erupts on Wall Street and we have to do something, Europe and Asia react in concert to keep currencies and trade balanced; the same given a crisis in Beijing or the EU. I think the big picture and the big players are the problem, of course, but they may just have enough resources to prevent the collapse of "the center".

The smaller players, on the other hand, will probably be the ones to pay first. Ireland is probably small enough, as Iceland certainly was before.

[Festivito]

6. For four years we were propped on a Ponzi scheme, not realizing

we had less and less to fall back upon in case such a scheme failed.

Now it has failed. Here we go with it.

[Bigmack]

7. I think hear you saying

That this multi-billion....maybe soon to be several trillion - dollar bailout scheme is rather like pumping money into a buggy whip factory in 1920 - an inherently doomed to failure adventure trying to prop up fatally flawed, alas now inherently unstable, institutions? Ms Bigmack

[DemReadingDU]

9. I think that's it in a nutshell. n/t

[TomClash]

10. Duh

Assets are overvalued and overleveraged. No kidding.

[Joanne98]

11. NO to IMF restructing plans. If the IMF trys to get involved

there will be RIOTS in this country!

[GliderGuider]

12. It would be supremely ironic to see the IMF institute "structural adjustments" in the USA

:evilgrin:

[.... callchet ....]

13. If you expand the parameters in your example

you will see that the money is still there, just in different hands. Your resurrection of the " Jubilee " even make more sense now. Why have turmoil and suffering in one house when all you have to do is give the money back. It is just a point of selfishness that prevents giving the money back.

[.... callchet ....]

14. Give the money back !

[Cary]

15. "Activity has ceased to be profitable."

Meaning what? Consumers don't want it?

I'm not understanding this concept. Perhaps it can happen in the short run but in the long run, whatever that is, we still have not only more and more people but more and more people demanding a fair share of the goods and services we can produce. That is problematic in terms of our environment, given current technologies. However there really is only one hard and fast rule in economics and that is that everything changes.

The US dollar has always been "just a fiction". Money is not real, no matter what medium of exchange you use. Money is an abstraction and subject to supply and demand like anything else.

Current conditions are no more "permanent" than any other conditions have ever been "permanent".

[GliderGuider]

16. Think of it in terms of Ponzi schemes

Consider a “properly functioning” Ponzi scheme before it breaks down. There are two ways it can get into trouble.

The first way is a liquidity problem. In this case there are enough new investors to maintain its operation overall, but some large investor in the middle wants to redeem their holding. In that case the Ponzi operator can go to an external funding source and get a loan to pay out the investor and tide the system over the bump.

The bigger problem comes when the population of potential investors loses confidence in the scheme and don’t want to invest in it any more. That causes a crisis of solvency, since there isn’t enough money to maintain the normal operation of the system. In this case borrowing money won’t help, since there are no new investors (or not enough of them) coming in to service the loan.

This has nothing to do with the demand for goods and services, since in a Ponzi scheme like the modern financial system there are no real goods and services, just payouts that depend on a stream of new investors.

I agree that the only constant in life is change. It’s just that this time the change is going to be massive, it’s not being well foreseen by those in power, and the probability of “recovery” back to the business as usual we’ve grown accustomed to over the last century is very low.

[BeHereNow]

17. Holy shit. Thanks for posting this, I think...

Gold and silver are going to the moon.
Wish I had more of both.

BHN