Last night, inspired by one of those rare friends that intuitively knows me so well, I re-watched a classic favourite film of mine, The Matrix. It was ground-breaking and ahead of its time, both in camera work and conceptual content. There are many iconic lines, one such line being: “You hear that Mr Anderson? That is the sound of inevitability.”
It’s the perfect quote for today’s piece. You see, in this morning’s Telegraph we read the following top news article:
“The economic outlook in Germany is deteriorating with alarming speed and any mistake by policy-makers could push the country into a full-blown slump, a leading economic institute has warned. “The danger of recession has increased markedly. It is a notably more critical picture than a month ago,” said the Macroeconomic Policy Institute (IMK) in Düsseldorf.
The IMK’s early warning indicator said the recession risk over the next three months has jumped suddenly to 32.4pc as trade tensions mount and liquidity ebbs away in the international financial system. This is higher than in March 2008 when the pre-Lehman storm clouds were gathering.” (The Telegraph, 17th April 2018)
Yet, the word “alarming”, “critical” and “suddenly” all need not really appear. That is because, to quote The Matrix, this is the sound of inevitability. Here are our 3 top reasons why our current financial system is bound to fail:
1. Banks and Bonds
In order to understand why we’re at risk of the financial system collapsing, you first need to understand how the global banking system works. Phoenix Capital neatly explain:
“When you or I buy an asset (say a house, or shares in a stock, or a Treasury bond), we do so because we’re looking to increase our wealth through either capital gains or through the income that asset will pay us in exchange for us parking our capital there. In simple terms, you’re putting/ lending your money somewhere (especially if you’re buying a bond) in the hope of increasing the value or your money.
This is not how banks work. When a bank buys something, especially a bond, it parks that bond on its balance sheet as an “asset.” It then lends money out against that asset. This in itself is not problematic except for the fact that the financial modelling of 99% of banks assumes that sovereign bonds are “risk-free.” Put another way, these models assume that the banks will always get their money back on 100 cents on the Dollar.
Yes, you read that correctly, despite the fact that world history is replete with examples of sovereign defaults (in the last 20 years alone we’ve seen more than 15 including countries as significant as Russia, Argentina, and Brazil), most banks assume that the sovereign bonds sitting on their balance sheets are risk free.”
I have written about Bonds before; many astute financial observes believe the collapse will begin here. The RT wrote in November 2017 that “Ten years after the 2008 financial crisis “very little has been really fixed,” and the next bubble is about to burst, says Bill Blain, a strategist at Mint Partners. According to Blain, this time the bond markets will trigger the mayhem.”
Keep an eye on the Bond market. Do a little research reading each week on this area to see how stretched the Bond bubble is becoming, and consider moving more of your money into physical precious metals accordingly.
2. Interest Rates with nowhere left to go
Never before have we lived in a time of such low, zero or even negative interest rates. This is a global phenomenon with no where left to go. But this has led central banks to become trapped by their own escape hatches, to an unprecedented extent:
“If [central banks] they raise rates to provide low-risk, high-yield returns to institutional owners, they will stifle the “recovery” and the asset bubbles that are dependent on unlimited liquidity and super-low interest rates.
But if they keep yields low, the only way institutional investors can earn the gains they need to survive is to pile into risk assets and hope the current bubbles will loft higher.
This traps the central banks in a strategy of pushing risk assets – already at nose-bleed valuations – ever higher, as any decline would crush the value of the collateral underpinning the titanic mountain of debt the system has created in the past eight years and hand institutional owners losses rather than gains.” (Peak Prosperity)
If I highlight the fact that this was written five months ago, it reinforces the reality that the above headline regarding the depth of the German financial crisis is nothing but a surprise.
Indeed, regardless of our politics and I do not know enough about him to comment, Ron Paul concluded that: “While it’s certainly high time to get back to normalized interest rates, after nearly a decade of near-zero rates the economy has gotten so used to the Fed’s easy money that returning to market discipline will expose the economy’s rotten fundamentals. Bad debts that weren’t liquidated after the last crisis were kept afloat with the Fed’s newly-created cheap money. New debts were taken on at the low-interest rates brought about by the Fed’s policies. But as interest rates rise in the coming months, those debts will be found to be unsustainable and we will see a repeat of 2008, but worse.”
Interestingly, although he is writing on the financial market his conclusion is paramount to a call to action on how to protect oneself: “I have always favoured gold, both as money and as an investment. Gold is the ultimate money, the ultimate safe asset, favoured by millions of people over thousands of years. There’s a reason central banks still hold on to their gold, because they know that when paper money and paper assets go bad, there’s nothing safer than having gold in your vault.
Gold maintains its purchasing power over time, and it even tends to go up in value when markets are crashing. Gold is the perfect safe haven to protect yourself against an economic collapse. By putting a portion of your savings into physical gold, you’ll have a cushion to protect yourself when your stocks or bonds lose their value. Don’t wait until the crash comes and you lose everything. Add a safe haven such as gold or silver to your portfolio before it’s too late.”
3. All Fiat Currencies Fail
This is a hard concept to wrap our heads around because all of us have only lived our own lifetimes, and for the under 30’s raised on instant credit and instant lifestyles, it is even more of an alien concept.
Yet, when it comes to every fiat currency, history clearly has one sound of inevitability; Collapse. This isn’t doom and gloom, just completely logical fact. Facts don’t react to our feelings, they stay facts, regardless of whether we emotionally agree with them or not:
“Some got there quickly, while others took a century or more. Regardless of how long it took, though, the seductive temptations allowed under a fiat monetary system eventually caught up with these governments, and their currencies went poof! You might suspect this happened only to third world countries. You’d be wrong. There was no discrimination as to the size or perceived stability of a nation’s economy; if the leaders abused their currency, the country paid the price.” (Truth is Reason)
And if the world reserve currency is the US Dollar, how is that fairing? That is really a rhetorical question. But just in case you’ve only recently joined the “woken up”:
“So, will a similar fate befall the U.S. dollar? The common denominator that led to the downfall of each currency above was Debt. With that in mind, consider the following: Morgan Stanley reported in 2009 that there’s “no historical precedent” for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. Our total debt now exceeds GDP by roughly 400%. Investment legend Marc Faber reports that once a country’s payments on debt exceed 30% of tax revenue, the currency is “done for.”
According to Zerohedge: “In simple terms, today we are facing a Crisis that is far, far worse than 2008. Before it ends, it is quite possible that we will see the entire Western Financial System collapse and a new system put into place. I want you to know that I do not use the words “systemic collapse” lightly. Indeed, I wish I wasn’t mentioning them now, but I’d be doing you a disservice not to bring them up because we’re well on our way towards it.”
I will leave you with a visual roll call of the currencies which have failed in the last 100 years or so, most of which have failed in the last 20 years. It’s quite sobering:
Yugoslavia – 10 billion dinar, 1993
Aire – 5 million zaires, 1992
Venezuela – 10,000 bolívares, 2002
Ukraine – 10,000 karbovantsiv, 1995
Turkey – 5 million lira, 1997
Russia – 10,000 rubles, 1992
Romania – 50,000 lei, 2001
Central Bank of China – 10,000 CGU, 1947
Peru – 100,000 intis, 1989
Nicaragua – 10 million córdobas, 1990
Hungary – 10 million pengo, 1945
Greece – 25,000 drachmas, 1943
Germany – 1 billion mark, 1923
Georgia – 1 million laris, 1994
Chile – 10,000 pesos, 1975
Brazil – 500 cruzeiros reais, 1993
Bosnia – 100 million dinar, 1993
Bolivia – 5 million pesos bolivianos, 1985
Belarus – 100,000 rubles, 1996
Argentina – 10,000 pesos argentinos, 1985
Angola – 500,000 kwanzas reajustados, 1995