Tag Archives: global debt

A 4,000 Year Old Lesson: Joseph & The Costs of A State Rescue

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Over the last 7 years we have watched the largest expansion of debt and the powers of central banks ever on record. Not a month goes by that I do not ponder how we could have surrendered so much authority to these entities.

McKinseyGlobal

After the Great Recession in 2008 one would have thought that we would have learned something about pouring trillions of cheap debt into highly leveraged financial deals as the “rescue” from the most recent financial collapse.
Yet the chart above from McKinsey Global Institute makes it clear that the financial wise men of modern finance only took us deeper into debt, making the entire global structure even more fragile.

So what could happen when we reach the bottom of the next global deflationary bust?

Rather than looking to the same group, drunk on the “eternal” riches of more power from more debt, let’s journey back almost 4,000 years to the Egyptians.

SenroswetI_Dynasty12_1961.1917

[Relief of Senwosret I, 12th Dynasty, 1961-1917 BC, The Metropolitan Museum of Art]

7 Years of Plenty, 7 Years of Famine

In the Hebrew writings of the Tanakh or Old Testament we find the story of Joseph and his interpretation of a dream by an Egyptian Pharaoh. The book of Genesis describes the dream’s meaning.

“That is the thing which I spoke unto Pharaoh: what God is about to do He hath shown unto Pharaoh. Behold, there come seven years of great plenty throughout all the land of Egypt. And there shall arise after them seven years of famine; and all the plenty shall be forgotten in the land of Egypt; and the famine shall consume the land; and the plenty shall not be known in the land by reason of that famine which followeth; for it shall be very grievous.” – Genesis 41: 28-31, A Hebrew –English Bible

Desert.Pyriamids

Whereas Joseph’s plan during the 7 years of plenty was for the Pharaoh to appoint overseers to collect 20% of the gain and store it up in the communities across Egypt in anticipation of the coming famine (Gen 41: 34-36), anyone looking at the actions of central bankers and government leaders since the Great Recession in 2008 can easily see that all “the grain” was used up and even more spent, as the public was lead to embrace the idea that the borrower is not the lender’s slave, but the basis of “experiencing” prosperity!

Famine? Pain? You must be joking; debt based money could always be created at a moments notice to overcome such obstacles, and without long term consequences. Right?

With global markets hitting record highs in 2014 and 2015, the real lesson we need to consider today, is what we could learn from the actions of the Egyptians and surrounding people as the famine changed their lives.

1) They first ran out of money to buy back the grain collected by the Pharaoh during the years of plenty.

“There was no food, however, in the whole region because the famine was severe; both Egypt and Canaan wasted away because of the famine. Joseph collected all the money that was to be found in Egypt and Canaan in payment for the grain they were buying, and he brought it to Pharaoh’s palace. When the money of the people of Egypt and Canaan was gone, all Egypt came to Joseph and said, ‘Give us food. Why should we die before your eyes? Our money is all gone.'” – Gen. 47: 13-15, NIV

As this headline from 2008 reminds us, our money today is really credit. When things get tough, credit tightens, meaning there is less available from the banks.

U.S. Banks Tighten Lending Standards, NY Times, January 7, 2008

2) As a solution to this financial crisis during the famine, Joseph established plan #2, and the people sold their livestock, or what we might see today as the businesses of the people.

“’Then bring your livestock,’ said Joseph. ‘I will sell you food in exchange for your livestock, since your money is gone.’ So they brought their livestock to Joseph, and he gave them food in exchange for their horses, their sheep and goats, their cattle and donkeys. And he brought them through that year with food in exchange for all their livestock.” – Gen. 47:16-17, NIV

CreditRiskMonitor_Dec15_BusinessRiskRising

While the Dow and S&P 500 stand at almost the same level they did when arriving here for the 1st time in history last December, giving the impression that American business is healthy, the chart above reflects the fact that the risk from bankruptcy has climbed for 2 years and is already at late 2008 levels (the sampling is based on 10,000 US businesses).

Clearly, the illusion from Wall Street is not reflecting the reality of Main Street. Based on the Wall Street view, we have not even started “the financial famine” yet.

But based on the rising risk of bankruptcies, the state will gain less and less from Main Street businesses in the period ahead. In fact, if more emphasis had been placed on start up and small businesses in the last 7 years, rather than pouring debt into larger global corporations so they could inflate their stock through constant buybacks, the economy would be healthier today. In other words, we would have had more stored up to cushion the severe slowdown that must come from all the money spent on the now even larger debt loads worldwide.

3) When the year was over, the people returned to “the state”, seeking another solution.

“When that year was over, they came to him the following year and said, ‘We cannot hide from our lord the fact that since our money is gone and our livestock belongs to you, there is nothing left for our lord except our bodies and our land. Why should we perish before your eyes—we and our land as well? Buy us and our land in exchange for food, and we with our land will be in bondage to Pharaoh. Give us seed so that we may live and not die, and that the land may not become desolate.’” – Gen. 47:18-19, NIV

4) And another solution to purchase food was found.

“So Joseph bought all the land in Egypt for Pharaoh. The Egyptians, one and all, sold their fields, because the famine was too severe for them. The land became Pharaoh’s, and Joseph reduced the people to servitude, from one end of Egypt to the other.

 

So Joseph bought all the land in Egypt for Pharaoh. The Egyptians, one and all, sold their fields, because the famine was too severe for them. The land became Pharaoh’s, and Joseph reduced the people to servitude, from one end of Egypt to the other.

 

Joseph said to the people, ‘Now that I have bought you and your land today for Pharaoh, here is seed for you so you can plant the ground. But when the crop comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and your households and your children.’” – Gen 47:20-24

Today, it is impossible for most Americans to consider being in a situation where even buying food would require selling assets and working in servitude to the state just to survive. Yet, whereas the average American spends approximately 6% of their budget today on food, the average Iranian, Indian, and Chinese spends about 25% on food, and the average Russian and Indonesian spends about 33%. For this reason, when their currencies plummet in value against the US dollar or other major currencies, it can place the people of those nations under extreme stress, and working under very harsh conditions are expected as part of surviving in that environment.

The US Spends Less on Food Than Any Other Country In The World, International Business Times, January 23, 2014

Food Prices in Russia Soar As Ruble Tumbles Further, The Moscow Times, Dec 16, 2014

Of course demographic changes like shown in the headline below remind Americans that finding money for some of our most basic needs is becoming more and more difficult.

Record 94,610,000 Americans Not In Labor Force, Breitbart, Oct 2, 2015

One of the most sobering documents I have examined in the 10 years of researching global markets and the global economy, is the US State Department’s annual Trafficking in Persons Report. As the global economy continues to slow from the largest and fastest increase of debt in world history, even more painful stories will follow. Labor conditions are already abominable in various nations around the world today, much like the sons of Israel experienced under the Egyptians a few centuries after Joseph had died. I hate to think how global working conditions could deteriorate even more.

Let’s return to the famine that struck Egypt and Canaan.

At the end of this period of time the people were now in bondage to “the state”. The people had sold everything to “the state” in order to buy food. Because they had food, “the state” had rescued them from the famine.

In Genesis 47:25, the people saw their current juncture as a good thing, much like the public at large has seen deep interest rate cuts and massive bailouts as policies that “returned things to normal”.

“’You have saved our lives,’ they said. ‘May we find favor in the eyes of our lord; we will be in bondage to Pharaoh.'”

The problem, like parts of today’s world, was that people had given up their money, their businesses, their private property, and agreed to work for the state, paying the Pharaoh 20% of what they earned and keeping the remaining 80% for their daily needs.

Happy Ending?

“No one was unhappy in my days, not even in the years of famine, for I had tilled all the fields of the Nome of Mah…thus I prolonged the life of its inhabitants and preserved the food which it produced.” – Ameni, a providential governor under Senwosret I

As anyone knows from reading the book of Genesis and Exodus, the descendants of Jacob (Israel)[Gen 35:10] prospered during the famine while raising their livestock in Goshen [Gen 45:1, 47:6,11, & 27] , land given them by Pharaoh, a few centuries later the Egyptians felt threatened by them, and work conditions for the descendants of Israel became very hard and like slaves.

“Now a new king arose over Egypt, who did not know Joseph. He said to his people, ‘Behold, the people of the sons of Israel are more and mightier than we. Come, let us deal wisely with them, or else they will multiply and in the event of war, they will also join themselves to those who hate us, and fight against us and depart from the land.’ So they appointed taskmasters over them to afflict them with hard labor. And they built for Pharaoh storage cities, Pithom and Raamses…. The Egyptians compelled the sons of Israel to labor rigorously; and they made their lives bitter with hard labor in mortar and bricks and at all kinds of labor in the field, all their labors which they rigorously imposed on them.” – Exodus 1: 8-11, 13-14, NASB

So with today’s financial bubbles starting to burst worldwide since 2014, while the “overseers” of modern finance continue promising even deeper negative interest rates or more intervention into our economic life and markets, we have come to a point in history where the “years of plenty” illusion is quickly running out of steam.

china-index

As the financial famine continues setting in, will we turn to answers outside the gods of modern Keynesian finance and unlimited debt solutions of the past? Once everyone knows we are at another major crisis, what will we be willing to sell or pledge to the state in order to stop the pain? As power centralizes at the global level, will we eventually say, “You saved our lives”? At what costs to us and future generations?

One World, One Bank, One Currency, Daily Reckoning, Addison Wiggins, Oct 1, 2014

 
In Joseph’s time the people came to see the Pharaoh and “the state” as the only solution to their situation. John’s writing in Revelations seems to reveal that the past could have a connection to the future.

“And he causes all, the small and the great, and the rich and the poor, and the free men and the slaves, to be given a mark on their right hand or on their forehead, and he provides that no one will be able to buy or to sell, except the one who has the mark, either the name of the beast or the number of his name.” – Revelations 13:16-17

Since 2008, the powers of central bankers and governments have only grown, thus whether seeking funds from the state through social safety nets or the greatest intervention by central banks into financial markets ever seen, we have already watched the public at large accept that this form of financial socialism has brought things back to “normal”.

However giving over so much power to this small group has reduced our motivation to seek solutions at the individual and local level. The national and global level has become the highest authority in the life of the people. Could this worldwide story be headed into a time of bondage as well?

 

A Skeptical Mind

 

 

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Optimism Didn’t Help Greeks or Chinese

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If you are reading this in 2024, you will wonder why we ignored so many warnings and so much history. Hopefully, this will help you understand 2015.

I am an American. In my country, nothing is sought more in our society than optimism. We buy books, go to seminars, and entertain ourselves in the pursuit of optimistic experiences. At first glance, this appears like a very good trend. Solomon wrote 3,000 years ago about the importance of hope and optimism when he stated, “A joyful heart is good medicine, but a broken spirit dries up the bones”.

But what if we are faced with world trends around us that can not be solved merely by the power of positive thinking. What if the fuel to this optimism, money, continues to move in a direction where there is less of it for everyone; either because of fewer jobs, or because we enter a period when financial assets deflate because creating trillions more in debt has reached its limits?

No matter how much our minds conceive and believe, we will have to live through a period with less, not more.

In the global financial world, there are two trends that continue warning us all that we are coming into such a period. Yet we seem so focused on the near term experience, that we even now fail to realize that the idea of “unlimited money” based on “unlimited debt” was never a sustainable path. Eventually, “all time high” stock headlines based on “all time low” borrowing costs must stop and change directions.

Google’s 16% Leap Lifts NASDAQ To New High, USA Today, 7/7/15

German Bund Yields Tumble Toward Zero Amid ECB Stimulus, Greece Jitters, WSJ, 4/16/15

 

Warning From the Top of the Financial World

BIS.Logo

Recently, the highest authority in the financial world, the Bank of International Settlements, released these comments in their 85th annual report on June 28th:

“Interest rates have never been so low for so long…Between December 2014 and end-May 2015, on average around $2 trillion in global long-term sovereign debt, much of it issued by euro area sovereigns, was trading at negative yields…. Such yields are unprecedented. Policy rates are even lower than at the peak of the Great Financial Crisis in both nominal and real terms…. There is something deeply troubling when the unthinkable threatens to become routine.

 

The economies hit by a balance sheet recession are still struggling to return to healthy expansion…

 

Domestic policy regimes have been too narrowly concerned with stabilizing short-term output and inflation and have lost sight of slower-moving but more costly financial booms and busts…Short term gain risks being bought at the cost of long – term pain.”[Bold my own]

Now I ask you, did that sound positive? Any student of market history, whether they are a curious teenager or global central banker, can learn about booms and busts dating back to the establishment of the Amsterdam Exchange in 1610, and the Dutch Tulip Bulb Mania that peaked in February 1637. The problem today is not a lack of information on history, but our desire to ignore it.

Moving on. Consider this news headline. Is it merely theatrics, or do the actual words from the BIS report reveal a landscape that is extremely high in risks to all investors….you know, something that would be considered “negative”.

 

The World Is Defenseless Against the New Financial Crisis, Warns BIS, UK Telegraph, 6/28/15

UKTelegraph_BISWarns_June28.15.

So why don’t more individuals, whether inside the financial industry or the public at large, discuss why governments reaching “lowest in history” borrowing costs alongside stock investors embracing “all time highs”, is not sustainable. Why are “bearish” market pundits, the highest authority in the global financial system, and history itself being ignored by the majority in 2015?

Easy. The experience of rising equity markets, and central planners intervening to make certain stocks “never” decline again, has created the illusion of ”all gains, no pain”. Is it that hard to see where this is going next?

2015-07-17_NASDAQ20.1

 

The Dam Story

In 2006, I read a book called Collapse: How Societies Choose to Fail or Succeed (2005) by Dr. Jared Diamond, Professor of Geology at UCLA. While his work is on systemic risks to the environment, I believe you will see how this story could apply to our human desire to have financial stability, even to the point of ignoring repeated systemic warnings that will bring changes for ALL of us.

Collapse_book“Consider a narrow river valley below a high dam, such that if the dam burst, the resulting flood of water would drown people for a considerable distance downstream. When attitude pollsters ask people downstream of the dam how concerned they are about the dam’s bursting, it’s not surprising that fear of a dam burst is lowest far downstream, and increases among residents increasingly close to the dam. Surprisingly though, after you get to just a few miles below the dam, where fear of the dam’s breaking is found to be the highest, the concern then falls off to zero as you approach closer to the dam! That is, the people living immediately under the dam, the ones most certain to be drowned in a dam burst, profess unconcern. That’s because of psychological denial: the only way of preserving one’s sanity while looking up every day at the dam is to deny the possibility that it could burst.

 

If something that you perceive arouses in you a painful emotion, you may subconsciously suppress or deny your perception in order to avoid the unbearable pain, even though the practical results of ignoring your perception may prove ultimately disastrous. The emotions most often responsible are terror, anxiety, and grief.” [pgs 435 & 436]

Is there any sign of a dam or two breaking in the financial world? Anyone keeping up with current developments in the world of money immediately brings to mind the recent stories on Greece and China.

TwoFlags.Greece.China

Let’s investigate these two stories; a lock down of a country’s banking system and wiping out 20% -35% of a nation’s stock wealth in less than 2 months.

In both cases, what has just financially hammered the lives of tens of millions of people, are stories where these same individuals had warnings for years, then months leading up to recent events.

 

Greeks Being Warned

Greek Bank Run Continues: Greek Domestic Deposits Lowest in Decade, Forbes, 5/30/15

“The standard view of the Greek debt crisis is that all everyone has to do is agree upon the reform program and that will be that. And that’s a reasonable enough view except that there’s one other thing that could happen. The Greek banks could run out of money….

Deposits at Greek banks are at their lowest level in more than 10 years amid broad concerns about the country’s economic prospects that have hammered shares in Greek lenders this year.”

 

Greeks Shocked; How Could This Happen?

Greek Banks Prepare to Plan To Raid Deposits to Avert Collapse, Financial Times, 7/4/15

“Greek banks are preparing contingency plans for a possible “bail-in” of depositors amid fears the country is heading for financial collapse, bankers and businesspeople with knowledge of the measures said on Friday.

The plans, which call for a “haircut” of at least 30 per cent on deposits above €8,000, sketch out an increasingly likely scenario for at least one bank, the sources said.

A Greek bail-in could resemble the rescue plan agreed by Cyprus in 2013, when customers’ funds were seized to shore up the banks, with a haircut imposed on uninsured deposits over €100,000.”

Greek Banks Set To Open Again on Monday – But ATM Limits To Stay, The Daily Express, 7/17/15

“The banks have been shut since June 29 after capital controls were put in place to stop the Greek financial institutions collapsing over fears that the country could crash out of the eurozone.

Cash points have been running with withdrawal limits of €60 and money cannot be transferred in or out of the country….

The bailout proposes Greek tax hikes, pension reforms and tighter supervision of the government’s finances in return for €86billion (£61bn) of cash.

The measures are more severe than those rejected by Greeks in a national referendum a little ever a week ago and condemn the country to years of economic woe.”

ATMLines

 

Chinese Being Warned

China Investors: Stock Market Fever, Financial Times, 4/10/15

“Retail money is pouring into tech st0cks and other ‘concepts’ = and the buoyant mood is spreading.

Sun Shuming could barely contain his joy. With one hand holding aloft a glass of champagne and the other making a thumbs-up sign, Mr. Sun beamed as a bank of cameraman snapped away on the floor of the Hong Kong exchange. Shares in GF Securities, the brokerage he runs, had just jumped 40 per cent within moments of going public on Friday morning.”

 
Chart Of the Day: Over 4 Million New Chinese Trading Accounts Opened Last Week, Zero Hedge, 4/28/15

ZH_ChinaBokerageAccounts.April2015

 

Chinese Shocked; How Could This Happen?

The Really Worrying Crisis is Happening in China, Not Greece, UK Telegraph,7/9/15

While all Western eyes remain firmly focused on Greece, a potentially much more significant financial crisis is developing on the other side of world. In some quarters, it’s already being called China’s 1929 – the year of the most infamous stock market crash in history and the start of the economic catastrophe of the Great Depression.

In any normal summer, a 30 percent fall in the Chinese stock market – a loss of value roughly equivalent to the UK’s entire economic output last year – after an ascent which had seen share prices more than double within the space of a year would have been front page news across the globe….

The parallels with 1929 are, on the face of it, uncanny. After more than a decade of frantic growth, extraordinary wealth creation and excess, both economies – America in 1929 and China today – are at roughly similar stages of economic development. Both these booms, moreover, are in part explained by extremely rapid credit growth. Indeed, China’s credit boom dwarfs that of even the “roaring Twenties”. Borrowed money, or margin investing, played a major role in both these outbreaks of speculative excess….

China Makes Selling for Big Investors Illegal, Zero Hedge, 7/8/15

Having corralled selling by the National Social Security fund earlier this week and after discouraging local reporters from mentioning selling in the press, China has now made it illegal for big investors to dump shares over the next six months.

ChinaInvestors_AfterCrash

 

A Lesson for Everyone, Whether Big Investor or Small Depositor

The answer is clear for everyone. We like our lives and world to be neat and orderly. We like to look ahead, and see a nothing on the tracks.

Yet, either from our own life, or that of others, we know this is not the real world. We know this is not what history teaches. Greece and China are merely part of a series of whistles being blown off in the distance, warning of changes to come.

Train.Orchard.JohnnyJones

We have watched as billions surpass trillions then top 200 trillion in global debt. As stocks and bonds have soared since 2008, central planning pundits have promised that by creating more pressure on the global system from rising debt levels, the dam was actually getting stronger. The 2008 “financial flood” that destroyed $60 trillion globally, well, those problems have been corrected.

A nation’s banking system being closed to its depositors and tens of millions of investors watching their stock holdings get cut 20-35% in the last 2 months are warning us that relying on a smooth impregnable global interconnected system to always be ready to support our plans in the future, is a totally fallacious idea.

There is no “hold on and eventually the world comes around to our desires”.

Whether cracks in the dam, or wealth in the electronic casino that can vanish by the trillions in weeks, when a system under enormous pressure finally breaks, it can prove very unforgiving.

DamBreaks

We have been here before. We would like to ignore painful money bedtime stories and the history we have already lived through. But even a search engine will not let us forget our past anymore.

Rush on Northern Rock Continues, BBC News, 9/15/07

“The rush of customers taking money out of Northern Rock continued for a second day on Saturday, amid concerns over its emergency Bank of England loan.
Banking sources suggest that on Friday alone clients pulled out £1bn – or 4-5% of retail deposits.”

“Do not store up for yourselves treasures on earth, where moths and rust destroy, and where thieves break in and steal. But store up for yourselves treasures in heaven, where neither moth nor rust destroys, and where thieves do not break in or steal; for where your treasure is, there your heart will be also.” – Matthew 6:19-21

 
“While they were saying, ‘Peace and safety!’, then destruction will come upon them suddenly like labor pains upon a woman with child, and they will not escape.” – I Thessalonians 5:3

A Curious Mind

 

 

 

 

 

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