Archive for the ‘coolest guy planet’ Category
Coolest guy on the Planet – addicted to money
Part 2 of the TV documentary ” Addicted to Money” is produced by Andrew Ogilvie, directed by Simon Nasht and presented by Irish economist David McWilliams. It has been shown on the ABC and I have found it very interesting as it gives a good insight into how and why the economy collapsed in 2007. Below is my summary of the events.
The economy has just had the equivalent of a heart attack and trillions of dollars has been pumped into it to stimulate it. For the last 20 years our economy has been in the largest boom. Once the credit dries up the market turns from greed into fear. The cash was sucked out of the markets very quickly. We now need a new understanding where we are heading. Some are weathering the storm better than others. In Ireland the economy is busted, undergoing the sharpest collapse on the globe. It’s strategy of offering low tax’s to foreign companies so they would relocate to Ireland. Now this strategy is working against them as the companies that did move there are now moving to cheaper locations.
Despite seeing some green shoots of recovery appearing, we would have to expect there would be aftershocks from a quake of this magnitude. Since this crisis started $50 Trillion has been wiped off global wealth. That is the equivalent of the US, China, Russia, Europe and Brazil closing down for one year and doing nothing.
What started as a remote crisis in a far away financial sector. In the developing world, 100million people have been plunged into poverty. Iceland was the richest countries in the world and it’s 300,000 people had the best standard of living on the planet before the Global Financial crisis. Now they are in economic ruin. Iceland is bankrupt. The value of homes and pensions have been wiped out. Iceland’s problems were caused by a group called “The new Vikings”, Entrepreneurs who took over the banks with the promise of revolutionizing the countries financial sector. They borrowed vast amounts of money in the delusional belief they could transform a tiny nation into an economic power house. International banks lent large amounts of money to these inexperienced Icelanders. “They had banks, insurance companies and media, they borrowed a lot of money and went on a shopping spree.” Easy credit fueled the free for all. The country fell apart. Iceland’s prime minister went on TV to call for calm. The international banks will squeeze Iceland hard.
Iceland has another unique story. This is more than the the story of Icelands demise. The road to ruin of all of us can be traced to one small square in an Iceland town. It was there 1986 that US president Ronald Regan and Russian leader Mickhail Gorbachev held a historic summit that began unravelling the post war system. This was the begining of the end of the cold war and with it the end of Communisim. In the same square stands a glittering prize, a brand new office building, the largest in Iceland, buit at the height of the economic boom, it is empty. Also in the same square is a bank building called Kaupbing that was crutial in the story of the collapse of the financial markets. This bank borrowed 5 times the GDP of Iceland and when they collapsed the ecomony in Iceland collapsed but also it was the end of the perception that financial markets are always right. It’s collapse triggered the selling of bank shares globally. The irony is that in the one small square in an Irish town is the end of Communism in one building and in another building the start of the end of Capitalism as we know it.
Globalization means that even a tiny nation can bring the entire system down. All roads lead to China, where the official figures say that 100,000 factories have closed and 10Million people have lost their jobs, however it seems that the real figures are almost twice as bad. Over the last 20 years the Southern Cities of China have only known the boom years of growth. Fishing villages were converted to trading ports. When the GFC hit, World trade came to a halt, container ships dropped anchor and lay stationery so shipping companies gave business away. Millions of peasant workers have been forced to return to their villiges to work the land and wait out the downturn. If this crisis goes on too long, then unemployed peasants and students threaten China’s stability.
Australia is doing okay with the mining boom as long as China is continues the demand. The real legacy of this crisis is only just beginning there has been a volcanic shift in world power. The aftershocks will be felt for years to come. China’s insatial appetite for resources is driving a never ending boom. for years China was prepared to pay almost any price to secure supply, but not anymore. Mining companies are finding a newly aggressive China wanting to buy these mines rather than just doing business with them. The game is up for Western Capitalism. China has been on a massive buying spree for mining and energy companies. China is after all a party state dictatorship armed with a giant cheque book.
Before the collapse Australia’s iron ore headed by rail then ships to China to be turned into steel. but now with demand uncertain, it has been stockpiled into ever growing mountains. In Ningbo China, right next door to the port a brand new privately owned steel mill was opened just as the recession struck. However the government were not happy with the owners so they took over the mill that has been running at half speed. China is taking back strategic industries, reversing decades of reforms.
The financial crisis has exposed something more fundamental than just a credit crunch, it has revealed a shift in the way our world works. China is firmly in it’s ascendancy, the State is back in the driving seat and many centres of power that have ruled for the past 20 years are now threatened. The USA is going to feel this more than anywhere else. China has money in the bank whereas the US only has a credit card. The US government has spent trillions of dollars bailing out busted banks. The figures are huge, the US has committed to spening US$12 trillion in all.
The nine biggest wall street banks lost nearly $100 billion in 2008 yet they received more than $175 billion in government aid. These banks still paid employees $33 billion in BONUSES. One in every three dollars went to these banks as pure subsity, a GIFT. This is taxpayers money. The banks threat was bail us out or the way of life that you understand will be gone! “It’s a hostage situation” Where will the US get all of this money?
This is where the new economy gets really weird, because the bailouts take us back to the villages in China. America’s financial survival depends on blackmailing some of the poorest people in the world. The average worker is earning about US$7 per week but saving 50% of it and it is these dollars that have been used to bail out the US banks. China fueled America’s consumer boom and now it has so much invested in the US economy it risks losing it all, if it doesn’t keep underwriting US government debt. China does not want to stop lending to the US, because if it did stop lending, it would not only lose a customer but it would be left holding the bag of worthless pieces of paper called US dollars. It is China’s emerging middle class that has the most to lose, they are being held hostage to the bail out economy.
China is the number one holder of US bonds in the world. China and America are locked in an unsustainable embrace, with each side in fear of the other side making a sudden move. So the big question is should China continue to lend money to the US in the hope that the US economy will recover? Or should it change it’s strategy and spread it’s wealth around throughout the China countryside?
Whichever way they go, the old status quo has gone forever. Will China say No to lending money to the US?
presenter, David McWilliams makes the very real point.
“In the West, the worst thing has just happened. The greedy banks made all the money and then when they lost it they went to their politician mates and asked to be bailed out. The governments bailed out the richest people in our countries using the taxes from the middle class and the extremely poor.”
DEBT DEFAULT……..There is noway the US can pay back the money that has borrowed!
Really the only question is what form does the Debt Default take? whether it is in the form of Official or Inflationary default. It is physically impossible for the US to pay off the debt, especially since the amount is getting bigger by the day and the worse the economy gets the more the government borrows.
America can not openly admit it will default, it will just keep printing more money!
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Coolest Guy On the Planet – Easy Credit
The TV documentary ” Addicted to Money” is produced by Andrew Ogilvie, directed by Simon Nasht and presented by Irish economist David McWilliams. It has been shown on the ABC and I have found it very interesting as it gives a good insight into how and why the economy collapsed in 2007. Below is a summary of the events.
In 1971 The US Government and Richard Nixon convinced the world to convert from the gold backed standard to paper money. The credit bubble was born and would come to bite us hard in 2007 when the Wall St Bankers came close to bringing the global economy down. Trillions of dollars have been wiped off the balance sheet.
When the Berlin wall came down in 1989, it was the end of Communism and Capitalism had triumphed, the cold war was over and the free market was the winner. A new mindset was created and governments moved out of the way of Capitalism. China and India transformed into large corporations and overnight there were billions of new players (consumers) in the free trade game. It didn’t need much regulation as the rules were simple, prosperity would build on to more prosperity. The consumer could borrow as much money as they wanted and invest those borrowing and the markets would rise and the markets would boom and everyone would benefit. This did not happen!
Lehman Brothers was the first to collapse. Easy Credit made a few people increadebly wealthy. Everyone made profits, the economy only went up. Easy credit made people manic, we went shopping, laying down the plastic credit card for the quick fix. 5 Billion credit cards were distributed to people that in most cases were given to people that could not pay the money back. Everyone was offered a credit card, school children, unemployed, etc. Credit card lending was more profitable by double than any other banking activity. At first everyone felt they could control this easy credit drug, we were invincible, the good times were in full swing.
On the eve of the economic meltdown in 2007 the German bank Hypo did a deal to buy the Irish Depfa bank for 5 Billion euros. Hypo did not know that Depfa’s profits were built on risky derivatives that turned out to be bad debts and Depfa was ruined. This triggered the largest banking collapse in Germany since the 1930’s.
People became addicted to paper money. Millions of people have lost a lot of money, their retirement funds, they have lost jobs, houses and other assets. We built an entire economy on a lie known as “Easy Credit”.
Our savings rate was zer0 in the US, people were spending more than they earned. It was a time bomb. It all started innocently, we all love the gadgets and toys. The trouble is we wanted it all now.
The suburbs became a neighborhood arms race, not only keep up with the Jones but get the next item first, large screen TV’s, new cars and bigger and better homes. Huge debts that could not be paid back. Cheap money for everything.
The new Ideology was how much money we could earn and spend as long as we could get our hands on the CASH.
EASY CREDIT – Buy now and pay later
The ones that benefited were the banks, they pushed the easy credit onto everyone, they have branches on every street corner. The criteria were loose and the bank managers became sales driven to get the cash out onto the street, into the hands of consumers so they could go on spending sprees.
Where did all this money come from? The flood of money came from the Nations of savers, Japan, The Middle East, Germany and China. On average it is reported that the Chinese people save nearly 50% of their income. Our banks took this stockpile of savings and distributed it to us in the form of easy credit.
It took 300 years for the world to save US$36 Trillion, but it in the first few years of this decade it doubled to US$72 Trillion. This is more money than we all spend in a year. This money was looking for a home. September 11, 2001 terrorism hit America and the US economy was starting to stall, the then treasurer Allan Greenspan, cut interest rates to 1% to stimulate the economy. This was the lowest interest rate for 50 years.
1% Interest is virtually “free money” and the banks needed to give it to everybody. Cheap Money = Easy Credit, this is the making of the bubble economy. Property prices increased as everybody became a home owner and/or invested in multiple properties.
The economic boom was in full flight, the property and share markets more than doubled since Y2K, however household savings were going in the other direction and wages were stagnating. These were the warning signs that someting was wrong, but we were all to wrapped up in it to see the obvious.
The banks took the saving Nations money and loaned it to the us and at the same time they applied a new technique called Derivatives. Simply put, derivatives are packets of debt made up from Mortgages that are payments spread out over time, such as House, Car and Credit Cards then they were bundled up and given the highest credit rating of “AAA, the gold standard” and then sold to investors. By 2008 the Derivatives market had reached US$683 Trillion which was 10 times the global stock market value. During the frenzy, there was a real lack of accountability as there was so much pressure to get the high volumes of deals done as the amount of money being made was huge.
The banks were bundling safe loans with “Sub Prime Mortgages” and there was no way the investor knew the real risk. These Derivatives were sold and then re-sold, everytime the middleman would take his cut, it was virtually a money tree.
Las Vegas, was considered the hottest investment opportunity on the planet during the early 2000’s. It was definitely the fastest growing state in the USA. This is an example of the now infamous “Sub Prime Mortgages”, they were a disaster waiting to happen. These loans were pushed onto people that could not afford them or did not have a job, so it should come a no surprise that they were unable to pay the loans back and therefore the only option was for them to default on the loan.
Many investors were now unwarily purchasing the most risky loans available known as unregistered “Credit default swap”. Think of a Credit default swap as an insurance contract on a company, if the company goes into default the investor gets paid off. But if the insurance company goes down then the investor loses his money 100%. During the economic boom this risk was unthinkable, let the good time roll.
Credit rating agencies who’s duty it is to warn investors of dangers were paid by the investment banks, so after rating the sub prime debt as “AAA”they were compromised. Now the general public, and our retirement funds were enticed by these gold standard investments and lead to the slaughter.
On the 28th April 2004 the banks sealed our fate. Since the 1930’s there had been a regulation that required the banks to hold a reserve of cash to cover riskier loans. At this meeting of the US regulator, the Securities and Exchange commission, that lasted less than 60 minutes, the world economic system changed forever. The meeting was lead by Goldman Sachs boss and now Treasury Secretary, Henry Paulson. The banks argued that restraints on their borrowing should be lifted and that they should be allowed to judge risks wisely. The people in this meeting stood to gain financially from the changing on the rules. At this point the banks have taken over control. History now tells us they were wrong and their gambling did not pay off instead it has caused mass hardship. The real kicker is that when they got into trouble, by their own doing, the taxpayer bailed them out and the executives kept all of the bonus money they had received. During 2005 and 2007, it has been reported that the seven largest US banks paid their executives US$95 Billion.
So when the easy credit comes to an end because everyone is in default of their loans, the outcome of this Economic collapse and Counties fail, banks go to the wall & currencies collapse. Right now there is a large pool of toxic debt owned by pension funds and banks.
I will discuss easy credit again in a later post, but until then think about this. The US has been printing money faster than ever before, if you have been reading my other posts you will know that to print money all they have to do is enter a one followed by many zero’ s into a computer, therefore the effects are instantaneous, there is no lead time for the money to hit the streets. How can the US pay back all of this debt??
The real question is, If it can’t pay back the debt when will they go into default?
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