Sunday, January 31, 2016

Globalization Is Insolvent

Bernie Madoff is wondering why he's the one in jail

Central Bankers don't understand the difference between solvency and liquidity. Solvency implies the ability of a borrower to self-service their debt, whereas liquidity is merely additional financing. Since 2008, Central Banks have papered over insolvency with liquidity under the assumption that all borrowers have equal access to credit markets. Which is asinine of course. Already, marginal borrowers are facing higher capital costs in areas such as the Energy sector, M&A, IPOs, stock buybacks, debt-funded dividends, and marginal sovereign governments. 

Globalization is inherently insolvent. It places production in the cheapest locales which have no spending power, and it places "consumption" in the developed world which face ever-rising unemployment. The entire Ponzi scheme is brokered by debt. The reason why developed nations have the ability to lower interest rates to 0% and print money, is because they are locked in an inexorable state of deflation. Meaning their output gaps are large and growing. Too little money is chasing too many goods. They're going out of business slowly but surely. Whatever job creation they've had since 2008 was merely debt funded via colossal doses of Fiscal stimulus - meaning this "growth" is ephemeral. Once the economy slides into recession, these deficits will no longer be stimulative and the capacity for additional borrowing will be gone. As it was with the Bush fake recovery, the McJobs will disappear within months. Keynes never said anything about growing the economy forever using Ponzi borrowing. Deficits were intended to be counter-cyclical to alleviate poverty, not pro-secular to fund fake "growth". He also didn't recommend "Keynesian" military blunders and massive tax cuts for money heading to the Cayman Islands. For some reason he didn't recommend printing money to buy stocks while the economy is outsourced. In other words, he didn't predict there would be so many idiots in the future.  

Central banks are the biggest Ponzi schemers in the history of the world, they make Bernie Madoff look like a rank amateur. The margin call for insolvency is already underway featuring receding liquidity and capital access for marginal borrowers. Once the weakest dominoes fall, then the capital markets will slam shut overnight locking out those entities that need continual access to capital markets to rollover their debts. Which includes almost every sovereign nation on the planet. 

You know you're a Ponzi borrower when, you need continual access to credit markets to service your debt:
Oct. 15, 2015
Treasury Secretary, Jack Lew, sent this letter to Congress informing them that without further borrowing (higher debt limit), the U.S. would be in default within days...

"Based on our best and most recent information, we now estimate that extraordinary measures will be exhausted no later than Tuesday, November 3.  At that point, we expect Treasury would be left with less than $30 billion to meet all of the nation’s commitments—an amount far short of net expenditures on certain days, which can be as high as $60 billion."

I call this self-imposed default, because in this case it's not the capital markets imposing the borrowing restriction. After all, the U.S. dollar is the primary reserve currency, therefore the rest of the world finances U.S. deficits via their dollar currency reserves. I only offer this to say that the U.S. is the largest Ponzi borrower in human history. It won't be the first to default, however other nations are far less secure in their ability to secure financing through all economic and financial "conditions".

Central Banking Bernie Madoffs didn't get the memo, because they're really not that bright after all. They'll be the last to figure out that they're Globalization's hangman, and the noose is tight. 0% poverty capital was a Faustian Bargain and the bill is due.