Its All About Debt

The global debt situation is steadily rising to the tipping point. Not only do we see individuals with unsustainable levels of borrowing, but corporations, municipalities, states and even nations.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said he expects more U.S. municipalities to declare bankruptcy and urged caution when investing in the $2.9 trillion public-debt market.

“There have been six or seven municipal bankruptcies already,” Dimon, 54, said yesterday at his company’s annual health-care conference in San Francisco. “I think unfortunately you will see more.”
Cities including Detroit and Harrisburg, Pennsylvania, have raised the prospect of bankruptcy.

Republicans are trying on for size the possibility of actually saying no to a pending request from the Obama administration to raise the nation’s debt ceiling, despite warnings of an economic “catastrophe” worse than the Panic of 2008 if no action is taken.

The idea is gaining momentum and sets up a huge fight and a potential government shutdown. It will also prove embarrassing for Obama to have the discussion about rejecting the increase while the leader of America’s biggest creditor, China, is in town for a state visit.
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Or we could also make the biggest banks smaller -- ideally, small enough to fail. This was the proposal of the Brown-Kaufman amendment to Dodd-Frank, which died on the Senate floor, largely because of opposition from Geithner and the Treasury Department. So we’ll do nothing, it seems, except let these massive banks become bigger and even less well managed.

Until next time, the people who run the country will again face the same choice as in November 2008: provide an unsavory bailout for management, shareholders and creditors that rewards failure and stupidity, or run the risk of causing a second Great Depression.

If the big banks get large enough, we’ll become like Ireland today -- saving those institutions will ruin us fiscally, destroy the dollar as a haven currency, and end financial life as we know it.

For many, Jay Peers is the $80-million mystery man.

To hundreds of investors across Alberta and B.C., some of whom poured their life savings into Federal Mortgage Corp. (FMC) Ltd., Peers’s Edmonton-based mortgage firm, he was for years a trusted adviser, even a close friend.
For years, the strategy seemed to work. “Typically he offered a rate of return of around 10 per cent, and up until this last year we’ve always got our money out, with the agreed interest,” says Kelly.
Most were asking the same key questions: How could FMC, a company with $46.4 million of liabilities according to filings with PWC, now have less than $12 million of assets? And how could PFK, with liabilities of $46.3 million, show total assets of just $2.9 million, leaving the two companies with a deficiency of nearly $80 million?

The last quote is an interesting study in human greed. Just like Bernie Madoff's ponzi scheme, the scheme in Edmonton operated well until it ran out of greater fools. The promised returns were not sustainable and when the assets were examined closely, the value just was not there.
Like all ponzi schemes, they can continue for some time until the truth is revealed the the scheme collapses under the weight of its own deceit.  The greatest of all ponzi schemes, fiat currencies, have yet to completely unravel.
Yes, inflation can erode their purchasing power, and has done that for years, but when the right conditions develop, as they have over the past few years, the collapse could be quite abrupt.  With sovereign debts reaching to the 80, 90, 100% levels of GDP and beyond in developed nations with their expensive, unsustainable social welfare systems, Western nations are living on borrowed time.
Soon we will see the full manifestation of ponzi behavior with major currencies.
I anticipate that the British Pound, Japanese Yen, Euro, and eventually the US dollar will be devalued.
When the currency crisis hits, the elite of the world will likely attempt to foist their hare-brained Special Drawing Rights (SDR) as an alternative to the dollar as reserve currency.  I will address SDRs in a future post.
When the currency collapse will come is unknown.  What is known is the inevitability of the outcome based on our current trajectory.  This is why I favor gold and hard assets, because it ultimately is about the debt (which is borrowing from future earnings) at every level of society.  Eventually, we will run out of other people's money.


  1. Even "Doc Doom" Marc Faber is on US, Europe bandwagon now

  2. Yes, Anonymous, and when the last bear becomes bullish on equities, then it is time to be very cautious. To date all the QE and accomodative interest rates have generated hot money flows to equities. I wonder how long this can continue, as the bond market is acting increasingly unhappy about all this debt.

  3. PW,

    Lets say if the market starts to rollover (for which I ran some risk analysis), then your gold positions has higher probability of going down in value. You are sort of hedged(unknowingly) assuming you open short positions else it will be ironic after all these years of sky is falling and you don't have anything to cover yourself.

    As I see my profits rise on gold(shorts) positions, more than that i get the satisfaction of being right side when majority of them is on other side :-)


  4. California governor declares fiscal emergency

    Hot of the Press PW


  5. You may be right to short GLD here Walter. For myself, much of my gold is held in bullion so I care little whether the market drops $100 or $200, as the long term trend is up. Of course if Benny "gets religion", stops printing money and raises the overnight rate, we could see bullion drop substantially. But that seems quite unlikely to me.

  6. Thanks for the note Bill. There are several states that are quickly approaching insolvency which will happen as soon as 2012. The situation of some Canadian provinces is even worse - Ontario and Quebec come to mind, but that has received little press to date.


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