A European perspective on the global financial situation

Another perspective on the global financial situation, this one from Egon von Greyerz of Matterhorn Asset Management, a Swiss asset management firm with an emphasis in precious metals:

Spring is here and optimism is creeping back into the world economy. In this newsletter we will discuss why there will be a long time before the fat lady will sing (for explanation see Wikipedia). In our view we are still in the first act of three in a drama, the outcome of which will dwarf the most tragic of Wagner’s operas.

In our January 2009 Newsletter we forecast that there would be a correction up in the US stockmarket similar to 1930 when the market went up 50% from the low and then declined by a total of 90% and resulted in a depression. None of the fundamentals have changed and we are going to see the most horrendous hyperinflationary depression that the world has experienced for at least 200 years. It will be worse than the 1930’s because the world is now totally interconnected both financially and economically and because there has never been in history a worldwide asset bubble and credit bubble of this magnitude .

“There can be no other criterion, no other standard than gold. Yes, gold which never changes, which can be turned into ingots bars, coins, which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par exellence”
Charles de Gaulle

THE US GOVERNMENT HAS LOST ALL CONTROL

The US Government is not running the country. It is running around like a headless chicken reacting to events and firefighting. It doesn’t have a cohesive or proactive plan how to deal the biggest financial crisis that the world has ever experienced. So it hasn’t taken a single measure that could solve the crisis. The only thing it knows is to print money. The US Government doesn’t understand that running the printing presses ever faster can never be a solution to a problem that was caused by excessive credit and deficit spending.

Wall Street is in control

All reactive decisions taken by the Government are governed by Wall Street who are more in control than the Government. Wall Street understands the problem much better since they are the principal beneficiaries of the current financial crisis. The crisis was created by the loose monetary policy of the US Government. Wall Street took advantage and exacerbated the problem by issuing unlimited amounts of toxic debt and derivatives. Wall Street obviously had the total blessing of Government which benefited greatly from political donations and the perceived prosperity that the credit bubble created. So not only did Wall Street make immoral amounts of money during the credit bubble but they are now the main beneficiaries of the Governments money printing. So far the US Government has lent, invested or committed $ 13 trillion since the crisis started in 2007. The majority of these funds are being used to save the financial system.

Wall Street by, being too big to fail, has created the perfect situation for itself. Losses are being socialised and absorbed by the Government and profits are privatised. So whilst the economy as a whole is suffering greatly due to financial crisis, most of the financial sector is continuing to prosper. In the medium term such unfair inequality will have political and social consequences.
What the US Government doesn’t understand is that directing virtually all their rescue efforts to Wall Street is not going to solve the problem. The Nobel Prize winning economist Joseph Stiglitz said in a recent interview that the bank rescue efforts will probably fail because the programs have been designed to help Wall Street rather than to create a viable financial system. Stiglitz went on to say: “the people who designed the plans are either in the pockets of the banks or incompetent”.

US debt growing exponentially

The US Federal debt in 2009 is likely to grow by at least $2 trillion and reach 100% of and GDP at around $13 trillion. In 1929 Federal debt was only 15% of GDP! Also in 1929 the US was a creditor nation as against today when the US can only survive due to its foreign creditors. In 1929 total US debt (private, commercial, state, federal, etc.) was 170% of GDP. In 1932-3 it reached 260%. In 2009 total US debt to GDP (excluding unfunded liabilites of circa $ 60 trillion) will be around 425%. Before this crisis is over this percentage will be significantly higher and possible even exponentially higher.

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What is important to understand is that the US and the rest of the world is entering this crisis in a much worse position than in the 1930’s. This is one of the reasons why the current crisis will be much worse. But it will also be worse because the whole world is in a similar situation which is unprecedented in world history. What makes this crisis totally insoluble is the toxic debt and the derivatives outstanding of over $1 quadrillion. We have in the last few years consistently stated that a major part of these derivatives is worthless. Fudging the valuation methods of the derivatives is not going to solve the problem. at best it will defer the eventual collapse for a few months. ... [some formatting and emphasis omitted]

Read the rest here. An interesting read.