Archive for January, 2009

Time to Freak Out

Wednesday, January 7th, 2009

I’m beginning to understand how it was that nothing was done about Hitler until it was too late. We are now experiencing, or about to experience, the end of the financial world as we know it. That’s just my opinion. I could be wrong. But, assuming I’m right, there is no respectable pundit, politician, economist, or even blogger, who is willing to say that. Saying it in public, even if it’s true, is a career-killer. It’s an opinion of the fringe, the nuts, which is exactly how Churchill was regarded with his freak out about the German threat. Only when it was obvious to everyone, i.e. too late, did Churchill get any respect.

Everyone is in debt, the federal government, the state governments, municipal governments, auto companies, home owners, credit card holders, pension funds, European governments, all governments in fact, except for maybe Saudi Arabia. We are all debtors. If you add up all of the governmental and personal debt in the U.S., it comes to something like $147,000 per person. We are bankrupt. The rest of the world is even more bankrupt than we are. U.S. Treasury bills are paying 0%, and people are snapping them up because it’s the safest place they can think of to stash their cash, except for burying gold bullion in the back yard.

This is not a sustainable situation. This is not just another recession that will be over a few months from now. This is the collapse of the global financial system. On the other side of this, whenever that comes to pass, the world will be a very different place.

How can everyone be in debt? Who are we in debt to? Money has been a fiction for a long time. Modern money exists as bits in a computer. It is created by borrowing and lending. When I get a $100,000 loan from the bank, the bank makes a bookkeeping entry that says I have $100,000 in my account. That money didn’t come from somewhere else. It was simply created out of nothing. That’s what money is. Theoretically there are some limits. A bank can only lend some multiple of its assets, but lately that multiple, for many financial institutions, has been 30 to 1, and things are called assets that ain’t. Investment banks have been borrowing 30 times their assets, and investing that borrowed money in derivatives that nobody understands. CALPERS, the California pension fund for public employees, borrowed huge amounts of money and invested it in real estate that has now lost most of its value.

Money is debt. The creation of money is the creation of a lender and a borrower, a creditor and a debtor. We are the debtors. The bankers are the creditors. The financial system has become absurd. The banks own everything, and nobody has any money. Of course some people, who aren’t bankers, still have money, and they are so desperate to find a place to put it where it won’t disappear, that they are buying Treasury bills that pay 0%. That rate of return is the same as saying, “Every investment in the world is so risky, we can sell notes that pay nothing because the U.S. government is that much less risky, relatively.”

I don’t know, but it looks to me like the fiction of money is breaking down. If people quit believing in what we call money, then there won’t be any. Some new idea of what money is will have to take its place. Something everyone can believe in. God help us. There are some interesting times a-comin’.