The entire world
presently is fixated with the Eurozone’s financial struggles, and, for ample
reason. Will this currency union of 17 nations collapse? Will some European
countries default on their debt? Could a group of countries emerge in a
fiscal union with a “new euro”? The consequences of a break-up of the
Eurozone are truly dire. Why? For quite a number of reasons, but the most
contagious of these being that numerous banks would collapse.
Should this occur,
it would ripple out to the entire world financial system in a matter of
nanoseconds. Credit markets would again seize up, contributing to another
Great Recession … if not worse. The fact is that perhaps hundreds of banks
(including some of the largest in the world) are already technically
insolvent. It explains why key central banks are working together to ensure
that no major banks get pushed to the wall should their funding dry up. On
November 30th, the central banks of five key nations (U.S., Japan,
UK Switzerland) together with the European Central Bank (ECB) announced
joint actions to backstop the liquidity requirements of the European banking
With the threat of
potential bankruptcies, it only follows that investors are pulling their
money out of European banking paper. As these banks roll over their debts
(when they come due) they find that there are no takers for their new debt.
That’s were the central banks come in.
Debates are raging
as to what could be done to alleviate Europe’s
financial problems. What makes the situation all so much more dangerous and
dooming than the first stage of Global Financial Crisis (GFC … a term we
have continued to use as we never believed that the GFC had ended), is that
Ground Zero is now found in the sovereign government bonds of nations in the
world’s rich club.
Whereas much of the
blame for the first stage of the GFC (which began back in early 2008) was
pinned on over-valued real estate securities and Wall Street alchemy, this
time it is in an asset-type that is supposed to be a risk-free — namely
government bonds of O.E.C.D. (Organization of Economic Cooperation and
Of course, nothing
is entirely risk free. However, the world’s financial system has been built
upon the throne of O.E.C.D. debt. For the purposes of regulating bank’s
reserve ratios, these bond holdings are considered risk-free. Yes, it is
government debt, not savings nor gold nor anything else tangible that
underpins the value of money and the world’s financial system. And, now the
very heart and core of this system has been shown to be subject to massive
You couldn’t dream
up a more lethal coronary for the world’s financial system.
This dire situation
now ushers in an era of complete lawlessness. Of course, aspects of the
financial dislocations that have unfolded to date have always involved greed
and corruption at various levels. As such, these developments have therefore
been against the intent of the original laws and regulatory structure. In
this sense, lawlessness is not new. But, no one imagined back in the days
when global financial systems were formalized under the auspices of the Bank
of International Settlements that an O.E.C.D. nation could ever go bankrupt!
While it is true
that no O.E.C.D nation has yet officially defaulted (not even Greece nor Ireland), the value of their
government bonds have disintegrated. Banks who hold these securities will
have incurred losses of as much as 50% and more. As such, O.E.C.D. debt —
the core of modern-day wealth — has grossly failed.
That means that the
rule of law is now conveniently put aside for what is deemed to be the
“greater good.” For example, the terms of credit default insurance have been
ignored in order that the credit write-downs and restructuring of Greece’s
government bonds would not be considered a technical default. Everybody
knows that Greece
has effectively defaulted on some of its debts. But not officially. Were
that the case, perhaps trillions of dollars of default insurance would have
been triggered, the realization of which would have abruptly caused the
collapse of numerous other financial institutions.
Of course, almost no
one wants to see financial markets collapse and economies to crash into a
nuclear winter of economic depression. As such, all of this gerrymandering
and rigging is overlooked. In the end, none of these and other financial
manipulations by policymakers will succeed in solving the fundamental causes
of the current crisis.
The basic problem is
very simple to understand. Imbalances amongst European nations have become
so extreme, that the fundamental creditworthiness of some nations has
deteriorated to the point that their government bonds have collapsed in
value. This in turn is hugely destructive for the capital base of banks and
other financial institutions. Even while such countries as Germany and
and a few others have prospered with large structural trade surpluses,
others such as Greece, France, Italy and others have run large and
chronic deficits. One condition is the mirror image of the other. For one
nation to be in surplus, another must be in deficit. But, understandably,
when this imbalance becomes chronic, it is not sustainable and will end up
in disaster. This is indeed what has happened.
Looking ahead, what
can we conclude? For one, the current situation is extremely dangerous.
There is no telling how things will unfold. The fact is that there are no
immediate and easy solutions. It is a difficult, plodding road back to
honest balance. This would involve the repayment of loans and/or the writing
off or forgiveness of debts. For example, one recent study estimated that
approximately $15 trillion in debt forgiveness would be required were America and Europe
to reduce their total debt levels to a manageable 180% of GDP. Could this
ever happen? Would the capital holders, the rich, the powers of this age
allow this? You be the judge.
Despite the fact
that all market participants around the world should now well understand
that unsustainable, non-self-supporting trends must come to an end, we
should not be surprised if short-term shenanigans continue. That the GFC
even occurred is proof of this message.
The key question of
the moment is this: Will the solution to current troubles be real and
cooperative, or will an uncontrolled disaster unfold? Hollow, bogus policy
actions will not work. We anticipate that, eventually, a patchwork of
countries will be cobbled together into a new financial union. Initially,
this would comprise only European nations.
But this likely will
not be the end of the transition
One must recognize that none of this can happen without the aid and
approval of America
and other non-European nations. If it wasn’t for the massive swap facilities
extended by America’s
Federal Reserve, Europe’s financial system
today would already have imploded. In any case, any type of union such as we
surmise will only happen with a further escalating crisis. Things are not
yet critical enough for such measures to come to implementation. When it
finally does, it will be a arrangement that will also not last. If so,
perhaps only for “one hour” (Revelation 17:12).
As a final
conclusion, the same problems that applied to Europe could next affect America.
It is also caught in a similarly imbalanced situation. It is running huge
deficits (both in its government budgets and externally on its trade
accounts). At some point, the world’s attention will again be turned to the
financial deterioration of
America. Then, U.S sovereign bonds will no
longer be so popular.
WILFRED’S FREE NEWSLETTER
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is a global economist/strategist. Formerly a top-ranked global analyst,
research director for a major Wall Street investment bank, and head of Canada country’s largest global
investment operation, his writings focus on the endtime roles of money,
economics and globalization. He has been quoted around the world and his
writings reproduced in numerous other publications and languages. His 2002
book The Endtime Money Snare: How to live free accurately anticipated
and prepared its readers for the Global Financial Crisis. His newest book,
Global Financial Apocalypse Prophesied: Preserving true riches in an age
of deception and trouble, looks further into the future.