I DIDN'T START OUT ANGRY. Nosir! Me a super fun guy! But you people are pushing me!
Once there was an Emperor of great wisdom named TOMMY TANG. Like all of his people, he'd been born dirt poor, but he and his parents had tilled that dirt and grown rice when good weather gave rain. The peasants would dig channels from the rivers, irrigate the fields and when drought afflicted, they'd carry water in barrels and use scoops. The people did it as rice was the only thing that prevented families dying as everyone including the emperor had nearly died a dozen times when the weather, the water or the rice ran out. The industrious people invented methods for keeping ditches covered so that the drought could not afflict but required was that the people workshare in creating those coverings. They called their irrigation system, Protected Precious Resources and their work system was named Communism as with such a crowd of people, every drop of resource needed every man's work. Under this system, one billion, then two billion people lived happily. The Emperor ran an immense kingdom which did, occasionally run out of water, weather and rice in isolated corners of the country --at times but where they remembered and implemented the method of covering the running water, the country created the world's biggest, cooperative rice farming venture anywhere. They now dabbled with Capitalism and put their precious unique rice on the world market to great profit. They were able to buy the things their country did not produce. Cornflakes and chocolate, and oh yes, OBJECTS MADE OF SOLID GOLD.
One day, this Emperor realized that for those two frivolous food items, he had made a mistake. He was trading with a very wealthy Barbarian country that preached equity, democracy, compassion and fairness but in truth at night, their soldiers rode around the world toppling rulers and installing patsies and flunkies whom they could control. These Barbarians smiled but they exploited 200 countries they traded with, taking precious resources at bottom dollar, assembling them into substances or 'things' they sold cheaply in big cities everywhere. Millions of items got sold and as no one could compete with them on the prices the Emperor's people found themselves working for pennies. The Barbarians called their system 'capitalism' and under it, profits piled up (for THEM ONLY, as it exploited all providers of parts and labor,) ergo these Barbarians lived in showy castles of solid gold, a metal that did not exist in the Emperor's land and even rice farmers have fancies, they had spent decades trading their unique RICE, trillions of pounds of it .... for these shining gold objects of great beauty which they'd been told were SOLID GOLD and which everyone thought, great value...but now suddenly, everyone spots the fact that the gold rubs off and underneath was a black, base, pot metal. No object is pretty when made of base pot metal. The emperor and his people had been hoodwinked. He had encouraged his people to trade trillions of pounds of rice --for decades, for this crap?
Emperor Tang became ashamed that he bought into Capitalism being a trained Marxist for sixty years, and now he is quite naturally furious. See this battle from Emperor Tang's point of view. What is he going to do? First, raise tariffs against our goods, which is horrendous for us. Naturally the Barbarians will raise tariffs against the rice so that nobody in the USA can afford it. Their going without fake gold, cornflakes and chocolate is no problem. They simply quit importing it. The Barbarians lose its only friendly trade market, stunning its already shaky economy, sending it to need war as a solution. However, the Tang Dynasy still has an ace card. READ ON:
CHINESE DERIVATIVE CONTRACT DEFAULT-THE SPARK
TO WORLD WAR III?
Sinophile, futurist, journalist Graham Summers tells us. September
15, 2009
In case you have not heard the news, China has announced that it will
be
instructing its state-owned enterprises to potentially default on
their
derivatives contracts. As I have written extensively in the
past, the
derivatives market is a massive time bomb just waiting to go off.
China's latest move may be the match that lights the fuse.
All told, US Commercial banks own $202 trillion in derivatives
in
notional value. To put that number into perspective, it's roughly four
times the global GDP. And 96% of this exposure sits on five
banks'
balance sheets. (JP Morgan, Goldman, BofA, Citi, and HSBC)
I've shown the below chart before, but it's worth re-visiting
(chart is denominated in TRILLIONS).
Of course, not ALL of the $202 trillion these guys own is "at risk."
As
their name implies, derivatives are "derived" from underlying assets
(homes, debt, etc). The actual "at risk" money can be far FAR smaller
than the "notional" value of derivatives outstanding.
However, when you're talking about $200+ trillion, even a marginal
amount of "at risk" money can mean ENORMOUS losses. Consider, if 1%
of
that $200 trillion were at risk, you're talking about $2 trillion in
capital. Now, if even 10% of those bets go bad, you're talking about
$200 billion in losses.
Now consider that, combined, the top five banks (JP Morgan, Goldman,
BofA, Citi, and HSBC) have roughly $700 billion in equity.
And that represents only 1% of the outstanding derivatives that are
actually "at risk." Given the over-leveraged, stupid plays Wall Street
made on mortgage-backed securities and credit default swaps (both
investments that had SOME degree of oversight, even if it were paltry),
as well as the fact that derivatives are COMPLETELY unregulated, I
would
argue it's quite possible that as much as 5% or even 10% of the
derivatives outstanding could be "at risk."
In that case, we're talking about $10-$20 trillion in "at risk" capital.
If even 10% of these bets go wrong, you've wiped out ALL the equity
at
all five banks AND THEN SOME.
As I mentioned just now (and before many times), the primary problem
with derivatives is that they are COMPLETELY TOTALLY unregulated. NO
ONE
has any idea what's "at risk" or who owns what or who's betting against
who. But we may be about to find out.
I've detailed the ongoing conflict between China and the US regarding
monetary policies on these pages before. The brief overview is that
China owns $800+ billion (by some accounts $1.3 trillion or more) of
our
Treasuries (debt) and is not too happy about Ben Bernanke and other
US
monetary figures throwing trillions around in bailouts and emergency
measures to counteract the financial crisis.
China has fired a couple of "warning" shots already, mainly in the form
of various Chinese diplomats expressing concern and frustration with
the
US's monetary policies. They even flew China's Vice Premiere to an
unscheduled talk with US monetary officials back in July.
No one knows what was said during the talks, but given that Ben Bernanke
is extended Quantitative Easing to October and has shown little signs
of
reversing his current "anti-dollar" policies, it's pretty clear China
didn't get what they wanted.
I've often wondered what China would do if push came to shove. Their
decision to have their state-owned enterprises default or renege on
their derivatives contracts may be the answer. Let me explain.
As I've stated on these pages before, I view the "bailouts" as nothing
more than an attempt to funnel taxpayer money to the large US banks
so
they can raise capital to avoid insolvency. It was essentially a
"re-capitalization" effort using public funds. And it came at the
expense of the dollar and Treasuries.
China, who owns more Treasuries and dollar-denominated assets than
anyone, was obviously not too pleased about this. They've asked
time and
time again for the US to stop what it is doing. However, Geithner,
Bernanke, et al, simply plowed ahead ignoring their requests (Geithner
actually told a group of students in China that the math behind the
US's
policies were solid which resulted in the students laughing at him).
China's decision to default on its commodity derivatives is a very
clever means of slapping the US Federal Reserve in the face without
"going nuclear" by selling Treasuries outright.
Commodities account for the smallest portion of derivatives on US
commercial bank balance sheets ($938 billion out of $200 trillion).
A
default here would trigger a chain reaction that could essentially
wipe
out the Fed's attempts are re-capitalization (the US banks would
suddenly be on the hook for billions in losses that they didn't expect).
It's a very serious indirect way of China saying, "if you want to
continue screwing around, we'll simply walk away from the table." But
they're doing it in a select asset class that no one but Wall Street
engages in (derivatives). The primary issues now are:
Whether China WILL actually begin defaulting (remember, so far it's
just
a threat). Whether or not China's decision would trigger a larger chain
reaction in the derivatives markets. How the US will respond to China's
threat. I do not know the answer to these issues. No one does.
I DO know, however, that a derivative chain reaction throughout the
financial system could cause a full-blown implosion like
September-November 2008. We're talking about massive volatility (2%+
swing days) and a stock market collapse of 20-30% within a matter of
weeks.
Remember, computers account for 70% of the market's volume. And they
can
simply walk away OR even worse, start driving the market lower as they
adjust to trading in the new environment. These are not sensible, brain
driven, investors who can make qualitative judgments. They are computers
trading based on algorithms that track various metrics. If we get a
black swan even (and China defaulting on derivatives would be one)
these
computers could go completely haywire and instigate a repeat of the
'87
Crash.
I am not saying that this WILL happen, but mention all of this to remind
you of the investing environment we're in. Pull the plug on the
computers and you've got panicked selling galore and a repeat of October
2008 if not 1987.
I'm preparing our portfolio for this eventuality this week (more on
this
in a minute) with a number of trades that should prove extremely
profitable if the Crash I've been predicting for months comes to
fruition.
However, we also need to consider the socio-economic implications of
what could happen should China start defaulting on its derivative
contracts with the US. If China chooses that route, the US could choose
to default on its debt to China. At that point we would be in a
full-scale economic war and potentially on our way to military conflict.
* *
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* *
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Now, I mentioned the Emperor would change tariffs. Did you know that Congress just proposed a TARIFF against all Chinese goods. With things as they are now, what will that do? You aren't expected to know ancient history but the Great Depression of 1929 could be laid at the feet of the United States Congress and their tariffs against EUROPE. Congress came up with a tariff bill named the Smoot-Hawley Act. The bill raised tariffs on goods that we imported from Europe to "protect" our manufacturers and labor. Europe responded by raising their tariffs against us. We responded by further raising our tariffs. Europe responded by raising their tariffs again. We responded - you get the picture. We effectively shut down world trade and as a result entered a world wide depression which some say precipitated the rise of the NAZI party and WW II. Further, everything that FDR attempted, using the socialist concepts of John Maynard Keynes, failed. The Great Depression ended at the end of WW II. 1929 to 1945 is 16 years. Not nice.
Trade is like the blood running thru the veins of a body. Tourniquet any limb it starts dying, that limb starts screaming. Pain, numbness, swelling, the limb goes nuts. Like Germany did, locked out of even grabbing colonies. France and England had colonies/ entire countries in Africa. Germany was not allowed in the club. Trade is blood circulation. It nutrifies countries.
Obama, who in his bid to be a cute politico for the last twenty years, amazing Whitey with how smart he was, apparently has never read or understood history, and now is proposing to raise tariffs on China. The idea is to again "protect" American labor unions. Well, on two counts that's a bad idea. First, China holds trillions of dollars of our T-bills. The T-bills can be called at anytime. Think POKER. Think 'CALL." That act would flat bankrupt the U.S. who has no aces in her hand!
China is, so far, only talking about countering by raising their tariffs against us. Does this sound like a repeat of 1929? What do you think is going to happen? To our economy? To world trade? The prospects for World War III? 2 + 2 = ? As a researcher, a budding futurist, you dear reader want to LEARN TO CHART THE PROGRESSION OF A DISEASE, UNDERSTAND ITs ROOT causes....see trends and identify the nature of the disease. Like tariff disease. Trade inhibited disease. And then you attack the FASCIST microbe (in this case, CORPORATE greed, lobbyists, crooked politicos, campaign donations and a President who must salute the guy he came to the dance with,) and spot trouble ahead of time. You must make the right diagnosis. You must start to language into reality the appropriate solution.
Disease has a very ordinary set of causes. If you're eating cake and milk three times a day and bathing in the frothy gray waves of the ocean near the sewage pipe, and you have a boil is on your chin, but your legs are covered with MERSA --- and your lungs are full of mold, what do you DO? What do you stop doing? How do you medicate? how do you reduce mucus in the body so that germs have no place to take hold? Identify mucus producing foods? Stop swimming in MERSA germs? Every citizen is his country's DOCTOR. Make your diagnosis and don't just do something, sit there at your PC and be a VOCAL ACTIVIST and create VOCAL LIVING ROOM MEETING GROUPS. Cuz you shrug helplessly and leave it to your congressman, that's like going to a doctor and asking him, hey what's up? He just gives you a shitload of antibiotics and that stuff'll kill you! Plus if you leave it to the system, and say, ask for health reform without being specific you get some law where people get carried to jail if they don't buy their own HMO. That's the Gov's freakin' remedy.
So first, you'd look down the line of the history of the Capitalist Fascism illness' -- its progression and see 'begin times,' then look at NOW, the crucial moment, then look toward the END RESULT of where it's headed, see ''end times'. That triple viewing will motivate you to IDEATING SOLUTIONS and then taking it to the town meeting, doing ACTIVISM.
You will at the same time start to take homemade REMEDIES, get your PERSONAL SOLUTIONS into play, like creating a UTILITARIAN TYPE MERCHANDISE BUILT in your garage work shop. Start a NEEDED SERVICE Biz, Get food growing land one gas tank from your apartment or house. Get your family's money out of BOA and hope and pray the whole economy doesn't freeze up and die which means NO CONSUMERS, no sales, NO loans, no food, no jobs. If your activism is STRONG ENOUGH, the GOV WILL NATIONALIZE all the banks, take all the banks's holdings those empty, dormant foreclosure homes and give them back to the citizens who bought them with REFINANCING... I HOPE. But will those citizens have jobs? That is not certain. We're probably talking a return to serf times, where we hoe the soil, bake in brick ovens, (SEE COUNTRY LIVING WEBSITE,) plant turnips and, make our own sandals to Sell or trade to neighbors. No flow of coins or greenbacks seems imminent.
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