More of the same

More often than not the most accurate forecasts for the weather are “more of the same.” If it is very cold and windy, the best prediction will be for no change; a continuation of the existing trend.

For economic predictions, perhaps there should be a caveat. Eventually there will be something that changes the forecast. We very well may be at that juncture in the coming year.

The overriding problem simply stated is that there is too much debt in the world. According to the Bank of International Settlements, the value of derivatives has grown in the past decade from $100 billion to almost $6 trillium, or ten times the world’s GDP.

Derivatives were supposed to provide a hedge, but instead risk was concentrated. It has been stated that we are confronted by what are said to be too many too-big-to-fail institutions. It has become apparent that debt on debt does not work as it mortgages future generational opportunities to grow.

All but forgotten is that governments have eliminated the principles  of moral hazard by rewarding the so-called risk takers. Misleading information has permitted some to take unusual risks in a desperate attempt to earn a profit. That rewarded the risk takers in bailouts. They recapitalized their underfunded banking system with taxpayers’ money. It should be noted that in U.S. five banks – JP Morgan, Goldman Sachs, Morgan Stanley, Citigroup and the Bank of America – hold assets worth more than half of the country’s economy – a very precarious situation, obviously.

Still, the central banks of the world keep printing more and more money, but the resulting interest rate cuts and bailouts have not accomplished the goal of reviving the economy, but just added to debts.

In the U.S. the Obama administration has increased the national debt by $6 trillion, more than all the previous administrations combined. The debts of the 50 states plus the government-guaranteed lending institutions now equal 100% of GDP – always considered a zone of extreme danger.

As to be expected, there is a loss of faith in financial markets and in governments in general. Piling on more debt entails a weakening of currencies.

The recent upturn in housing and auto sales is encouraging but does not mean that a real economic recovery is underway. At some point the paper currency no longer will be accepted. Why should lenders accept it when it represents nothing?

Until that time arrives, the date uncertain, things will go on. However, one thing is obvious. At one point, the structure will break down, so “more of the same” will go on for the present


Bruce Whitestone