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Next Stop The Sustainable Society

Politics / Social Issues Nov 26, 2011 - 12:23 PM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleNo longer in the realms of North Korean thinking, the near term prospect is that the runaway train of late stage, financially engineered consumer capitalist culture will hit the debt and deficit buffers and will stop, dead. Fear rules. Mainstream media in Europe continues to wave the scarecrow-with-a-skull of the Eurozone imploding, the euro disappearing, the European Union collapsing. Los Indignados and anti-nuclear crazies will link up with Al Qaeda and show open disrespect to everything from WalMart and McDonalds to friendly smiling atoms. Tahrir Square is the new Global Village. Gloom and doom.

Ecology still has a look-in but its political mutant version is rigorously militant and dedicatedly fantasist. It, like any other above-ground political movement avoids facing the basic necessity of accelerating the fall of our corrupt, pathological, inefficient and fatally flawed financial system. Thinking that far is too much effort. It would mean real change.

Late stage financial capitalism now has everything set and programmed to literally turn on a dime and shift into its own collapse mode - delivering certain hyperinflation - but this is not media-friendly news for adults, and therefore "does not exist".

In a previous article I argued, and go on arguing that global commodity markets have a new deathwish primal fault: they now need ever rising commodity prices. If they dont get them, they will collapse. The only possible way to prevent this is to force near-instant financial system-wide collapse from outside the system, pre-emptive style. This means the complete collapse of the pathological global banking and trading system, a downsizing of at least 95%, in a stunningly short period of time. If the agony is strung out by Muddle Through Politics, we will only get hyperinflation followed by something even worse, hyper-deflation, leaving a guaranteed wasteland. Not only North Koreans think that.

Our first stop is modern finance, and specially its deadly hand on so-called hard assets, ranging from gold and silver through oil and gas to metals and all major food products. As we are told, day and night, directly and indirectly, with the lie quotient ranging from total to only relative our "modern financial and trading system" is perfectly neutral, balanced, self-correcting and all risk is controlled or "hedged". The system is risk-free. Anybody able to believe that should stop reading this article, forthwith.

Even worse, bringing in the word "risk" is already a nod to poker-and-playtime. The cult of so-called risk in modern finance is exactly the same cult infecting all-day all-night poker players: they know they will lose. To afford this conspicuous consumption they make sure the real risks - meaning losses - are borne by somebody else, anybody else. Only when these patsies are dead or broke does the gamester stop playing. The patsies very certainly include bankers willing to lend, because they in turn count on somebody else, anybody else taking the final bill. Call this "somebody else" governments. No need anymore to add taxpayers, because global systemic financial risk, that is losses, are now way beyond anything taxpayers can pay in a generation - in a string of countries, on your planet today.

As we know since as long ago as 2008, for average media consumers and average editorialists, the finance poker playtime act finally leveraged itself to "the event horizon" or tipping point at which any kind of disruption will bring the card castle down. We know it. You know it.

 What happened to global commodity markets - especially oil - in 2008 ? To be sure, it was Goldman Sachs which goosed oil prices, but GS didnt act alone, and basically had no choice. All through the system, every hedged bet on commodities has a counterparty which in theory has "serious value" when or if the initial bet blows up. Like we know, obsessional fear of loss - only surpassed by insane greed for profit - creates a chain linked system of hedging every hedge and every wager.

These long chains of almost worthless hedges and terrifyingly hollow counterparties are easy to compare with ADN sequences: 98% of ADN sequences have no genetically-determinant meaning, they fit both mice and men, flies and falcons. A similar pool of literally junk finance is wheeled on stage to give meaning, security, and counterparty hedging to any bet. A single average family housing unit can generate or lever tens of million of dollars of "value" which of course has to be "insured", and the insurance wagers then have to be "insured". The trick is to do it cheap and fast, through leveraging

What happens when one counterparty player, the issuer of a hedge somewhere along one of the chains runs into trouble? The entire chain collapses, pulling down the web of chains. At each stage along the chain there is only razor-thin capital covering any possible losses, so each link in the chain dissolves into insolvency when its counterparty is unable to pay.

There is no secret at all of where and why we get hundreds of trillions of dollars of apparent or virtual debt, finally sovereign or national which at the worst possible and deadly moment can become real debt. Until that moment, a few dollars or euro can run, rationalise and make credible a bet on millions of dollars or euros of debt.

If you dont feel comfortable with this pile of insane risk - future losses - you are far from alone. As argued by several hard-to-contradict analysts and scientists, including Nassim Taleb and Benoit Mandelbrot, the founder of fractal geometry, markets are intrinsically prone to random disruptions.
Modern dysfunctional capitalism's ace card - the present banking, insurance and financial system -  operates on the fond notion that systemic risk either does not exist at all, or can be hedged to zero, and that money can be borrowed and printed in unlimited quantities. Used by the right people, this can be spread around the fraternity of poker players operating risk-free wealth skimming operations giving unlimited riches, to the right people, and a living wage for maybe 40% of the population, the chosen middle classes who work their iPhones and consume Coca Crap.

Of course this game plan only operates as long as the "insurance" isnt called on, and for as long as the real economy generates surplus wealth to skim.

The lure of leveraged capital to skim wealth and generate risk-free fortunes for the right and chosen people extracts a heavy tribute: it hollows out the economy like a maggot shell the fly came out of - but poetical mindeds can call it the chrysalis and a fleeing butterfly. The economy is de-gutted. On the ground, down there in the real economy, risk aversion is so total, paralytic fear reigns so supreme, that almost nothing moves. The economy stagnates. Unemployment rises, what else is new ?

Trophic levels in the capitalist predation hierarchy pyramid are rigorous: only 10% of 10% of the population will really be rich, and only 10% of the last slice will eat, talk, think and consume for millions, right down at the big and spreading, ragged edge base of the pyramid. Everything works fine until it changes.

Change is just as often total and cataclysmic, as soft-touch evolution of the fairy tale type offered by liberal bourgeois media, packaged for the middle classes intent on muddling through as long as they profit - and others lose.

Above all the real world economic ecosystem has to have an energy support system, supplying food and raw materials - if not it simply does not exist. Likewise, our parasitic late state financial capitalism cannot exist if it does not have industrial capitalism to prey on and to skim wealth from. Big fish cant exist without small fish and one thing is very sure: surplus parasites die off very fast whenever they make the big mistake of being too greedy or too numerous.

Real investment in productive assets is always necessary, not only to feed the masses but also the 10% of 10%. This investment is totally different from zero-risk wealth skimming operations based on near-zero capital but demanding sky-high rates of return. The difference is that parasitic poker-play capitalism intrinsically has open endedly massive real risk to pay for the sky-high returns.

For all kinds of reasons, including population growth, globalisation, resource depletion and others financial capital now completely dominates industrial or productive capital. The pernicious consequences of this dominance have poisoned the economy and culture at multiple levels, right through the trophic hierarchy.  In the political sphere, the aggregation of hundreds of billions of dollars in skimmed profits has generated near-open corporate kleptocracy and political corruption. This is a high gain positive feedback loop, like a concrete foot on the accelerator pedal easily explaining why no politician, anywhere in the liberal bourgeois societies has any remaining credibility.

Consider the energy system for example. Called "unbundling" in Europe, the declared goal is to break up all vertically-integrated former monopoly energy production and supply systems, whether this is possible or not having no hold on the process. This is a pure late stage capitalist ideal. For electricity and in Europe, the supposed dream is for producers in Romania and Sweden to compete for consumers in Portugal and Italy. Why not ? All along the Smart Grid supply chains, energy traders would get their cut, and of course they would deliver clean, reliable and reasonable-priced electricity to final users.

You know it isnt true, I know it isnt true. Housing, once upon a time, concerned building various types of accommodation, sometimes built (oh gosh) by the state, and financing buyers through mortgage lending supplied by lenders who took a modest yield for 30 years in return for known, predictable and low risk. Through late stage capitalist financial engineering, as we know, housing can give you the subprime crisis with the "pool of risk takers" widened so far it draws in the banks and the sovereign debt of countries tens of thousands of miles away from the scene of the crime. The political corruption operating in the US subprime racket is relatively well known and described - but the important point it is basic or structural.
The ecosystem was rotten to the core.

We can look anywhere else in what was formerly "the real economy" and find this process at work. Apart from housing and energy, we can look at food and the metals needed for manufacturing throwaway goods - now the focus of feel good ecology campaigns called "recycle and save". The key point is to first produce and sell the useless gadget, then throw it away, then recycle it. In every case, leverage and risk hedging will ensure the process can only survive if prices and "value" rise. Founding beliefs are therefore stark: real estate never goes down in value; oil price never fall; electricity prices can only rise; food price must rise - and so on. Speeding the process, our corrupt political elites have set  near-zero yields on cash to force all savings into poker playing financial plays. No Alternative.

As we know, there could or might be no alternative for our discredited, even despised political elites but when the long chains break, and risk webs collapse everybody finds themselves close to the proverbial fan: even worse, once the magic web starts falling apart the former Black Swan events start occurring on a regular basis. The system goes into breakdown mode.

The longer it stays hovering on the brink of total collapse the worse is the final result, which again is not only North Korean thinking. As we have seen since the US subprime rout of 2008-2009 this morphed into, or more simply emigrated to Europe, growing all the time for the very simple reason that investing in the real economy is for Little League players without the crustal shell of total greed which sets apart Great Capitalists. As a direct result, in country after country actual and real productive investment - in real terms given real inflation rates - is stagnant or declining. Capital available for leveraged skimming remains cheap and abundant.

We now have an open chance the whole web blows up, destroying the bases of debt creation, and stopping the income streams needed to servicing it through constant growth of debt. In a real capitalist system, which exist and have existed since humanity began on an organized basis, unpayable debt is written down and all insolvent borrowers, lenders, and their counterparties are wiped out. Preventing this is basically the only remaining goal of our present political elites - proving they are in no way capitalists, let alone responsible.

Like we know, our late stage perverted and mutant version of capitalism creates a fantastic upturned pyramid of debt - to enrich a thin crust of the populace at the present and longer-term expense of all the rest. It hollows out and sucks dry the real economy, tossing this zombie into a shallow grave so that it will not disturb the perpetual motion machine of fake economic data, bad banks, manipulated laws and regulations, and pathological lying.

If this system does not collapse it will shift to police state and martial law. Ever increasingly, official media tells us that liquidating the overhang of bad debt would "destroy the world as we know it." The truth is that each day the zombie system lingers on, it will do more damage and make the endgame more lethal; the sooner it collapses, and the faster that collapse takes place, the more chance will exist for the 99% of normal persons to pull through and rebuild a normal economy.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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