The Sum of Risks – Global, Strategic, Political, and Financial
Politics / GeoPolitics Sep 18, 2017 - 03:58 PM GMTBy: Raymond_Matison
Never before, not since the founding of America even including our Civil War of the 1860’s, not in the history of the entire world has a confluence of risks risen and coalesced to the degree that makes the next few years the most dangerous on this planet since monkeys evolved to walking upright. Immense risks are prevalent in America, Europe, Middle East, and Asia – essentially covering most of our globe.
These risks are structural in the sense that political tinkering can no longer obviate nor reduce them, they are also political within each sovereign country or region with conflicting goals to those of other countries or regions, they are often driven by technological innovation and development changing global manufacturing processes, job availability and worker incomes. Our world has become more interconnected because of instant communications, instant money transfers, manufacturing which involves single country assembly of global components – and therefore, it has become more interdependent than ever. This interdependence is particularly dangerous in its global financial system based on central bank money creation where decades-long dollar preeminence has distorted countries trade balance, currency values, and bloated sovereign debt. America’s military, industrial, and financial dominance with its petrodollar since the 1970’s is now being challenged as never before by a growing number of countries which are grouping together with a desire to no longer be dominated by the geopolitical policies of the United States – and who seek an alternative or escape from America’s hegemony.
The following article attempts to highlight many, but not all of these risks. In this period of almost unbridled optimism regarding investment markets it is helpful to be reminded of the accumulated risk level extant in our world presently which can and will cause disruption in our markets, banking system, economies, and societies. It is also helpful to be reminded as why in a period when jobs and incomes appear to be increasing, improving the economic mood of people signaling a significant positive change in the direction of the whole country – its destination still remains unchanged.
Political Risks
America and its people have elected a Republican majority both in the House of Representatives and in the Senate. A Republican President was chosen from outside political ranks with a populist mandate. This should have meant that the policies of this silent majority would visibly and increasingly be implemented. However, the facts to date are quite contrary to this reasonable or logical expectation. Thus far, Congress has little to show for any accomplishments or legislation for the benefit of citizens. There continues to be great acrimony among and within both political parties, with special vitriol aimed at the sitting President. One could argue that opposition from the entrenched political swamp, which President Trump vowed to clear, has thus far prevented him from even governing effectively.
President Trump’s recent order to launch rockets into Syria and committing more troops to Afghanistan – quite contrary to his stated campaign platform demonstrates that it is the deep state and the swamp that have sidelined the President and the hopes of those who elected him. Certainly appearances are that neoconservatives and the military industrial complex have neutered his previously stated platform. The sale of nearly $100 billion of military hardware to Saudi Arabia, and the prospect of such sales to Japan and South Korea, in light of North Korea’s seemingly continuing provocations, does not provide confidence for a reduction in the risk of military conflict. If any such military conflict is to include United States troops, it will more rapidly raise our national debt further debilitating our economy - while providing great profit to the owners of the military/industrial complex.
Perhaps the most risky event to happen recently was our Treasury Secretary’s conditional declaration of war against China. When and How? It happened when Mr. Mnuchen announced that the U.S. will institute a sanction on China which will stop its ability to use the international SWIFT money transfer system – if it were to violate the sanctions the U.S. has already placed on North Korea. Since China holds over $1 trillion of U.S. debt, the implementation of freezing its assets in this way is a declaration of war against China. Many will understand that only Congress can declare war, but since America has previously abandoned this constraint anyway, it now appears that the Treasury Secretary can initiate a global financial and possibly its consequent nuclear war. Such pointed mandates are not constructive but dangerous, seem desperate, yet add significantly and unnecessarily to this “Sum of Risks”.
Our national debt has risen at an alarming rate over the last three presidential cycles from $8 to $20 trillion. This national debt cannot be repaid under any conceivable national economic growth or taxation program. The present political agreement to eliminate the nation’s debt ceiling completely is not a special achievement, since politicians in every prior instance have raised it when it appeared necessary. These previous actions demonstrate that there never was a real debt ceiling, but that it was just political theatre. The undesirable alternative option to devalue this debt through inflation will reduce the value of our dollar currency such as to cause a global meltdown from both its effect on Americans regarding their domestic purchasing power, and trillions of dollars evaporating in asset values held by foreign governments and their banks.
It is not only the national debt that is excessive, but bank debt and credit extended in every loan category. News of store and mall closings has been prevalent in the media for some time, yet there seems little acknowledgment that commercial real estate debt must be faltering. Residential real estate transactions and building permits have stalled as current outstanding mortgage loan levels now exceed those in the 2008 financial crisis. Both student and automobile loans currently both hover around $1 trillion, as their default rate has risen to record highs. Regardless of the stated and faked unemployment rate, the proportion of Americans working is at decade low levels, which with stagnant wages in middle class jobs means that the population’s ability to repay existing debt and credit is impaired. It also means that an economy which is 70% driven and comprised of consumer spending – can neither pay down debt, increase spending nor grow that economy.
New regulations now require that state, county and local governments show unfunded pension liabilities utilizing more realistic actuarial assumptions regarding interest rates and contribution levels. This revelation will ultimately confirm that nearly 99% of these pension funds for states, municipal governments, and corporations are underfunded to an extent that they cannot possibly fulfill their present contractual commitments, and that the previously touted benefits will ultimately need to be cut for all participants. The future-insolvent status of our Social Security system has been widely pronounced in the past from many credible sources, which will also require drastic benefit and contribution changes. Add to this the funding hole of Medicaid/Medicare/Obamacare – and these shortfalls taken together means that we have discovered the financial version of what in astronomy is called a black hole, where a whole galaxy gets swallowed with nothing not even light coming out. When the whole of the populace understands and starts to experience the full drastic impact of this Ponzi scheme on their individual lives, it is likely that there will be a revolution with pitchfork marches on every level of government and corporations.
Politicians have been deceiving ignorant but basically honest hard-working people forever, and as long as people remain uninformed and uninvolved - the scam will continue. This potentially explosive event of citizen uprising against broken government entitlement promises is likely the real source and need that politicians see for militarizing our local police. It is also the likely stimulus for economists and political proponents to eliminating cash in our economy with the substitution of electronic funds - with which our citizens can be controlled with the simple click of a computer button. The recent security breach at Equifax encompassing over 143 million personal information files putting an entire population at risk of identity theft, gives a glimpse just how a cashless society may work out for consumers. The recently touted proposal for universal minimum income is a scheme to provide a new substitute plan for the failing pension system and long-term job destruction coming from artificial intelligence and robotic automation. Increasing the proportion of income coming from government pension programs and transfer payments would make people even more dependent for their survival on a system in which their trust has been consistently disappointed. Universal minimum income would create a social system comparable to that in Middle East monarchies where a small group of elites rule over a citizenry, which is bought off by the “benevolence” of income provided by the rulers of the hoi poloi.
Reflect that Democrats talk about raising taxes while Republicans talk about lowering them. However, no political party politicians have talked about the most important topic - that of reducing the size of government which is the nation’s largest employer. Such a reduction on a large enough scale would raise the production level of the nation – as government employees who produce nothing are now paid more than productive industry employees. Republicans could reduce taxes more efficiently by cutting the size of government – and it would stimulate their desire for economic growth. Democrats may think that they can raise taxes without reducing the size of government, but that only works when the size of government is small to begin with – it does not work when government is large. Trusting current politicians who will not raise the issue of over-bloated government is about as safe as trusting prior politicians who created this mess.
Finally, we need to reflect on the fact that the present political gridlock in Congress and the cultural conflict among the nation’s citizens, together with a reduction of pension benefits for all citizens will cause, start or add to the next economic depression and market downturn. The present euphoria about financial market performance of the last years is being seriously misread; the rising markets do not confirm that the underlying economy is strong or that it is even improving, it is confirming that the dollar is losing value and that more dollars are needed to purchase a portfolio of securities. A doubling of the stock market over the next year would not signal economic strength but instead a loss of confidence in the currency and an inflationary calamity in the making.
For those interested in an independent view of investment markets can do so by reading “Prognosis of Financial Markets for 2017 and Beyond”: http://www.marketoracle.co.uk/Article58065.html.
Domestic Systemic Risks
One of the major factors negatively affecting economic growth is the slowing or stagnation of our relatively mature and aging population. Economic growth is far easier to achieve when a nation’s birth rate is expanding and its population is rising as opposed to when they are not. Politicians are powerless here as they cannot mandate or pass legislation to increase the nation’s birth rate.
Continuing technological innovation has created great disruption to past business and manufacturing processes, even as it has provided huge new opportunities for those willing to quickly re-educate themselves for the newer higher tech market. The rest are victims to unemployment which, with the passage of time, become ever more unqualified to get a job with good income. Hence income inequality will continue to increase between the high knowledge employees and all others, decimating jobs in our middle and lower class. Add to this evolving employment crisis the coming pension black hole, and we have the basis for universal hardship and convulsion. Jobs and wages have been in decline over several decades, and this trend is likely to remain so for decades more. Therefore, our consumer-driven economic model and its fiat currency need replacement. In the meantime one thing will remain true: when consumer spending drops a little, we will have a recession and when it drops a lot we will have a depression.
Perhaps the most misunderstood and unreported fact of our changing society came in the 1960s with the passing control of our institutions of higher learning to liberals and left-leaning educators. Both Hitler and Stalin brainwashed their youth to make them supporters of their hideous system of governance. Only in America has this brainwashing continued to the present day. They are no longer called Marxists, Leninists, or Communists; today they hide under the appellation of socialists, progressives, leftists, radicals, and seekers of social justice. The recent calls by such groups for the killing of our President, denial of free speech at our universities, and openly violent groups such as the Antifa is hiding an active revolutionary movement that in its actions is unmistakably Communist. This cadre of university educators has grown a new generation of hard-core leftist, Marxist radical students which will continue to attack the most basic principles of this formerly great nation and its genial Constitution. If this nation is to recover, it will first need to cure the radical socialist cancer that has been spread throughout the nation.
The media was also infiltrated by graduates of these leftist teaching universities and consequently has persistently espoused a socialist-leaning position, and failed to alert the populace of this subversion. This systemic risk is now so ubiquitous that our former American exceptionalism has given way to identity politics and divisiveness which may well lead to an internal bloody civil war.
Global Risks
The sum of risks outside the United States parallels those issues affecting America, and in many cases is its mirror image, except that most foreign countries are likely to experience these events more severely. Europe, China, Japan and the developing world has taken on the U.S. as a model for economic growth, and with the decades-long accommodation by the IMF is now also bloated with debt. The noteworthy exception is Russia, which seems to have learned its lesson from the IMF, when in the 1990’s it almost totally collapsed the Russian economy and the ruble because of the debt it had extended to Russia under the guise of promoting economic development. Many other nations have had similar experiences and have learned since then.
Overwhelming sovereign debt in most European Union countries has saturated their bank balance sheets to the extent that combining this risk with their own defaulting business loan portfolios portends the failure of the European Union itself - requiring also a reestablishment of new currencies. Europe’s central bank is still buying failing securities of its constituency, practicing emergency measures, nearly a decade after the original financial crisis with media falsely pronouncing a return to economic normalcy. We still do have a crisis, and it is developing further.
As an example, extending further loans to Greece, when it was not financially qualified for any additional loans more than ten years ago, demonstrates that political considerations have trumped, and do continue to trounce financial sanity. European bank and sovereign failures will not, because they cannot, reverse without disruptive changes, and will further the unraveling of the European Union itself. As a result of global financial institution connectedness, bank failures can quickly span the globe, precisely because the dollar makes up a major portion of foreign bank reserves. Just consider this: when the dollar loses value, the reserves of global banks will be drastically reduced, dangerously exposing those banks diminished capital levels to defaulted business loans hastening bank failures.
Economically advanced countries such as Canada and Australia are now experiencing their own real estate demise with the attendant problems that loan defaults create for the solidity of banks and other lending organizations. In the U.S., mortgage loan amounts again exceed those of the previous crisis, while capacity for wages and mortgage repayment has not improved. Such default risks are rising globally.
Conflicts in the Middle East, driven by geopolitical goals for energy supremacy and encirclement of perceived challengers to America’s hegemony, are constantly adding to America’s imperial overreach cost. With military bases across the globe, its effectiveness for concentrated power in one global location is necessarily diluted. Despite America being the foremost military power in the world, it cannot fight wars on multiple fronts at the same time. Therefore, the conflicts in Ukraine and Eastern Europe, which also threaten Finland, Sweden, Norway, and the Baltics from Russia, or within Middle East countries seeking their own true sovereignty, and responding to North Korea with China as its ultimate ally, adding to a potential military action in Venezuela - cannot all be successfully fought at the same time. In addition, these wars would have major domestic civilian resistance, as they are neither wars of defending the violations of America’s borders nor wars of fighting against foreign invaders. American citizenry has already been at war for decades on foreign soil and will reject further neocon military conflict rationalizations for “American national security”.
The ever more tightly developed grouping of countries, initially identified by the acronym of BRICS (Brazil, Russia, India, China, and South Africa) is continuing its economic integration despite outside efforts to undermine it. Their creation of institutions to mirror those of the IMF and World Bank has gained new members which require the acronym to be updated to CRISIS (China, Russia, India, South America, Iran, and South Africa) See: BRICS? No, CRISIS http://www.marketoracle.co.uk/Article53009. In addition, China’s development of its One Belt, One Road 21st century version of its two thousand year old, historically famed Silk trade road promises to unite vast geographic portions of the globe in trade that will raise living standards of billions of people and shift economic power back to the Middle Kingdom of China and the East.
Financial Risks
The FED, a privately owned institution, was founded over one hundred years ago when America’s population was growing, and neither the people nor government had much debt. The immediate extension of credit to consumers as we know it today was not then even in existence. As the FED could print money against Treasury debt, it did so quickly after its founding in 1913 to finance America’s participation in WWI, which started its century-long inflation of the nation’s currency.
An acceleration of currency printing and reduction of interest rates stimulated risk-taking, established new business endeavors, and generally grew the economy as a whole. When the FED decelerated its money growth, and raised the cost of borrowing money it stopped the formation of new business ventures, caused debt-based business failures and generally created recessions or worse. Yet somehow, overall, the quality of life in the 20th century seemed to improve for the average citizen. While these quality of life improvements may have had more to do with advancement in technology rather than genial central bank management, nobody cared as long as there were plenty of jobs, and an ability to earn a living wage. Thus, the Keynesian FED central bank model was accepted by most, and embraced by spendthrift politicians.
Today, with consumers, corporations, and all levels of government drowning from debt, and population growth decelerating, this economic model is no longer viable. Actually its model may never have been viable for the long term, but it just happened to correlate positively during America’s rapid population growth period, its late entry in two world wars whereby contending countries manufacturing facilities were completely destroyed opening its markets to American products, and global dollarizing of finance provided the illusion that central bankers and their economic models are democratic, far-sighted and infallible.
During the 2008 financial crisis the FED increased its balance sheet by approximately $4 trillion, meaning that it has created this much currency with which to buy risky bank assets. The nation’s national debt has increased to $20 trillion, while foreign banks are said to hold $12 trillion. When Congress queried Ben Bernanke about the amount the FED had printed and extended to failing foreign banks, he refused to answer. Over the last decade large national banks both domestic and foreign have paid billions of dollars in fines and penalties for criminal activities including mortgage fraud, money laundering, precious metal price rigging, LIBOR interest rate fixing, and other illegal activities. Using these bank leaders, none of which have been imprisoned, as representative of financial morality likely to be found also at central banks, and since FED board members are not accountable to anyone except its owners, are above the law, and neither the FED nor America’s gold holdings have been audited, why would anyone believe anything its representatives say?
In any case there has been an immense amount of fiat money creation. The FED’s systemic freedom to intervene in fixed income, equity, precious metals, and other commodity markets has allowed it to manipulate those markets. It can even manipulate markets by moral suasion merely stating that the FED will keep interest rates low for the next several years. In Europe, its central bank chairman simply stated that the central bank will do “whatever it takes”, and for five years this statement seems to have sufficed to keep European banks and governments from panicking.
Yet the evidence is there that the economy and its metrics cannot be controlled as expected. For example, the FED and its cousins in Japan and Europe have been trying to achieve a stated goal of 2% inflation for a number of years without success. It is another sign that their economic model is not working as desired even when driven by targeted FED or other central bank policies. Yet with the dollar being the major reserve currency of the world, all banks are more interconnected than is desirable. Any reduction in the dollar’s status or a major diminishing in its value relative to other currencies will bring disaster to the global banking system. That is the hit that foreign countries will have to take in order to be free of the dollar system, but it appears that the world is readying exactly for this event.
Increasingly there are major risks to the value of the dollar. Foreign countries, long incentivized or forced to use dollars for trade, over decades have experienced harsh re-negotiations of debt and often have had to surrender their financial sovereignty to institutions such and the IMF. Their collective experience has prompted them to seek independence from the dollar. The BRICS nations have moved far along a path to construct an economic and banking zone free of the dollar’s influence. China and Russia’s are already trading oil and other products in the yuan or ruble. Having these currencies officially backed by gold is likely to be the event that will bring about a permanent currency devaluation of the dollar. Oil future contracts are ready in yuan and convertible into gold, as gold can be purchased for yuan on the Shanghai Gold Exchange. A new dinner table seating arrangement is being set up for global governance elitists.
To keep our financial hegemony intact, the IMF is likely to print a world reserve currency called the Special Drawing Rights (SDR) as a logical sequel to the existing now problematic dollar. This would be highly attractive to the U.S. and likely acceptable to the rest of the world - as the dollar is the major component of the SDR, which also includes the Euro, British pound, Japanese yen, and Chinese yuan. But the more important consideration is that the creation of SDR global money does not preclude or negate BRICS countries using and developing yuan/ruble gold-backed trade. This would still be a democratization of currency acceptance, and individual countries could make their sovereign decisions for their reserve currency choices. By contrast, singular world embrace of the SDR would become the mother of all centralizations, fully attendant with its risks of control, corruption, and geopolitical games.
This all means that America’s petrodollar hegemony will be undone. It also means that the trillions of dollars in bank-held derivative contracts will be looking for collateral, which will not be able to be satisfied. It also means that America’s ability to utilize currency wars and sanctions effectively will be severely reduced weakening geopolitical influence. Finally, it means that if America’s leaders themselves do not officially devalue the dollar against gold as it did in the last century, there will be a foreign-forced revaluation of gold severely devaluing the dollar. It looks as if the country’s majority of “deplorables” all will have to sit at the table of our leader-created consequences of the last decades, and eat the same meal and bear the same consequences.
Conclusion
Never in the history of America nor in the history or the world have we had such connectedness and interdependency. Never have people and countries been so aware that the present financial system with its mountainous debt abetted by its vulnerable fiat currency is not sustainable, and that it has been in the process of demise and conversion. Both leaders and common folk are aware that this long multi-decade process is coming to a predictable end. That long process will now be supplanted by the coming of a relatively short but disruptive global financial reset event. This has been well described by Nobel winning economist Dr. Hyman Minsky where excess debt starts a financial crisis, but trivialized by the vision that one last fallen snowflake on a snow-bank starts the avalanche.
Throughout and after this difficult reset period as measured in years, the more tech- savvy employed will hardly notice the problems associated with those who cannot qualify for a job, and will see their lives continually improved by amazing new innovative electronic technology and gadgets. Their quality of life will improve a lot. As the novelty of the first robot providing hot towels to its hotel guests or cooking and serving a hamburger in a restaurant becomes commonplace over time, the long-term rate of those employed will continue to decline. Over decades this paradigm may return our society to its old feudal ways with those tech-savvy people with jobs as “landed barons” with the rest seen as the toilers in the fields. The future for the employed will be very good indeed – but not so good for the rest.
However, for the vast majority of people on this planet, initially this systemic economic, currency and financial tsunami will impoverish every household, inundate every bank and other financial institutions such as insurance companies, will destroy bond and stock markets around the globe, cause the coup d’état or overthrow of country governments, drastically change the moral values in our societies, cultures, and even a number of civilizations in unpredictable ways. So profoundly mankind will be affected that perhaps many years in the future a historian-authored book may raise the question as to how some of us humans could have been so arrogant, tyrannical, power hungry, elitist – or so myopic, lacking in empathy, compassion and foresight. How could we allow the “Sum of Risks” become so large?!
Raymond Matison
Mr. Matison is a U.S. patriot who immigrated to this country in 1949. With a B.S. in engineering physics, an M.S. in Actuarial Science, work in the actuarial field, and as a financial analyst at Legg, Mason Inc., Lehman Brothers, and investment banking at Kidder Peabody, and Merrill Lynch provides a diverse background for experience. First-hand exposure to fascism, socialism, and communism as well as the completion of a U.S. Army military intelligence course in the 1960’s have inspired a continuing interest in selected topics in science, military, and economics. He can be e-mailed at rmatison@msn.com
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