I believe we, as a nation, are about to become very poor. This false sense of prosperity, which has been possible only through deficit spending and a fiat monetary system, is coming to an end; and, well it should.
Our foreign creditors have already limited how much they are willing to lend to us. This began back in July when foreign creditors pulled over $25 billion out of the U.S. stock and bond markets. This is the point when the real credit contraction began. At that point borrowing began to get more difficult.
But the real boogey-man, lurking in the shadows, which doesn’t get discussed in the mainstream media, is the derivatives market. This is what the central planners of the world are truly concerned about, because it is slowly unraveling and has the ability to stop the world from turning. The estimated value of the derivatives market (CDO, CDS, MBS, etc.) ranges from $500 trillion to over $1,000 trillion(!). The GDP of the entire world is around $75 trillion. Warren Buffet has referred to derivatives as “weapons of mass destruction.”
Banks around the world are supposed to abide by Basel regulations. However, the bankers and corporations developed a way to spread out their risk without violating the regulations. They developed the derivatives market, which is essentially gambling on a global scale. Derivatives are essentially insurance contracts on securities the insured didn’t even necessarily own, except they weren’t called or considered insurance so they didn’t fall under SEC regulation.
AIG was the biggest seller of these derivatives and due to losses stemming from these contracts AIG lost its’ AAA rating which led to further calls on it’s contracts, which, in turn, led to the company’s bankruptcy. The whole operation was a fraud.
Once this happened, everyone else starting failing…Lehman, Merrill, etc. The end of AIG meant the end of all the investment banks, as they had no way to insure their obligations which, in turn, meant they could no longer borrow money.
The other big player in this game and the biggest trading partner with AIG was Goldman Sachs. When AIG went under, Goldman immediately lost over $20 billion. To keep their operations going, Goldman was allowed to become a commercial bank and borrow directly from the Federal Reserve.
While there are others components to this crisis, it is the credit default swap contracts written by AIG that allowed it to get so out of hand. And, without the government stepping in and bailing out AIG, every bank would have failed.
None of this ever could have been possible if the world hadn’t abandoned the gold standard for a fiat monetary system.
What can be expected, as these derivatives continue to unwind, is the printing of massive amounts of paper. And, while the market is currently deflating, the overall consequences of the actions of the Treasury Department (headed by former CEO of Goldman Sachs) and the Federal Reserve Bank will be inflationary. Those who are going to get hurt the most will be those living on fixed incomes such as Social Security; most especially since we are facing a crisis there, too. The total outstanding obligations for Social Security and Medicaid are approximately $70 trillion. No one, other than David Walker, the former Comptroller General of the Currency, is talking about this.
This has the potential of having monstrous snowball effect. As the Fed and the Treasury pump trillions of dollars into the world economy, the value of the dollar will decline and all of the foreign nations and sovereign wealth funds holding these increasingly worthless dollars will divest themselves of them. The result will be all of that paper coming back here. Hyperinflation.
As far as the bailout goes, that had more to do with expanding the powers of the Executive Branch, than it did with appropriating money. Case in point, while Congress was debating the bailout, the Federal Reserve pumped over $600 billion into the economy. It did, however, blatantly display for whom the government works – the banks and corporations.
When the people delivered as resounding “NO!” to Congress, the Representatives chose not to represent their constituencies. And, the Executive Branch resorted to actions akin to terrorism, in order to coerce the House to vote yes, as explained by Congressman Brad Sherman on the House floor:
I don’t think we are anywhere near the bottom this yet. And, the actions taken by the Fed and the Treasury Department run parallel with the actions taken during the Great Depression – price fixing. Instead of slaughtering cattle and plowing crops under to keep agriculture artificially high, they are trying to inflate the currency to keep housing artificially high. It didn’t work then and it won’t work now. What they will succeed in doing is creating a depression like we have never seen before; most especially since we no longer have any manufacturing or industry to fall back on.
I, also, don’t believe this was an accident, as too many people had been warning of this for way too long. I do believe that it turned into something far more than the central planners bargained for, however.
