Friday, January 16, 2009
The forecasters at Leap2020 (who have been right in many of their predictions, but wrong in large calls such as the timing of the collapse of the dollar) are predicting that 2009 will be an unfolding year of worldwide insolvency:
Is there anything to what they are saying?
A new sequence of the fourth phase (so-called "decanting phase") of the unfolding global systemic crisis has began: the sequence of global insolvency.***
Contrary to what political leaders and their central bankers seem to believe worldwide, the problem of liquidity that they are striving to solve by means of historic interest rate drops and unlimited money creation, is not a cause but a consequence of the current crisis. It is in fact a problem of solvency***
The situation prevailing today throughout the entire global financial system, a large part of the world economy and all the economic players (including States) who based their growth on debt in the past years. The crisis translates and magnifies a problem of global insolvency. The world is becoming aware of the fact that it is a lot poorer than it used to believe in the last decade. And 2009 is the year when all the economic players must try to assess their real level of solvency, knowing that many assets are still losing value. Moreover a growing number of investors no longer trust the traditional instruments and indicators of measurement. Quoting agencies have lost all credibility. The US Dollar is just a fiction of international monetary unit and many countries are striving to get away from it as quickly as possible. Thus, quite rightly, the entire financial sphere is suspected of being a giant black hole. Concerning companies, no one can tell if their order books are reliable because in every sector customers cancel their orders or just stop buying, even when prices are discounted, as indicated by dropping retail sales in the past few weeks. Concerning States (and municipalities), slumping fiscal revenues are likely to result in even higher deficits and then bankruptcies. As a matter of fact, Russian billionaires, Gulf oil-monarchies, Chinese commercial Eldorados, all the « golden-egg geese » of companies and financial institutions of the planet (namely European, Japanese and North-American ones) turn out to be insolvent or hardly solvent. The question of the solvency of the US federal State and federated states (as well as of Russia or the United-Kingdom) is beginning to be asked by some big international media; as well as the question of the solvency of large capital-based pension funds, major players in this past twenty years’ globalised economy.
According to LEAP/E2020, the trend is clear: the sequence that has begun this year is a sequence of global insolvency.
Well, probably the leading expert on monetary policy - Milton Friedman's co-author on the leading treatise on the Great Depression - agrees that the problem is not one of credit, but of solvency. She told the Wall Street Journal in October that insolvent American companies should be allowed to fail, so that the system can correct itself.
Paulson and Bernanke and Frank and the rest ignored her. Instead of letting poorly-run companies fail, and letting well-run companies pick up the pieces cheaply and then use them for valid business purposes, the fed enacted various schemes to try to stop or hide the failure of the weak and incompetent businesses.
The government has not only failed to stop "the contagion", they have ensured that it infects larger and larger companies . . . and eventually the governments which try to "fix"
Due to this faulty approach to the economic crisis, the entire world now faces an insolvency crisis.