Wise Words – October 2022 – On Financial Crises And The Bankruptcy Of Nations

==== The Cause Of The Current And All Financial Crises

Currently there is a minor panic in the UK. This may escalate to a major one if there is a run on the Pound. The immediate cause is a chancellor stating that he would increase government borrowing and reduce taxation at the same time.

That sent a very bad signal to the current market ‘casino’. It looks irrational, even in a post-sanity society.

The root cause of the problem is the same as always: Bad Paper.

CDOs, LDIs, CFDs, paper currency, shares, it doesn’t matter any more. Institutions issue paper of a type or quantity that the boys in the back room know is a bad risk. They give loans to bad risks and then offer paper derivatives of those loans.

Brokers buy the paper, hold it, or sell it on. They bet that it will go up in value, or offer an income. Shorting makes the problem worse; thousands of brokers have a vested interest in seeing the issuing entity do badly. This militates against upright commerce.

Brokers know human beings are irrational, impulsive and greedy. Brokers themselves are under the gun to turn a profit. 

The game is not to be left holding the Bad Paper when someone at the table bets large on tick and then goes bankrupt when the bill comes due.

In a casino, only the debtor and the casino lose out. In the stock market, the rot ripples out and your aged parents get their pension payouts slashed.

I’ve lost track of the number of recessions I’ve lived though and the cause is always the same: Bad Paper.

I recall only two, Nordic governments who handled such crises properly. Anglo-Saxon governments are too much in thrall to the mystique of money to bring the hatchet down, surgically, where it needs to fall, to the greatest benefit of the taxpayer. Not enough men are ‘perp-walked’ in front of the cameras to discourage the younger generation of wanna-be tyros.

The fundamental problem is now everyone thinks like a gambler and no one thinks like the biblical Joseph who foresaw the seven lean years.

Everyone wants to be a ‘playa’ and win big. No one wants to take the longer, harder, quieter, surer road.

Bad Paper has been normalised; see the recent popular Cryptocurrency rout.

Everyone knows there’s a problem but the shylocks still financialise, the technocrats nod them on, politicians bow before them and the plebs still accept constantly-depreciating plastic money in exchange for the sweat of their brow, which ‘money’ is itself a Realised Lie: it’s been a long time since the Pound could be exchanged for a pound of silver!

 

===== Why Does My Country Have Such a Huge Financial Debt/Deficit ?

Your country has a huge public debt/deficit/is effectively bankrupt, for one or more of the following reasons:

– It borrowed to sustain a war which was not as short and decisive as its generals expected.

– It repeated the above.

– It wanted First World amenities but it only had a second-class economy, so it borrowed to pay for them.

– Large, useless public building projects used up millions/billions/trillions in public funds.

– The state’s dole (welfare) obligations increased in scope year-on-year.

– The state has a free medical system which does not triage potential patients; any citizen may demand treatment.

— The public and its politicians have a mindset that state spending is free; they do not think that they and their children, and their children’s children, personally pay for it, eventually.

– Its leaders are corrupt.

– Its citizens are, overall, corrupt.

– It went through a recent revolution/iconoclasm and lost its collective memory.

– Its politicians let foreign entities dictate to them. 

– Its politicians and generals have made too many bad purchases e.g. of overpriced and/or unreliable military equipment.

– Its politicians dare not/will not not preach austerity to the public; profligacy garners votes, prudence does not.

– It created a national crisis and borrowed to offset the result e.g. the Covid virus response.

– Its central bank printed too much money, thus lowering its value to foreign lenders/buyers. The country as a whole is seen as a worse risk and thus its borrowing costs increased. This continued for years.

– Its bankers, stock brokers and politicians encouraged the public to get into more personal debt, or at least did nothing to discourage it. Thus the country as a whole is seen as a worse risk and thus its borrowing costs increased.

– Its public sector workers have excessive pension entitlements, for which money has to be borrowed to pay, as people are generally living longer.

– Its public sector workers are too many in number for the work available.

– Its public sector workers in the top tiers are paid too much, and vote themselves more.

– Its politicians and most of the public think that having more and more public sector workers is A Good Thing.

– Its politicians and their constituents have not figured out that the flow of money between taxpayer, treasury and the private sector is almost all one-way; a crisis is fomented and then the offer comes to solve it, for excessive fees. Your taxes are spent before they are collected and you are paying 30 – 60% of your income in taxes overall!

– Its politicians, bankers and financiers fell for the latest fashionable financial wheeze when the smart money was thinking about getting out, or didn’t invest in it at all.

– Foreign powers deliberately encouraged your government to borrow money, so as to gain control over a key local resource e.g. oil fields, minerals, arable land.

– Foreign bankers know that yours is a stable country which will eventually pay its debts, so they are happy to let it ‘run up a tab’. Sometimes they don’t care if the country is stable, if they can get high interest rates on bonds in a 5-year window.

– Foreign investors are desperate to gain a return, and thus are happy to place money where there is a reasonable chance of a 3%+ annual return in the short to medium-term.

– Your country is socialist, officially (or more commonly, in practice.)

– Your country is not Christian.

– Your country’s politicians think that only one of the above is a cause of the country’s financial problems.

In fact, there are multiple causes, but they can’t consider them all at once, if they even know them, because they do not have high IQs. Or they do know them, but prefer to ‘dumb it it down’ for the public, keep their jobs as long as possible, then move into the private sector when de-selected due to public anger, letting the next incumbent handle the problem(s.)

Continue with the above for 50 years and you too will experience a depression the way your grandparents did. The second and third generations do not learn from history and thus make the same mistakes as their forefathers.