The Big Game – I Told You It Would Not Work

| October 9, 2008

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As I write this, the markets in Japan are down nearly 10%. Several of the markets in Asia are closed in hope of shuttering themselves against the raging storm that they helped create. The Yen carry trade is at long last unwinding like the tightly wound spring it was. There is not enough money in existence to stop what has been going on this past week. No bail out from the Fed, Treasury, the UK, the EU or even Saudi sovereign wealth can stop it, they never could All of the leverage that funds in the US, UK and EU borrowed at near 0% interest in Japan in order to speculate in long term debt is being called in. As a result the Yen is rocketing higher as suddenly everyone needs to buy Yen to repay these loans.

The hammer will fall hardest on countries like India and Brazil, who have borrowed heavily to build infrastructure to lift their population out of poverty. The fight for them will be to find a way to survive as the altruistic world bankers adopt a bunker mentality, and it’s every currency for itself.

We will soon face a moment of decision – is the future a regulated socialist world, forever painted in washes of gray colored by rampant government regulation and controls? Or will we let the facade of the rotten corrupt system burn to the ground, therefore sowing the seeds of the next golden age?

More than a year ago, in a post entitled “Iron Sunrise” (apologies to Charles Stross) I likened the world financial systems to a dying star that had run out of ready fuel, in this case the fuel was debt. For months I have been trying hard not to post any “I told you so” information on this building disaster, but now let me quote from last year:


Remember – this was written in 2007:

For the last few weeks, access to these enormous blocks of credit has all but been eliminated as the entities that might offer them recoil in fear from the credit markets. The problem here is that so much bad paper (debt) was sold as good debt over the last 4 years that no one knows who to trust any more. As a result there are some strange and unprecedented events. Leverage buy outs (recently re-coined “private equity”) have frozen up in mid-deal. In some cases the banks who agreed to provide the cash and then sell the debt on the open market are left holding a multi-billion dollar bag.

The stones are all lined up for the avalanche, but some of the strongest forces in the market (Federal Reserve, Goldman-Sachs, Merrill Lynch and others) are doing everything they can to hold it back, or at least force it to unfold slowly.

The way I like to look at it is the analog of the life cycle of a star. Your average star is an unimaginably huge ball of gas that is undergoing continuous nuclear fusion due to its enormous size – that is to say a huge, ever exploding hydrogen warhead just 93 million miles down the road. When a star like our sun runs out of fuel hydrogen, it starts to burn other elements, each stage the fusion core produces heavier and heavier elements as the start keeps swapping to whatever it has to burn to stay “lit”.

As a result, even solid corporations are now wanting for the basic fuel of business – money. This could be seen as the same hydrogen a star normally burns. Lacking money, they could use debt (helium), but now even that is hard to come by.

This garbage debt is the tail end of the bright burning prosperity cycle that will soon be a fond memory. It is the Silicon and Iron of our economy. It may be the fact that this is all that is currently left to use as fuel for the global engine. We as a planet are in new financial territory, and there is no good prediction or model of how this will unfold. The biggest players on the world stage are committing huge resources to slow down the collapse that the laws of math say must take place before we can clear out the dead wood and usher in the next age of prosperity.

One has to wonder if these giants see things much more clearly than we do, as they act as if they are in a fight for their very existence.

As a star enters it’s iron cycle, it has only moments to live. Already the core of the star is collapsing leaving the burning surface a hollow shell, moments away from “blow off”. Sadly this blow off is all of the money you and I have carefully held back from our pay and salted away in the markets in hope of not just providing the fuel for future prosperity of our country, but funds of our retirement as well.

Now a year later, we know that in fact these financial titans were in fact fighting for their very existence. Many of them did not or will not make it. In fact (contrary to popular opinion) they must not survive if we hope to realize the brighter future that dark days create. For the future to be born, the dead elements of the past must be cleared so that a better, hardier form can arise.

If me, a computer scientist could see this more than a year ago, how can the likes of Paulson and Bernanke claim this was a surprise? The truth is, as I pointed out in September of 2007, they all knew this day was coming and tried everything they could to play for more time in the vain hope that they could somehow cheat the reaper and forestall the day of reckoning.

There is no joy in calling this one right. At this point the collapse is finally under way, more than 18 months or so after it had wanted to start. By delaying this inevitable event, they likely multiplied the size many times over. It is collapsing so fast that it will be well into 2009 before the shock wave hits the broader world economy. Nearly every firm and corporation in this country and others are soon going to re-assess all of their plans for new projects and funding for 2009 based on a new reality. Some familiar names will cease to exist, and others will be a shadow of their former self.

Make no mistake, there is an ending here. But there is also a beginning, the choice will be ours and will determine how our collective future looks.

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Category: Credit Backlash, Economics, Geopolitics, Main, Recession Watch

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

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