More Sovereign Defaults Loom?
By Staff News & Analysis - March 09, 2010

Inter-dealer broker Tullett Prebon expects worries of a second crisis caused by sovereign debt defaults to boost volumes in its industry this year, although revenue from trading is down 5% so far. Terry Smith, the company's chief executive, said the company would benefit from greater volatility causing more trades, after profits rose slightly and revenue remained flat in 2009. "I would be shocked if there was not another crisis at some point during the course of this year," Mr Smith said. "Banks have de-leveraged, but governments have leveraged up." The company's revenue was flat at £948m and pre-tax profits grew 14% to £156.5m on cost reductions. – UK Telegraph

Dominant Social Theme: If it's not one thing, it's another.

Free-Market Analysis: In keeping with the Bell's analysis of dominant social themes for investment purposes, we draw the reader's attention to perhaps the most important point of the above article: "Banks have de-leveraged, but governments have leveraged up." This is an innocent sentence, perhaps, but to us its eight words manage to purvey radical confusion. They are in fact symptomatic of an economic confusion that has expanded drastically over the past century.

You, dear reader of the Bell, are a super-sophisticated economic maven and not apt to be confused. But many people reading this sentence might be quite upset by it and for the wrong reasons. They would think, perhaps, that the private sector was starting to behave responsibly –finally – but that government still hadn't caught on to the necessary cost cutting. Government, these observers might believe, still doesn't understand that moderation and fiscal probity are key.

They would be wrong, of course, for reasons we are about to explain – ones having to do with economic inter-connectedness. What we are getting at of course is that in the central banking/fiat money era, there is no real private sector left. The public sector, thanks to mercantilist money printing, is everywhere and in a sense controls everything.

How does it work? First governments print too much money, causing a mania, and then the private sector implodes into ruin. Again, the government and those standing behind government print more money. Gradually the private sector, especially big banks and big corporations, are stabilized. But in doing so, government has turned the danger of a deflationary depression into a potential hyper-inflationary crisis.

Today, we would argue, we are in the center of the eye of the hurricane. On the other side lie the raging, gale-force winds of massive inflation, government (sovereign) defaults and repudiations. Yes, global "private sector" bankruptcy has been averted for the time being by direct and indirect applications of massive public funds. But there is no science here. No delicate calibration of what is necessary. Literally trillions have been printed and given away without care, without thought, in a blind panic to ensure that the system does not collapse. These give-aways are not free. They are not without consequence.

Now, as a result, government is "leveraged." Private deleveraging and public leveraging are part of the same dysfunctional mechanism. That's how the mercantilist fiat-based business cycle works. But in this case, because the ruin was so evident and the system was so desperately close to falling apart, we can only assume that what lies on the other side is going to be equally deadly. Why shouldn't it be? For every action there is a reaction.

On the other side, to be sure, lie more defaults – "public" rather than "private." But there is another issue, too, that we want to raise, and which the article excerpted above does not examine. It is the larger issue of Western (and global) economic viability. Governments must cut costs, pay down debts and raise revenue to survive. But from a larger economic standpoint, there is likely only one way to deal with tomorrow's challenges. And that is to do what Federal Reserve chairman Paul Volcker did in the late 1970s in the United States – drain the swamp of excess money by printing less of it and raising interest rates to double digits.

The trouble with this solution is that the business cycle this time around has been so excessive and so obviously destructive that it might take much HIGHER interest rates to do the trick. Rates of thirty or forty percent, anyone? A truly drastic reduction in the money supply driving the US and the larger Western world into depression? This is a most grave scenario. People may not stand for an economic environment that is two or three times more punitive than it was the in the late 1970s and early 1980s.

The other problem is that Paul Volcker worked his magic in a pre-Internet era. People didn't really understand what was going on and Volcker was presented as a hero in America for "saving" the system. He didn't save it, of course, he merely SALVAGED it for the same crowd of power elite players that have driven it into the ground once more.

And so we find ourselves (as is the Bell's unique investment mission) once again trying to ascertain the potential success or failure of the elite's dominant social themes – their ability to sustain their promotions. In this case, as in many others, we must confess that we are not in a position to make a definitive prediction, not yet anyway. Even so, we would urge readers to grapple with these issues as best they can, for they are most important. You see, if you believe that the elite is going to be able to navigate the second leg of this financial hurricane and come out with an intact financial system, then you will make certain financial decisions and live and work a certain way.

But If you believe the next leg of the economic crisis presents the harder test – draining money rather than printing it – and if you believe that people simply won't stand for what may be an ongoing jobless depression or severe inflation verging on hyperinflation, then you will conduct your affairs in a much different manner. And to make it even more complex, your analysis, if you choose to approach the world this way, will be complicated by the advent of the Internet.

It is the Bell's contention that the success or failure of elite promotional themes (global warming, peak oil, the necessity of green industry, the efficacy of central banking, etc.) constitute the most important elements of investing in the 21st century – but that the prospects for continued success (and acceptance) of these memes has been complicated immeasurably by the Internet, which has exposed many of them and continues to do so today. One must certainly analyze the prospects of elite memes, but in today's world that analysis must take the Internet truth-telling and ongoing reporting into consideration.

After Thoughts

As more begin to understand the reality of power-elite promotions – that they are a kind of fear-based propaganda aimed at gathering additional wealth and power for only a few (at the expense of the many) – the task of those supporting such promotions grows increasingly more difficult. To be a successful investor in the 21st century, one will continually have to monitor the success or failure of the power elite as they grapple with the other side of the global economic hurricane. Upcoming sovereign defaults may be grave indeed, but there are other difficulties that lie ahead – and savvy investors will have to calibrate each and every one.