GOVERNMENTAL FUNDING TURBULENCE (07-31-2011)
Last week both Italy and Austria have skipped a planned government bond action (as they were uncertain of the success of it).
“Italy's decision to cancel a mid-August bond auction, citing "large cash availability and the limited borrowing requirement" may ease pressure on Italian yields next month.” (Wall Street Journal)
Governmental funding will derail sooner or later. Not for only the so called PIGS or ClubMed nations, but for all nations. As governments structural spend more than they earn, they’re depending on the cash flow delivered by their bond auctions. Declining market demand/trust will deliver first severe higher rates on the bonds, that will turn into a buyers strike. As it will no longer possible to roll-over their debts, the liquidity of governments will decline severely. Some of them get to the point that they will have to chose no longer to serve the existing debts by interest/amortization payments, but spend the tax revenues on other budget items.
If only one single nation will make this choice, governmental bonds will loose their build-in guarantees (which were not based on actual income, but based on easy funding by debt increase) and become very unfavorable. They will get the same valuation and imago as the CDOs got, when those fell over the cliff in 2007/2008. The domino effect takes care of the rest. Only those with very low debt/GDP ratios will have some access to the capital market.
The result of this will have huge impact: Almost all governments will have just/only access their nett tax income available for both spending and debt service, and not a dime more, as funding will can’t deliver artificial budget extension anymore. Relations of the payment officials of the governments will be paid on time, others will have to wait for ever. To make things more complicated: their tax revenues will fall, as pension funds and other financials will fail as huge parts of their asset portfolios are getting sour and they will go on what’s euphoric called a bank holiday.
Governmental budgets will shrink/contract instantly, not by any political agenda or dogma, but just by the lack of available cash. This will influence nations severely as large parts of their economies are feed by the governmental funding. Governments will have to make dramatic choices with huge impact on people. The pressure on governments will be huge. The temptation no longer service the debt (by interest payments and amortization) will become huge and many nations will stop to service their debts. This will destroy the last standing governmental funding and the governmental bond market worldwide will come to a complete standstill.
Funding governments by publicly (and/or not publicly) printing money is not a valid/sustainable option. The USA did this already for 6 months for approximately 84% of their funding publicly by the POMO (Permanent Open Market Operation) activities of the FRB as China reduced their T-Bill purchases as they wants to diversify their reserves/investments. As the FRB stopped to publish M3 (money creation) data in 2006, the dollar became a virtual currency based on global market demand and they were able to do this also not publicly to support the market demand by the plunge protection team (installed by the Reagan Administration after the 1987 crash and the reason why US markets has outperform any other market since than).
As the ECB still publishes money creation data, the ECB can’t do this, and this is basically OK, as uncontrolled 'printing' of money (no created in normal economic performance) just waters down the value of financial assets. It’s creates money without economic gain, it’s just paying yesterday on the cost of tomorrow. It’s the Zimbabwean method, that only bring economy/society devastating consequences and has also only a very short future. See the picture of the one Billion Mark note of 1923 attached as proof of such. Nationalizing the central banks will also not fix the problem, but may enlarge it even further (the unlimited war funding caused by this is what has brought governments, financial systems and currencies down in the past and this repeating once again is certainly not a valid option).
But their is one huge option/opportunity in this area: when money creation is used for energy investments it will destroy the currency, but stabilize it. This is called the currency/energy hedge of Energy focused/narrowed QE. As parts of the currency reserves of central banks can be wiped out too by this turbulence, this currency/energy is a very important hedge that should be realized ASAP.
The combination of governmental bond default and hyper inflation will be fatal and wipe out the value of all savings/pensions and by this will destroy the wealth of middle class overnight. No government ever has survived of of those two.
Please see http://www.economist.com/content/global_debt_clock, http://www.usdebtclock.org or the illustrated http://usdebt.kleptocracy.us for data on the huge debt problem of the Western World. The West has gone too far in exporting the productive part of their economies and by that in artificial wealth 'creation' by credit. On top of that there's also the issue of not in budgets calculated and by that not funded future liabilities (according to GAO's Comptroller General of the USA).
Capital deficit of governments will become the battle field for/of democracy. Not many governments will survive an instant 50% budget cut. Governments that could find ways to do this with the less impact on society will survive. This is why many governments will stop servicing their debts. Pension funds will collapse or will only pay pennies on each dollar they had to pay. Banks will enter dire straits as they will see declining asset values combined with high loan default ratios. This will impact consumer spending a lot, as the western economies benefit a lot of the spending of the income of older people out of the pension system.
The western world has too much debt, too less production, too much (credit based) consumption and probably too spoiled by all of this. This period of artificial ‘growth’ (started in the 80ties, growth can be divided in real economic growth and credit based artificial growth) has ended in 2007, but we’re still in denial (the other psychological response phases will follow later).
Almost all nations made the last years the very unwise decision the import the huge problems caused by the ‘artificial growth model’ of the banks into the governmental budgets, which by this has come to heavy burdened and will derail, this will cause a collapse of the value of pensions (as pension capital mainly is invested in treasuries). But the invisible part of this iceberg will hit us in the moments of already dire straits (the so called Murphy’s Law): as states default, financials will pull all state granted guarantees which exceeds any imagination we have. Governments thought that guarantees, where just a piece of paper without any consequences. Governments have been as stupid as the insurers of triple AAA CDOs, who thought that insurance was about getting a piece of the action in exchange for a piece of paper. As these CDO insurers all have gone bankrupted, so will all with guaranties parcel out governments do.
It has not ended by policies (no politician can ever redirect this development: there are no miracles available in this area), but by derailing (we’ll all want to ride it to the max, even when it’s derailing yet). The big question is: will democracy survive this derailing? The western world was/is on a cross road: choices had/has to be made (less credit) and they aren’t / will not be made (and the credit system will derail with anything build on it).
All choices can be brought back to one simple question: do we go further in increase remote uncontrollable ‘derivative’ like government structures, or will we cherry pick a new mix of local/national/regional government? In this choice we must know that democracy and distance are reversely proportional. There is no such thing as federal democracy, as that system is too vulnerable for lobbyists: it has became just corporatism that’s still presented as democracy.
Some possible responses/defenses/adjustments/solutions are:
Gov at Home. Senators and Congressmen in the USA and the EU parliament members in the EU should come home and should hold office in their home states. Bill voting by them can be done electronic (as their votes are public there’s no danger of technological manipulation). This will make them less accessible for democracy ruining lobbyists and more accessible for their constituents. It will increase the democratic quality of government. It will deliver a new (balanced) mix of local/regional/national and transnational government, where the gravity point for budget reasons will return to more close to home levels. See the http://www.govathome.com initiative for such a model in the USA. More direct/visual and/or closer to home democracy. This e-Congress model will make hard decisions more acceptable, as well will it be able to cut out easily many by lobbyists injected existing parasitic activities on the governmental budgets.
De-hubbing of continental and global politics. This decentralization also will deliver another new productive continentalization/globalization 2.0 wave: cities/regions will achieve active bilaterals with foreign cities/regions based on mutual interests/benefits/equality for economic performance. Bilaterals where cities/regions are fitting pieces of a puzzle to each other, with not much (things making more complex instead of more easy) central overhead margin: just 100% economic function/output. Just like in air traffic de-hubbing has take place (direct flights from anywhere towards most voluminous destinations), the same will happen in continental and global politics. Concentrations mostly deliver not the best possible price/performance ratios.
Quantitative Easing (money creation) focused on / narrowed to energy investments. This could be done harmless as energy attached assets with their rising output values are the perfect hedge against purely financial assets with their declining output. Energy investments that use renewable ‘fuel’ are purely capital assets that produce a daily needed commodity (electrical power). They reduce the fuel import demand and by that make any economy that chose for them more healthy each day they are in action. Energy focused QE makes a nation structural in better shape. Dig into a more description of all facets involved on http://www.planck.org/downloads/Energy-Politics.pdf or http://www.planck.org/downloads/Energy-Finance.pdf. Energy focused QE will give a way out, turn the tide, deliver market based jobs and market based economic performance.
Install a ‘percolating up’ QE distribution model (as ‘trickling down’ don’t work and only lead to ‘carry trade’ which enforce the risks of the financial system and don’t do nothing for both domestic economic revival, nor energy transition towards cheap/clean renewable. This also will give the banks, pension funds and other financials an energy attached income (and by that time) to adjust their business model to the new realities delivered by the 21st century, without collapsing. See the attachment for a diagram of the possible design such a ‘percolating up’ QE distribution model.
Installing/restoring some new financial regulation. Banning CDS trade if one doesn’t own the original asset, as that’s the tool by which some hunters/speculators makes profit at the cost of the future of nations. Maybe also a retraction of gold leases by the central banks, as those contracts deliver the capital supply to the speculators. Maybe also legislation that makes credit agencies liable for the effects of their too positive ratings (CDOs where rated AAA by them till ‘minutes’ for their implosion), which will change political driven inequalities in rating. Derivatives and virtual short selling are contributing very less to any economy worldwide, but deliver yet the cost of huge turbulence/risks. Since the Reagan and Thatcher Administrations we a) destroyed some wise regulation, b) we build a heavy governmental expansion and c) we exported our economic production. Three not very smart things to do and we pay now for the consequences of both those three mistakes. We've postponed it to the max, with every artificial 'solution' we could think of (most of them have the word credit in their name). Regulation guarantees open/fair markets. Open/fair markets are the foundation of economic performance. Tearing down regulation that guaranteed fair markets was not wise and we have to correct it if we want to restore open/fair markets. The political game of 'give me the fair market regulation decline, than I'll give you government expenses expansion' has brought us here. Both sides can be blamed for the excesses brought by it and which has bought us current status. It has destroyed open/fair markets and bankrupted governments the same time. From now on this should be practiced precisely the opposite direction: increasing better (that's something else than more) the future protecting / direction giving legislation and decreasing the future demolishing / bankrupting governmental expenses. We need some courage in governmental leadership again. We need some vision on a sustainable direction we want to go. A financial sector of 1% GDP is very much contributing to real wealth creation. A financial sector of 10% is very much parasitic on real wealth creation as it delivers wealth destruction. Finance is good and builds a future. Too much finance is bad and destroys a future.
Outphasing 'revolving door' practices. Nations have also to fix the 'revolving door' practices between governments and businesses visa versa, as these practices undermine the credibility/integrity of governments severely, something that doesn't help to get governmental support of the people in more difficult times. Making 'revolving door' practices illegal, is an example of good regulation we need to install as we now suffer under the consequences for governmental imago/function by the absence of it.
Developing a local/regional/domestic/continental energy industry that harvests renewable energy. As this is a fuel free energy models, it fixes the problem of fuel imports which are merely wealth exports (wealth exports we can’t bear very much than). We must change our energy system from imported molecules to domestic harvested electrons.
Stopping with fighting wars all over the globe. An economy can bear one war once in a while (still war can be considered a waste of capital/human/energy/resources/credit), but we ware fighting too much wars simultaneously right now. We've stressed our national security drive till levels where it starts to undermine the national security. Both financial as diplomatic. Maintaining a global army is a very expensive business. We harm our GDP by it severely. War is an expense activity during and afterwards doing it and should be reduced to minimum/necessary levels as it drains an economy both by production loss and cost increase. We should start to calculate all costs. The army's one and only task is protecting the people and not for regime change a la cart for special interest groups and their lobbyists. Socializing costs and privitizing gains is not a good concept. In purely economic terms: We overstretched our global exposure, till levels where it harms our GDP, our governmental budgets, our governmental funding and our national global 'brand'.
Start with geothermal energy exploration. Geothermal is about harvesting the heat of the decay/fission/fusion of the earth’s core on the hotspots of the earth’s crust. Each nation has such hotspots (easy accessible -not deep- small areas where the earth magma has heated rocks or water to almost the surface), not only the nations where volcanic activities are located. Holland for example has a huge hot water reservoir in the province of Groningen. Geothermal is fuelless, limitless, endless and total invisible (no horizon pollution). Geothermal will replace coal and nuclear totally. Geothermal is a good 24/7 based load power supplier.
Quantum Dots PV technology. Quantum Dots make it possible to convert the ‘skin’ of each manmade object/building into a high performance solar energy harvester. Just an isolation layer, a connectivity layer and an active PV layer, all in the form of a sort of paint will do the job. Even windows can be turned into energy harvesters by Quantum Dot technology. We should direct start to cover each roof and each wall with industrial made solar panels within 5 years. This will stop the wealth drain of importing energy fuels/molecules and make households and offices energy independent. The only thing a government has to do is installing Energy focused/narrowed QE with it’s in the attachment described ‘percolating up’ distribution model.
Massive houses isolation. The first thing we should so and the most simple one. Isolation will save energy (and thus wealth) without any wealth/heath consequence if done right. Doing it right is installing 2 or 3 fold windows (an already decades available technology). Doing it right is wall isolation with small polyurethane foam beads with a glue coating. The small beads make it possible to isolate existing objects by some very small drilled channels and still ventilates moisture out of the house. The glue coating guarantees that the isolation stays where it's put as long as the house stands (something beads without glue coating don't deliver). Isolation prevents further eating out of the payment power of households by ever rising energy bills for heating/cooling. It's simple, it's low tech, it's cheap and it's very effective. If the former US Administration had implement this instead of giving everyone $ 1000 the energy wealth drain was stopped significant.
Realizing a currency/energy hedge. Governmental bond defaulting can not be prevented if they financial WMD of hyperinflation is not used. But hyperinflation can be prevented. It can be avoided by hedging the (declining) values of financial assets with the (increasing) values of energy assets. This financial/energy hedge can deliver rest at the financial front, even for nations with a funding problem. An example: Greece has very much geothermal energy hotspots. They can be explored very easily and make Greece the power supplier of South/East Europe. The Greece State can collect license fees on the geothermal exploitation licenses and restore there long term income and by that improve their rating significant. Explaining it just in one line: combining \ with / delivers a stable —.
Outphasing gold totally (as in 100%) as monetary factor (if it's still out there somewhere as factor of any significance). Gold is a total dead asset, that doesn't contribute anything to economic performance/revival. Gold as foundation is a) uncontrollable (Fort Knox) and b) will only deliver a passive everybody and the system parasiting global elite (those who currently hold the gold lease contracts of the central banks and their counterparties, a too long but basic monetary story to explain here), while the general prosperity levels of nations will collapse. Collaterals on energy investments are a much better foundation for the monetary system of any nation in the 21st century. Energy harvesting investments not dead assets like gold as they produce a global wanted commodity (kWh) which also has a huge upside perspective in future pricing. Renewable energy investments (with their increasing output value) are the perfect hedge against the implosion of financial investments (with their declining output values). So the stable foundation/backing of each currency and/or financial should become fuelless renewable energy investments with the Energy as QE and/or Energy as ROI model. Once again: Combining a \ line with a / line delivers a stable — line.
So we can make some conclusions:
The coming season is a very interesting one and that’s a huge understatement. Will governments survive or fall when their budget excess funding stops? Will the nation state stand, or disintegrate or merge into far away / long distance governments with almost zero democracy? Will democracy levels rise or decline? Will there be anarchy, disintegration or will more authoritarian super states models take over? Will energy systems change and contribute to performance of nations? Will the Western World start producing again as the credit based consuming model hits the wall?
The Washington Consensus (budget cuts focused) will be replaced by the Beijing Consensus (investments focused), with attached emergency funding. Having no debts and huge assets is a structural advance we have not appreciated enough the last 3 decades. The whole ‘let other nations do the work’ attitude is a late psychological internal invoice on our apparently still standing colonial thinking. Production based growth creates wealth, credit based growth eats wealth out.
You should picture for yourself an almost full redesign the concept of government based on your own political visions. If budgets are suddenly cut by half: what parts of government you want to continue and what parts of government you want to skip. The size of the budget is on factor, the spending of it another one, where you can paint a new adjusted picture out of your same political heart. This will be the biggest and most difficult challenge of your life. Be prepared for it, so that if it happens you’ve already done your thinking/homework.
I hope this all will help you to draw the picture of the type of closed budget governance you want to see and by that build better/sustainable democratic structures, some easy to implement better financial legislation and the realization of an Energy focused/narrowed QE distribution structure.
The future can be made. Always. Also in tough/challenging times or even in sudden dire straits.