In his recent article, “The Global Economy is at the Point of Maximum Danger,” English commentator Ambrose Evans-Pritchard wrote:
“The world’s two biggest financial institutions have had a heart attack. The global currency system is breaking down. The policy doctrines that got us into this mess are bankrupt. No world leader seems able to discern the problem, let alone forge a solution.
“The International Monetary Fund has abdicated into schizophrenia. It has upgraded its 2008 world forecast from 3.7pc to 4.1pc growth, whilst warning of a “chance of a global recession”. Plainly, the IMF cannot or will not offer any useful insights. Its “mean-reversion” model misses the entire point of this crisis, which is that central banks have pushed debt to fatal levels . . . .”
“Mean-reversion” is a mathematical methodology commonly used for stock investing that can also be applied to other processes. The general idea is that both a stock’s high and low prices are temporary, and that a stock’s price will tend to “revert” to its average (or “mean”) price over time. When the current market price is less than the average price, a stock is considered attractive for purchase, with the expectation that the price will rise (revert) to the “mean”. When the current market price is above the average price, the market price is expected to fall. In other words, deviations from the average price are expected to revert to the mean.
Insofar as the International Monetary Fund claims to rely on “mean-reversion” data to predict the future economy, the IMF is betting that the global markets are so far from their averages (or mathematical “means”) that a technical correction must take place and all the high commodities prices must fall back (revert) toward lower, more average prices, while all low stock prices must likewise rise (revert) back to higher, more average prices.
The IMF’s “mean-reversion” theory makes pretty good sense—unless a new element has entered into the equation.
For example, suppose the captain of the SS Titanic calculated the average elevation of his vessel for the first several hundred miles of the voyage was at sea level. The Titanic might ride up on some waves that would elevate the ship a few feet above sea level, or the ship might slip into an occasional trough where the elevation was temporarily a few feet below sea level. But under a “mean-reversion” theory, the Captain could normally predict that every time the ship rose above sea level, it would fall back down (revert) to sea level, and every time the ship fell below sea level, it would again rise “revert” back to sea level (the “mean” or average elevation).
But once you introduce an new element—like an iceberg—into the mean-reversion equation, the old data and the old mean become irrelevant. Once you put a hole in the hull and the Titanic sinks 50 feet below the sea level, the former mean-reversion calculations are powerless to push the vessel to “revert” to the “mean” (sea level).
Same thing with stocks, bonds, commodities—and even national and global economies. The mean-reversion theory probably works pretty well—unless a new element is added into price calculations. When the IMF declares that according to the “mean-reversion” test, the high prices of commodities and low prices of stocks must soon “revert” back toward the “mean” or “average,” the IMF is ignoring the fact that two enormous changes (icebergs) have intruded and compromised the value of any previous “mean-reversion” data:
First, the dollar—once directly backed by gold, and then by silver, and finally (indirectly) by oil—is no longer backed by anything. The dollar (declared by Public Law 95-147 of October 28th, A.D. 1977 to be of “no assured value”) has become a pure fiat currency of no intrinsic worth whatever. That means that all paper promises to pay (debt instruments like stocks, bonds, mortgages and pension funds) that are denominated in dollars, no longer have any known or assured intrinsic value.
As a result, no one really knows what “$1” or “$100” or “$1 million” really mean anymore. We know that $100 is 100 times bigger than $1 and that $1 million is 10,000 times bigger than $100, but nobody knows that $1 dollar is. We have complex economic equations like “Wealth = (a + b) times X”, but no one knows that “X” (dollars) is. As a result, we can understand the direction and velocity of the economy, but we have absolutely no means to understand its substance. The resulting confusion is reminiscent of construction of the Tower of Babel.
Our fundamental measure of economic activity has become meaningless. More importantly, as the entire world slowly recognizes that seemingly irrational fact, dollar depreciation (inflation) will continue until the dollar is virtually destroyed or gov-co restores its meaning with a gold or silver backing.
The second and probably more fatal of the two “icebergs” is the fact that the total debt of both the United States and of the world is too great to ever be paid. Total American debt of the federal, state & local governments, plus private debt (mortgages, car payments, master card, business loans, etc.) is estimated to be about $75 trillion. That averages out to about $250,000 for every American man, woman and child.
Does anyone believe that the average man has $250,000 in assets to pay off his “fair share” of that debt? I sure don’t. Does anyone believe that an average family of four has an extra $1 million to pay off their “fair share” of that total debt? I don’t. I doubt that more than one man in 100 could repay his “fair share” of that debt. Thus, there is no way that such debt can be repaid with the current value of the U.S. dollar.
No way.
The average global debt—based on $700 trillion in derivatives, plus God only knows how much national and private debt for people who are not Americans—could run as high as $800 trillion to even $1 quadrillion. Divide that debt by the global population of 6.7 billion, and we see that the average man’s share of the global debt is somewhere between $120,000 and $150,000 (that’s in addition to the total American debt).
Does anyone believe that the average Asian, African or even European has an extra $100,000 to repay their “fair share” of the global debt? I don’t. Can anyone suggest a way for this debt to be repaid? I can’t.
The world’s annual Gross Domestic Product is roughly $54 trillion. Assuming the total global debt is only $800 trillion, that means the total global debt is about 14 times the size of the annual global income. If the people of the world agreed not to spend one dime on their own food, clothing, shelter, energy, entertainment and taxes for 14 years, we could completely repay the existing debt. But such agreement is impossible. While it might happen that we won’t be able to eat for 14 years, I guarantee that you’ll never see a time when governments stop collecting taxes for fourteen days, let alone fourteen years.
Point: There’s no way to repay the value of the existing global debt. No way.
To illustrate, suppose you earned $100,000 per year and you were in debt for $1.4 million (14 times your gross). After you pay for your normal expenses like food, housing, transportation and taxes—if you really, really “tighten your belt”—how much do you suppose you’d have left each year to repay on your $1.4 million debt?
Pick a number: Ten grand? Twenty? Thirty?
If you could repay $20,000 per year on the $1.4 million debt, you’d be paid up in just 70 years (unless your creditor charged interest on the debt, in which case it might take two or three times as long). Do you know anyone willing or able to work for 70 years? I don’t. Do you know of anyone willing to live at a subsistence level for 70 years so they can pay off their “fair share” of a debt they didn’t personally incur? I don’t.
Point: Again, there is no way to repay the existing American and global debts. No way.
In fact, there’s no way to repay even half of the existing debt. And I’d bet that there’s no way to repay more than 20% of the existing debt. In fact, I expect to see 80 to 90% of the existing debt repudiated by inflation or national bankruptcies. If so, then as I’ve said repeatedly, the value of most paper promises to pay (debt instruments like stocks, bonds, bank accounts, retirement funds, cash) that memorialize the unpayable debt will be depreciated by 80 to 90% over the course of the next few years.
In other words, if you’re holding a bond, a 401K, a bank account, or a stock that’s currently valued at $100,000, the day is fast-approaching when the purchasing power of your “paper promise to pay” will be reduced, on average, to between $10,000 and $20,000. You are going to lose $80,000 to $90,000 in purchasing power of your $100,000 debt instrument.
Most of what passes for the world’s “wealth” is denominated in these paper debt instruments (promises to pay) that can’t be paid. What’s going to happen to the global economy when the world recognizes that their purported wealth (paper promises to pay) is depreciated by 80 to 90%? There’s going to be chaos. Utter economic collapse. Shock. And dead bodies stacked up like cordwood.
We are now living a world where 1) the dollar has no intrinsic value; 2) the American and Global debts are impossible to pay; and 3) the debt instruments (evidence of wealth) for the existing debts must be hugely repudiated.
Bear in mind that one man’s debt is generally considered to be evidence of another man’s wealth. If I have a “debt” of $100,000, my creditor has a correlative debt instrument (my promise to pay) for $100,000 which he calculates as “evidence” of his wealth. If circumstances are as I suspect and 80 to 90% of the existing debt must be repudiated, it’s also true that 80 to 90% of the existing paper wealth will also be repudiated.
If you can suggest how any economy can continue to function after 80 to 90% of its purported (paper) wealth disappears, I’d sure like to hear about it.
Therefore, any former IMF “mean-reversion” data (based on a time when the dollar had value and/or it was believed possible to repay all the debts) is no longer applicable. Our “titanic” economy has hit a couple of icebergs; the dollar’s worthless; the debt’s unpayable. Those “icebergs” caused the “mean-reversion” predictions based on historic economic values to have no more current meaning than a prediction that the SS Titanic—sunk to 100 feet below the surface of the Atlantic—will soon revert back to its “mean” elevation at sea level. Once the hull is breached, the mean-reversion calculations must be abandoned and replaced by calculations based primarily on the force of gravity. Once the hull is breached, the Titanic must go down, down, down—until it finally rests on the “bottom”.
The U.S. and global economies have hit the icebergs. Thus, the IMF’s prediction that, under the mean-reversion theory, “happy day will soon be here again” must be false. The IMF must know that the new state of affairs makes the old averages (mean) irrelevant. The IMF is pumping sunshine. That “sunshine” is pretty and it makes you feel good, but it’s a lie.
LORD knows I don’t want what I think is coming. We are not heading into something as civilized as a “bear market,” or a “recession” or even a “depression”. We are heading into a catastrophe. People are going to die. Lots of ‘em. And I can’t see any way out unless someone can devise a way to actually repay the value of the existing debts.
If you know any way to repay the value of the existing debt, do tell. I will thank you. I will praise you. I will ask the Good LORD to bless you.
But if you, too, can’t see or imagine any way to repay the value of the existing debt, then you’d better buckle up because we are heading into a disaster of dimensions unseen since the American Civil War.
