After all these years, the most famous investor in the world still believes that derivatives are financial weapons of mass destruction. And you know what? He is exactly right. The next great global financial collapse that so many are warning about is nearly upon us, and when it arrives derivatives are going to play a starring role. When many people hear the word “derivatives”, they tend to tune out because it is a word that sounds very complicated. And without a doubt, derivatives can be enormously complex. But what I try to do is to take complex subjects and break them down into simple terms. At their core, derivatives represent nothing more than a legalized form of gambling. A derivative is essentially a bet that something either will or will not happen in the future. Ultimately, someone will win money and someone will lose money. There are hundreds of trillions of dollars worth of these bets floating around out there, and one of these days this gigantic time bomb is going to go off and absolutely cripple the entire global financial system.
Back in 2002, legendary investor Warren Buffett shared the following thoughts about derivatives with shareholders of Berkshire Hathaway…
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so
far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
Those words turned out to be quite prophetic. Derivatives have definitely multiplied in variety and number since that time, and it has become abundantly clear how toxic they are. Derivatives played a substantial role in the financial meltdown of 2008, but we still haven’t learned our lessons. Today, the derivatives bubble is even larger than it was just before the last financial crisis, and it could absolutely devastate the global financial system at any time.
During one recent interview, Buffett was asked if he is still convinced that derivatives are “weapons of mass destruction”. He told the interviewer that he believes that they are, and that “at some point they are likely to cause big trouble”…
Thirteen years after describing derivatives as “weapons of mass destruction” Warren Buffett has reaffirmed his view that they pose a threat to the global economy and financial markets.
In an interview with Chanticleer this week, Buffett said that “at some point they are likely to cause big trouble“.
“Derivatives, lend themselves to huge amounts of speculation,” he said.
Most of the time, the big banks that do most of the trading in these derivatives do very well. They use extremely sophisticated computer algorithms that help them come out on the winning end of these bets most of the time.
But when there is some sort of unforeseen event that suddenly causes a massive shift in the marketplace, that can cause tremendous problems. This is something that Buffett discussed during his recent interview…
“The problem arises when there is a discontinuity in the market for some reason or another.
“When the markets closed like it was for a few days after 9/11 or in World War I the market was closed for four or five months – anything that disrupts the continuity of the market when you have trillions of dollars of nominal amounts outstanding and no ability to settle up and who knows what happens when the market reopens,” he said.
So if the markets behave fairly calmly and predictably, the derivatives bubble probably will not burst.
But no balancing act of this nature ever lasts forever. Just remember what happened in 2008. Lehman Brothers collapsed and then the financial system virtually froze up. According to Forbes, at that time almost everyone was afraid to deal with the big banks because nobody was quite sure how much exposure they had to these risky derivatives…
Fast forward to the financial meltdown of 2008 and what do we see? America again was celebrating. The economy was booming. Everyone seemed to be getting wealthier, even though the warning signs were everywhere: too much borrowing, foolish investments, greedy banks, regulators asleep at the wheel, politicians eager to promote home-ownership for those who couldn’t afford it, and distinguished analysts openly predicting this could only end badly. And then, when Lehman Bros fell, the financial system froze and world economy almost collapsed. Why?
The root cause wasn’t just the reckless lending and the excessive risk taking. The problem at the core was a lack of transparency. After Lehman’s collapse, no one could understand any particular bank’s risks from derivative trading and so no bank wanted to lend to or trade with any other bank. Because all the big banks’ had been involved to an unknown degree in risky derivative trading, no one could tell whether any particular financial institution might suddenly implode.
After the crisis, we were promised that something would be done about the “too big to fail” problem.
But instead, the problem of “too big to fail” is now larger than ever.
Since the last financial crisis, the four largest banks in the country have gotten approximately 40 percent larger. Today, the five largest banks account for approximately 42 percent of all loans in the United States, and the six largest banks account for approximately 67 percent of all assets in our financial system. Without those banks, we would not have much of an economy left at all.
Meanwhile, smaller banks have been going out of business or have been swallowed up by the big banks at a staggering rate. Incredibly, there are 1,400 fewer small banks in operation today than there were when the last financial crisis erupted.
So we cannot afford for these “too big to fail” banks to actually fail. Even the failure of a single one would cause a national financial nightmare. The “too big to fail” banks that I am talking about are JPMorgan Chase, Citibank, Goldman Sachs, Bank of America, Morgan Stanley and Wells Fargo. When you total up the exposure to derivatives that all of them currently have, it comes to a grand total of more than 278 trillion dollars. But when you total up all of the assets of all six banks combined, it only comes to a grand total of about 9.8 trillion dollars. In other words, the “too big to fail” banks have exposure to derivatives that is more than 28 times the size of their total assets.
I have shared the following numbers with my readers before, but it is absolutely crucial that we all understand how exceedingly vulnerable our financial system really is. These numbers come directly from the OCC’s most recent quarterly report (see Table 2), and they reveal a recklessness that is almost beyond words…
Total Assets: $2,573,126,000,000 (about 2.6 trillion dollars)
Total Exposure To Derivatives: $63,600,246,000,000 (more than 63 trillion dollars)
Total Assets: $1,842,530,000,000 (more than 1.8 trillion dollars)
Total Exposure To Derivatives: $59,951,603,000,000 (more than 59 trillion dollars)
Total Assets: $856,301,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $57,312,558,000,000 (more than 57 trillion dollars)
Bank Of America
Total Assets: $2,106,796,000,000 (a little bit more than 2.1 trillion dollars)
Total Exposure To Derivatives: $54,224,084,000,000 (more than 54 trillion dollars)
Total Assets: $801,382,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $38,546,879,000,000 (more than 38 trillion dollars)
Total Assets: $1,687,155,000,000 (about 1.7 trillion dollars)
Total Exposure To Derivatives: $5,302,422,000,000 (more than 5 trillion dollars)
Since the United States was first established, the U.S. government has run up a total debt of a bit more than 18 trillion dollars. It is the biggest mountain of debt in the history of the planet, and it has grown so large that it is literally impossible for us to pay it off at this point.
But the top five banks in the list above each have exposure to derivatives that is more than twice the size of the national debt, and several of them have exposure to derivatives that is more than three times the size of the national debt.
That is why I keep saying that there will not be enough money in the entire world to bail everyone out when this derivatives bubble finally implodes.
Warren Buffett is entirely correct about derivatives – they truly are weapons of mass destruction that could destroy the entire global financial system at any time.
So as we move into the second half of this year and beyond, you will want to watch for terms like “derivatives crisis” or “derivatives crash” in news reports. When derivatives start making front page news, that will be a really, really bad sign.
Our financial system has been transformed into the largest casino in the history of the planet. For the moment, the roulette wheels are still spinning and everyone is happy. But sooner or later, a “black swan event” will happen that nobody expected, and then all hell will break loose.
Americans are going to spend more than 600 billion dollars this Christmas season, and on Friday we got to see our fellow citizens fight each other like rabid animals over foreign-made flat screen televisions and Barbie dolls. As disgusting as this behavior is to many of us, there may soon come a time when we will all fondly remember these days. Most Americans are completely unaware of what is currently happening in the financial world, but right now there are deeply troubling signs that we could be on the verge of another major global financial collapse. If the next great economic downturn does strike in 2015, that could mean that we may have just witnessed the last great Black Friday celebration of American materialism. As you read this, stock prices are approximately double the value that they should be, margin debt is hovering near all-time record highs, and the “too big to fail” banks are being far more reckless than they were just prior to the last major stock market implosion. So many of the exact same patterns that we witnessed back in 2007 and 2008 are repeating right now, and as you will see below, this includes a horrifying crash in the price of oil. Anyone with half a brain should be able to see the slow-motion financial train wreck that is unfolding right before our eyes.
Every year, it has been my tradition to write an article about the mini-riots that erupt in retail stores all around the country on Black Friday. This year things were a bit calmer because so many stores opened up on Thanksgiving itself, but there was still plenty of chaos. For example, in the video posted below you can see women viciously fighting one another over discounted lingerie and underwear…
But instead of launching into another diatribe about how we are committing national economic suicide by buying hundreds of billions of dollars of foreign-made goods with money that we do not have, I want to focus on what is coming next.
You see, I believe that in the not too distant future many of us will be wishing for the days when the debt-fueled U.S. economy was healthy enough for people to be wrestling with one another on the floor over good deals in our retail establishments.
The next great financial crash (which many have been anticipating for years) is rapidly approaching. So many of the same things that happened last time are happening again. As I noted above, this includes a crash in the price of oil.
In the months prior to the last stock market collapse, the price of oil began plummeting dramatically in the summer of 2008. This was an “early warning signal” that something was deeply amiss in the financial world…
Many people assume that a lower price for oil is good for the economy, but the exact opposite is actually true. The oil industry has become absolutely critical to the U.S. and Canadian economies. And in recent years, the “shale oil boom” has been one of the only bright spots for the United States. If the shale oil industry starts to fail because of lower prices, a lot of the boom areas all over the nation are going to go bust really quickly and a lot of the financial institutions that were backing these projects are going to feel an immense amount of pain.
Unfortunately for us, the “shale oil revolution” simply does not work at 80 dollars a barrel.
And it certainly does not work at 70 dollars a barrel.
As I write this, U.S. crude is sitting at about 66 dollars a barrel due to OPEC’s recent decision to not cut output.
That is the lowest price for U.S. crude since September 2009.
So just like we saw during the summer of 2008, crude oil prices are collapsing once again. The chart below comes from the Federal Reserve, but it is a few days out of date. Now that the price of crude is down to about 66 dollars, you have to imagine the price actually going below the bottom of this chart…
Needless to say, this price collapse is having a huge impact on the stock prices of oil companies. The following information about what happened in the markets on Friday comes from Business Insider…
Here were some of the biggest losers on Friday:
- BP (BP), down 5%
- Royal Dutch Shell (RDS.A), down 6%
- Total (TOT), down 5%
- Statoil (STO), down 14%
- Exxon Mobil (XOM), down 5%
- ConocoPhillips (COP), down 9%
- Marathon Oil (MRO), down 13%
- Occidental Petroleum (OXY), down 7%
- Anadarko Petroleum (APC), down 14%
- Linn Energy (LINE), down 13%
- Whiting Petroleum (WLL), down 28%
- Oasis Petroleum (OAS), down 32%
- Kodiak Oil & Gas (KOG), down 28%
And this list goes on.
But this could just be the beginning of the oil price declines.
The most powerful oil official in Russia believes that the price of oil could fall below $60 next year…
Russia’s most powerful oil official Igor Sechin said in an interview with an Austrian newspaper that oil prices could fall below $60 by mid-way through next year.
Sechin, chief executive of Rosneft, Russia’s largest oil producer, also said U.S. oil production would fall after 2025 and that an oil market council should be created to monitor prices, the same day the OPEC cartel met in Vienna and left its output targets unchanged.
“We expect that a fall in the price to $60 and below is possible, but only during the first half, or rather by the end of the first half (of next year),” Sechin told the Die Presse newspaper.
And one oil industry analyst just told CNBC that he believes that the price of oil could ultimately plunge as low as $35 a barrel…
“When you look at the second half of 2015, that’s when you see oil beginning to dwarf demand by about a million, a million and a half barrels a day,” he said. “Thirty-five dollars is a possibility if they don’t get an agreement next spring because that’s when the oil really starts to build and you can have a billion barrels of oil with really no place to put it.”
This comes at a time when there are already a whole host of signs that the global economy is slowing down. Three of the ten largest economies on the planet have already slipped into recession, and the economic nightmare over in Europe just continues to get even worse. In fact, we just learned that the unemployment rate in Italy has shot above 13 percent for the first time ever recorded.
In addition, it is important to remember that the “real economy” in the United States is in far worse shape than it was just prior to the last financial crash. Just consider these numbers…
-In the United States today, the number of payday lending locations is greater than the number of McDonald’s and the number of Starbucks.
-One recent survey found that about 22 percent of all Americans have had to turn to a church food panty for assistance.
-This year, almost one out of every five households in the United States celebrated Thanksgiving on food stamps.
-The rate of government dependence in America is at an all-time high and approximately 60 percent of U.S. households get more in transfer payments from the government than they pay in taxes.
-According to a report that was just released by the National Center on Family Homelessness, the number of homeless children in the U.S. has soared to a new all-time record high of 2.5 million.
If things are this bad now, what are they going to look like after the next great financial crash?
And without a doubt, the next crash is coming. Hopefully we have at least a couple more months of relative stability, but many experts are now urgently warning that time is quickly running out.
By this time next year, Black Friday may look a whole lot different than it does today.
When the economy of a nation collapses, almost everything changes. Unfortunately, most people have never been through anything like that, so it can be difficult to know how to prepare. For those that are busy preparing for the coming global financial collapse, there is a lot to be learned from the economic depression that is happening right now in Greece. Essentially, what Greece is experiencing is a low level economic collapse. Unemployment is absolutely rampant and poverty is rapidly spreading, but the good news for Greece is that the global financial system is still operating somewhat normally and they are getting some financial assistance from the outside. Things in Greece could be a whole lot worse, and they will probably get a whole lot worse before it is all said and done. But already things have gotten bad enough in Greece that it gives us an idea of what a full-blown economic collapse in the 21st century may look like. There are reports of food and medicine shortages in Greece, crime and suicides are on the rise and people have been rapidly pulling their money out of the banks. Hopefully this article will give you some ideas that you can use as you prepare for the economic chaos that will soon be unfolding all over the globe.
The following are 10 things that we can learn about shortages and preparation from the economic collapse in Greece….
#1 Food Shortages Can Actually Happen
Most people assume that they will always be able to run out to their local supermarket or to Wal-Mart and get all of the supplies they need.
Unfortunately, that is a false assumption. The truth is that our food distribution system is extremely vulnerable.
In Greece, many people are starting to totally run out of food. Even some government institutions (such as prisons) are now reporting food shortages. The following was originally from a Greek news source….
The financing for many prisons has decreased to a minimum for some months now, resulting in hundreds of detainees being malnourished and surviving on the charity of local communities.
The latest example is the prison in Corinth where after the supply stoppage from the nearby military camp, the prisoners are at the mercy of God because, as reported by prison staff, not even one grain of rice has been left in their warehouses. When a few days earlier the commander of the camp announced to the prison management the transportation stoppage, citing lack of food supplies even for the soldiers, he shut down the last source of supply for 84 prisoners. The response of some Corinth citizens was immediate as they took it upon themselves to support the prisoners, since all protests to the Justice ministry were fruitless.
#2 Medicine Is One Of The First Things That Becomes Scarce During An Economic Collapse
If you are dependent on medicine in order to survive, you might want to figure out how you are going to get by if your supply of medicine is totally cut off someday.
In Greece, medicine shortages have become a massive problem. The following is from a recent Bloomberg article….
Mina Mavrou, who runs a pharmacy in a middle-class Athens suburb, spends hours each day pleading with drugmakers, wholesalers and colleagues to hunt down medicines for clients. Life-saving drugs such as Sanofi (SAN)’s blood-thinner Clexane and GlaxoSmithKline Plc (GSK)’s asthma inhaler Flixotide often appear as lines of crimson data on pharmacists’ computer screens, meaning the products aren’t in stock or that pharmacists can’t order as many units as they need.
“When we see red, we want to cry,” Mavrou said. “The situation is worsening day by day.”
The 12,000 pharmacies that dot almost every street corner in Greek cities are the damaged capillaries of a complex system for getting treatment to patients. The Panhellenic Association of Pharmacists reports shortages of almost half the country’s 500 most-used medicines. Even when drugs are available, pharmacists often must foot the bill up front, or patients simply do without.
#3 When An Economy Collapses, So Might The Power Grid
Try this some time – turn off all power to your home for 24 hours and try to live normally.
Sadly, most people simply do not understand just how dependent we are on the power grid. Without power, all of our lives would change dramatically.
In Greece, authorities are warning of an impending “collapse” of the power grid. If it goes down for an extended period of time in Greece, the consequences would be catastrophic….
Greece’s power regulator RAE told Reuters on Friday it was calling an emergency meeting next week to avert a collapse of the debt-stricken country’s electricity and natural gas system.
“RAE is taking crisis initiatives throughout next week to avert the collapse of the natural gas and electricity system,” the regulator’s chief Nikos Vasilakos told Reuters.
RAE took the decision after receiving a letter from Greece’s natural gas company DEPA, which threatened to cut supplies to electricity producers if they failed to settle their arrears with the company.
#4 During An Economic Collapse You Cannot Even Take Water For Granted
If the power grid goes down, you will soon no longer have clean water coming out of your faucets. That is one of the reasons why it is absolutely imperative that the power grid stay operable in Greece.
Sadly, most people don’t understand just how vulnerable our water system is. In a previous article, I quoted from a report that discussed how rapidly our water supply would be in jeopardy in the event of a major transportation disruption….
According to the American Water Works Association, Americans drink more than one billion glasses of tap water per day. For safety and security reasons, most water supply plants maintain a larger inventory of supplies than the typical business. However, the amount of chemical storage varies significantly and is site specific. According to the Chlorine Institute, most water treatment facilities receive chlorine in cylinders (150 pounds and one ton cylinders) that are delivered by motor carriers. On average, trucks deliver purification chemicals to water supply plants every seven to 14 days. Without these chemicals, water cannot be purified and made safe for drinking. Without truck deliveries of purification chemicals, water supply plants will run out of drinkable water in 14 to 28 days. Once the water supply is drained, water will be deemed safe for drinking only when boiled. Lack of clean drinking water will lead to increased gastrointestinal and other illnesses, further taxing an already weakened healthcare system.
What will you do when clean water stops coming out of your faucets?
You might want to start thinking about that.
#5 During An Economic Crisis Your Credit Cards And Debit Cards May Stop Working
Most people have become very accustomed to using either debit cards or credit cards for almost everything.
But what would happen if the financial system locked up for a period of time and you were not able to use them?
This is something that the citizens of Greece are potentially facing in the coming months, and this is something that all of us need to start thinking about.
#6 Crime, Rioting And Looting Become Commonplace During An Economic Collapse
Big corporations are already making extensive plans for how to protect their stores in the event that Greece switches from the euro to the drachma.
The following is from a recent Reuters article….
British electrical retailer Dixons has spent the last few weeks stockpiling security shutters to protect its nearly 100 stores across Greece in case of riot.
The planning, says Dixons chief Sebastian James, may look alarmist but it’s good to be prepared.
Company bosses around Europe agree. As the financial crisis in Greece worsens, companies are getting ready for everything from social unrest to a complete meltdown of the financial system.
#7 During A Financial Meltdown Many Average Citizens Will Start Bartering
During this economic depression, alternative currencies have already been popping up in Greece.
When things fall apart on a global scale, will you have things to barter for the things that you need?
#8 Suicides Spike During An Economic Collapse
When you think of the Great Depression of the 1930s, what do you think of?
Many people think of images of people jumping out of buildings.
Well, something similar has been happening in Greece. Suicide statistics in Greece have been absolutely soaring during the last couple of years.
Once prosperity disappears, many people feel as though life is not worth living anymore.
#9 Your Currency May Rapidly Lose Value During An Economic Crisis
Just remember what happened in Germany during the Weimar Republic and what has happened recently in places like Zimbabwe.
The truth is that it can happen anywhere.
Right now, Greeks are pulling their money out of the banks because they are worried that their euros will be turned into drachmas which would rapidly lose value.
If I was living in Greece I would definitely be concerned about that. The return of the drachma seems to get closer with each passing day. Just check out these screenshots.
#10 When Things Hit The Fan The Government Will Not Save You
Has the government of Greece come to the rescue of all of those that are deeply suffering right now?
Of course not. The truth is that the Greek government can barely take care of itself at the moment.
History has shown us that governments simply cannot be counted on when things hit the fan.
Just remember what happened during the aftermath of Hurricane Katrina.
In the end, the only one that can be counted on to take care of you and your family is you.
So you better start preparing.
Unfortunately, as I wrote about the other day, time is rapidly running out for the global financial system.
Even some of the top economic officials in the world are warning that another major crisis could be on the way.
Just check out what World Bank President Robert Zoellick said the other day….
“Events in Greece could trigger financial fright in Spain, Italy and across the eurozone. The summer of 2012 offers an eerie echo of 2008.”
He also compared a potential exit of Greece from the eurozone to the collapse of Lehman Brothers back during the last financial crisis….
“If Greece leaves the eurozone, the contagion is impossible to predict, just as Lehman had unexpected consequences.”
So what are some things that the average person can do to get prepared?
Well, a recent article on SHTFplan.com entitled “The List: A to Z Survival for the Abysmal Times Ahead” contains hundreds of ideas for preparing for the chaotic economic environment that we are heading into.
Preparation is going to look different for every family. No two situations are exactly the same.
But there are some practical steps that nearly all of us can take to better position ourselves for what is coming. Now is the time to get educated and now is the time to take action.
Or you could be like all of those that laughed at Noah while he was building that big boat.
In the end, things did not work out too well for those folks.
The Facebook IPO is kind of like a graduation party – everybody comes together for one huge blowout to celebrate the end of an era before going their separate ways. Unfortunately, most people on Wall Street do not understand how bittersweet this moment really is. A tremendous amount of pain is ahead for Wall Street in the next few years, and we will probably never see anything like the Facebook IPO ever again. But the Facebook IPO sure has been fun to watch. Facebook is one of the largest companies to ever go public in the United States. According to CNN, 247 million shares of Facebook exchanged hands in the first 45 minutes of trading. The Facebook IPO was nearly ten times larger than any other Internet IPO in history, and the amount of money being made by some people on this deal is absolutely amazing. For example, it is being reported that Bono will make more money on the Facebook IPO than he has from being part of the band U2 for the past 30 years. Sadly, this euphoria is not going to last for long. The next wave of the global financial collapse is rapidly approaching, and once it strikes there will not be much for anyone on Wall Street to be smiling about at all.
During the IPO process, Facebook sold more than 420 million shares and raised about 16 billion dollars.
Those are incredible numbers.
At 38 dollars per share, Facebook would have a market cap of about 81 billion dollars.
So is Facebook worth 81 billion dollars?
Of course not.
But most stocks are tremendously overvalued at this point.
Yes, Facebook has 900 million users and it made about a profit of about a billion dollars last year.
But that does not add up to an 81 billion dollar company.
Not even close.
A recent article by Jay Yarow explained this in more detail….
As good a business as that is, it’s not Google good. It’s not Apple good. And at the current IPO pricing, Facebook has to be a much better business in the near future.
In fact, Yarow says that Facebook is going to have to dramatically improve in order to justify the current valuation….
So, what’s the bull’s case for Facebook? Unfortunately, it comes down to faith. You have to have faith that Mark Zuckerberg, Sheryl Sandberg, and the rest of the executives at Facebook will discover a magical money making product that will justify its valuation.
Unfortunately, there are already signs that the growth of Facebook is slowing down.
Advertising revenue during the first quarter of 2012 was only $872 million. That was a decline of 7.5 percent from the previous quarter.
And eventually someone will come along and topple Facebook just like Facebook toppled MySpace.
Facebook did not even exist a decade ago. Right now there are young kids tinkering around in their college dorm rooms trying to figure out how to create something that will be even better than Facebook.
The truth is that Facebook is operating on borrowed time. It is not going to remain “hot” and “trendy” forever.
But for the moment, there are a whole lot of people out there that want a piece of Facebook.
Hey, I am not in the stock market at all, but even I am half-tempted to buy a few shares so that I can introduce myself as a “part-owner of Facebook”.
After all, who doesn’t like Facebook?
Yes, government agencies and big corporations use Facebook to spy on all of us. If you don’t believe this, just check out this article, this article and this article.
But there is an incredible upside to social networking websites such as Facebook and Twitter as well.
They have given average people the ability to communicate directly with each other on a massive scale.
In the past, the big corporations pretty much had a monopoly on mass communication.
If you wanted to get your message out independently of the big corporations, you could hand out fliers, you could send out mass mailings (very expensive) or you could try to get a book printed.
But today something that you post on Facebook or Twitter could be seen by thousands (or even millions) of people within a few days.
The Internet is filled with a whole lot of garbage, but it can also be used as an incredible tool for good.
Sitting at home behind your desk, you have the potential to touch the lives of people on the other side of the globe through the Internet that you would probably never have a chance of influencing any other way.
So I am very thankful for Facebook.
We should use tools like Facebook to wake people up while there is still time. Our world is becoming increasingly unstable and we might not always have the opportunity to freely share our thoughts with the entire globe like this.
Just try to imagine a world without Facebook, Twitter, YouTube, blogs and Internet forums.
All of those things have only existed for a relatively short period of time, and there is no guarantee that we will always have them.
Instead of wasting our lives away in front of our televisions, we should be taking advantage of these tools to help change the world.
Every single day, hundreds of people are directed to my website from Facebook. I am hoping to eventually increase that to thousands of people per day.
A great economic collapse is coming to this world. People need to keep their eyes on the financial crisis in Europe and on the derivatives market. The coming financial tsunami will likely be even worse than the crash of 2008.
People are going to be looking for answers.
Now is the time to be a light shining in the darkness.
Not everyone has the time or the knowledge to be able to set up a website or make YouTube videos, but nearly everyone is capable of setting up a Facebook account or a Twitter account.
If you make even a small effort, you could end up touching the lives of thousands upon thousands of people.
Yes, there are a lot of negative things that can be said about Facebook, but at least for today let us celebrate it for what it has given us.
It has given us the opportunity to make a difference on a massive scale, and that is a wonderful thing.
In the past, there certainly have been governments that have gotten into trouble with debt, but what we are experiencing now is the first truly global sovereign debt crisis. There has never been a time in recorded history when virtually all of the governments of the world were drowning in debt all at the same time. This sovereign debt crisis is never going to end until there is a major global financial collapse. There simply is no way to unwind the colossal web of debt that we have constructed in an orderly fashion. Right now the EU and the IMF have been making “emergency loans” to nations such as Greece, Ireland and Portugal, but that is only going to buy those countries a few additional months. Giving more loans to nations that are already drowning in red ink may “kick the can down the road” for a little while but it isn’t going to solve anything. Meanwhile, dozens more nations all over the globe are rapidly approaching a day of reckoning.
All of the bailouts that you are hearing about right now are simply delaying the pain. The reality is that when the “emergency loans” for Greece stop, Greece is going to default. Greece is toast. The game is over for them. You can stick a fork in Greece because it is done.
One of the big problems for Greece is that since it is part of the euro it can’t independently print more money. If Greece cannot raise enough euros internally Greece must turn to outside assistance.
Unfortunately, at this point Greece has accumulated such a mammoth debt that it cannot possibly sustain it. By the end of the year, it is projected that the national debt of Greece will soar to approximately 166% of GDP.
The financial collapse of Greece is inevitable. If they keep using the euro they will collapse. If they quit using the euro they will collapse. When the rest of Europe decides that it is tired of propping Greece up the game will be over.
At this point very few people are interested in lending Greece more money.
As I wrote about yesterday, many of the nations around the world are only able to keep going because they are able to borrow huge amounts of money at low interest rates.
Well, nobody wants to lend money to Greece at a low rate of interest anymore.
Today, the yield on 2 year Greek bonds is back over 28 percent.
Fortunately for the rest of the world, Greece is just a very, very small part of the global economy, but when interest rates start spiking like that on U.S. debt or Japanese debt the entire world financial system will be thrown into chaos.
So why is there so much of a focus on Greece right now?
Well, there is a real danger that the panic will start to spread.
The other day, Moody’s Investors Service slashed the credit rating on Portuguese government debt by four notches.
Portuguese debt is now considered to be “junk”.
But even more alarming is that Moody’s stated that what is going on in Greece played a role in reducing the credit rating of Portugal.
The following is a portion of what Moody’s had to say when they cut the credit rating of Portugal by four notches….
Although Portugal’s Ba2 rating indicates a much lower risk of
restructuring than Greece’s Caa1 rating, the EU’s evolving approach to providing official support is an important factor for Portugal because it implies a rising risk that private sector participation could become a precondition for additional rounds of official lending to Portugal in the future as well. This development is significant not only because it increases the economic risks facing current investors, but also because it may discourage new private sector lending going forward and reduce the likelihood that Portugal will soon be able to regain market access on sustainable terms.
Do you understand what is being said there?
Basically, Moody’s is saying that the terms of the Greek bailout make Portuguese debt less attractive because Portugal will likely be forced into a similar bailout at some point.
If the EU is not going to fully guarantee the debt of the member nations, then that debt becomes less attractive to investors.
The downgrade of Portugal is having all kinds of consequences. The cost of insuring Portuguese government debt set a new record high on Wednesday, and yields on Portuguese bonds have gone haywire.
If you want to get an idea of just how badly Portuguese bonds have been crashing, just check out this chart.
But it is not just Portugal that is having problems.
Just recently, Moody’s warned that it may downgrade Italy’s Aa2 debt rating at some point within the next few months.
Spain is also on the verge of major problems and Ireland may need another bailout soon.
Things don’t look good.
Unfortunately, if the dominoes start to fall the entire EU is going to go down.
Big banks all over Europe are highly exposed to sovereign debt and they are leveraged to the hilt.
It is almost as if we are looking at a replay of 2008 in many ways.
When Lehman Brothers finally collapsed, it was leveraged 31 to 1.
Today, major German banks are leveraged 32 to 1, and major German banks are currently holding a tremendous amount of Greek debt.
Anyone with half a brain can see that this is going to end badly.
So how is the European Central Bank responding to this crisis?
They are raising interest rates once again.
That certainly is not going to help the PIIGS much.
But Europe is not the only one facing a horrific debt crunch.
In Japan, the national debt is now up to about 226 percent of GDP. So far the Japanese government has been able to handle a debt load this massive because the citizens of Japan have been willing to lend the government gigantic mountains of money at interest rates so low that they are hard to believe.
When that paradigm changes, and it will, Japan is going to be in a massive amount of trouble. In fact, an article in Forbes has warned that even a very modest increase in interest rates would cause interest payments on Japanese government debt to exceed total government revenue by the year 2019.
Of course the biggest pile of debt sitting out there is the national debt of the United States. The U.S. is so enslaved to debt that there is literally no way out under the current system. To say that America is in big trouble would be a massive understatement.
In fact, the whole world is headed for trouble.
Right now government debt around the globe continues to soar at an exponential pace. At some point a wall is going to be hit.
The Wall Street Journal recently quoted Professor Carmen Reinhart as saying the following about what we are facing….
“These processes are not linear,” warns Prof. Reinhart. “You can increase debt for a while and nothing happens. Then you hit the wall, and—bang!—what seem to be minor shocks that the markets would shrug off in other circumstances suddenly become big.”
That is the nature of debt bubbles – they keep expanding and expanding until the day that they inevitably burst.
Governments around the world will issue somewhere in the neighborhood of 5 trillion dollars more debt this year alone. Debt to GDP ratios all over the globe continue to rise at a frightening pace.
Because the world is so interconnected today, the collapse of even one nation will devastate banks all over the planet. If even one domino is toppled there is no telling where things may end.
The combination of huge amounts of debt and huge amounts of leverage is incredibly toxic, and that is what we have all over the globe today. Almost every major nation is drowning in a sea of red ink and almost all of our major financial institutions are leveraged to the hilt.
There is only one way that the sovereign debt crisis can end.
Very, very badly.
I hope you are ready for what is coming.