[R-G] [BillTottenWeblog] Shoes Dropping

[Bill Totten]

Clusterfuck Nation

by Jim Kunstler

Comment on current events by the author of
The Long Emergency (Atlantic Monthly Press, 2005)

www.kunstler.com (February 18 2008)


The fall of Britain's Northern Rock bank may be the first dropped shoe
in a chorus line of big banks tap-dancing into oblivion. The British
government's move yesterday to nationalize the insolvent mortgage
lender's remaining operations leaves shareholders holding an empty bag.
Their only resort now will be to call their lawyers. What we may be
witnessing, in a movement that will surely spread to the US, is a
changing of the guard at the top of the financial food-chain between
bankers and lawyers.

Shoes may have begun to drop in the US last week with Citigroup halting
redemptions for its $500 million CSO mini hedge fund - half a billion
dollars being something less than walking-around-money in the Hamptons
these days. Halting redemptions means that investors in the fund cannot
withdraw their money - the same as going to the bank and being told your
account is frozen. Hedge funds can play rough with their investors
because they are unregulated. The reason they remain unregulated is the
presumption that anybody rich enough to "play" in a hedge fund can
afford to lose (or be swindled) with no protection on the sidelines from
government busybodies. What's more, the hedge fund managers do not have
to make any of their operations open to public view, so that neither the
investors nor any regulating authority knows what they are actually doing.

What the big banks who run many hedge funds are doing is going broke.
They are pretending to be solvent by borrowing money from the Federal
Reserve, the nation's alleged superbank. But borrowed money is not
capital, that is, surplus wealth wholly owned. Borrowed money is an
obligation, a liability, a negative on the balance sheet. You can't have
an entire financial system based on nothing more than a giant
daisy-chain of liabilities. Somewhere there has to be a "reserve" of
assets, items of value owned by somebody.

Through most of modern times, assets have been denoted by cash money. A
given bank will hold in "reserve" say $10 billion in money that is not
owed to anybody, allowing them to do things like pay depositors who show
up at the window needing money for groceries. Up until a few decades
ago, nations held an ultimate reserve of actual gold in a vault (Fort
Knox, Kentucky, in the case of the USA) and the physical possession of
this gold was said to "back up" the value of the certificates that
circulated as a "medium-of-exchange" or currency.

But that system was considered too awkward and "reserves" were then
denoted in just currencies themselves, or certificates that represented
the existence of currencies held elsewhere, or pixels on a screen
representing the movement of alleged piles of currency from one place to
another, or the intention to move a notional pile of currency to a
theoretical destination, and then that became an algorithm purporting to
represent the future arrival of a notional pile of money at theoretical
destination to be named later, and so on ... And after another while,
the nature of money became so detached from anything real, so abstract,
that its very existence became hypothetical. Even this "worked" for a
while, in terms of the managers of this money being able to "cream"
substantial amounts of this hypothetical money off the top of their
notional operations and translate that hypothetical cream into Tribeca
lofts, Gulfstream jets, and other real luxuries.

The rest of the economic food chain - and the social order that
represented it - got stripped of remaining asset value (and social
value) until they had nothing left to trade with except debt, in one
form or another, and this phase of the game turned out to have a short
lifetime when the only debts remaining to be monetized were the
contracts on houses occupied by people with no hope of ever meeting
their obligations - and then the whole sorry racket started to go up in
a vapor.

This is roughly where we are, and where the banks stand today. They are
pretending to have money and desperately cadging loans from all comers
to keep appearances up, but the loans can't come in fast enough. The
appearance of confidence is crucial (as it is, of course, in any "con"
game) to keep the investors (depositors) at bay. If a bunch of investors
(depositors) all got nervous about the solvency of a given bank, they
might try to slip in there during business hours and withdraw or redeem
their "money" and perhaps translate it into items of value like gold
coins, bottles of vodka, or cases of nine millimeter pistol ammunition.
And if enough of this bunch showed up at the same time, we would see a
phenomenon called a "run" on a bank. And after that started at one bank,
the thing Franklin Roosevelt called "fear itself" could easily spread to
depositors in other banks pretending to be okay ... and that would be
the magic moment that the USA discovered it was no longer a rich nation.

That would be a very rude awakening. The whole world would know about it
in about thirty seconds, and the rest of the world would be in a lot of
trouble, too, since so much of its notional wealth is represented by
piles of US dollars (or certificates denoting them). Then what you could
see is a run by other nations (investor-depositors) on the United States
of America as a whole, or an awkward global receivership process, in
which all remaining assets were stripped - including maybe even some of
those Tribeca lofts and Gulfstream jets.

Of course, the rest of the world would have a hard time getting any of
this stuff out, or fencing it off at a discount. Rather, they'd probably
just eat their losses and quarantine themselves off from the world's new
financial-and-economic leper. They'd stop sending us Toyota Highlanders,
plastic salad shooters, and, oh yes, oil. We'd be left with a lot of
empty big box stores, vacant highways, and houses inconveniently
deployed too far from any place of utility. One thing we'd have plenty
of, though, is home-grown pissed-off people. Some of them may even be
lawyers.
_____

Note: my novel about America's post-oil future, World Made By Hand, is
now shipping to booksellers everywhere.  Get one. You'll like it.

http://jameshowardkunstler.typepad.com/clusterfuck_nation/


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