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November 29, 2006

Tulips of Stone Part II
by Nigel Maund

Global Debt Saturation - The Human Reckoning

Originally published November 15th, 2006

"There is no calamity greater than lavish desires
There is no greater guilt than discontentment
And, there is no greater disaster than greed"

Lao Tzu (604 - 531 BC, "The Way of Lao Tzu")

We stand for Freedom.
That is our conviction for ourselves;
that is our only commitment to others"

John F Kennedy (35th president of USA, 1961-1963)

The world's greatest residential property bubble, is, at last, starting to come apart in the US, UK and Australia first, as predicted by this writer in his article "Tulips of Stone", written in 2004. The sustained 25 basis point rises in interest rates undertaken by the Reserve Banks of the US, UK, Europe and Australia is, albeit slowly, beginning to bite. This will slowly intensify as rebalancing of the global economy takes place.

Funded by the massive re-allocation (or misallocation) of capital under the easiest credit environment ever witnessed by man, the real estate bubble has grown since 2001 to become an unrestricted and unconstrained financial supergiant with seemingly endless digi-money as its underpin, unsupported by any hard asset in one of the world's greatest and insidious confidence tricks ever undertaken. The most astonishing thing is, very few people have had the gumption to ask why was this ever allowed to happen? So long as the entire incredible edifice appears to survive, however implausible, to sustain never ending asset inflation everyone is happy, or so it seems, for now.

As home buyers are pushed beyond all reasonable limits in taking out their mountainous mortgages by schemes ever more fantastic, implausible and irresponsible, including the macabre and hyper cynical "death bed mortgages" hatched in the cynical home of mortgage engineering "par excellence", the UK; the so called regulators whimper weak warning signals about an impending avalanche of potential defaults. As if to prove the insanity of the human mass psyche, any thought that this improbable lunacy may stop is met by the mentality, reminiscent of the "Tulip Mania" of Holland, and the "South Sea Bubble" in England, that these investments can never go down as though bricks and mortar have some association with an all powerful deity and are immune from the laws of economics and common sense.

For the majority of home owners, they are now "lobster potted" for the rest of their lives in the 21st Century's version of the Victorian treadmill. Welcome to modern debt controlled serfdom, where if you lose your job, either through retrenchment or illness, you lose your home. It has become a veritable "Sword of Damocles", or a stick with which to beat recalcitrant labor into a bloody pulp, should they ever prove restless or disobedient. The ruthless and faceless plutocrats who benefit vastly from this incredible and dreadful scheme must be laughing on their return to a status of demagogic power which is the modern equivalent of the Roman or the Medieval European Aristocracy at its exploitative worst. The difference between the rich and poor widens, by the day, into a gaping crevasse in all societies around the world, and, incredibly, no one appears to understand or really care about the overall social and political implications. The "I'm all right jack" mentality is more applicable to today's world than ever before. Greed has become the credo of 21st Century society and money its surrogate and false God.

The mortgage weapon forms an integral part of the armory of the so called New World Order (NWO) as it seeks to accumulate wealth and power to control people by stealth. Other tools include the explosion of credit card debt where people have been encouraged to spend to the limit of their cards. If they can manage this limit, then the credit envelope is just expanded to encourage them to spend to the absolute limit of their debt servicing capacity incurring "loan sharking" interest rates in doing so. The fact that Governments turn a blind eye to this evil is proof positive of their own complicity, corruption and total lack of moral fortitude.

The Broader Picture Impacting on Real Estate

Another plank in the NWO's grand scheme is the hoodwinking of the electorate of all countries with bogus economic statistics such as: "the unemployment rate"; "Consumer Prices Index" and "Gross Domestic Product". When first devised, in the early part of the 20th Century, these figures actually meant something and were reliable indicators of economic performance. However, decades of "cheese slice" style tampering with the ingredients of these statistics has increasingly rendered them meaningless and, now, they are all but worthless. Their only real value now lies in what all this tampering was designed to achieve, namely fooling the general public into the following false beliefs:

The economy is in far better shape than it really is and growth greater than it really is. The vital "feel good factor" is the psychological goal of the manipulated GDP;
Inflation is far lower than it really is through a lower CPI. This statistic is used to control wage claims, reduce pension increases linked to the CPI and politically manipulate the electorate to believe that management of the economy is far stronger than it really is. This is important to manipulate people's vital consumer behavior through the "feel good factor";
The unemployment rate is far lower than it really is. This is another important psychological - political tool for reducing political action in respect of the real unemployment rate and in manipulating the economic "feel good factor" and potential wage claims.

The total corruption of these vital economic indicators demonstrates the extreme cynicism and moral bankruptcy of so called Democratic Governments. Furthermore, it shows how these Governments really view their citizens, and what an absolute sham "Democracy" really is. The far reaching consequences of the manipulation of vital economic indicators will become apparent as the massive debt financed bubble economy starts to unravel. Pensioners become impoverished, and savers see their savings whittled away through remorseless currency debasement. Furthermore, the majority of the wage spectrum sees their real earnings eroded by institutionalized inflation. The objective here is to increase profit margins of the multinational corporations through the following international cost management strategy:

Erode labor costs through inflation and CPI linked limitation to wage claims;
Outsource jobs to low cost labor areas to exert downward pressure on internal wage claims;
Play low cost labor areas off against high cost skilled labor areas to reduce the costs of the latter;
Destroy welfare benefits to labor by any method possible as these become production costs;
Increase the hours worked at no extra cost;
Get Governments in industrialized states to fund training initiatives and apprenticeships through taxation thus providing skilled and semi - skilled labor funded by their own workers through taxes;
Offer substantial tax and other financial incentives for investment made in green or brown field sites all paid for by the low to middle income workers taxes. The rich can afford top accountants and become "tax efficient" a term not dissimilar to that dreadful military euphemism, "collateral damage".

The plutocratic corporate - industrial dynasties are waging a constant war on labor in order to increase their profits by any method possible. The techniques used are time honored and well tested, and comprise a mixture of:

Lifetime enslavement through the debt - mortgage lobster pot - "the manacles of fear";
Complex multilayered taxation diminishing the ability of labor to save and get ahead and to ensure their lifetime in harness;
Wage and savings erosion through continuous but variable inflation above the manipulated CPI;
Easy labor laws facilitating hiring and firing of staff without incurring financial liabilities;
Creating an atmosphere of fear, insecurity and instability in the minds of labor, keeping them constantly off balance and afraid.

The above all impact on the ability of any mortgagee to meet the repayments on his property should an economic downturn occur or should he lose his job for any reason whatsoever. Furthermore, most mortgagees will be paying between 25% and 35% per month of their after tax salaries to meet mortgage repayments. Many of these repayments are interest only. Their saving will in consequence be nominal and insufficient to sustain them for any length of time in the event of a loss of job.

The Human Cost of Real Estate and Other Debts

All these measures have not come about by accident but are planned and emplaced by a faceless plutocratic elite working behind an elected group of corrupted marionette politicians, marketed and sold to the electorate by a syndicated and owned media system. The impact of these policies on social behavior has been highlighted by the writer before. However, because of their significance, they need some re - iteration here.

Uncertainty concerning future employment, combined with large debt obligations and family concerns, conspire to create intense worry in even the most stable personality. Sustained worry and stress induces biochemical changes in the body which have adverse affects on the immune system and cause many people to resort to the use of tobacco, alcohol and drugs. The latter have seriously adverse side effects of their own but also serve to compound the medical consequences of worry and stress. Besides the biochemical changes, another major side effect of worry induced stress are the complex psychological side effects such as frustration, fear and inadequacy. These cause such human behavioral responses as heavy smoking, drinking, drug abuse, crime and violence in all its various expressions.

As debt saturation approaches situation overload, the less skilled and educated members of society feel they are not able to participate in the good life they see advertised by the ubiquitous media, so they resort to crime to obtain money to meet these artificially created or, often, real wants. Hence, another adverse affect of debt and easy credit is to accelerate the crime rate by orders of magnitude. What the world needs is not more policemen, but far less credit and debt! To address the effects is to ignore the cause. Credit and debt induced worry and stress cause smoking and drinking related illnesses, cancer, heart attacks and numerous other medical and psychological disorders including suicides. The merchants of credit and debt are also the "merchants of death and human misery" on an unimaginable and largely unaddressed scale.

Interest Rates - How Much Can the Real Estate Market Bear?

The current real estate bubble has been made much worse than any previous bubble not only by its awesome magnitude, but by mortgage refinancing on a hitherto unimaginable scale engineered to sustain economic consumption based on ever increasing asset values. This is the so called mortgage based ATM, where people have been able to repay credit card debts by dipping into their appreciating property values and then run up their credit cards all over again. Cars, electronics, house additions and renovations, education, and holidays have been financed in this manner to partially compensate for falling real wages and salaries, while real inflation romps along in double digits, as demonstrated by the year upon year rise in the salaries and benefits provided to Directors and CEO's of the world's medium sized to major corporations. These pay rises, as everyone knows, bear no relation to those afforded the labor force which are constrained by the CPI. As George Orwell correctly pointed out in his novel "Animal Farm", some animals are more equal than others.

The key issues facing the global real estate markets, which have enjoyed the greatest boom in world history, concerns the underlying weakness of the global unit of currency, the US dollar and interest rates. The US dollar has enjoyed a worldwide "Seigneur" status, hitherto only enjoyed by the Roman sesterces and the British pound, since 1945. Not only is the US dollar the currency of international settlements but currency of all international commodity transactions. Furthermore, the US has the world's largest Bond and Equity markets and is viewed as the safe haven of last resort for capital. Global surpluses piled up by China, Japan, India, Korea and Taiwan has all traditionally ended up in US denominated securities. However, during the last decade the hitherto unquestioned pre-eminence of the US dollar has been undermined by the explosion in US Federal, State and Public debt. The figures are now well publicized and beyond human comprehension. Debt at all levels of the US economy has reached saturation point and there is no evidence that any of these debts are ever going to be addressed in an orderly unwinding resulting in a soft landing. Like a black hole at the centre of a spiral galaxy, the shear scale of numerical debt is sucking everything into it. The odd thing is that in real terms the US dollar is nothing other than a piece of colored paper with writing and numbers on it. It is not a title deed to some defined amount of a tradable substance like gold or silver, as it used to be. It carries no warrants or guarantees and affords the owner absolutely nothing. Its value is only a perceived value and, therefore, based on trust. Nominal dollars, as expressed by colossal debts, are not sustained by cash in circulation. The money is therefore largely digital and abstract and hence a gigantic confidence trick. The world banks are run by magicians as they have managed to create abstract money and convince people it is real. What does this all tell us about the nature of the human mind?

To add to burgeoning US debt problems, one has to factor in the historically high cost of the US Military Complex running nearly 1,000 global bases and some 14 US Navy Carrier Battle Groups, not to mention the daily financial and human cost of the unfolding debacle in Iraq and Afghanistan. The latter is quietly becoming the US version of Augustus' Tuetoberg Forest disaster in AD 9, when the loss of three Roman legions in Germany prevented the further enlargement of the Roman Empire and thus changed the course of the history of Europe. Few outside the US, would now question that the Pax Americana is now in decline. The 21st Century is shifting inexorably towards China and India. Whilst China and India continue their rise to global superpower status, the world is slowly shifting towards the Euro as a "global bridging currency" until the Chinese Yuan becomes the new global specie by about 2025.

Both market and global political sentiment is turning against the Anglo - Americans who are seen as meddlesome, overbearing, extremely hypocritical and duplicitous. The Achilles heel of the US - UK hitherto overarching global power is the US dollar. It has, until now conferred a huge economic and political advantage. However, its perceived strength hides its underlying weakness. Recent action in global markets suggests the world economy is quietly moving out of the dollar into the Euro and gold (although the latter is, at current prices, an insignificant monetary instrument). The undeniable link between the US - UK and Israeli actions in the Middle East and the latter's pre - eminence in reserves of vitally important light and intermediate sweet crude oil needs no further discussion. US - UK control of such reserves is not a situation Russia and China would be happy to see eventuate. Furthermore, concern about global rebalancing and US debts combined with the tremendous loss of prestige both the US and UK have suffered in the Iraq shambles is setting the stage for a historic turning point. Both countries are undeniably in decline. This sentiment will serve to further undermine an already fundamentally worthless US currency.

As the dollar breaks through support at 82 and then the crucial 75, on the weighted currencies index, the Fed will be forced to raise interest rates to defend the dollar and reduce accelerating inflation. Unlike previous periods where interest rates were raised in 50 and even 100 basis point hikes, the present debt saturated real estate and credit markets would quite simply implode if such hikes were made today. So, for the real estate markets it will be a "death by a thousand cuts" to be endured over a protracted period of rebalancing.

For those ordinary people who purchased houses over the last three years, at inflated prices, the years of misery and pain are arriving. Debt is a double edged sword and for most of history the root cause of much pain, suffering and evil. The "have it all now" society we now live in is about to meet its day of reckoning. One sincerely hopes that a vital moral lesson will be learned for future generations to ponder. However, sadly, I doubt it. As one writer said "If there is one thing about history, it is that mankind learns nothing from history". It gives the writer no pleasure to see the world's principal advocate of individual freedom (see President Kennedy's fine words in the heading to this essay) the USA, make a host of disastrous decisions which will ultimately bring about its demise. The US has failed to heed the lessons of Rome and Britain. Empires always collapse because they lose their vision to the corruption that always attends great power.

Nigel H. Maund
BSc (Hons) Lond., MSc, DIC, MBA, MIMMM, F.Aus.IMM, SEG
Economic Geologist