The world is in the opening act of a long and epic tragedy. As I predicted some time ago, the government of the United States has begun to buy the nation’s mortgage debt at far above its true value from the charlatans of Wall Street. In Europe too, banks are finally being overwhelmed by their own greed and mendacity; whilst at an earlier stage of the cycle, due not to any excess of prudence over their US rivals but due only to different accounting standards, the great financial institutions of the old world are falling victim to the same blight of usury and poisonous financial alchemy that has infected those of the new. Inevitably, European governments will be force marched down the same path through the vale of tears. For all of us, this will be our own, all too modern, Via Dolorosa.
In the coming months, governments of all of the major world economies will follow the American example and attempt to recapitalise their banking systems in one way or another. The result of this will be the same as it will be for the United States. Their credit worthiness will be destroyed, leaving the last remaining haven for peoples’ savings no safer than a sack full of cash buried in the ground. Think about how much money there is in existence, contemplate how it is believed to be worth so much more than is actually needed for all of the people of the world to live and then consider what will happen when that fragile confidence trick is exposed? Let there be money our rulers said, fiat obscura will be the new response.
But what of the near future? We will shortly be engulfed in the filthy, stinking water thrown up by the death throws of the leveraged fund leviathan as it is slain by its own parents. September has been cruellest month for hedge funds since their invention. The short selling ban has destroyed the very basis of those old fakers statistical and convertible arbitrage – what use is a hedge fund that can’t hedge itself you might ask? The failure of the wholesale lending markets have starved their remaining lenders – the so called prime brokers (would not sub-prime brokers be a more suitable and honest a name?) – of the capital to provide them with leverage and what they do have available is at a far higher price. And last, but not least, their clients are deserting them in fear of what the future will bring. The coming months will witness the burial of the dead from this most monstrous of industries. Even the largest funds, Citadel, Renaissance Technology, D.E. Shaw & Co, HBK, Brevan Howard, GLG and others will find themselves on their knees. Some may survive but, without the elixir of cheap leverage to drive them, their existence will be marginal at best.
And of the longer term? I am steadfast in my belief that the system of money created from debt will implode just as it has exploded. A monetary great crunch to follow the slow motion big bang of the last thousand years. For reasons that may not be immediately obvious, the most important mathematical formula in the world at present is 1/(1-r) – the sum to infinity of a converging geometric series. Calculate the value of this formula for r = 0.98 and r = 0.90 for an approximate view of what will happen to the world’s money supply as a result of the de-leveraging to come over the following months and years, and its relevance will be painfully clear.