Friday, October 7, 2011

The Answer is More Debt - Really?

Sorry to keep banging on about debt. Perhaps you already get it and don't need my tirades about the stupidity of creating more debt to plaster over more debt. Perhaps politicians are just trapped. Austerity = no votes; stimulus = we might have a chance.

The new plan in Europe today is to, yes, wait for it, provide more stimulus and pull back on austerity. After all, austerity means negative growth, stimulus means, um, 'positive' growth. Let's see now, same debt constraints, same resource scarcity problems, so where is the positive growth going to come from? Right, squeezing the last ounce wealth out of peoples life-savings by increasing credit and inflation. Sounds real sensible.

If this isn't the end-game for this monetary system, what is?

And 'mums and dad's are being encouraged toward more debt too.

An article in yesterday had this to say about debt:

"money is cheap these days - so why not borrow it and then borrow some more at every chance while low interest rates last?"

Ok, so house prices are dropping and the equity in your home is approaching zero and debt amounts are drawing closer to the value of homes. Negative equity is just over the horizon, so why not borrow while you can?


And banks too are getting into more debt, and taking your mortgage as collateral. The ASB Bank, here in New Zealand, has announced a NZ$12.3 billion covered bond programme.

"Covered bonds are senior debt instruments backed by a dedicated group of home loans assigned to provide security for the debt known as a “cover pool.” Popular in Europe, they are usually issued for terms of five to 10 years. The way they're structured means if the issuing bank defaults, the assets in the cover pool are carved off - or ring fenced - from the bank issuer’s other assets solely for the benefit of the covered bondholders."

Who are the secured creditors? Yes some big overseas fund. If the ASB defaults, other nationalities may own your mortgage. Do you think they will care where you live when they want your house to sell? At that stage, the game becomes political and a big bailout from the NZ government will save us...and produce more debt.

This debt sickness is destroying the western financial system. We are seeing governments and individuals grabbing more of it and advising us to do so. No one is showing true leadership to get us out of this death spiral.

As mentioned before, with more debt comes less trust that you will pay this back. Governments across the globe, including New Zealand recently, are being downgraded by debt rating agencies and finding their costs of borrowing (interest) increasing. This will undoubtedly flow through to higher taxes for all.

Here's more detail of the news from Europe.

"Conducting his last press conference as head of the European Central Bank (ECB), President Jean Claude Trichet announced a further round of covered asset purchases, a sort of QE (or money printing).

The Bank of England has just announced an extra £75 billion QE."

Thanks guys; punish savers and reward the misappropriation of capital. Yeah, that makes sense.

And people think gold is in a bubble? Try Debt is in a bubble.

This new round of stimulus, or money printing, will be positve for gold and silver prices.

Gold in New Zealand dollars: $2140.80 per oz
Previous all time high: $2284.16 per oz (19 Aug, 2011)

Silver in New Zealand dollars: $41.46 per oz
Previous all time high: $59.19
per oz (30 Apr, 2011)

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