Addison Wiggin on an Empire of Debt and the Mother of all Bubbles
“The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered. ” ― Thomas Jefferson
There is only one way for a bubble (the end result of inflation) to meet its end - it must be deflated! Whether the bubble is made of soapy water or the largest mountain of debt the world has ever seen! And neither there is any way for either of these temporary phenomena to be coaxed into eternal life. Despite what the spin masters at the Federal Reserve (neither Federal nor possessing real Reserves) or their apologists in the Federal Government keep pretending in public, the trillions in debt became way too large to have the faintest chance of being repaid - and this happened a long, long time ago! Ever since that reality hit home, those at the controls have been engaged in a massive Ponzi scheme to delude investors into buying their debt and voters to keep running on the treadmill of false hope!
The reality is that the global debt bubble was already filled with holes since the 2008 credit collapse! No matter how much 'hot air' continues to be pumped into its center by the world's central banks and governments, the bubble - which has become structurally unsound - will never be made whole again. This is why hyperinflation, feared by many who know that we are in big trouble, is not the problem! Next up is a deflationary depression that will reduce the world financial system to a pile of rubble!
Starting in late-2012, early-2013 that giant popping sound heard worldwide will be the implosion of the century-old central-planning system of central banking. Delayed well past its 'sell-by date' by its misled proponents who pay lip service to free markets, trusting rather in the discredited economic paradigm of Keynesianism - the populace will experience the full force of a squeeze unlike anything ever imagined. Widespread hunger, homelessness, debt slavery and world war are the likely result!
The days of 'pretend' have come to an end. The 'Emperor's' nakedness is now exposed for all to see! The world empire of debt is on the verge of falling and likely along with it today's mightiest empire! Read on about what no politician dares admit and start preparing today - get rid of most or all debt!
America is BANKRUPT!
The real world revolves around cash flow. Families across the land understand this basic concept. Cash flows in from wages, investments and these days from the government. Cash flows out for food, gasoline, utilities, cable, cell phones, real estate taxes, income taxes, payroll taxes, clothing, mortgage payments, car payments, insurance payments, medical bills, auto repairs, home repairs, appliances, electronic gadgets, education, alcohol (necessary in this economy) and a countless other everyday expenses. If the outflow exceeds the inflow a family may be able to fund the deficit with credit cards for awhile, but ultimately running a cash flow deficit will result in debt default and loss of your home and assets. Ask the millions of Americans that have experienced this exact outcome since 2008 if you believe this is only a theoretical exercise. The Federal government, Federal Reserve, Wall Street banks, regulatory agencies and commercial real estate debtors have colluded since 2008 to pretend cash flow doesn’t matter. Their plan has been to “extend and pretend”, praying for an economic recovery that would save them from their greedy and foolish risk taking during the 2003 – 2007 Caligula-like debauchery.
I wrote an article called Extend and Pretend is Wall Street’s Friend about one year ago where I detailed what I saw as the moneyed interest’s master plan to pretend that hundreds of billions in debt would be repaid, despite the fact that declining developer cash flow and plunging real estate prices would make that impossible. Here are a couple pertinent snippets from that article:
“A systematic plan to create the illusion of stability and provide no-risk profits to the mega-Wall Street banks was implemented in early 2009 and continues today. The plan was developed by Ben Bernanke, Hank Paulson, Tim Geithner and the CEOs of the criminal Wall Street banking syndicate. The plan has been enabled by the FASB, SEC, IRS, FDIC and corrupt politicians in Washington D.C. This master plan has funneled hundreds of billions from taxpayers to the banks that created the greatest financial collapse in world history.Part two of the master cover-up plan has been the extending of commercial real estate loans and pretending that they will eventually be repaid. In late 2009 it was clear to the Federal Reserve and the Treasury that the $1.2 trillion in commercial loans maturing between 2010 and 2013 would cause thousands of bank failures if the existing regulations were enforced. The Treasury stepped to the plate first. New rules at the IRS weren’t directly related to banking, but allowed commercial loans that were part of investment pools known as Real Estate Mortgage Investment Conduits, or REMICs, to be refinanced without triggering tax penalties for investors.The Federal Reserve, which is tasked with making sure banks loans are properly valued, instructed banks throughout the country to “extend and pretend” or “amend and pretend,” in which the bank gives a borrower more time to repay a loan. Banks were “encouraged” to modify loans to help cash strapped borrowers. The hope was that by amending the terms to enable the borrower to avoid a refinancing that would have been impossible, the lender would ultimately be able to collect the balance due on the loan. Ben and his boys also pushed banks to do “troubled debt restructurings.” Such restructurings involved modifying an existing loan by changing the terms or breaking the loan into pieces. Bank, thrift and credit-union regulators very quietly gave lenders flexibility in how they classified distressed commercial mortgages. Banks were able to slice distressed loans into performing and non-performing loans, and institutions were able to magically reduce the total reserves set aside for non-performing loans.If a mall developer has 40% of their mall vacant and the cash flow from the mall is insufficient to service the loan, the bank would normally need to set aside reserves for the entire loan. Under the new guidelines they could carve the loan into two pieces, with 60% that is covered by cash flow as a good loan and the 40% without sufficient cash flow would be classified as non-performing. The truth is that billions in commercial loans are in distress right now because tenants are dropping like flies. Rather than writing down the loans, banks are extending the terms of the debt with more interest reserves included so they can continue to classify the loans as “performing.” The reality is that the values of the property behind these loans have fallen 43%. Banks are extending loans that they would never make now, because borrowers are already grossly upside-down.”
Master Plan MalfunctionYou have to admire the resourcefulness of the vested interests in disguising disaster and pretending that time will alleviate the consequences of their insatiable greed, blatant criminality and foolish risk taking. Extending bad loans and pretending they will be repaid does not create the cash flow necessary to actually pay the interest and principal on the debt. The chart below reveals the truth of what happened between 2005 and 2008 in the commercial real estate market. There was an epic feeding frenzy of overbuilding shopping centers, malls, office space, industrial space and apartments. During the sane 1980’s and 1990’s, commercial real estate loan issuance stayed consistently in the $500 billion to $700 billion range. The internet boom led to a surge to $1.1 trillion in 2000, with the resultant pullback to $900 billion by 2004. But thanks to easy Al and helicopter Ben, the bubble was re-inflated with easy money and zero regulatory oversight. Commercial real estate loan issuance skyrocketed to $1.6 trillion per year by 2008. Bankers sure have a knack for doing the exact opposite of what they should be doing at the exact wrong time. They doled out a couple trillion of loans to delusional developers at peak prices just prior to a historic financial cataclysm.
The difference between bad retail mortgage loans and bad commercial loans is about 25 years. Commercial real estate loans usually have five to seven year maturities. This meant that an avalanche of loans began maturing in 2010 and will not peak until 2013. With $1.2 trillion of loans coming due between 2010 and 2013, disaster for the Wall Street Too Big To Fail banks awaited if the properties were valued honestly. A perfect storm of declining property values and plunging cash flows for developers should have resulted in enormous losses for Wall Street banks and their shareholders, resulting in executives losing not only their obscene bonuses but even their jobs. Imagine the horror for the .01%.
The fact is that commercial property prices are currently 42% below the 2007 – 2008 peak. The slight increase in the national index is solely due to strong demand for apartments, as millions of Americans have been kicked out of their homes by Wall Street bankers using fraudulent loan documentation to foreclose on them. The national index has recently resumed its fall. Industrial and retail properties are leading the descent in prices according to Moodys. The master plan of extend and pretend was implemented in 2009 and three years later commercial real estate prices are 10% lower, after the official end of the recession.
Part one of the “extend and pretend” plan has failed. Part two anticipated escalating developer cash flows as the economy recuperated, Americans resumed spending like drunken sailors and retailers began to rake in profits at record levels again. Reality has interfered with their desperate last ditch gamble. Office vacancies remain at 17.3%, close to 20 year highs, as 12.3 million square feet of new space came to market in 2011. Vacancies are higher today than they were at the end of the recession in December 2009. The recovery in cash flow has failed to materialize for commercial developers. Strip mall vacancies at 11% remain stuck at 20 year highs. Regional mall vacancies at 9.2% linger near all-time highs. Vacancies remain elevated, with no sign of decreasing. Despite these figures, an additional 4.9 million square feet of new retail space was opened in 2011. The folly of this continued expansion will be revealed as bricks and mortar retailers are forced to close thousands of stores in the next five years.
It is clear the plan put into place three years ago has failed. Extending and pretending doesn’t service the debt. Only cash flow can service debt.