THE NEXT FINANCIAL CRISIS

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THE NEXT FINANCIAL CRISIS

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OCTOBER 2013 THE NEXT FINANCIAL CRISIS

St. Michael, Earl of Bensalem.

1. The entire world economy will collapse again within five years (i.e. before October 2018). 2. “Why?” Is the most common question. However, it should be “How?”. 3. I will answer “why?” first; a. Why did (it) happen? b. The “why” part is the very simple, our economic theories are out of date, we are too short-term and too greedy. Our politicians are only interested in their careers, the central bankers are Keynesian and the advisors work on broken models. 4. The “how” part is also very simple – the Austrian Business Cycle Theory explains all. 5. The Austrian business cycle is the theory that proposes that easy and cheap credit fuels speculative bubbles in the economy. a. Usually this cheap credit stems from low interest rates, quantitative easing (QE) and countries/central banks altering their exchange rates (e.g. China by selling the Yuan to buy the Dollar via government bonds, increases the supply of dollars and lowering America’s interest rates). b. What happens next is that this easy and cheap credit goes into risky borrowings or financial asset purchases. c. Either way the supply of money increases causing mal-investments (i.e. investments that shouldn’t be made in the first place). The mal-investments arise because the cheaper credit allows more riskier loans to be made as; i. Conventional borrowers like blue chip big business become very unprofitable to lend to since the rate of return is reduced via competition between lenders. 1. I.e. if I offered Microsoft £1bn at 5% when interest rates were 3% and interest rates were then dropped to 0.5%, then a bank/ hedge fund whatever could undercut me at 3%. 2. This is since the competitor’s eye my 5% borrowing rate, releases that I am making ‘excessive profits’ on this loan and will undercut me to take my business. (They could now get a 2.5% return, instead of my 2% return, although the real world is slightly more complicated, Microsoft is assumed to act rationally and if they can find a cheaper borrower, they will do). ii. Riskier borrowers thus become more profitable; 1 E-mail; [email protected] Twitter; @SMEBtheWizard

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OCTOBER 2013

St. Michael, Earl of Bensalem.

1. I.e. when interest rates were 5% then if ‘Crook LTD’ wanted a loan then because of the risk and threat of losing my money, I would have to charge the company a high amount to compensate e.g. 10%. 2. HOWEVER, with manipulated and low interest rates at 0.5%, I can now make the same margins at 5.5% and thus I am now more tempted to lend this money. 3. I will do this because my conventional borrowers offer me a 2.5% profit and my riskier borrowers a 5% profit. 4. To summarise, with a 5% interest rate and 10% borrowing rate, the riskier borrowers would not be able to afford to borrow as the lenders charge a high amount of compensation. But at the 0.5% interest rate and 5.5% borrowing rate, the riskier borrowers would now be more able to borrow as the lenders would now be more willing to lend due to the collapse of the lending rate to conventional borrowers. Therefore more lending to dodgy/risky borrowers results… 5. With the modern day wonders of securitisation, who do you think a bank is now going to lend to? iii. The answer is BOTH since they now have more money to lend and it is cheaper to lend. The risks can also be passed on. d. The above is when cheap credit goes into risky borrowings but it can also prop up the financial share markets if cheap credit from QE circulates around the system. i. For if cheap credit from QE circulates around the system then interest rates fall (which is the central banks intentional idea). ii. By making interest rates cheaper the amount of return from conventional and risky borrowers fall, which assuming all things being equal, means that the money would have to go somewhere else. What is the point of lending to someone if you don’t make any return from it? iii. Since the interest rate is low from the cheap credit, putting money in the lending gives a very low return and they can lose the real value of their money from inflation. Therefore they buy shares, gold and other financial assets in order to try and make a higher return to try and beat ‘beat inflation’. iv. This is similar to the ‘Quantity Theory of Money’ in that as the money supply increases, with a full and fixed capacity in the short run, inflation results. The inflation this time is in the share/gold and housing markets amongst others causing an artificial bubble started by Central Bankers. e. Of course when the supply of money decreases – the whole world collapses as the mal-investments turn out to be ‘sour’ and consumers/businesses default on theirs 2 E-mail; [email protected] Twitter; @SMEBtheWizard

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OCTOBER 2013

St. Michael, Earl of Bensalem. borrowings (since ‘Crook LTD’ can no longer afford to pay 10% interest rate when the interest rate is back up to 5%).This could be from; i. An increase in interest rates, which caused the 2007 financial crisis in housing1 and also the Dot Com bubble of the early 21st century. 1. An increase in interest rates reduces consumer income (due to higher mortgage repayments) but also forces people to default on their loans (since like ‘Crook LTD’ they can’t afford the 10% interest rate). 2. Indeed in 2007 many were offered loans very cheaply since interest rates were very low (thanks to Alan Greenspan, Fannie Mae, Freddie Mac and others) and thus people had nothing to lose if they didn’t repay. ii. A reduction in quantitative easing and other central bank manipulation techniques. iii. When China stops buying dollars. The interest rates on bond yields will rise, increasing interest rates across America and the world. People will default and the entire financial system will collapse.

f.

Having sustained low interest rates is completely unfeasible due to inflation that will result from more spending and a depreciating exchange rate making import goods (like oil) more expensive.

6. Modern day situation; a. QE is huge in America and Japan. Whilst being currently active in the Eurozone and the UK. These main economies will one day stop this central bank manipulation. b. Interest rates are low in the Eurozone, Japan, America and the UK. c. China is still manipulating its exchange rate by buying US government bonds. d. Securitisation has created a ‘risk free environment’ since the credit rating agencies have played with the valuation of assets by labelling junk as triple A (AAA). 7. Current effects; a. Low interest rates have helped mal-investments. i. Inefficient businesses have been propped up by cheap and easy credit. ii. Households have seen their mortgage repayments slashed causing a consumption boom. iii. THIS IS UNSUSTAINABLE.

1

See my previous work (Financial section) - http://www.scribd.com/SMEBtheWizard

3 E-mail; [email protected] Twitter; @SMEBtheWizard

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OCTOBER 2013

St. Michael, Earl of Bensalem.

b. QE is propping up the share market whilst also cheapening credit by expanding the money supply. c. Help to Buy (UK), Funding for lending (UK as well) and Fannie Mae /Freddie Mac (both USA) are still continuing their stupid policies causing mal-investments in housing. 8. What will happen; a. Interest rates will increase, QE will fall, the money supply will decrease and the malinvestments will default causing total financial ruin. b. There will be; i. Another housing crisis. Since consumers will no long be able to afford these with their higher mortgage repayments. ii. Another banking crisis. Since consumers and businesses will no long be able to afford these with their higher mortgage/ interest repayments. iii. Another car industry collapse. Since consumers will no long be able to afford these with their higher mortgage repayments. iv. ‘High cost airlines’ will collapse. Since consumers will no long be able to afford these with their higher mortgage repayments. v. Shares will halve and collapse especially in technology firms (Dot Com 2) since these have a ridiculously high P/E ratio and are usually toys not essentials. (Currently Hedge funds are looking for the ‘next big thing’ and they have decided Facebook, Twitter, Netflix and various other companies which now have multi-billion valuations with very small profits. Interest rate hikes caused the first Dot Com boom; chances are they will cause the second). vi. Oil prices will crash hurting the stability and economy of the Middle East. vii. Gold will rocket as it is a safe haven (so will the Swiss Franc). viii. Exchange rates around the world will havoc everyone with higher inflation is deflationary currency countries along with reduced growth in appreciating currency countries. Currency flows will go mad. ix. A worldwide recession and eventual depression will result. Millions of people and business will go bankrupt. x. Countries will collapse, the Eurozone may even die. xi. Poverty will increase, people will starve and many will die. xii. Political unrest will regain momentum and technocrats will rule the world instead of democracy. xiii. Western Civilisation will be overtaken by Eastern Civilisation. xiv. This will be a turning point in history and World War Three may be upon us. (But this will most likely be fought over fresh water supplies in the Middle East possibly at the same time). c. A word to the wise; 4 E-mail; [email protected] Twitter; @SMEBtheWizard

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OCTOBER 2013

St. Michael, Earl of Bensalem. i. Every single person in the world says that they will beat the model, beat the system and cash out early. ii. All will fail, wait or be greedy except four people who will predict the crisis and short sell everything. There is a reason why these four people will be billionaires. iii. Chances are – you will not be one of them. You will fail, wait or be greedy. It has happened before and will happen again. Human stupidity seems to be the only certainty in life. iv. You can’t rely on mathematical models; 1. They are missing out variables (the smallest things are by far the most important). 2. The variables don’t generally connect with other. 3. The information they are based on is usually outdated and wrong but mainly because you can’t predict irrational short term behaviour. (If you could predict irrational behaviour, it wouldn’t be irrational). 4. (Check out ‘Long Term Capital Management’, a company that changed the industry but collapsed due to their Mathematics).

9. There is a solution though; a. Remove central banks and their functions (after the ‘managed readjustment’). b. Remove governments and place Austrian School economists in power. c. Worldwide privatisation, deregulation and a switch the focus of taxation from income to expenditure attacking greed and not the incentive system. i. Taxing expenditure and not income reduces consumption and allows rational economic agents to put their extra disposable income (gained from the reduced income taxation) to other uses i.e. insulating themselves from the higher interest rates. ii. Deregulation and privatisation will free people from the government and promote efficiency when it is needed. iii. (The rich consume more VAT goods and avoid the high rate of income tax anyway. The poor will have more income to spend if negative income taxes are introduced). d. A monetary policy (‘managed readjustment’) of the following; i. A publically told policy of a 0.25% increase in the interest rate every four months. So in April, August and December. ii. Around the world as not to cause capital flow and exchange rate problems. iii. This will continue for six years. iv. After this, central banks and their functions must be removed and in turn the financial markets must be liberalised, interest rates liberalised and banking regulation to be slashed. If the bank or anyone wants to lend to you 5 E-mail; [email protected] SMEBINATION Twitter; @SMEBtheWizard

OCTOBER 2013

St. Michael, Earl of Bensalem. they must be able to lend to you and accept any consequences that may occur. v. An international agreement must be made NOT to bail out banks in the case of banking failure. Moral Hazard must NOT be allowed to prevail ever again. vi. QE to be unloaded at 1% per month again around the world at the same time. vii. Credit rating agencies need reform (they shouldn’t be able to make more from a higher ranked asset – that causes lower ranked assets to be ranked as higher ones) whilst Fannie and Freddie must die.

e. India must be liberalised and open for trade and foreign investment. We need a huge country to pull us out because China is part of the problem. India cannot fail for long because we will all suffer collectively if it does. f. More Free Trade is needed; i. Doha must be signed and agricultural tariffs must be slashed; 1. This will increase Africa’s ability to compete and thus improve Africa’s economy whilst allowing development. (Protectionism in agricultural is killing them). 2. It will also allow world food prices to fall and free up disposable incomes to help with the increased interest rates. 3. Domestic economies will be allowed to develop and adapt to change. 4. An example (of the point 9.f.i.1.) is Britain in the 1840s when the ‘Corn Laws’ were abolished, workers incomes and living standards rose and the economy moved away from agriculture to services and manufacturing as resources were freed up. ii. A US/EU free trade deal must be signed and implemented, quickly. iii. The EU must be reformed with regards to the Common Agricultural Policy (CAP) and various other projects. iv. Protectionism must decline or we will experience the same retaliation seen in the 1930s. 10. To conclude; a. b. c. d. The world is a mess and we need a future. We must change or be forced into change. We must evolve or die because survival is not compulsory. The question remains – when will we learn?

6 E-mail; [email protected] Twitter; @SMEBtheWizard

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