by John Galt
June 23 2013 05:00 ET
In a fascinating report by the McKinsey Global Institute, “Financial Globalization: Retreat or Reset?” , the details of just how isolationist the international financial system has become could be a leading indicator as to why the burgeoning regional currency war could erupt into a global monetary conflict as it appears that cross border banking has crawled to a halt in the wake of the great crash and deleveraging started in 2008. The figures from this report are supported by one series of charts which terrify the banksters of the world and should keep the unprepared thinking about “what if” the system seizes up. This week was a brief, albeit serious, preview of what a total economic system collapse begins to look like to the average soul.
The first chart which is only updated through 2012 from the Bank for International Settlements (BIS) displays the total notional amount of derivatives outstanding in the over the counter market (OTC):
(Source: BIS Quarterly Report)
That’s right my fellow travelers, that total does in fact read:
Yes, seriously, $632 trillion plus.
Thus when Ben Bernanke, the brilliant academic but steaming cow pile of a banker came out and did his duty this week by squatting on the investing public and dropping a deuce on the average moronic CNBCFBNBBBG viewer, well, is anyone really shocked that the world took a serious look at the policies of the Western banking system and investment masters and began to get nervous? It was this same type of figures as displayed above in 2007 and the same type of ignorance of financial reality which impaled the world economy in 2008 and damned near started a World War thanks to a series of cascading financial defaults which would have destroyed most of the corporate hierarchy on earth.
The biggest problems are usually the most obvious and rarely reported. This time the problem can be identified quite simply as a lack of trust which has major implications for the future of globalist capitalism as envisioned by the creation of the Chinese hybrid system with authoritarian controls and quasi-capitalist economic management of the financial systems. The currency fluctuations have major implications however and the two largest Western regions are indicating stress that could blow up and destroy the world economy in less than a week. The derivatives charts from the BIS display this risk quite clearly:
(Source: BIS Quarterly Report)
Between the European Union and United States there is over $336 trillion in derivative risk outstanding. This is a result of leveraged bets on both sides of the trade of which just a 5% failure rate would cause the entire world economy to spiral into total collapse. The lack of actual assets versus liquidity in one nation demonstrated the dangers to the system this week yet few individuals grasped the concept that the very interconnected economic system which has allowed a leveraged expansion based on credit would just as easily result in an implosion and massive contraction in real money, aka, a deflationary world wide depression, unless all sides work in concert to maintain financial systemic exchanges and flows of capital.
Unfortunately for the average schmuck who is not paying attention, this very key ingredient to averting a financial disaster has been contracting at a frightening pace since 2007. With the combined risk of an uncontrolled deleveraging event along with an unsustainable loose monetary policy in those nations attempting a rational Keynesian debt reduction (Yes, it is an oxymoron), the chances for a minor financial error created by a remote or peripheral nation’s central bank could and would probably bring the entire Western banking system into a collapse scenario in very short order. The key is to pay attention to those indicators that warn everyone that a collapse is imminent.
Ambrose Evans-Pritchard grasped the gravity of the situation in Europe within the story from the at the link below:
From the commentary above:
Foreign bank loans fell by $472bn (£311bn) in rich countries in the fourth quarter of last year, contracting at an 8pc annual rate. The retrenchment was led by a collapse of interbank loans in the eurozone, where lenders in the creditor states continue to pull back from periphery countries.
Volumes fell by $284bn across the eurozone, a 20pc rate of contraction. Belt-tightening by banks is a key reason why the region remains stuck in recession for the seventh quarter in a row.
The BIS said in its quarterly report that the markets are “under the spell of monetary easing”, convinced that central banks will keep the asset boom going despite signs of “broad deceleration” in the US economy and fatigue in China.
Read that last sentence again after realizing the staggering implications of the data in the first two sentences. The phrase that will eventually explain the reason to panic is “fatigue in China.” And the BIS data as of Q1 bears that out. In fact total cross-border financial exchange and activity had declined some 61% since 2007 through Q1 of 2013 and when the Q3 figures are updated later this year, odds are it will be far worse!
In the report linked at the top of this article from McKinsey, the first chart which is most alarming starts to tell the tale of how last week happened in the world financial markets and odds are how it will get worse:
That’s right boys and girls, capital flows are contracting, not expanding across the Western economies and that usually indicates a future economic contraction will return within months. In fact cross-border lending has collapsed not just in Europe, but around the world except for some select strategic client nations of the superpowers:
The changes in cross-border financial activity was across the board since 2007, a disturbing trend when one considers the globalist interdependent system implemented in full during the 1990’s:
How bad has it actually been since 2007? Only the Asian tigers and BRICs indicate any pulse of cross border financial activity since the disaster in 2008-2009:
Declines in cross border claims is usually a precedent of a massive world-wide economic contraction, not just a correction. However the powers that be are so desperate to find yield and create the appearance of liquid financial systems within the global economic system that speculation versus capital creation and investment are the tools in use today. That is best exemplified by China’s willingness to expand investment in Latin America:
So where did all of this money go? Venezuelan utilities? Infrastructure? Try just like Wall Street in a Communist nation, speculation in the form of equities:
This makes the over 100% off of the 2009 lows in the United States averages look like pikers by comparison and I’m sure when old Chavez was alive, he was offering our Imperious Leader advice on how to nudge the averages higher and make a cent or two for his “trust.”
In reality, China is in a world of trouble but few commentators on the mainstream economic media wish to acknowledge the dangers of an economic system which has a shadow banking system 1/2 the size of it’s nation’s $7 trillion plus GDP! Even Moody’s recognize the threat back in May as exhibited in this article from Bloomberg:
From the article above:
“Given the substantial scale and growth of shadow banking activities in China, we are doubtful of the banks’ ability to isolate themselves from a significant increase in defaults in the shadow banking domain,” Moody’s analysts led by Hu Bin wrote in the report.
Translation for my non-geek readers is simple:
If the shadow banking system implodes in China as it did in the United States during 2007-2008, then the Chinese economic collapse could trigger a world-wide deflationary economic crisis, especially if there was a sudden need to raise cash, not liquidity, but cold hard digitized cash in very short order. The Chinese stock market, as exhibited via the Shanghai Stock Exchange Composite, is down almost 40% since 2009 despite a global economic monetary equity speculative binge!
The sell off on global equity markets this week should be the warning signal that everyone needed to see as to what happens when one Ponziconomy after another collapses due to the sheer weight of the fraud which encourages speculation over capital creation. There were numerous unconfirmed reports about problems within the Chinese banking system this week which were a warning sign that a sell off was imminent in every market around the world be it commodities, equities or most dangerous of all, bonds. The difference between being liquid and having cash on hand was demonstrated in all probability by the People’s Bank of China which has been in the eye of the rumor mill as the one entity selling paper, not physical, assets to raise cash to inject funding into their domestic banking system. It would explain thee across the board liquidation of paper assets while at the same time making purchases for delivery of metals, petroleum products, and agricultural materials at greatly discounted prices.
By tying in the lack of cross-border financial activity with the apparent lack of fundamental management of the Chinese economy whereas the economic data which was always suspect appears to be blatantly fraudulent, then it would appear the headline below from the Financial Times on June 4th could indeed be a harbinger of the collapse of the entire world fiat funny money system global banking as we know it.
Unfortunately when money and goods stop flowing across borders, bullets and bodies usually follow. The world has experienced throughout the centuries major conflicts; the two most drastic of such in the 20th Century starting in Europe as the almost certainly will again. Sadly, our blinding ignorance about nationalistic feelings, disrespect for capitalism and private property rights, along with corrupted political institutions around the world will almost certainly lead to another global conflict in months rather than years.