Alternative View
By Lance Crossley

Last month, I took a mid-year review of how I was faring with my 2010 prediction that states would face serious insolvency issues. We found evidence that this is indeed happening in the form of the Greek debt crisis as well as a number of other Euro nations that are dancing with precarious balance sheets. I said the theme of insolvency would also play out on the institutional level (with banks) and the individual level. Since I didn’t have space to address the latter two items last time, I’ll give it a go for this column.
The thing with debt is that you can’t separate government debt from bank debt or from individual debt; it’s all part of the same story. For example, last issue I mentioned one of the reasons for the bailout of Greece was to keep German and French banks, who were heavily invested in Greek bonds, solvent. French and German leaders feared a Greek default would render those banks’ assets worthless, and thus engender a run on their countries’ banks.
How much of a threat is the sovereign debt crisis for banks? A June 11 Bloomberg article reported that in a worst-case scenario – where Greece, Ireland, Italy, Portugal and Spain would all restructure their debt because of their inability to pay – banks globally would lose $900 billion dollars. In the past I have mentioned how the banking system is extremely over-leveraged. That means it would never have to reach a worst-case scenario to create another banking crisis. It would probably only take one or two countries to default to start the domino effect.
The debt crisis is also unfolding on the individual level. At the end of May, the Organization for Economic Co-operation (OECD) said in its semi-annual economic outlook that the debt levels among Canadian families threatens our economy. The report was overall quite positive on the Canadian economic recovery, but was quick to point out that “the high rate of household indebtedness is a source of risk to the outlook.”
The OECD report follows a similar warning from the Certified General Accountants Association of Canada, which said household debt in Canada is 2.5 times what it was in 1989 – that’s $41,740 per person! People just don’t have any rainy day funds anymore. When something goes wrong, they are really in the mud. The main asset Canadians hold is their homes. If housing prices begin to decline – as I believe they will – a lot of people will be without a financial lifeline.
The whole debt problem will eventually cause deflation. There’s no other way around it. What goes up, must come down. In that sense, my 2010 prediction wasn’t really a prediction at all. I was only observing a story that was already written during the many years of easy credit and loose monetary policy. What we are witnessing now is the story unfolding.

Alternative View
By Lance Crossley

As we are nearly halfway through 2010 – scary, I know – I thought it would be a good time to see how my New Year’s predictions are panning out. In my December 2009 column, I wrote the following:
“My 2010 predictions can be summed up in one word: “insolvency”. To be insolvent is to be unable to pay one’s debt obligations. In my view, this trend will only get stronger on the individual, institutional, and state level.”
For this column, I’ll keep my remarks to the state level. Last year, how many times did you see Greece on the news? These days, you can’t turn on the television without hearing the latest on the Greek debt crisis. What is happening across the Atlantic is extremely important. For those of you who don’t know, Greece has been under tremendous international pressure to get its fiscal house in order. The world markets are refusing to buy Greek debt except at insanely high interest levels. Why? They don’t believe it will ever get paid back. Markets believe it has gone past the point of no return. Even when Greece announced severe cutbacks to its public service, an action that provoked riots and deaths, currency markets have continued to turn its back on the country.
Euro zone leaders and the IMF eventually had to step in and agree to a $146-billion bailout to restore confidence in the international markets. Only one problem: even with the bailout, the market still didn’t believe it would be enough to make Greece solvent. So European leaders went back to the drawing board and came up with a $1-trillion bailout scheme, the largest bailout in history. Incredibly, the effect of this massive liquidity injection lasted less than 24 hours. The Euro almost immediately began to plummet. This was the market’s way of saying, “It doesn’t matter what you do at this point – this thing is broken.” This all in bet by European leaders has been going horribly wrong. What’s their next move? A ten trillion dollar bailout? The market just doesn’t buy this whole charade.
Why is the market crucifying Greece? Because they know who is bailing them out. It’s other bankrupt nations. They know credit rating agencies have been downgrading the debt of Spain and Portugal. They know Ireland and Italy are also facing similar problems. They know this is the broke bailing out the broke.
One of the reasons for the hasty bailout is that France and Germany’s banking sectors are hugely exposed to Portuguese, Spanish, and Greek debt. Leaders feared a contagion effect, and didn’t want a run on their banks. They prevented a run on the banks (for now) but they have not prevented a run on the Euro currency and various national debts.
Greece is the canary in the coal mine. Once this European story plays out with the other nations I mentioned, currency speculators will turn across the Atlantic to the U.S. dollar. The balance sheet of the U.S. is no better than Europe. The dollar is currently benefiting from the European crisis as some investors are fleeing to it as a “safe haven”. This will only last so long. Eventually, investors will also abandon the dollar and run to the only immortal currency – gold. At that point, gold will soar well over $2000 an ounce. The monetary system as we know it will have to push reset and reinvent itself. Things will start again but it’s going to be a turbulent ride to get there.

Alternative View
By Lance Crossley

Your faithful editor, Mr. Casey Lessard, recently gave me 100 trillion dollars. Seriously. Following a dinner we had a few weeks ago in Toronto’s Bloor West neighbourhood, in which I proposed that the United States is firmly on the road to hyperinflation, Casey kindly sent me a rather fitting gift: an authentic 100 trillion dollar bill from Zimbabwe’s bout of hyperinflation in the 2000s. (Ed.: This was the second largest bill ever printed until the Z$ was suspended in April 2009; government transactions are now performed in US$.)
Zimbabwe is one of the worst examples of hyperinflation in history. It is also the first example of hyperinflation in the 21st century (though, dare I say, it won’t be the last. More on that later).
The road to hyperinflation for Zimbabwe started with a sputtering economy, enormous government deficits, and the inability to borrow due to poor credit ratings. The Robert Mugabe government, which desperately wanted to avoid creating the civil strife that results from harsh austerity measures, resorted to what most governments do in this situation: printing money. Since Mugabe couldn’t find buyers for Zimbabwe bonds, he rolled the printing presses.
At its peak in 2008, inflation in Zimbabwe was increasing at an exponential rate. Put in a more tangible way, the cost of grocery shopping would double every 24 hours.
Hyperinflation brings cruel consequences for the average citizen. If you’re on a fixed income and your pension is $3000 a month, and the price of everything around you increases 50 to 100 times that amount, you can imagine the hopelessness of the situation. Basically, hyperinflation is an instantaneous way to wipe out all your savings and wealth.
During my conversation with Casey a few weeks ago, I suggested that the United States is highly vulnerable to hyperinflation. Like Zimbabwe, they have a struggling economy and gigantic government deficits. The only difference is that other countries are still willing to buy U.S. treasuries (i.e. U.S. debt). However, that may be changing.
In 2009, the U.S. had to auction a record $1.49 trillion in treasury bills to pay its deficit. And that was only freshly minted debt. If you count the debt the U.S. had to “roll over” from previous auctions, it totalled over $8 trillion. That is a massive amount of debt to sell. Remember, somebody at the other end has to assume this debt.
To me, it is astounding that anyone would buy a U.S. treasury security in light of all the money printing talking place south of the border. John Williams, an American economist who calculates statistics based on how the government used to calculate these things (before various administrations started cooking the stats), says the real inflation rate in the United States is at least twice as much than is reported by the government. In other words, people are buying U.S. treasuries to lose money at this point. This can only go on for so long.
Recently, some well-informed analysts have also noticed some “funny business” in the way the U.S. reports the results of its treasury auctions. Without getting too technical, it appears that part of the treasury auctions are being bought by the Federal Reserve itself. This would indicate that there is already not enough demand for the massive supply of U.S. debt that must be met. If you wrote yourself a cheque and cashed it in to meet your monthly obligations, you would be put in jail for fraud. The U.S. government, on the other hand, can get away with it. But not forever.
Will we ever see a million, billion or trillion dollar American bill? As incredible as it may sound, this is not a ludicrous proposition anymore.

Alternative View
By Lance Crossley

In George Orwell’s 1984, the ruling party’s three slogans were “War is Peace; Freedom is Slavery; Ignorance is Strength.” If you need any evidence that an Orwellian world is already upon us, you need to look no further that the awarding of the Nobel Peace Prize to US President Barack Obama – a bizarre and scandalous episode that drips with irony.
In the 108-year history of the Nobel awards, it has never gone to a leader so early in his tenure. So why Obama? One Nobel committee chairman defended the selection by saying, “Alfred Nobel wrote that the prize should go to the person who has contributed most to the development of peace in the previous year. Who has done more for that than Barack Obama?”
Let us run through all the remarkable contributions President Obama has made to the cause of peace. He has expanded the war in Afghanistan, poetically adding 30,000 troops to the area just a few days before his acceptance speech. He authorized the war to expand into Pakistan, where the killing of innocent Pakistani civilians has become a regular occurrence. He’s pointing the gun at Iran and Yemen. He continues to occupy Iraq by building permanent military bases in the country. He has tried to block court cases that challenge torture and domestic spying. And he has still not closed Guantanamo Bay, as promised so often during his election campaign.
In light of all this, his December 10 Nobel acceptance speech was all the more difficult to stomach. On what planet can a man accepting a peace prize get away with this: “I … reserve the right to act unilaterally if necessary to defend my nation.” Or how about this: “So yes, the instruments of war do have a role to play in preserving the peace.” Or this: “War is sometimes necessary.”
One observer astutely called it “an infomercial for war”. International security analyst Kaan Kutlu Atac said the president used the word “war” 44 times, the word “kill” five times and “peace” 31 times. It seems peace is losing ground.
Obama’s Nobel Peace Prize is perhaps the most striking symbolic event of 2009. An event that only makes sense in a world where people truly believe war is peace.

Alternative View
By Lance Crossley

My wife always makes fun of me after reading my columns because, as she says, “they are always such downers”. I can’t really argue with her on that one. But in my defence, I really am trying to call it as I see it. Anyway, she’s going to love this one. So without further ado, allow me to make my predictions for 2010.
My 2010 predictions can be summed up in one word: “insolvency”. To be insolvent is to be unable to pay one’s debt obligations. In my view, this trend will only get stronger on the individual, institutional, and state level.
Many countries are in serious financial trouble. Ireland’s public services have been drastically slashed with emergency budgets in an effort to pay its bills. Credit-rating agencies recently downgraded the credit-worthiness of Greece and Dubai. The U.S. and the U.K. have been warned of possible future downgrades.
The individual level is no better. In the U.S., bankruptcies are up by over 30 per cent so far in 2009. A similar story is emerging in Canada, albeit not as drastic.
My main concern, however, is with the banks. Western banks are so highly leveraged you can almost hear their top-heavy structures beginning to creak and crack. In the United States, over 130 banks have gone bankrupt in 2009. The top five Canadian banks are even more highly leveraged than the big banks in the states. According to a Sprott Asset Management report, these Canadian banks are leveraged at an average of 31:1, meaning a mere drop in their tangible assets of three per cent would effectively wipe out their worth.
The Sprott report suggests the only reason Canadians banks sidestepped the 2008 crash was because of a stealth government bail-out of $114 billion. It wasn’t called a bailout, of course; it was merely a “liquidity injection” courtesy of the Canada Mortgage and Housing Corporation ($65 billion), the Bank of Canada ($45 billion), and the Canada Pension Plan ($4 billion). Apparently all it takes to sedate the Canadian population is to change the terminology, or in the case of CPP, bury it on page 32 of your investment board’s 2009 annual report.
So the situation is risky even if you take their financial statements at face value. The problem is their financial statements, at least in the U.S. and Europe, are effectively “cooked”. The bank failures happening in the United States are quite revealing in this respect. Take the recent failure of AmTrust Bank, for example. It reported assets of $12 billion against deposits of $8 billion – not highly leveraged at all. Yet the government had to cough up $2 billion (25 percent) to cover people’s bank deposits. In other words, a large portion of their so-called “assets” were phony. This story is playing out again and again south of the border.
Whether the insolvency story is kicked further down the road or explodes in 2010 is anyone’s guess. But it is certainly something to watch out for. Happy New Year!

Alternative View
By Lance Crossley

Here in Canada, we seem to think we are immune to a housing bubble, so it was interesting to see the Globe and Mail – usually a real estate cheerleader – at least question the logic of why we continue to experience a booming housing sector amid the greatest economic crisis since the Great Depression.
In an Oct. 30 article, the Globe wrote, “Canadians are in the midst of a mortgage binge, taking out home loans at a pace that’s nearly eight per cent faster than a year ago…housing prices don’t usually survive recessions.” While the article correctly points to the Bank of Canada’s record low interest rates as a primary culprit for the buying spree, nowhere in the article does it mention the other major culprit: the Canada Mortgage and Housing Corporation.

Too big to fail?
The CMHC provides insurance to the banks for the entire amount of any mortgage when the purchaser has less than a 20 per cent down payment. This is another way of saying that they insure virtually all mortgages, since the average down payment of Canadians who buy a home is only about six percent. With this CMHC guarantee, the banks have no risk when they issue mortgages. If the homeowner defaults, it is the taxpayer who is on the hook. We don’t have a name for “sub-prime” here in Canada because we don’t need one – the CMHC makes almost everyone a worthy borrower.
Some are starting to call the CMHC the northern version of Fannie Mae and Freddie Mac. By the end of 2009, the CMHC says it plans to insure a staggering $813 billion worth of mortgages and mortgage-backed securities. That is well over half of Canada’s entire GDP. If there is a northern version of “too big to fail”, the CMHC is it.

An untold story
The National Post’s Diane Francis, the only mainstream journalist I know to call out the CMHC, warns that “Ottawa’s smugness about its superior regulatory regime and Canadian banking conservatism” is an accident waiting to happen.
“It’s a mortgage slush fund which distorts the market,” Francis writes. “It allows banks to lend recklessly without consequences and pushes up the price of housing for everyone.”

Worse than America
One of the most astute observers of this quiet Canadian housing bubble is blogger Jonathan Tonge (www.americacanada.blogspot.com). Here s what he has to say:
“Even at the zenith of the US housing bubble, prices peaked around $230,000 US while incomes were around $47,000 US. In Canada, incomes are $44,000 and prices are now at $326,613. If I have evidenced to you at this point how risky our lending has been, how are we so different than America? One might even say that we are much worse.”
The voices that recognize we are indeed in a housing bubble are few and far between. It won’t be long before the rest of the public catches on.

Alternative View
By Lance Crossley

I have said this before, but future generations will write about our time as a turning point in history. One major event that is attracting too little attention is the decline of the American dollar. To understand the importance of this we must first understand the dollar’s privileged status as the world reserve currency.
Gold used to be the anchor that gave paper money value; paper currency was freely convertible into a fixed quantity of gold. But since President Richard Nixon abandoned the gold standard in the early 1970s, the international money system is entirely based on fiat currency.
To fill the void gold left behind, the American dollar – due to its economic and military might – stepped into the role of world reserve currency. That meant other countries would stock up American dollars as “proof of value” for their own currencies. It also meant international transactions for commodities such as oil were all settled in American dollars.
This is starting to change, and quite rapidly.

The Independent, a British newspaper, reported on October 6 that Gulf Arabs were secretly meeting with China, Russia, Japan, and France to end dollar dealings for oil and replace it with a “basket of currencies” which would include the euro, gold, and the Chinese yuan. To give you an idea of the significance of this, one of the reasons America invaded Iraq so swiftly was because Iraq started to sell oil in euros instead of dollars – something America saw as a clear threat to the dollar’s status.
But this time, we aren’t talking about a rogue country. The ones staging a mutiny against the dollar are some of the most powerful countries in the world. (These countries have since denied the secret meeting, but at least one other reporter has confirmed with senior sources that this meeting did in fact happen. It is also worth noting that these countries have openly, and on the record, questioned the dollar’s reserve status numerous times over the last several months).
Another bad omen for the dollar is that it is now becoming the currency choice for the carry trade. The currency carry trade is a strategy of very wealth investors who borrow one currency and cash it in at a profit in another currency.
When the Asian crisis hit in the 90s, Japan set interest rates at zero percent. Carry traders borrowed Japanese Yen for free, converted it to dollars, and then bought U.S. government bonds that had interest rates of 4-5 percent. There’s your profit.
Now America is becoming the weak currency by which carry traders prey upon to cash in at a profit elsewhere.
Meanwhile, the U.S. will continue to recklessly print money in order to keep its economy on life support. The more money it prints, the more it devalues its currency. When the currency is devalued enough, countries like China will stop buying American debt. That will result in more money printing and, very possibly, hyperinflation.

Alternative View
By Lance Crossley

In his weekly radio and Internet address this past weekend, U.S. President Barack Obama lashed out against critics making “phony claims” about his health care reform bill. He urged “an honest debate, not one dominated by willful misrepresentations and outright distortions”.
To be sure, the debate on health reform south of the border has been hotly debated. Angry crowds have jammed into town hall meetings across the country. At some of these meetings, the confrontations have even turned physical. Some people call the reform bill socialist, others call it fascist. The problem is that there has been a lot of emotion but not a lot of context.
One of the central features of the bill is the idea of saving dollars through the targeted cost-cutting of Medicare, a government health insurance plan available for Americans 65 and over. These cost-cutting proposals were inspired by some controversial studies at the Dartmouth Institute for Health Policy and Clinical Practice. The studies wowed people in the Obama circle by showing how government could cut Medicare spending by hundreds of billions without affecting quality of healthcare delivery.
How did they arrive at these conclusions? The studies found that when it came to end-of-life care, some regions spent more than others on Medicare. The “great discovery” was that the ones that spent more had no major difference in patient outcome than the lesser spending regions. To make a long story short, the Dartmouth Institute championed these lower spending regions as models that should be emulated by the rest of the country. The higher-spending regions, according the studies, have no justification for spending more because other regions get the same results with less. Therefore, there should be essentially the same budget ceiling applied to all care across the country.
Sounds reasonable, right? But hold on a second. One glaring omission in this study is that it fails to take into account data such as the economic status of the patients. For example, the least expensive medicare facility in America is the Mayo Clinic in Rochester, Minnesota. The most expensive facility is found at the New York University Medical Center. Huge socio-economic differences between these two areas were simply ignored in the Dartmouth studies, even though it is well known that economic conditions have a huge impact on health. For example, lower-income people are more vulnerable to chronic diseases, which are extremely costly to treat. The study also didn’t take into account the amount of family support a patient has, which is important because those with more help at home can have more home-care rather than rely on expensive overnight stays at the hospital.
If this cost-cutting proposal is passed in the reform bill, the poorest are the most likely to suffer. While President Obama laments his critics, one wonders whether he has been critical enough of the ones advising him.

Alternative View
By Lance Crossley

On July 23, Bank of Canada governor Mark Carney announced that the recession was coming to an end. On July 29, President Obama said things have gotten better: the United States had prevented a depression and this was the beginning of the end of the recession. On August 3, a Bank of Montreal economist said the U.S. recession will end in the third quarter. And on August 5, the front page of The Toronto Star declared “Economy on the Rebound”. Leaders, experts, and media have announced in unison that all is well with our economy.
What a steaming pile of horse doo-doo.
The facts tell a very different story. Everything hinges on the United States’ ability to generate growth but there just isn’t any credible evidence that will happen. Now that the housing bubble has burst, the next shoe to drop is the commercial real estate market. Banks have postponed this day of reckoning by extending commercial loans instead of foreclosing, but how long this can go on is anybody’s guess.
Unemployment is officially at almost 10 percent now. Unofficially, some reputable analysts have it at almost twice that figure because of the skewed methods the government uses in its calculations. Either way, unemployment benefits are running out for many Americans, with the New York Times reporting as many as 1.5 million jobless will see their benefits end by Christmas.
State tax revenues have experienced their biggest fall since records began 45 years ago. Virtually every state is insolvent, most notably California, which has had to make draconian cuts to avoid bankruptcy.
Railroad carloads, which carry goods and are an accepted reflection of economic vitality, are down 22.5 percent since 2006. Retail sales are slumping. Consumer spending is tightening despite government efforts to stimulate credit. Even the Bank for International Settlements, which acts as a global central bank, has warned that the fiscal stimulus packages are only a band-aid and will be followed by an “extended period of economic stagnation.”
Most ominously, countries like China and Russia are starting to show signs they will no longer support America’s debt by buying its government bonds and treasury bills. If this happens, the dollar will plummet and American standard of living will drastically fall, as everything they import will becoming significantly more expensive.
So why all the optimism about emerging “green shoots” in the economy? Their hope is largely based on the rise of stock markets, which have rebounded greatly since bottoming out in March. But this climb can be attributed to Federal Reserve Chairman Ben Bernanke, who has expanded the monetary base by $1 trillion with fresh money. This new money has not been directed into productive purposes; rather it has been channelled straight into tradable assets. As a July 16 Wall Street Journal article pointed out: “In other words, Ben Bernanke has been the market.”
Where is it all headed? I wouldn’t be at all surprised to see another stock market crash as early as this fall, following the end of the American fiscal year when the final numbers come through and investors can see the bigger picture. Even if that day is postponed, the economy’s cheerleaders won’t be able to hide the reality forever.

Alternative View
By Lance Crossley

(The last in a four-part monetary system series)

It is astonishing to see how little the idea of monetary reform is up for political debate. Nevertheless, there is a small but growing chorus of voices offering an alternative vision to our money system. Here are a few of the more realistic proposals I have encountered. While none is a panacea, each is capable of improving the current system.

Return Bank of Canada to its former glory
Canada’s central bank was created in 1935 and nationalized three years later. It is supposed to be owned by the public in the interest of the common good. In effect, however, it has become a vehicle of Bay Street bankers. It wasn’t always that way. From WW2 until the early 1970s, money creation was shared by the private banking system and the government (through the Bank of Canada). The central bank would lend government money with what amounted to an interest-free loan. This paid for massive undertakings like the war and costly infrastructure projects like airports and the Trans-Canada Highway. This “government created money” would eventually find its way into the private banks, which would then use the cash as its reserve base to lend to businesses and individuals. In the words of Paul Hellyer, a former Trudeau cabinet minister: “It was the system that gave Canada the best 25 years of the 20th century.”

The 100 per cent reserve system
The modern banking system is based upon the “fractional reserve” scheme created by the goldsmiths in the 17th century. For a small fee, goldsmiths held people’s gold in safes and provided the depositor with a receipt that was good as gold in the marketplace. The goldsmiths soon noticed that only 10-20 percent of their clients would redeem their gold at any one time. This meant they could “safely” lend gold at interest many more times over the amount they actually had in the vault – as long as they held at least 10 percent reserves. This deception worked as long as people trusted there was actual gold backing their paper receipt. Mandating a 100 percent reserve requirement on banks would take away their money creating privileges and prevent runs on banks like the one we witnessed last fall in the United States.

Local currencies
Bernard Lietaer, a former Belgian central banker, argues that people and corporations are actually competing for money, not markets and resources. That is why he and a growing number of activists are promoting the idea of local currencies, which can circumvent the need for legal tender. The idea is that as long as there is an agreement between two people, paper money doesn’t matter. For example, in Ithaca, New York, community members can use time credits to shop at the farmer’s market or even pay rent. Farmers and landlords can use the pledged “hours” to get help with the harvest or building maintenance.

While all of these ideas differ in their application, they share the common belief that the money system has gotten away from us and has become detrimental to the common good. Perhaps Lietaer says it best: “We’ve forgotten that we designed it, and it’s now leading us around.”