THE ECONOMIC RIP TIDE – THE PAPER BUBBLE
Chapter Three
As a doctor in the Emergency Department I occasionally saw patients with strange complaints.
The complaints generally concerned pain in different parts of the body. The patient, almost always, was a male. Since, I was very experienced, I could tell after a few minutes of conversation and a visual inspection of the patient’s body, breathing, and color, that there was no serious medical disease present. I then proceeded with a psychological evaluation. Within minutes, I knew that I had before me a patient with a serious psychotic disease. It was almost always schizophrenia, however, occasionally it was a patient with a manic depressive disorder.
This story was very familiar. The patient had thoughts of grandeur. If he was not God, he was a president or some other important figure. He believed that he lived in a sumptuous lifestyle. He owned castles, yachts and spent money with abandon. Of course, I called a psychiatrist and the patient would be admitted to the hospital.
Individuals can have schizophrenia. So too, can societies. If we look back at the period of time commencing in the early 1970s we will see evidence of societies losing touch with reality and believing that they are God-like and deserve the wealth of heaven.
The people of Europe and the United States had worked hard after the Second World War. In a period of two decades this population became wealthier than they had ever been before. They were exporting manufactured goods to all countries of the world. Their farms were amazingly productive. There were lakes of butter and grain and wine. Huge surpluses were the major problems of the Western nations during this period.
Workers demanded more holidays, early retirement and every sort of social welfare. Europe, was ahead of the United States. In France, the 35 hour week, was inaugurated. This short work week had never been seen before in the history of mankind. In Germany, Turks were brought in as guest workers. The Germans went on vacation.
Against a background such as this the new phase of unreality began. What every person in the Western world wanted was a beautiful home and a new big car. Frequently, not one home, but two or three. And, not one car but two or three. Travel to all the beautiful spots of the world became became an absolute necessity. Eating the best of food, and in large quantities, became part of la Dolce Vita.
However, although the population of the West had full employment, it did not have enough cash to purchase such major assets as homes and large cars. In the past, purchases were almost always made in cash or as a large percentage in cash. The banks and financial institutions saw their chance. This was an opportunity for these firms to make untold profits.
Earlier in the century, the banks and financial institutions were owned by wealthy, hard-working do an intelligent men. These men were called capitalists. They thought in terms of their families. They wanted to make dynasties for their families. Their time framework was centuries. They valued their names and family reputations. They sent their children to the best universities and trained them well in business and all the slippery nuances of government.
Their children, who were also hard-working and intelligent, had a different set of values. They did not think in terms of centuries, they thought in terms of money. Being extremely well trained and fortified by their friends, relatives and business connections they decided to take advantage of the euphoria found in the common population. I call these men the Money Managers. They were only interested in money. The more they made, the more they wanted. There was no end to their greed.
The Money Managers wanted power as well. They did not want to be known, simply, as president of a company. They devised a new term. CEO. Chief Executive Officer. No one could be above them. They had a different time frame than their parents. Their time frame was five to 10 years, no more. In that short period of time they wanted to make millions and then billions. Nothing was to satisfy them. Since the entire world was entering a state of unreal prices and unreal goals, The Money Managers we’re able to concoct exceedingly complex schemes that they believed would benefit themselves.
As the entire world wanted new homes and new cars, the project was very easy. Have the buyers sign pieces of paper and then keep these papers as your new assets. Of course, the papers were called: Mortgages.
The entire world changed. Construction companies began building homes throughout the West. Car manufacturers produced cars in many different countries and sold them easily. Buyers and lenders became ecstatic. Buyers were getting things they had never dreamt they could own. Beautiful homes, large shiny cars, and every type of mechanical and technological device that could be created by the manufacturing industry. Payment became a beautiful dream. Sign a piece of paper and promise to pay in the future and the object of your desire was yours.
The mountain of debt began to grow. At first it was in the hundreds of millions and then, it became billions, and then, it became trillions. Governmental agencies were formed to process all the new loans. Fannie Mae, Freddie Mac and hundreds of smaller financial firms started to write paper. It is approximated that there is 40 to 60 trillion dollars spread across the West in the hands of financial and governmental institutions.
This phantasmagorical Paper Bubble is now a monster of an agreement between the people of the West and their financial institutions. In addition, as the West outsourced it’s manufacturing and agriculture, countries of the East also accumulated enormous quantities of debt paper. One may think that since the paper is backed by buildings and homes there is no problem. However, these buildings and homes lacked one crucial item: Energy!
Without energy to heat and cool these homes and also to light them, they cannot be occupied. Without energy to repair and maintain these homes they cannot be lived in. Without energy for transportation, people cannot go to and from work to their homes. In addition, the financial institutions that technically own these properties cannot do anything without responsible occupants. The buildings and homes require maintenance, insurance and taxes for local governments. No institution can repossess buildings or homes, since they are a liability rather than an asset.
If an agreement were reached between financial institutions, governments and occupants there would still be an unsolved quandary. Who would pay for the energy, the maintenance, the insurance and the local taxes for all these edifices. Forty trillion dollars is an impossible sum. The economy of the West would have to be in superb shape. In fact, however, it is in terrible shape.
The government is presently trying to sustain the financial institutions by printing inordinate quantities of money and giving this money to the financial institutions. Like treating a schizophrenic patient with a shot of penicillin, it simply will not work.
The borrowers cannot repeat their lane loans since the Western economy is almost dead in the water. At the present moment we are seeing a 10% unemployment rate. Businesses are dropping employees daily. The unemployment rate will soon reach 15%. There is no possibility of repaying $40 trillion worth of debt. Especially, since property values have dropped dramatically.
The only recourse that the governments of the West have is to print money and give this money to the financial institutions. In essence, what the governments will do, is debase their currency. This will be the last nail in the coffin. With unwanted fiat currency the countries of the West will be unable to import vital goods such as, petroleum, minerals, agricultural products and manufactured goods.
Although the financial institutions will be forced to let borrowers live in their unpaid homes, and their unpaid buildings in order to prevent destruction of these edifices by the weather and vagrants. And although the financial institutions will receive from their governments, the capital that they have lost in making spurious loans they will find it impossible to function as lending institutions when the public cannot afford to pay their first loans.
In the next chapter we will see what will happen when the government, the financial institutions, and the public try to undo their Paper Bubble.
