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The Daily Reckoning | Tuesday, September 25, 2012 Comedy: When government incompetence leads to Argentine line-jumping... An update on Japan’s unsustainable borrowing practices... Plus, Dan Denning on life in the modern feudal world, and plenty more... ------------------------------------------------------ External Advertisement This One Stock Could Be Wall Street’s Darling Major investment houses are quietly buying millions of shares of one company. Goldman Sachs, Fidelity, Tradewinds, Janus Capital, all of them are loading up heavy on this stock... And it’s easy to see why.  It’s a $7-billion company sitting on a $300-billion discovery that could shape modern society for decades. Here’s how you take advantage before it’s too late.   Quote of the Day... “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 Sushi-Grade Crises   Joel Bowman Reckoning today from Buenos Aires, Argentina... A dear friend sent us a message. “Comedy” was the title and, attached, was a cameraphone snapshot depicting, as our unpaid correspondent described it, “3-4 planeloads of people queuing to get through 2 scanners at customs at Ezeiza [Airport, Buenos Aires] while the 4 remaining scanners were conspicuously closed.”  This is typical of government operations in late-stage, degenerate socialist countries, like Argentina. What happened next is also typical...and instructive. Again, according to our friend’s report, “After hurling abuse at the customs officials...300+ people made a run at the gates, pouring through un-scanned and un-taxed, carrying all sorts of illicit goods like iPhones and digital cameras.” First time tourists might have been surprised at this flagrant flouting of the law...indeed, those accustomed to traveling in the US, where the TSA has conditioned individuals to leave both brains and dignity at home, might have been truly shocked. Homecoming Argentines, however, would have known exactly what to do. And they would have been front of the line-jumping line and first into the taxis. We share this little anecdote not to make fun of the city’s gate- hopping porteños...but to praise them for their disobedience...and to give our Fellow Reckoners a glimpse of what’s coming down the pipes.  As anyone living under the vile though increasingly-impotent “Kirchnerista” rule well knows, it’s not that the Argentinian authorities lack the desire to tax and scan incoming passengers...it’s simply that they don’t have the resources to do so. The country is broke. Again. (Again...again...etc...) And it’s not alone. In fact, it might fairly be said that the entire welfare- warfare model of the west — plus Japan — is collapsing.  Get ready for line-hopping on a scale perhaps never before seen. To be sure, this isn’t just about Argentina...or Greece...or even Spain or Italy. At least not exclusively. A recent story in The Atlantic wondered aloud, for example, “Who could be next in line for a gut-wrenching loss of confidence in its growth prospects, its sovereign debt, and its banking system?” The piece then went on to invite euro crisis-weary readers to turn their attention farther afield, to the world’s third largest economy. “Think about Japan.” Fellow Reckoners are by now familiar with Japan’s story...and of its differences and similarities to the situation in the “rest of the...uh, west.” After Nippon’s “postwar miracle” of the 1980’s came crashing down, the Japanese government embarked on an unprecedented borrowing binge, designed to pour concrete, build infrastructure and stimulate the economy with the kind of “shovel ready” jobs that cause so many Keynesian kooks in the US to begin foaming at the mouth. For the better part of Japan’s two “lost decades” (and counting) the government simply took out new loans to “roll over” existing debt, taking advantage of extremely low interest rates to do so. (Sound familiar?)  How long can that continue, you ask? Well, we don’t know. Nobody does...but indefinitely seems like a long time. Probably too long. Could things finally be coming to a head? “This year,” continues The Atlantic, “the Japanese government needs to issue debt amounting to 59.1 percent of GDP; that is, for every $10 that Japan’s economy generates this year, the government will need to borrow $6.” Of course, this kind of government borrowing requires of Japanese people equally high levels of private savings. Unlike the situation in other notoriously spendthrift nations, where governments rely on the “kindness of strangers” to finance their borrowings, the Japanese government mostly issues debt “locally.” Indeed, roughly 95% of Japanese government debt is held domestically, by Japanese banks and insurance companies.  The problem here is that Japan has a shrinking population...and the young don’t quite save like the old once did. In a recent paper published by Professors Takeo Hoshi of USCD and Takatoshi Ito of the University of Tokyo, the pair found that savings rates are on course to fall from over 3% currently to below 2% before 2020. There they stay for roughly a decade, before gradually declining to roughly negative 3% by 2050.  Where will the government get the money to finance its borrowing then? Even assuming expenditures continue along their current projections (as government expenditures almost never do)...and given what Hoshi and Ito call an “unrealistically optimistic assumption that Japan’s GDP will grow at 2% annually for the next 40 years,” the pair extrapolate a variety of scenarios in which the government debt-to- GDP ratio blows out to 300% sometime over the next decade. Should the yield on Japanese Government Bonds rise during that time, the figures could change dramatically. Indeed, some simulations have the ratio tipping 500% before the next two decades are up.  That eats up a lot — eventually all — of Japan’s domestic savings, forcing the government to rely on foreign lenders for cash, potentially driving yields on JGBs even higher. That’s bad news for Japan’s financial institutions too, which suffer valuation losses as interest rates rise. According to Hoshi and Ito, these banks and insurance companies “collectively hold about 142 trillion yen of central and local government bonds as of the end of March 2010 [...] about 32% of total bank loans.” Not insignificant, in other words. Not like letting a few queue jumpers skip ahead because the government is too overextended to man the scanners at the airport. Not like a few ne’er do wells hitting the streets in Syntagma Square, Athens, because the might have to work beyond 50 years of age. And not the kind of “crisis” that inspires a congress of iClad hipsters to camp out at the wrong end of Manhattan Island because their geography is as bad as their economics.  No. If Hoshi and Ito are onto something, we could be talking big fish. Really big fish. A sushi-grade crisis. And we haven’t yet gotten to the biggest fish of them all. More on that later in the week... But first, in today’s guest essay, Dan Denning, editor-in-chief of the Australian Daily Reckoning, shares with us his thoughts on “modern feudalism” and what’s really going on in the financial markets. Please enjoy...   No one thought this could ever happen in America... Argentina did it in 2008. France and Ireland did it in 2010. And Portugal did it just last year. All told, more than $88 BILLION worth of personal retirement funds were confiscated to pay off government debts.  But that can’t happen in America, right? Guess what — it already has. And if Congress has its way, it could happen again... See what they’re planning in this alarming new video. The Daily Reckoning Presents Your Liberty and Your Money   Dan Denning We begin with a cynical thought experiment. It’s really a conclusion about what’s going on in the financial markets. And the conclusion is this: the value of financial assets and currencies is being deliberately crashed in order to transfer wealth from the public to a small group of global elites. Sounds crazy, right? Maybe even cranky? We’ll get to that shortly. But first... The typical result of credit booms and busts is to transfer ownership of real assets and productive businesses from the public to the insiders. In our thought experiment, the Federal Reserve exists to make this happen in a way that doesn’t alert the public to what’s really going on. The insiders — or anyone who knows how these things work — sell to the public in the mania phase. The panic and crash phase of a bust is when the public realizes the game is up. Prices crash and liquidity disappears in the bust. Real assets and the share prices of real businesses are left lying around on the ground. If your money didn’t get destroyed in the crash, all the good assets can be bought cheap. The end result is that the middle class ends up poorer and the financial/political elites end up owning all the good stuff. This happens time after time in financial markets. Productive assets are slowly accumulated by a small group while in real terms, incomes fall for the majority. Another way to think of this is as modern feudalism, but with better-dressed peasants who have iPhones. In the modern feudal world, you don’t work the land. You work a keyboard, if you can find a job. And if you can’t, the government will pay you a token wage to keep you from starving/working. The main improvement of the modern feudal system is that the King can’t kill you extra-judicially. In the modern feudal system, only the Chief Executive has the power to deny you life, liberty, and the pursuit of happiness via a drone strike. This reprieve from arbitrary death from above (the King) is probably the biggest improvement in modern feudalism. So far, the only people to be killed thusly are terrorists and unlucky strangers who don’t vote in US elections. And to be fair, when it comes to subsistence, there are plenty of cheap calories in the modern world. People may be malnourished on modern food, but they won’t starve. Worst case scenario, you eat your way into a food coma or some medical crisis. Up until now, being a financial serf was bearable. But something is different about the preceding boom and the current bust. When Internet stocks crashed, it was a wealth transfer. People lost money. But it wasn’t real money anyway. It was the gains from the bubble, not capital saved for retirement. Besides, in response to the dotcom crash the US Fed lowered interest rates. World monetary policy became synchronised. The result was a boom in all assets and in all places. Stocks, bonds, real estate, commodities...you name it. Nearly everything boomed. Now we get to the part that’s different about this bust. This bust began in 2009. But the authorities soon discovered that things had become so complex and so large that a normal correction/wealth transfer was not possible. It’s okay to pump up Internet stocks and then watch them crash. But you can’t very well pump up the whole global financial system and then watch it crash, can you? Can you? Well, yes, you could. But there would be a couple of unavoidable results. One result would be a global economic collapse. The system is interlinked now. A financial crash becomes an economic crash...the Greater Depression Ben Bernanke wants to avoid. But that’s just the start. A financial crash means the end of the current global monetary system. US dollar devaluation played a key role in the credit boom. But it undermined the stability of the whole dollar system. You crash the system, you crash the dollar. What comes after the dollar? You can bet the people who benefit from the dollar system — the Fed — don’t want to find out. But the most serious result of the system crash — and we’re talking much more serious than Microsoft’s blue screen of death — is that real people see their real lives really wiped out. When Middle Class savings are destroyed through stock market crashes, housing crashes, and inflation, people end up a lot poorer. And that’s just the Middle Class. The people who went into the crash with even less come out of it worse than ever before. Let’s end the thought experiment there. It can’t be possible that anyone would wish for all those consequences of a system crash, could it? The only people who could wish for such a thing are the people who see it as a chance to build an anti-democratic global system from the ruins of the current one...a system with one government and one money and one rule of law which only applies to the governed and not the rule makers or money makers. That can’t really be what they’re after, can it? In any event, we will find out this week if coordinated central bank interventions from the Federal Reserve, the Bank of Japan, and the European Central Bank are enough to keep markets from crashing for a little longer. The central bankers are fighting a losing battle, we fear. When you look at the world’s financial system as a series of geometric shapes, it’s a giant wedge of credit supported by a tiny triangle of equity. In banking terms, there’s only a small portion of real, quality collateral supporting a huge edifice of asset values. Sovereign government bonds used to count as quality collateral. But the debt crisis has changed perceptions of value and safety. What you have is a financial system supported by very few reliable, quality assets which aren’t also someone else’s obligation or promise to pay. So let’s keep an eye on stocks and see how they hold up. Each new phase of money printing has packed a weaker punch. If the pattern holds, markets will be under pressure soon. And then we’ll see if the financial crash is simply a pretext for getting you to surrender your liberty as well as your money. Regards, Dan Denning,  for The Daily Reckoning -------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com   What to Expect in 2013... Between 2004-2007, Bill Bonner and Addison Wiggin did their best to alert their loyal readers to the dangers of the housing bubble well before the mainstream said anything about it. Well, today, they see something even worse looming just over the horizon. It’s not often our Reckoner-in-Chief agrees to appear on-screen, but this was just too important. Click here (or the image below) to see what they’re talking about now...