August 8, 2011
Vilnius, Lithuania
Ancient Greek mythology tells the tale of Odysseus, the heroic king of Ithaca whose 10-year journey home after the Trojan War became one of the world’s most famous epics.
At one point in the journey, his ship was heading straight for two deadly hazards– on one side was Scylla, a six-headed monster disguised as a giant rock, and on the other side was Charybdis, a sinister whirlpool born from the sea god Poseidon.
The perils were close enough to pose an inescapable threat to ships passing through, forcing the captain to choose between the two evils. A Latin proverb from this story, “incidit in scyllam cupiens vitare charybdim” (he runs on Scylla, wishing to avoid Charybdis), is now “between a rock and a hard place” in modern English.
This is exactly where the entire world finds itself right now. With confidence vanishing, markets panicking, and entire nations going bankrupt, ultimately there are no good solutions… and thinking people need to understand some simple truths about the situation:
1) America’s credit rating was punished by S&P because US politicians failed to reach an adequate solution to the country’s massive debt woes which are nearing 100% of GDP. Investors reacted by buying the Japanese yen– a country whose sovereign debt rating is two steps below the US, and at 220% of GDP, over twice as indebted!
Not to mention, Japan has burned through 4 prime ministers and 8 finance ministers just in the last four years. This is not exactly a country whose government has a successful track record of dealing with its problems.
How does this make any sense? That’s like firing an employee who gets drunk on the job and replacing him with a gun-toting heroin addict. Yet faced with a universe of bad choices, investors will pick the one which appears to be the ‘least worse’.
This approach is sure to create even more gross misallocations of capital down the road.
2) World governments have gone on the offensive against S&P, slamming the rating agency and trying to discredit the firm’s financial calculations without acknowledging the underlying premise– that America lacks a credible plan to deal with its crisis.
Leaders from countries as diverse as France, South Korea, and even Russia have all shrugged off the downgrade and publicly reiterated their confidence in the United States.
(They even rolled out Warren Buffet who said that the US deserves “a quadruple-A” credit rating.)
You know that old adage– how do you know that a politician is lying? Because his lips are moving. When so many world leaders are expressing nearly unanimous support for the dollar and the US government, it’s time to be very concerned about what’s going on behind the scenes.
3) G7 finance ministers have pledged to take any steps necessary to calm markets and “avert collapse in world confidence.”
Here’s the thing: All governments can do is print, borrow, or steal from taxpayers. These are exactly the policies that created a loss of confidence to begin with, and now they are pledging to restore confidence by doing the exact same things.
If they take action, the situation will only get worse. If they don’t take action, the markets will panic and the situation will only get worse. Rock. Hard place.
4) Trillions of dollars are sloshing around in the financial system right now desperately seeking some modicum of safety. With the wave of downgrades and money creation that’s coming, few asset classes look stable… so that little hunk of yellow metal is starting to look awfully attractive to a lot of investors.
5) Governments will do whatever it takes to keep the party going and maintain the status quo, whether it’s printing money into oblivion and sticking consumers with massive inflation, or sending police out into the streets to beat everyone into submission.
I really want to urge you to think rationally about your situation and ask yourself a simple question– do you feel secure having the entirety of your assets and livelihood under the control of a single bankrupt nation in the midst of a financial collapse?
If not, it’s time to let go of the excuses and take action.
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