The Web of Debt and the Great Abyss - Gary North

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The Web of Debt and the Great Abyss

Dr. Gary North

In August, 1998, a hedge fund called Long Term Capital Management, Ltd. got into trouble. It was a highly leveraged fund open only to the rich. The investors had pooled their funds and then had taken on about $100 billion dollars in debt in the form of futures contracts and bank loans. It was leveraged about 20 to one.

This money was invested in currency futures and other sophisticated debt arrangements. It was run in terms of highly mathematical formulas created by a pair of economists who had won the Nobel Prize in economics for their theory of how debt markets work. Hardly anyone had heard of this fund when it hit the brick wall.

Its formulas had stopped working.

The fund was about to default on $100 billion of debt. The Federal Reserve System called together a weekend meeting of 16 large banks that were about to suffer huge losses when LTCM defaulted. The banks' representatives met and decided to put in another $3.5 billion or so to keep LTCM's doors open to its creditors.

This would avoid a "fire sale" of its assets. This saved the banks, but LTCM's investors lost everything.

Why did the Federal Reserve care? Because of the structure of the international debt markets. The web of debt is interconnected. If one debtor cannot pay its creditors, then these creditors cannot repay their creditors, and so forth.

When the Credit Anstalt Bank of Austria defaulted in 1931, it took down other large European banks. The Great Depression got worse -- much worse. Central bankers remember Credit Anstalt.

About two weeks after this bailout, my friend John Mauldin was on a flight to Bermuda. John doesn't fly business class. He always sits next to people with real money, not next to their middle-class employees. He got into a conversation with a senior executive in a very large re-insurance company.

The man had been involved in some of the negotiations to bail out LTCM. He told John, "We were looking into the abyss." John believed him. I do, too. But six billion people didn't know anything about LTCM. Their financial futures were on the line, but nobody told them. Nobody will tell them next time, either.

Today, the derivatives market is a web of interconnected credit/debt contracts. Some estimates of its size are as high as $150 trillion. Other estimates are more conservative: $80 trillion. It is not a regulated market. No international agency collects mandatory statistics on its size. The world's bankers hope that there will be no LTCM-type event that creates a cascade of defaults. The public has no clue regarding the magnitude of this web of debt.

Debt is going to be the political issue, worldwide, in the coming years. Governments have made massive promises to their citizens regarding retirement funds and medical subsidies. These promises cannot be met; statisticians know this.

But politicians defer making a decision.

These political debts rest on assumptions regarding the growth of population and the work force that cannot be achieved in Europe or North America or Japan.

There will be a disguised default at some point. Governments will change the retirement rules. Younger voters know this today, but as they get older, they will become more insistent that the changes be imposed on the generation coming up behind them. Even though millions of voters know this, nothing is being done to deal with it.

Congress counts as a short-term budget surplus about $70 billion a year of new Social Security long-term debt. The name of the game is deception and deferral. Long-term deferral is built into the modern political system.

I mention this to remind you: the decision-makers lie. They lie because the public wants to be lied to. The public knows it's a lie, but as long as the crisis is deferred, no one really cares.

The public has deferred to the debtors -- governments -- and the debtors prefer to lie. This commitment to outright lying sets the standard of ethics for the debt markets. The same commitment to self-deception is at the heart of our corporate financial future.

The U.S. government is in debt to tens of millions of voters. In contrast, the solvency of the short-term derivative market debt hinges on obscure companies. The economy depends on the solvency of a tiny percentage of the U.S. population: "qualified investors." These are people with a million dollars or more net worth.

They are allowed to invest in LTCM-type companies.

They have a chance to reap above-market returns because small investors are kept out of these markets by U.S. law. This legal restriction operates as a subsidy by the government to the rich. This is done in the name of protecting the little guy -- protecting him from high-risk, high-return investments.

But, as we almost saw with LTCM, bad decisions made by the fiduciaries of the very rich can have horrendous consequences on the general population.

To paraphrase Karl Marx: "A specter is haunting democratic capitalism: the specter of debt." It is the specter of the abyss.

Reality Check

How will ever-increasing margin debt effect the market - and the stocks you've put your money is in? Gain insight and answers every day by joining Gary North's free e-mail daily: Reality Check Subscribe by sending an e-mail to: ice@ballistic.com

Dr. Gary North

In August, 1998, a hedge fund called Long Term Capital Management, Ltd. got into trouble. It was a highly leveraged fund open only to the rich. The investors had pooled their funds and then had taken on about $100 billion dollars in debt in the form of futures contracts and bank loans. It was leveraged about 20 to one.

This money was invested in currency futures and other sophisticated debt arrangements. It was run in terms of highly mathematical formulas created by a pair of economists who had won the Nobel Prize in economics for their theory of how debt markets work. Hardly anyone had heard of this fund when it hit the brick wall.

Its formulas had stopped working.

The fund was about to default on $100 billion of debt. The Federal Reserve System called together a weekend meeting of 16 large banks that were about to suffer huge losses when LTCM defaulted. The banks' representatives met and decided to put in another $3.5 billion or so to keep LTCM's doors open to its creditors.

This would avoid a "fire sale" of its assets. This saved the banks, but LTCM's investors lost everything.

Why did the Federal Reserve care? Because of the structure of the international debt markets. The web of debt is interconnected. If one debtor cannot pay its creditors, then these creditors cannot repay their creditors, and so forth.

When the Credit Anstalt Bank of Austria defaulted in 1931, it took down other large European banks. The Great Depression got worse -- much worse. Central bankers remember Credit Anstalt.

About two weeks after this bailout, my friend John Mauldin was on a flight to Bermuda. John doesn't fly business class. He always sits next to people with real money, not next to their middle-class employees. He got into a conversation with a senior executive in a very large re-insurance company.

The man had been involved in some of the negotiations to bail out LTCM. He told John, "We were looking into the abyss." John believed him. I do, too. But six billion people didn't know anything about LTCM. Their financial futures were on the line, but nobody told them. Nobody will tell them next time, either.

Today, the derivatives market is a web of interconnected credit/debt contracts. Some estimates of its size are as high as $150 trillion. Other estimates are more conservative: $80 trillion. It is not a regulated market. No international agency collects mandatory statistics on its size. The world's bankers hope that there will be no LTCM-type event that creates a cascade of defaults. The public has no clue regarding the magnitude of this web of debt.

Debt is going to be the political issue, worldwide, in the coming years. Governments have made massive promises to their citizens regarding retirement funds and medical subsidies. These promises cannot be met; statisticians know this.

But politicians defer making a decision.

These political debts rest on assumptions regarding the growth of population and the work force that cannot be achieved in Europe or North America or Japan.

There will be a disguised default at some point. Governments will change the retirement rules. Younger voters know this today, but as they get older, they will become more insistent that the changes be imposed on the generation coming up behind them. Even though millions of voters know this, nothing is being done to deal with it.

Congress counts as a short-term budget surplus about $70 billion a year of new Social Security long-term debt. The name of the game is deception and deferral. Long-term deferral is built into the modern political system.

I mention this to remind you: the decision-makers lie. They lie because the public wants to be lied to. The public knows it's a lie, but as long as the crisis is deferred, no one really cares.

The public has deferred to the debtors -- governments -- and the debtors prefer to lie. This commitment to outright lying sets the standard of ethics for the debt markets. The same commitment to self-deception is at the heart of our corporate financial future.

The U.S. government is in debt to tens of millions of voters. In contrast, the solvency of the short-term derivative market debt hinges on obscure companies. The economy depends on the solvency of a tiny percentage of the U.S. population: "qualified investors." These are people with a million dollars or more net worth.

They are allowed to invest in LTCM-type companies.

They have a chance to reap above-market returns because small investors are kept out of these markets by U.S. law. This legal restriction operates as a subsidy by the government to the rich. This is done in the name of protecting the little guy -- protecting him from high-risk, high-return investments.

But, as we almost saw with LTCM, bad decisions made by the fiduciaries of the very rich can have horrendous consequences on the general population.

To paraphrase Karl Marx: "A specter is haunting democratic capitalism: the specter of debt." It is the specter of the abyss.

Reality Check

How will ever-increasing margin debt effect the market - and the stocks you've put your money is in? Gain insight and answers every day by joining Gary North's free e-mail daily: Reality Check Subscribe by sending an e-mail to: ice@ballistic.com

-- NorthFan (NF@Heeeeeeeee's.back), July 17, 2000

Answers

Nothing to worry about untill you notice the abyss looking back.

-- Dan Newsome (BOONSTAR1@webtv.net), July 17, 2000.

The Truth Behind GN, His Fortune And His Followers

Forum: Gary North is a Big Fat Idiot Forum The Truth Behind GN, His Fortune And His Followers


Date: Mar 24, 07:23


After reading "Gary North Is A Big Fat Idiot" I was amused at one section where the writer talks about how GN is losing subscribers and wants to hold on to them.


Truth be known, North's newsletter "Remnant Review" is published by Agora Publishing out of Baltimore, MD. A company that also publishes many other "financial," biz-op and health newsletters. North and his newsletter generate $2.5 million a year from subscriberships!


North writes his newsletter from his "bunker" farm in Arkansas with the assistance of one other person. From there he runs his entire "loon" empire. To say that North doesn't profit immensely from all his hype and hysteria would be an understatement.


Not long ago North held a 1-day seminar in Arkansas, it was designed for his readers and followers. He charged $100 and got 500 people to attend - $50,000 for a few hours of ranting and raving is not bad (and I understand they had to turn people away). There's big money in scaring people! As for his followers: one of his biggest followers and supporters is a guy named Bill Myers, a circumspect mail order entrepreneur who fancies himself as a Internet expert, computer genius, trend researcher and schlockmeister.


Not long ago Myers began his rant and rave on Y2K, telling the visitors to his site (www.bmyers.com) and his discussion board to begin to stock up on water, food, clothing and to move to Arkansas (incidentally, he only lives a few miles from North). He predicted the end of the world, a return to Kevin Costner like "Postman" living. He was in full survival mode, living on a farm in a small town (Huntsville, AR - population 1600), repleat with water well, river, caves, natural gas. He even built and added on generators, solar power, underground reserves and he stocked his new office building/barn with hundreds of pounds of freeze-dried food from Walton Feed.


But then something happened. He created a shoddy program that allows people to instantly create websites, and he sold this simple, easily cobbled together product for $497 (Myers doesn't create anything original, for this program he found several freeware scripts and tied them together - in the past he's created CD roms and sold the rights to reprint them that were filled with public domain information - for example, he created a CD called "The SBA on CD Rom" which was just the complete free information available on the SBA site put on a CD; he sold the rights to this CD rom for $897). He had a line of people around the block wanting to purchase the product because, as usual with any schlockmeister, they saw dollar signs in their eyes. They were going to get rich with this thing.


So Myers publicly modified his Y2K beliefs, he began to tone down his rederic, even though it was part and parcel with North's (they are very good friends - even though Myers has been married, divorced and lived with his current wife before they were wed - something that would put Myers on the front lines for a stoning according to North's beliefs). Privately Myers believes every word entoned by North, and believes that the world will come to an end on 1/1/2000.


Why would he change his tone? Simple. Money!


If you have a Y2K doom & gloom viewpoint people aren't going to buy your overpriced crap program. They will be scared because their investment and ability to make massive fortunes will be wiped out in a period of a year. So you tone down what you say, alay peoples fears and sell them a worthless progam.


LINK


http://www.bmyers.com/index.html


But yet in his December 1998 newsletter to his subscribers, Myers tells his readers to enjoy 1999, get closer to your family, hug your kids, cherish each day because 1999 will be the most memorable year of your life. Sounds kind of fatalistic to me.


They come from everywhere. It's amazing how many people North and Myers have influenced to give up their current lifestyles and move to some backwoods burg. And they still keep coming.




-- cpr (buytexas@swbell.net), July 18, 2000.


Just to clarify. I did not write the original on BIFFY (Gary North is a Big Fat Idiot). Doesn't matter what comes out about The Gareeee Duct Tape (prior to y2k known as Scary Gary); some IDIOTS will believe him anyway.

-- cpr (buytexas@swbell.net), July 18, 2000.

Thank you, NorthFan, for posting this. (Note how CPR immediately attacked it without addressing a single point actually raised by North, effectively giving it the appearance of credibility it would not otherwise have. More and more, I suspect CPR is paid by North to make his critics look like wackos.)

-- WD-40 (wd40@squeak.not), July 18, 2000.

LUBE JOB...........you are truly sissyman's moronic equal. North is in the business of spreading and increasing FUD and FEAR for MONEY and his LUNATIC Convictions. He has been wrong for 35 years. At the end of every one of his "crises" he does the "I was wrong, SORRY" and then looks for another to SELL TO FOOLS LIKE YOU.

-- cpr (buytexas@swbell.net), July 18, 2000.


And note that CPR still will not actually dispute anything that North writes, merely gives the same old worn out straw man stuff.

It's interesting that, before he moved to Arkansas, North resided in Texas -- where CPR hails from. It sure would be interesting to know if these two are in "cahoots" -- CPR's zealous semi-coherent ramblings are making North look too credible...

-- WD-40 (wd40@squeak.not), July 18, 2000.


All and all, it is just a brick in a wall. Prices beyond comprehension. I sit frugile and vilagent.

-- Thank You, Gary (for@brickinadyke.com), July 19, 2000.

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