Global liquidation of paper debt-instruments
by Alfred Adask
Hugo Salinas Price was born in A.D. 1932. He holds degrees from Wharton School, University of Pennsylvania, the Instituto Tecnologico at Monteray, Mexico, as well a law degree from the Universidad Nacional Autonoma de Mexico. The man is well-educated.
He founded Mexico's Elektra retail chain and became one of the world's wealthiest men. He's currently retired from business and focused on restoring a silver-based monetary system for Mexico.
In a recent article ("The Coming Liquidation"), Salinas-Price warns of an approaching crisis when investors will try to sell (
liquidate) their bonds and learn that no one will buy at full face value. Panic will ensue. Prices will crash. Fortunes will be lost. The world economy could collapse.
According to Salinas-Price,
"The total world debt is $223 trillion. . . . That $223 Trillion is actual debt, and does
not include the potential debt lying in derivatives of this debt, which is another humongous amount which would become debt should there be any significant
default on the existing $223 Trillion world debt."
"The $223 Trillion world debt is like a huge cloud up in the sky. It is of vital importance for the world of finance that the $223 Trillion world debt continue 'up in the sky,' and that it not be subject to liquidation."
Warning #1: It is of "
vital importance that the world debt remain primarily
unliquidated.
Salinas-Price didn't define "liquidation" in his article. However, he did tell us that,
1) "
'Liquidation' and '
payment' are two different things," and,
2) "'
Liquidation' means that
holders of debt seek to exchange the debt they hold,
for cash."
The "
payment" of a debt is the obligation of the debtor to the creditor.
The right of "
liquidation" belongs to the creditor and doesn't directly involve the debtor.
To illustrate, suppose Bob borrows $10,000 from the First National Bank. It would be Bob's obligation to
repay that $10,000 debt on some future date to the creditor (First National Bank).
However, that First Bank has the right to "
liquidate" Bob's debt by selling Bob's
promissory note to some third party (like the Second National Bank). Bob would still owe the $10,000 debt, but he'd no longer owe it to the First National Bank because the First had "liquidated" the debt instrument (Bob's promissory note) by selling it to the Second.
Bob is still the debtor, but the First National Bank is no longer the creditor. Thanks to the "liquidation" (sale) of the
paper debt-instrument (Bob's promissory note), the Second National Bank will have become the creditor.
* The same thing happens with bonds traded (liquidated) on the bond markets. In essence, Bob might purchase a government bond for, say, $10,000. By doing so, Bob loans $10,000 to the government. Bob is the original lender; the government is the debtor.
The bond, itself, is a paper debt-instrument that serves as evidence of that loan and as title to the bond-holder (that's Bob) to receive the government's repayment of the $10,000 loan (plus interest) at some future date.
However, if Bob (creditor in this example) suddenly needs $10,000 in cash, he can "liquidate" the $10,000 bond by selling it to some third party. This "liquidation" has nothing to do with the value of the debt. The government still owes $10,000 to whoever holds/owns the bond. By liquidating the bond, the person entitled to collect $10,000 from the government changes from Bob to some new third party who purchased the bond from Bob on the bond market.
This sale/liquidation has no direct impact on the value of the bond. The government still owes $10,000 to whoever holds the bond. So, we're left to wonder why Salinas-Price gives his
Warning #2 that,
"The problem for the world's central bankers is . . . there must be no movement to get rid of bonds in exchange for cash."
There
must be no mass movement to sell/liquidate bonds for cash? Why not?
The danger in mass liquidation of bonds is not to the debtor/government. The danger is to private investors who purchase bonds. The essence of a liquidation crisis is a market where there are far more sellers than buyers. Under those circumstances, if sellers are determined to sell, they must agree to sell their investments for less-sometimes much, much less-than they paid.
Thus, a liquidation crisis can cause investors to lose much of their investment capital.
If enough of that capital is lost, it could trigger a global, economic collapse. Salinas-Price warns that such loss is both inevitable and close at hand.
* Historically, most
investors didn't liquidate their paper-debt-instruments very often. They tended to
buy and hold investments for the long term.
In recent years,
speculators have tended to "liquidate" their investments more quickly in order to turn a fast buck.
Today's "
High Frequency Trading" (HFT) computers liquidate investments in terms of micro-seconds.
Point: We are liquidating our investments at an ever-faster pace. Salinas-Price warns that if we liquidate too much, too fast, we could trigger a global economic collapse.
Danger: If two or more HFT computers overreact to each other's buying and selling algorithms, they can enter into a self-reinforcing spiral ("deadly embrace") that could trigger a mass "liquidation" and market collapse. If they're small enough, we might label such computer-driven price declines as "flash crashes". If such declines are deep enough, we might call them "flash catastrophes" of the sort seen at
Revelation 18:10, 17, 19.
Given the predominance of speculators and HFT computers in today's markets, the average frequency of liquidation is growing as are the potential dangers perceived by Salinas-Price.
* We mortal (as opposed to digital) investors believe that our stocks, bonds, pension accounts, bank accounts are all "liquid". That is, we believe that our paper investments can be sold at any time we please for roughly full face value. We might lose a few dollars; we might gain a few dollars; but, basically, we're
confident that we can sell our investments for roughly the prices we paid for them.
That belief seems true so long as virtually everyone doesn't try to
simultaneously sell our paper debt-instruments. But, if most of us tried to suddenly "liquidate" a significant portion of the world's debt-instruments, the values of those instruments would fall like stones.
Why?
Because if most of us tried to sell simultaneously, we'd find out that there aren't enough buyers and we therefore
couldn't sell for full face value. There'd be more paper debt-instrument sellers than buyers. If we couldn't liquidate our investments at full face value, we'd probably
panic and repeatedly cut the price of our investments until we were willing to sell them for 10 cents on the dollar, maybe less.
If enough paper collateral were vaporized during a "flash catastrophe"/
mass liquidation, the US or even world financial systems could collapse.
* The term "toxic assets" was coined back around A.D. 2008 when panicky investors tried to simultaneously liquidate (sell) piles of paper-debt-instruments on the markets, found out that they couldn't do so, and began to think that their
paper debt-instruments were worthless. The Federal Reserve stepped in and purchased billions of dollars' worth of "toxic assets" at or near full face value and thereby sustained public
confidence in the
paper debt-instrument financial system.
Our fiat-currency, debt-based financial system runs on
confidence. It is a con-game run by con-artists. That confidence (in paper we trust) is primarily based on the presumption that all of our paper debt-instruments (stocks, bonds, etc.) are "
liquid". We
presume that we can sell our paper debt-instruments at any time for, basically, full face value.
Yes, we understand that the price of our investments might go up or down, but we
presume that they will not decline substantially whenever we choose to sell them. We
presume that, thanks to the Federal Reserve's market manipulation, stock and bond profits will generally rise in a never-ending bull market.
However, in the event of a widespread "liquidation" of investments, investors would learn that those
presumptions are false. Learning those presumptions are false, investors would
lose confidence in the markets, panic, sell everything and precipitate a financial collapse.
* In A.D. 2008, the Fed began to purchase over $3 trillion worth of "toxic assets". The Fed did so to prevent the public from learning that the
fundamental presumption of liquidity is false, and therefore lose
confidence in the markets. By agreeing to pay full face value for investments whose real market prices were far lower, the Fed prevented a mass liquidation and
loss of confidence that could've collapsed the economy. In doing so, the Fed increased its "balance sheet" from about $850 billion to $4.4 trillion.
The "toxic asset" phenomenon resulted from speculators trying to
liquidate their paper debt-instruments into a free market that wouldn't buy them at full face value. The terms "toxic assets" and "illiquid assets" are roughly synonymous.
* Salinas-Price warns that a second episode of mass liquidation is close and more dangerous than that of A.D. 2008.
In A.D. 2008, the Federal Reserve had sufficient capital to purchase over $3 trillion worth of "toxic assets" at full face value. But could the Fed do it again?
Probably not.
If we faced a second price-dropping moment of widespread illiquidity, how much could the Fed spend this time to shore up public confidence? Not much. The Fed already has a $4.4 trillion balance sheet filled with "toxic assets" that might be worth less than $2 trillion. Already choking on too many toxic assets, the Fed may not be able to buy large quantities of "toxic"/"illiquid" assets.
Implications?
That loss of liquidity (ability to quickly sell one's investments at full price) would precipitate investor panic.
If we go into another "Great Recession," there'll be no one to purchase our "toxic assets" at full face value.
There'll be no "bail-outs".
Bonds and stocks will only be "liquidated" at significantly lowered prices. Investors' confidence will fail. Markets will fall. Investors will lose their paper assets.
* Salinas-Price: "World debt will continue to be a massive cloud up in the sky, as long as investors wish to own [i.e, "hold"; not "liquidate"] bonds. Since central banks drove interest rates down all over the world to absurdly low levels-even to negative interest rates-prices of previously-issued bonds rose to equally absurd levels and thus created huge profits for those who owned [held]those bonds."
Salinas-Price implies that by lowering interest rates to Near-Zero, the Fed made bonds so artificially profitable that no one wanted to sell/liquidate.
If so, it follows that one purpose for Near-Zero Interest Rates may have been to
prevent people from simultaneously
liquidating their bonds. That, in turn, suggests that the Fed
knows that bonds are significantly over-priced and doesn't want that knowledge to seep into the bond market in the form of drastically falling prices.
It would also follow that, if the Fed raised interest rates (or even threatened to do so), it might trigger a mass liquidation of bonds and significant price decline. This would explain why Janet Yellen and the Fed have been so reluctant to raise interest rates. If they do, they might collapse the US and even global economies.
* Note that it's not the government-debtor that loses during a widespread liquidation of bonds. It's the
speculators who purchased and then tried to liquidate/sell the bonds who lose.
Government has already received the $10,000 cash paid by the original creditor. If that creditor sold the bond, whoever is left holding the bond at a moment of liquidation crisis will lose if he tries to sell at that time. If he holds the bond until maturity and the government-debtor is still in business, the bond-holder's investment may be redeemed. But if he panics and tries to sell into the illiquid market, he'll lose much of his investment.
While a liquidation crisis won't cause government to lose on the falling prices of
existing bonds, government will lose on the sale of
new bonds. So long as the market insists on paying only, say, $5,000 for an
existing $10,000 bond, the government will be hard-pressed to sell its next tranche of
new $10,000 bonds for more than $5,000. Liquidation of
existing bonds should increase the government's costs for
new borrowing.
* If US bonds suffer a mass liquidation, stocks should follow.
Let's assume that many who invest in bonds also invest in stocks. Let's also assume that if an investor really needs $10,000 and can't get it by selling his bonds, he will sell some of his stocks.
If widespread bond liquidation leads to widespread stock liquidation, we can expect a stock market panic-complete with plunging stock prices-to follow a bond market panic.
Result? Wealth stored in most paper debt-instruments will be destroyed, the money supply will shrink, and the nation will slide deeper into an economic recession or depression.
*
Warning #3: "Banking systems invest in bonds. Bonds make up an important part of their assets. In Europe, if the assets of the banking system fall by only 4%,then the whole European banking system is bankrupt.
"A collapse in bond prices caused by rises in interest rates would be deadly for the whole European banking system, and if Europe collapses, the rest of the world would have to follow suit.
In my previous examples, I've speculated on what might happen if a bond liquidation crisis caused a $10,000 bond to be priced at $5,000 and lose
50% of its face value. Salinas-Price is warning that we don't need a 50% fall in bond prices to trigger a global collapse. A mere
4% fall in the EU bond markets should be enough.
A flash crash could cause a 4% fall.
If Salinas-Price is right, then, whenever interest rates rise, the bond markets will fall, and the rest of the paper-debt-instrument markets should follow.
But, will interest rates rise? Will the Fed or the ECB dare to raise interest rates by more than a few basis points-if at all?
"Interest rates will have to rise, sooner or later; central bankers tremble when they see the slightest sign that interest rates are ticking up.
"Obviously, the FED and ECB cannot even think of raising interest rates; they are trapped and wait in dread for the deluge of bond liquidation when the $223 Trillion debt cloud hanging over the world turns into a cloudburst."
Inevitably, interest rates will rise and some sort of bond liquidation crisis will ensue. But Salinas-Price implies that the Fed can't raise interest rates anytime soon. Just hinting that interest rates might rise could trigger the mass liquidation crisis that Salinas-Price warns "
must" be prevented.
If the Fed does raise interest rates in, say, September-will they trigger a liquidation crisis and bond price collapse?
If the Fed does not raise interest rates, how long can the bond markets stay artificially profitable before those profits create another distortion large enough to triggers a collapse?
The Fed's problem isn't merely to calm the savage, flesh-and-blood investors, but also to pray to God that the digital investors (HFT computers) don't interact and over-react to cause a major flash crash that precipitates a liquidation crisis in the bond market.
The Fed is caught between the rock and the hard place. They're darned if they do raise interest rates, and darned if they don't.
Darn it.
Mr. Salinas-Price is warning that a bond liquidation crisis is inevitable and coming soon.
If he's right, the only investors who won't be ruined by an inevitable liquidity crisis will be those who invest their wealth in something other than paper debt-instruments-something tangible like gold or silver.
That's undoubtedly why Hugo Salinas-Price is devoting his time to trying to persuade Mexico to return to a silver-based monetary system. He's trying to protect his country from the coming global liquidation of paper debt-instruments.
he 2015-W American Liberty, High Relief gold coin to be issued by the U.S. Mint will be a 1-ounce .9999 fine gold piece that will carry a face value of $100, becoming the United States' first gold coin to bear that denomination.