Feb 7, 2012

Where’s the Jubilee?

Since late fall global stock markets have managed to rally to multi-year highs despite global debt levels that continue to increase to all-time highs. Kondratieff theory holds that such excessive debt must be removed from corporate, individual and most of all sovereign balance sheets sooner or later. But since the global financial crisis began in earnest in 2007 central bankers have effectively delayed this process of debt retirement through the most ingenious and outrageous financial alchemy the world has ever seen.  If you took a poll today, most would say these central bankers have averted a deflationary collapse that could have been seen as a full-blown Kondratieff Winter.

It is still possible to avert such a global deflationary meltdown but only if world leaders and central bankers could coordinate some form of a global jubilee on a grand scale. It’s by far the best solution to this dilemma that grows worse each day, each quarter, each year. Aggregate global debt obligations today exceed $100 trillion nominally and are so large they cannot be serviced by the output of those now so indebted and thus many countries are susceptible to the detriment of even marginally higher interest rates that could make repayment of their obligations impossible. An ideal example is Greece and Portugal, two countries that have virtually no exports that have been dependent upon government spending for a high portion of their GDP. They are the two countries most likely to default, and in fact Greece has already defaulted except as a technical matter.

Sadly, European leaders just don’t grasp super-cycle dynamics; for if they did they would know that imposing brutal austerity upon a people will not allow them to pay their debts. Surely, there must be some form of control imposed upon these distressed nations but not the type that will impede growth or their spirit of renewal. This must be encouraged, not discouraged as the austerity measures would do. Bondholders must take a bigger hit and take their medicine and learn a painful lesson themselves. But will they? That’s the big question and since the Greek bailout must be agreed to soon to avert the $19 billion coming due next month, world leaders and creditors better soon begin to embrace the jubilee concept or risk possible global contagion. The aggregate debt is just too big and we all know it.

Ironically, a settlement of the present Greek restructuring with a more robust haircut to the bondholders could sow the first seeds of the next spring cycle phase of the K-Wave. That is my hope, because no one wants to see the worst side of a Kondratieff Winter, not even those who are short the market. What is needed here is a coordinated jubilee among many classes of debt instruments  (most notably sovereign debt of western nations including the US) that would give clarity and confidence going forward to all market participants- investors, entrepreneurs, workers, corporate management, and others so that the next growth phase of the cycle can begin in earnest with a firm foundation. Kondratieff theory holds that this is impossible without the removal of excessive debt.  The sluggish growth seen in recent years that has occurred despite trillions in fiscal and monetary stimulus is the best evidence of all that more debt is not the answer.

The current market averages do not account for these excesses to be removed anytime soon. They assume central bankers will be able to pull the levers needed to prevent a recession or worse. Recently Chairman Bernanke asserted that the Fed would keep rates at near zero through 2014. I found this as surreal and it smacked to me of desperation considering that Bernanke’s term as Fed chief will end well before then. Has “Fed worship” become so acute that we actually believe such nonsense?  In recent weeks a new euphoria has set in with the prospects of less worse unemployment and the looming IPO of Facebook. It’s great that some things are getting better but I wonder if anyone is giving serious consideration to this jubilee notion. I suspect however this matter will soon come to the fore and accordingly I have added some fresh material on this in the Jubilee section of our site. I encourage our readers to check this out and the works of David Knox Barker that can be seen at www.longwavedynamics.com.  The jubilee concept called for in the book of Leviticus squares very nicely with the core theme of Kondratieff cycle, which has been around longer than we can imagine.

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