Summarizing The Global Balance Sheet’s Negative Feedback Loop Of Debt

Excellent summarization of a debt negative feedback loop. The author rightly concludes that the solution to the global debt predicament will take a coordinated effort of all countries, with the critical pillar support provided by the US, Europe, China, and the Fed. The Fed isn’t a country, but it is the engine room of the US Dollar International Monetary Funding System and has to be included.

In a similar fashion, the author should have included the ECB as a critical pillar that must be part of a coordinated solution. The reason is because the structure of the ECB and it’s balance sheet is in itself the solution. Gold resides at the top of the asset side of its balance sheet, both in position of importance and as a percentage of overall assets. The key distinction is that this gold is marked to market every quarter to reflect the ongoing change (higher valuation) of gold’s value in currency terms over time.

The market valued gold acts as a counter balance to the central bank’s traditional debt asset holdings. As debt assets continue along the path of impairment and suffer erosion of value, the gold position goes in the opposite direction and fortifies an otherwise weakening balance sheet. The asset side of the balance sheet must equal the central bank’s liabilities in the form of outstanding currency. Increasing supply of currency is balanced by the increase in marked to market gold value.

The ECB’s structure represents the future structure of all major central banks of the world, including the Fed. The path to a solution to unsustainable debt is to replace debt as equity with equity as equity. It is patently absurd to see debt as equity in the first place. It requires a leap of faith where confidence is given to the notion that the debtor will always make good on his debt. History shows us this confidence is misplaced and highly flawed, Greed and the predisposition to “kick the debt can down the road” to future “bag holders” clouds sound reasoning and allows one to believe the impossible, that debt is really equity. This misplaced belief is the genesis of a debt bubble, and of course a day of reckoning that comes as a result.

Physical gold as the dominant reserve asset does not require faith in a counter-party’s ability or intention to honor payment. This is where we are headed, gold freely held and freely marked as a stand alone asset, decoupled from the credit and paper markets. Paper gold held as a someone else’s obligation to deliver will no longer have credibility once it is revealed for what it really is, just another IOU from a counter-party who has no ability or intention of ever paying debt in real terms.

When paper gold and it’s credibility collapses, physical gold will be free of artificial supply that only exists on a bullion bank ledger or as a digit somewhere in cyberspace. Price will be free to reflect true supply in the face of true demand. Take the current investment demand for gold and demand as a reserve asset, then compress this demand into existing physical supply only. This is Freegold.

Think on this and understand the implications of our current gold price that reflects a supply that is over 90% paper. Understand the bargain one is presented with if physical gold can be acquired at any price quoted in a paper market. Such a person who chooses to trade bank credit for real physical gold in hand is front running an inevitable trade that must occur. The hidden leverage is enormous for those who are brave enough to see the truth and act.

Good luck in the new year. Gold, get some physical now!

Summarizing The Global Balance Sheet’s Negative Feedback Loop Of Debt

Cohen Investment Strategies submits:

The Dangerous Negative Feedback Loop

Global Balance Sheet Recessions

Global governments are carrying more debt than ever and raising question as to whether or not a second — and perhaps even more dangerous credit crisis — is inevitable. The clock is ticking and every second, the world takes on more debt. In 2001, global government debt totaled $18.2 trillion. Fast-forward a decade, and the figure now totals nearly $44 trillion, an increase of 140 percent (more than 9.0% a year). The chart below depicts the countries with the highest and lowest debt levels.


According to The Economist, global sovereign debt is forecasted to grow an additional 7% in 2012 reaching a historical high of $47 trillion. Measuring debt against gross domestic product (GDP), the global debt-to-GDP ratio at the end of 2010 reached approximately 80%. While the heaviest balance sheet offenders include troubled European countries like Italy, Greece and Portugal (See Figure 1 below), the United States isn’t far behind with $15 trillion in debt and a debt-to GDP ratio topping 100%. And tipping the scale at over 200% at the end of 2010 was Japan. The result of this rising debt means more government interference, a further slowdown in the already debilitated economic environment and the possibility of further citizen uprisings.


One of the problems with economic crises is that mainstream economists and financial advisors either don’t see them coming or simply won’t admit to them. That’s exactly what happened in the fall of 2008, when the financial crisis kicked off in the United States. Since that time, governments have continued to spend, all while production has slowed and unemployment has skyrocketed. As we enter the fourth year of the post-crisis environment, there is no sign of growth that is impressive enough to get us out of the negative feedback loop in which governments have continued to operate. A negative feedback loop takes hold when massive government debt loads, a weakening financial system and a slowing economy feed off each other, interrupted by Federal Reserve and other central bank reflationary attempts. As shown in the chart below, rising debts become unsustainable and trigger austerity measures designed to reduce spending and/or increase taxes or other revenue sources to try and reduce debt. In significantly depressed economies, the drag continues and a recession or even depression like conditions hit. The more production and employment falter, the more lending contracts, causing further harm to the economy, missed budgets and higher bond yields. The result is a downward spiral of business and financial activity and a banking crisis usually ensues. Under pressure to stimulate the market, the Federal Reserve and other central banks carryout band aid fixes by printing money and governments implement additional austerity measures which starts the vicious cycle of the feedback loop all over again.

Negative Feedback Loop


In the center of the feedback loop is what we call Euphoric Mania. This is when the Federal Reserve and central banks step in to help with their band-aids whether it’s printing money, lowering rates, coordinating central bank action, or expanding the balance sheet by trillions. But, like any high, the lift is temporary and doesn’t take hold. In no time at all, we are back to where we were at the top of the loop, because without sustainable economic growth, the band aids don’t solve the problem.

Roger Nightingale, well-known European economist and strategist at RDN Associates, believes a 2012 global recession is a 65 to 75 percent probability and that further deterioration into a lengthy depression is possible. So what does this mean in terms of a growth outlook? Nightingale offered this forecast:

“The peak rate of growth for the world’s economy occurred more than 12 months ago. We are probably going into negative territory around spring of next year; it is not for certain, but that is the most likely scenario… should recession kick in; the global economy might be too weak to generate any GDP growth for years, or even decades. When the downturn ends, and when the upturn begins, will it be powerful enough to take us into some sort of growth again? Or are we going to find ourselves in a protracted depression-type scenario?”

The fix needs to come from a unified front, not just a single country or continent. When we look at the three global pillars of the world economy — the United States, Europe and China — sure, each has its own problems, but each one’s fiscal choices impact the globe as a whole. And really, it’s four pillars when we add the Federal Reserve. We are a four-legged intertwined economic and financial system that relies heavily on each other for banking resources, government debt issuance, investments and exports. The feedback loops are never ending. And when economic growth stalls, debt accumulation increases. Without taking tough, systemic and coordinated economic measures including fiscal consolidation and a commitment by governments to cut rising deficits and reduce what are, in some cases, dangerous levels of national indebtedness, a second crisis may indeed be inevitable. The world is trying to recover from the worst financial crisis in 70-years and is suffering from debts levels not seen in decades and the crisis continues to intensify. And, as the graph below shows, with the exception of Ireland, countries need just as much, if not more, financing to cover debts in 2011 compared to 2010. Nothing has changed.


Read the full analysis (pdf)

December 2011 Cohen Plan Monthly Report

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