Not Liquidity – Solvency!

We have written repeatedly that we are fast approaching a crisis of not just liquidity, but of national solvency.

Liquidity has to do with somehow – by means wise or foolish – meeting obligations that come due today.

Solvency has to do with ongoing financial viability, about long-term viability of affairs as presently structured.

Bankruptcy is a term used when a court declares an entity insolvent.

While we don’t mind being in a distinct minority saying something if it is true, we are glad to see the Bank for International Settlements (BIS) in Basel, Switzerland has joined us in seeing that today’s risks are not just of liquidity, but of solvency.

To review a few of our prior comments on the subject, here’s one from June 2019 in a piece called The Way the World Works, in which we observed that media figures weren’t bothering to ask candidates vying for the office of President about our financial outlook:

“You would think that with $22 trillion in unpayable national debt (and unknown trillions more in promises the government has made to pay people for things in the future), candidates and news moderators would be deeply concerned about the ways and means of our national solvency and survival.  But not so!”

Note that back then, although only a year and a half ago, the national debt was “only” $22 trillion, $5 trillion less than it is today. 

We commented again that season on solvency in a piece called THE DEBT CEILING AND THE TICKING TIME BOMB:  

“The nation’s solvency takes a back seat to the real issue politicians care about on both sides of the aisle:  REELECTION!

“The net effect of another suspension or of a protracted fight ‘solved’ with new spending initiatives that are unpaid for, will be serious questions about US solvency in financial centers around the world.  Already foreign central banks are moving away from the dollar and to gold.

“New questions about US solvency cannot be comfortably answered.  In fact, the only real answer to how debt that comes due today can possibly be paid is by issuance new debt tomorrow.

“Or by printing more money of no intrinsic value.  

“That is why gold marches up in lockstep with the rising debt ceiling.”  

Earlier this year (New Faces in the Gold Spaces!), we noted that the Fed can meet immediate liquidity issues with money printing.  But that does nothing about solvency:

“More and more people are recognizing that the US is actually facing solvency issues.  For the time being, the Fed has been able to fill the budget gap with money-printing.  But there is a cost to that kind of legal counterfeiting, too.  

“It will show up before long in the value of the dollar and a reluctance by foreign nations to keep funding US debt.”

We have written as well recently of the same liquidity/solvency issues in large corporations, so-called “zombie companies,” that only survive thanks to creditors who are willing to let them increase and roll their debt forward, but that are not able to improve their prospects for survival.

It is a definition that fits the US government.  The Fed provides endless liquidity for now, but there is an end point to such money-printing.  When foreigners are no longer willing to fund our debt at current levels, interest rates will explode and the global dollar system as presently constituted will come to an end.

Now, in conjunction with its latest quarterly report, senior BIS official Claudio Borio announced, “”We are moving from the liquidity to the solvency phase of the crisis.” 

ZeeroHedge offers this translation of Borio’s remarks:  “It’s about to get much worse, only because central banks will ignore all the warnings, they will double down on the same failed policies, pushing leverage to even record-er highs, yields to even record-er lows, and sparking a propagation of zombies the likes of which have never before been seen.”

We can’t answer the question of why governments keep engaging in these Groundhog Day monetary policies generation after generation, or why people never seem to learn.  But we can say this:  As before, the key to protecting yourself in times like these is gold.