Beware of More “Hopium” from the Crucial European Summit

 

 

Years ago, a Christian friend—I’ll call him Peter—confessed to me that he had once operated an elaborate check “kiting” scheme. As he related the story, the pain it had caused was still vividly etched on his face. Here’s what happened.

Peter had gotten behind on his bills. He was about $1,000 short but was expecting a $2,000 refund from the IRS in a month or so. For whatever reason, instead of seeking a short-term loan or just making late payments, he thought it would be easier to create money out of thin air by writing hot checks to pay his bills. He was wrong.

After writing the bad checks, Peter knew he had about three days before the checks would start to bounce. He then opened accounts at three more banks and wrote even more bad checks to cover the first batch—all of which is illegal, of course.

Within a few days, the nagging fear of getting caught started to catch up with Peter, but instead of coming clean, he took the scheme to a new level. Running out of banks, he began writing hot checks at small grocery and convenience stores spread across town so that no one would remember him or become suspicious.

As each day passed, the complexity of the scheme increased, taking up more and more of Peter’s time. He had to keep a color-coded map in his car to record the places he’d been, the clerks who waited on him, store hours and the amounts he needed to kite to keep the scheme going. It seemed the end of the month was an eternity away.

One slip-up and the entire scheme would be discovered and the house of cards would crash down on him. Peter’s nerves were shot after the first week, and he began to feel as guilty as if he’d committed robbery—which, in effect, he had.

Before it was over, Peter cried out to God for grace and mercy. He promised the Lord that he would never do such a foolish thing again and that he’d devote his life to serving God, even if it meant getting caught and going to prison.

Eventually, the $2,000 IRS check arrived and was quickly deposited. Peter said it was the happiest day of his life when the last of the checks cleared. He finally had relief from the fear that his scheme would collapse and he would be arrested.

This story has many correlations to another, far more massive challenge happening right now. The entire global financial system is built upon a legalized “check kiting” scheme.

There is an adage that describes this situation perfectly—“Borrow a little money and the bank owns you. Borrow a lot of money and you own the bank.”

Greg Hunter of USAWatchdog gives a disturbing view of just one metric, the liability created by the outstanding derivatives currently in the market. It sheds light on our current international house of cards:

“The Bank of International Settlements pegs the total world over-the-counter (OTC) derivative exposure at around $600 trillion, but many experts say the real figure is more than twice that amount. No matter which figure you use, it is a gargantuan sum. OTC derivatives are an unregulated dark pool of money with no public market. These are basically debt bets between two entities on things such as credit risk, currencies, interest rates and commodities. According to the latest report from the Comptroller of the Currency, just four U.S. banks have an eye popping $235 trillion of OTC derivative leverage. As a nation, U.S. banks have a total OTC derivative exposure of $250 trillion.” (Read the full story here.)

Investopedia defines a derivative as, “a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.” (Emphasis mine.)

Banks in the U.S. and abroad are carrying the huge public debt of the U.S. and European nations, and it is all highly leveraged—enough to bury them many times over. These profligate nations now “own” the banks—in that the banks have no recourse against their debtors. They have become accomplices in what is the highest economic risk in the world, the sovereign debt bubble.

Annual global gross domestic product (GDP)—that’s the total wealth produced each year on earth—is estimated at $63 trillion dollars. That seems like a lot, until you compare it to the derivative market of at least $600 trillion dollars. This does not include any other forms of debt. No wonder that Warren Buffett named these derivatives “instruments of financial mass destruction.”

As European nations like Greece, Italy and Spain discover they have no money to pay their bills, instead of defaulting and potentially causing the system of fiat money to crash, other nations or organizations like France, Germany, the U.K., the U.S., the International Monetary Fund (of which the U.S. is the largest contributor) or the European Central Bank must come up with even more fiat money to cover their exposure through a host of techniques amounting to little more than smoke and mirrors. They are essentially writing hot checks to cover the insolvency of any nation in danger of default because they know that everyone’s risk is now interrelated and that there is no “check coming from the IRS” to bailout the entire world.

Counterintuitively, this process has caused the markets to respond positively in recent days. Many sophisticated investors know it is a house of cards, but like our political leaders, they don’t want the cards to come crashing down on their watch and are even profiting on the scheme—at least for now.

In spite of the reality that ever more hot checks are being written to cover earlier ones, this act has the effect of “restoring confidence” in the markets. Savvy analysts now refer to this insanity as an addiction to “hopium.”

As I write, the European leaders are holding yet another summit to “solve” their financial woes. Some call this the “make or break” week for Europe and subsequently the global economy.

Incredibly, this is the 14th such summit for the same purpose. We will likely hear that a “new plan” has been adopted that will restore confidence and keep the house of cards from giving way. If a plan surfaces that has any substantial details, we will watch to see how much more debt is created to stave off the inevitable pain.

I anticipate that the “hopium” splashing across the headlines will be substantial enough to again rally markets that naively welcome the printing of even more fiat money. That is not necessarily bad—for you. It buys time for the wise to get their personal financial houses in order.

But be sure, the day will come when the scheme cannot continue. I do not anticipate a soft landing regardless of when or how the endgame unfolds.

And that brings us back to my friend Peter, who got caught up in his personal financial nightmare. He escaped disaster, but the end certainly did not justify the means and I told him so. In fact, the very best result was not that he paid off his debts and avoided going to jail—okay, I was happy about that—but the real blessing was that he came to his senses and repented of his foolishness.

That is the outcome we must always seek, whether it is our personal—or global—financial crisis. I believe it is the outcome the Lord desires for all of us.

Our son Todd is home for fifteen days of rest from his combat assignment as a medic in Afghanistan. We are learning of his challenging experiences serving in the line of fire of a bloody war. He has suffered the loss of several brave fellow soldiers in his unit. I am so grateful that God has protected him from harm and for this time we have with him before Christmas. His experience reminds me to be thankful for all of our brave military personnel and to thank God for our freedom.

Chuck Bentley

Leave your thoughts and comments below.

Related to the high risk economic environment we are in, I have a new book coming out in 2012 called, The S.A.L.T. Plan: How to Prepare for an Economic Crisis of Biblical Proportions. You can get an advance copy with your donation to Crown Financial Ministries by December 31, 2011. Click here to learn how.

About Chuck Bentley

CEO, Crown Mininstries
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19 Responses to Beware of More “Hopium” from the Crucial European Summit

  1. Michael Bergmann says:

    Chuck,

    Thank you and the rest of the Crown staff for voicing a Christian Worldview as it relates to finances. Your posts have been to the point and have help guide me in both business and financial matters.

    This week’s post on derivatives really struck a nerve. I just refianance a comercial building we own for a decent interest rate; just under 5%. But the deal included an interest rate swap to “limit the banks risk exposure”. After researching how they worked, I actually understood how it worked and thought I had a good handle on our risk exposure. We are very confident in our ability to make the payments and have about 80% equity in the building which is fully rented with long term leases.

    But the “600 trillion dollar question” has never been answered by the bank or their internal derivatives expert; what happens if the other party in the swap fails? The only response after weeks of asking was either a blank stare or the “They can’t default. Your contract is lumped into one big pool and so there will not be a default on the other side”.

    Should I be concerned?

  2. ndfan70 says:

    You know I knew the global financial situation was bad, but I didn’t think it was that bad. Thank you Chuck for writing this and explaining how bad it really is. We are not hearing this detail from other sources.

    • Roy Stacey says:

      Now I understand why I never trust Bankers, Loan Sharks, Brokers, Politicians, Retirement Specialists, many Clergymen and other forms of financial low life. While it is good to be “debt-free” what good is it in a financially stupid, and Bankrupt nation such as the United Snakes?? Do I Trust “Turbo-Tax Timmy Geitner, and “herlicopter Ben” Bernanke? No, would you? Call me when WW III starts, OK?

  3. jacki poulin says:

    It is all scary – Q. We have no debt except for our house and have 13 years left on the mortgage. What do you suggest? Should we try to sell and get out of a mortgage too? We would have to go into a small condo, right now our married daughter and family live with us in the suite of our home.

  4. DavidS says:

    What good will it do to pay off our homes and cars? We still will not own them outright. Even if the house is paid off, but you can’t pay your taxes, you loose your home to the government… If a financial meltdown happens, and it seems inevitable, it will result in the greatest revival this country has ever seen. It will separate Christians from pretenders. As Peter said to the lame man, “gold and silver have I none, but what I have I give to you – in the name of Jesus rise up and walk”. Currently, we can’t say “gold and silver have I none”, nor can we say “rise up and walk”, However, when the financial world collapses, we will be able to say both! I don’t look forward to it, but great good will come from it. The church in America, right now, is certainly like the church at Laodicea, who thought they were “rich, increased with goods, and have need of nothing”. But, we are about to be forced to buy eye salve and gold tried in the fire. But praise God, He is in control! And He has promised to conform us to the image of Jesus Christ, my Savior! And we who believe in Jesus, our God and Savior, will spend all eternity in paradise no matter what happens in this sin cursed world! Thanks for your articles.

  5. Maureen McCarron says:

    I appreciate your insights. I think I understand how my investments in money market, mutual fund and bond instruments work, but recently acquired, on my advisor’s advice, something called a “TIPS Bond” fund. After reading your column, I will ask my advisor if this “exchange traded fund” exposes me to derivatives.

  6. Jo Turner says:

    I know it’s bad. Larry Burkett warned about it too. Thanks for explaining it better. It is imperative to get our financial houses in order, but we shouldn’t be fearful. Be prudent and live by God’s principles in His Word. Keep faith in Jesus. Happy to hear that your family is all together for Christmas, and that God has kept Todd safe. Thank-you for this article.

  7. someone says:

    all these big so called leaders, politicians, who think they are smart. they keep overspending. spending money they dont have. then they “raise” taxes again and again so they can keep doing dumb stuff and they wont have to alter or make changes to their bad habits.. they can’t even create and live on a budget. it just boggles the mind.

  8. Peter says:

    So I guess I need your book but If I have a good retirement base diversified – What should I do? Should I go out and purchase gold and metals? What else is there unless I go out and accumulate a number of items or commoditties? In short paragraph what do you suggest we do?
    Thanks very much

  9. How do we get our finances in order and be wise? Do we take all our money out of the bank and investments and go back to putting it in shoeboxes under our beds? I want to be wise, but what is a wise decision in light of what you have said? Thank you for your thoughts.

    • Rachel says:

      I had an idea to share, although I’m not sure of Chuck’s opinion on this matter: What seems to have positive results for the community you live in is putting your money in a local credit union. Oftentimes they are run by the local account holders, and you have much more transparency about where your money goes and how it earns interest. Much better than hiding it under the mattress, and, in my opinion, much better than supporting the irresponsible big banks. As Christians, I believe we have a responsibility to know exactly what we are earning our returns from, and we must remember that our responsibility doesn’t end once we invest with a company/bank – we must insist upon transparency and socially and environmentally-responsible investments that help bring about the Kingdom here on earth. Think globally; act locally.

  10. sarah w. says:

    That is nuts. Want to thank your family for the service your son does, yes thanks to you an mama Bentley too because you are there in heart with him (this I know). I pray for protection for our military personal.

  11. God is faithful – that fact is our Rock. Without any practical understanding of how to do it, I am transitioning from cartoon animator to FARMER. I always animated to put food on the table for the family – these days I feel I’ll do a better job skipping the animation part. While Crown never advised me to do this specifically, I credit them with helping me see the current financial disaster as it truly is: nothing overwhelming for our God.

  12. Mark McCombs says:

    Following scripture is certainly good advice in times like these. Scripture tells us to be very careful about debt and to be diversified with investments. Unfortunately, governments don’t heed Scripture’s advice found….But one more thing: You won’t understand monetary policy or international finance without an investment of time. I don’t think Chuck has done this. He needs to discuss these matters with some PhD Economists who would challenge his numbers and his thinking. Speaking of International Finance as a kiting scheme or the evils of fiat money shows a lack of understanding.

  13. Joe says:

    Chuck, Thanks for the update on the global money situation. Praise God for your son’s safety, and leave spent with family. Thanks to him for his service and you and your family for what you endure. I am familiar with Army dad life. Our oldest was 10th MTN, 11B, 3 combat tours, 2 in Iraq. As we prayed over our son – Num. 6:24-26 – it is our prayer for you and yours!

  14. PD says:

    certainly anything we can do to get out of debt is critical, in order to purchase supplies for survival. money and even precious metals may have no value in a world where food AND water are scarce. if all goes down, the house payment will be the last worry on your mind.

  15. Leroy Zumack says:

    The world is in a mess financially. Whether Mr Bentley is qn expert with a PhD or not, he speaks horse sense. Believing that God is in control is not naive, nor living by wishful thinking. This earth is sin cursed and we will reap what we sow. At the same time, the just will live by faith.

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