Is October 1, 2016, the “end of the world as we know it?” Or not? What does that mean, exactly? Is it true? Why now?
It depends on who you ask; it always does, after all. Predictions and stories about three big events abound on the Internet. Here’s the list; Deutsche Bank is threatened to go under, the Dollar lost its prominence in the World Bank and we gave up control of the Internet.
In my opinion, pretty much all of the bad things in the world can be traced back to the Congress of the United States of America. Since they meddle in pretty much everything that goes on, directly or indirectly, they can usually be shown to be integral to the development of many problems. We’ll look at each of the three big events.
Deutsche Bank failing? Ten very large hedge funds pulled their business from Deutsche bank this past week, causing something of a panic in the market for their shares, which closed down sharply on the day (about 6.7%). Why? First it is enlightening to understand what a “hedge fund” is. We hear about them in mysterious terms, cloaked in secrecy and intrigue, as if only very wealthy insiders can participate.
Here’s a simple truth: hedge funds are merely pooled transactions that are all legal, can be done by anyone, and are only as effective as the manager.
What makes hedge funds bad? First, most do not perform well, as the managers are, to a large extent, simply market guessers in a vast, unpredictable market. Second, they are terribly expensive to own, as the managers get a huge percentage of any success. Third, the managers have purchased Senators and Congressmen for years, assuring that their success is taxed at a very low rate (there goes that Congress thing again.)
Why did the withdrawal of ten hedge funds rattle Deutsche Bank investors? Volume – the hedge funds clear transactions through large banks, and those banks are dependent on the revenue generated by those transactions.
Will this cause the bank to fail? Heck, no. So why the panic? Look deeper. Our Federal Government is trying to extract $14 Billion from Deutsche Bank for their role in the sub-prime mortgage debacle of 2007 – 2009. $14 Billion approximates the entire reserve assets of the huge bank, and would require liquidations, margin calls, forced sales, and all kinds of trouble within the bank, and would probably cause them to close.
Like our domestic banks in 2006 and 2007, Deutsche Bank was doing the bidding of our Congress in making risky home loans. Congress continually upped the percentage of loans that were required to be sub-standard, under threat to the banks of losing their ability to do business here. When the inevitable happened, Congress pointed fingers at everyone and everything, except themselves!
To be sure, this is not a crisis. Neither the German nor the American government is about to let a significant institution such as Deutsche Bank fail. And certainly not because of a fine imposed by the U.S. I am very comfortable quoting George H. W. Bush, “Not gonna happen!” By the way, on Friday the shares rose over 14%. The world didn’t end.
The U.S. Dollar. October 1, 2016 is the first day that the Special Drawing Rights (SDR) of the World Bank is inserting the Chinese Yuan into the basket of currencies used in International transactions. To many of the Internet “talking heads,” October 1 would be the day the dollar died, your 401(k) and IRA would become worthless, and the world would cease to exist in any recognizable manner. Worried yet?
This move was a long time coming, and was announced many months ago. Does that make it more or less scary? Here’s a little background.
Since the inception of the Federal Reserve (FED) in 1913, the U.S. Dollar has been on a slow value downtrend. This is yet another step, but hardly the fatal blow. Under the Law of Supply and Demand, when demand for anything lessens, including the U.S. Dollar, the price (value) goes down. Yes, this is another step on the way down, but it is not the “end of the world as we know it.” Nor is it the end of the Dollar. The world will not end, at least not on the SDR.
Loss of Internet Control. This topic is the closest to getting agreement from me, although many people I know and respect disagree with me. Controversial subjects are like that. At midnight on September 30, we executed a pre-planned transition of ICANN, the Los Angeles-based Internet Corporation for Assigned Names and Numbers, from the USA to an International coalition. The details are highly technical, but just think of this – the Panama Canal.
When Jimmy Carter gave away the canal, most of us were against the move, and for what I consider valid reasons. This is a parallel argument. In retrospect, was it a good idea? I think not. But, did it cause a world-altering change? Since the transition, the canal has maintained continuous operation, and was expanded to handle larger ships, opening this past June. The Canal didn’t cause the world as we know it to end.
Long run, I have some concerns, as some of the members of the new ICANN control board have a propensity to censor the Internet within their own boundaries. Depending on the attitude of the U.N.-backed Board, this could lead to trouble. The U.N. is already hostile to the U.S., and that leads to increased uncertainty.
My concerns about this move are long-term, and among them I worry about increased hacking ability, identity theft, hostile countries gaining access to our intellectual property, and other broad, general topics. But, it is the end of the world as we know it? Not yet, anyway.
What about all the doomsayers? Mostly, they are hawking their newsletters. Don’t waste your money.