This crisis will dwarf the Lehman Brothers bust… But not 1 in 1,000 investors sees what’s coming… In the mailbag: “Look at how almost every socialist state ends – not how it begins”…

Monday, September 15, 2008 at 1:45 p.m…

That’s when Wall Street investment bank Lehman Brothers filed for bankruptcy.

Lehman had debt of $619 billion. It was the biggest bankruptcy in history.

And over the next six months, the S&P 500 crashed 40%. This dragged the rest of the world into a financial panic that you likely remember all too well.

Now, try to imagine what happens when a debt pile worth more than $22 trillion goes sour. That’s more than 35 times Lehman’s liabilities when it went bust…

There’s never been a bankruptcy anywhere near that scale in history. But as we’ll show you in today’s dispatch, simple math tells us it could trigger the biggest financial crisis in history.

This time, the crisis isn’t a creature of Wall Street…

Instead, it’s brewing more than 3,000 miles due East in Brussels, Belgium – the administrative capital of the European Union (EU).

As we’ve been showing you, similar to what happened with the Soviet Union in the early 1990s, the EU is breaking apart as a political and economic unit.

“Brexit” – Britain’s ongoing attempt to break free from the EU – is one widely publicized fissure.

But as legendary crisis investor Doug Casey has been warning, Brexit is part of a wider trend – a trend away from the kind of centralization of power the EU represents…

It’s not just the United Kingdom (UK) seceding from the EU, but Scotland from the UK. The Basques and Catalans may eventually secede from Spain. Belgium, a totally artificial country, may eventually break up into Flemish-speaking Flanders and French-speaking Wallonia.

France has half a dozen secession movements. Italy was only unified into its present form from scores of principalities, duchies, and baronies in 1871 by Garibaldi. It was the same with Germany until Bismarck in 1871.

In short, political power is being decentralized in Europe. It’s breaking down into smaller units. Eventually, Doug says, this process will sink the entire EU project.

And when that happens, it will have massive implications for your wealth – no matter where in the world you’re based.

Remember, the EU has the world’s second-largest economy after the U.S…

And the euro – the currency shared by 19 of the 28 EU member states – is the world’s second most traded currency, behind the U.S. dollar.

The euro is also the world’s second-largest reserve currency. And it makes up about one-fifth of foreign exchange reserves.

Then there’s the towering euro debt pile to consider.

There’s about $22 trillion in debt denominated in euro – in the form of government ($11.3 trillion) and corporate ($10.7 trillion) bonds.

As we mentioned up top, total eurozone debt now dwarfs Lehman’s debt pile when it went bankrupt. It also dwarfs the $1.3 trillion in U.S. subprime mortgage debt outstanding at the peak of the subprime bubble in early 2007.

That was enough to send the global economy into a tailspin…

The so-called Great Recession that followed the Lehman bust led to a loss of more than $2 trillion in global economic growth. Thousands of businesses went under. The damage was second only to the Great Depression of the 1930s.

So you can begin to imagine what’s in store when the EU’s economy collapses.

It’s why I traveled to London last week…

I came here to meet with Nickolai Hubble, an expert on how these financial contagions spread.

Nickolai is a member of The Agora. It’s the international underground news and research network Legacy Research cofounder Bill Bonner put together back in 1978… and it’s our “eyes and ears” overseas.

Nickolai is the chief strategist at an advisory here called Zero Hour Alert. It’s focused on helping folks protect their wealth in the next crisis… and even profit from the turmoil it will create.

And he recently wrote a book about the end of the EU called How the Euro Dies.

A central point Nickolai makes in the book is just how fast financial contagions can spread.

Take the 1997 Asian Financial Crisis…

It’s a classic example of how a crisis in one part of the world can quickly infect other parts of the world. As he put it…

On July 4th 1997, a medium sized Thai property developer called Somprasong Land Development bondholders voted to default on an $80 million debt. Over the next two days, it triggered the unimaginable contagion which became known as the Asian Financial Crisis.

And the effects were felt around the world. Nick again…

As a result, the biggest ever drop in the Dow forced trading to be suspended for the day. One of Japan’s top ten banks failed, as did one of its top ten brokerage firms, sending the country into its first recession in 23 years.

Russia went into default after hiking interest rates to 150%. The “G7” richest nations had to create a rescue plan for Brazil. The International Monetary Fund (IMF) rescued three other nations. Three more escaped by the skin of their teeth.

It’s hard to overstate the damage this relatively small Thai default wreaked thousands of miles away. Indonesia went from almost eliminating poverty to 40% of its population living below the poverty line within two years.

Keep in mind… that all stemmed from a default on just $80 million in debt. That’s just a rounding error in comparison with the $22 trillion debt pile that could go bad in an “End of the EU” scenario.

The analogy Nickolai uses to describe how these things work is an avalanche…

Like snow at the top of a mountain… debt accumulates. You get a bigger and bigger pile until a trigger finally sends it careening down the slope.

The same thing applies to a financial avalanche. Here’s Nickolai again…

If you look at the EU and American banking systems, and how interconnected they are, there’s no way you can say that the contagion from an End of the EU scenario won’t just spread to the U.S. very quickly.

All it takes is a U.S. bank that has lent a lot of money to a failing European bank. Here in Europe, governments have switched from “bailouts” to “bail ins.” Without getting too far into the weeds, that means that the folks who’ve lent to banks… are the ones who pay for the rescue.

As a result, the bank in America who thought it had a good loan with an Italian or a French bank, suddenly finds it’s owning worthless bank shares. And that could be the trigger that makes the crisis go global.

Of course, if you live in America, you may not be interested in the ins and outs of European banking policy.

I (Chris) split my time between Lisbon, Portugal, and my hometown of Dublin, Ireland. And even people I talk to here in Europe find this stuff tough to follow sometimes.

But how much did you know about subprime mortgage bonds in 2006?

That’s the question I want to leave you with today.

We now know subprime mortgage bonds were financial weapons of mass destruction…

…and we know they detonated in 2007 and 2008 under the foundations of the global financial system.

But imagine if someone had tried to explain to you what collateralized debt obligations (“CDOs”) were in, say, 2005 or 2006. Imagine they pleaded with you to listen to them about why they were primed to blow.

Your eyes probably would have glazed over. But had you been clued in… you could have saved yourself from having a huge chunk of your wealth wiped out when the crisis hit.

The same thing is true of the time bomb that is the end of the EU.

That’s why we’ve been putting this story on your radar, even if you don’t live in Europe…

No one knows when the crisis will hit. But it’s important to be prepared before it does… not when it’s too late.

It’s why we put together the Ultimate Crisis Playbook for you. It’s 109 pages filled with tips from our investors, speculators, and traders across Legacy Research – guys like Doug Casey, Dan Denning, Teeka Tiwari, and Jeff Clark.

You’ll learn about the five asset classes you should consider to make your portfolio crash-resistant… how to make money as stocks fall… even a proven commodities system you can use to avoid having your wealth wiped out in the next crisis.

As a Daily Cut reader, you can access it for free here.

In the mailbag: “Look at how almost every socialist state ends – not how it begins”…

The capitalism versus socialism debate is officially the longest-running in The Daily Cut since we launched last August.

And it continues today, after reader Dean G. said this last Thursday

How does one define the words and the reality of what they really are? I would think that capitalism is a free, unfettered system of enterprise and has no interest in humanity. Socialism may be defined as a system of human activities benefiting the collective interest of any group. Some of your readers would have it more one way or even a pure system of one kind. […]

I grew up in a time when most companies respected and valued their employees. In the system we have now, almost all companies provide no benefits – except those that have a social conscience.

Not everyone sees eye to eye with Dean…

Dean G. gave an opinion of what he thinks each form of government has to offer. I personally am a capitalist, not a wealthy one by any means, but I do just fine on my own the way I was raised to do. I started working at age 12 in the family business, a small machine shop. My wages were $5 a week; I didn’t like doing chores at home. I learned the business from the bottom up. No one does that anymore, it’s an education that does not exist in any school anywhere.

I’m retired now. The family business was sold off years ago. I live in a small town, I own my house. I bought my first house at age 24, I am free to come and go as I please, and I’m enjoying myself immensely all without the benefit of a pension plan, 401(k), or IRA. My point is if you can’t live within your means or take the time to learn what you need to do to exist in any country, state, city, town, or society, then whatever education you got growing up or paid for later in life wasn’t worth the paper it’s printed on or the money you spent on it – regardless of the governmental system you live under.

– Alan W.

It appears he also grew up in a time before books… Two painfully incorrect sentences from Dean G.: A) “I would think that capitalism is a free, unfettered system of enterprise and has no interest in humanity.” B) “Socialism may be defined as a system of human activities benefiting the collective interest of any group.”

Let’s start with B) By his definition of socialism, every single capitalist enterprise is socialist because it benefits the collective interests of that group. That means if I start a trading circle that makes members money it is socialist by his standards. It would also apply to shareholders of companies benefiting financially. That’s just plain incorrect.

A) Now, this statement is a real laugh. By definition, capitalism is driven solely by the self-interest of humanity. That is true from everything like the products and services we sell that people find value in all the way to supply and demand regulating the distribution of scarce resources. In truth, it is socialism that has no interest in humanity; rather, the interest is with the hand that feeds, although it might masquerade as collectivism. Socialism is just populist propaganda that panders to the most gullible. It’s simply not possible to make good on their promises (unless you actually believe lunatics like AOC). Take a look at how almost every socialist state ends, not how they begin.

The real question is do you think a world full of people can actually run well if we are not all pulling our weight? My frank answer is “hell no.” If someone doesn’t want to get on board and work to contribute, they don’t deserve to benefit, certainly not to the same degree as those who do. That doesn’t mean we have to be callous and hang people out to dry, but we certainly shouldn’t reward them for it.

Let’s also not forget that everything from regulatory agencies, to justice systems, all the way to charity can be run more efficiently and effectively through private, free-market models.

– Brendan V.

Was Dean G.’s comment last week misguided? Do you agree with Brendan V. that our institutions would run better under a private model? Write us at [email protected].



Chris Lowe
April 15, 2019
London, England