BERAL, INC.
Andrew Racz
Director of Research
300 East 54 Street, Suite 26C
New York, NY 10022
Phone: (212) 319-6949
Fax: (212) 753-1944
E-mail: mlikar@aol.com

The Crisis That Almost Wasn’t

Who Owns the Eiffel Tower?
December 7, 2011

In December 2011, more people heard about the IMF than anytime in the previous 25 years. The IMF actually became the banker of last resort for the world. The tragic part is, however, that the IMF is running out of money and as a result it has to squeeze the countries it helped and this resulted in multiple personal tragedies.

The IMF is mentioned in the latter part of 2011 as the lender and fiscal guardian of Greece, Italy, Spain, Portugal and my native Hungary.

To that extent it was pictured as the vicious enemy of the people in those countries which I mentioned.

Furthermore it became known that the IMF was running out of money. Now if the banker is running out of money and the clients are squeezed, the situation is relatively sad.

The world with all its troubles in the last 100 years has not collapsed. Granted the time before 1914 has been mentioned as an era of peace and prosperity. On August 4, 1914 Britain declared war on Belgium and the British Foreign Secretary, Sir Edward Gray, while staying in his elegant rooms near Trafalgar Square stated with remarkable foresight “the lights are turning off in Europe; it will take generations to light it up again.”

World crises happened for 100 years. And surprisingly these crises were solved for 100 years.

Europe survived Hitler; Russia survived Stalingrad, and the American monetary system survived Lehman, Iraq, Afghanistan and Pakistan.

Granted the United States in December 2011 has $15 trillion debt. President Reagan only had $300 million and unemployment reached almost 14 million.

In the financial pages we have witnessed that since 2002 gold has gone from $300 to $1,900 and then day after day we heard that investors were selling gold to acquire additional liquidity.

Very soon silver too will take off. It ran to $35 from $6 in less than a 10 year period and then we entered the age of uncertainty which converted into the age of commodities.

In the last 10 years the world’s population increased from 6 to 7 billion; from countries like China, India, Brazil, and Russia have made greater and greater demand on the world’s commodities and therefore on the monetary resources of the world.

However, this year 2011 may go down as the monetary equivalent of 1938 of the age of Munich. In 2011, companies and countries were trying to dump commodities in order to pay their bills.

We have discovered that the world did not know about prudence in the previous 20 to 25 years because countries sometimes borrowed 2, 3 sometimes 10 times more money than they could return in any shape and form.

Furthermore the debt of a country like Greece became the assets of banks in Paris and London and therefore any real disturbance in Greek debt structure would bring about tragedy to France or Germany or England as well as to Greece.

The bankers of the world including the IMF started to push papers. They attempted delaying repayments , but basically speaking they were window dressing the banking system.

An initial intelligence came about the sale of gold. Some countries had gold like Italy, Russia, Spain, and in order to answer what is called the margin call, they sold gold.

Unfortunately, the deficit was greater than the available gold supply and then came about the crisis that hopefully almost wasn’t.

An interesting idea came to me about the banking crisis of Europe of 2011 by asking a simple question. Who owns the Eiffel Tower?

After all, everybody knows about the Eiffel Tower and if it is owned by the French Government and if it is valued at $300 million, the French Government could repay a $300 million loan by auctioning off the Eiffel Tower.

Then I tried to expand this idea to a greater ownership. After all, Europe is large. Europe has more GNP and more population than the United States and a longer period of time to accumulate assets than any other part of the world.

So why is the richest part of the world in such a debt crisis?

Europeans have always been known for ignoring reality. We have to go back to the 1930’s when Hitler issued his book, Mein Kampf, and everybody could read what was coming but even in 1938 and 1939, the Europeans were on vacation on the French Rivera.

Europe survived Hitler but 100 million people died and actually the destruction was enormous.

Now in 2011 if one took an inventory of all the real estate owned by governments, all the farmlands owned by governments, one could come to the conclusion that that such inventory would more than cover the total debt of the European banks and government.

Furthermore, it is not only farmlands; it is not only real estate. Real estate more often than not carries rent – it’s a flow of income. The value of farmlands – whether they grow sugar, coffee, cocoa, wheat, corn, reoccurs every year and the discounted value for 10 years in corn or soy beans is enormous. It is again bigger than the total debt.

And this is where my thesis starts.

Europe except perhaps Switzerland has debt. But Europe has real estate, farmland, farm products, has roads, has airports, each and one of them can be put into a package and sold on the open market.

There is no law which says that packaging assets and income producing assets has to be done so stupidly or even dishonestly as the American real estate boom of the first decade of this century.

We can set up any residual value and I repeat real estate, farmland, and products. Thousand dollar units, and have discounted value of corn sold in the open market.

Basically what we are doing is converting debt into equity.

Let’s be precise Hungary owes $1 million to a whole variety of German banks. The Hungarian Government can put together a $1 million bond; $1,000 denomination with corn or soybean or sugar to be produced and sold on the market in the next five years. If the market likes the package, $1,000 as an Indexed Bond is sold on the open market and it can repay the money to its German lenders.

If in our example Hungarian debt of $1 million to the IMF can be repaid fully or partially from the sale of the corn residual index bond and this would lead to less tension and more liquidity in the system.

The title of my presentation is The Crisis That Almost Wasn’t. The crisis actually doesn’t have to happen. It doesn’t have to happen because we stopped it in the last minute. We still have a functioning financial system, we still have a number of intelligent people who can package commodity oriented or residual oriented bonds which have legitimate value which when sold on the open market can reduce the pertinent debt in the country, the banks, the individuals can function and carryon their lives.

The banking crisis of 2011 and probably ’12 is a real crisis. It is a European crisis; it is an IMF crisis but fortunately it is not an intellectual crisis.

Our universities have given the capacity to a few people at least who can package all or part of the residual assets of Europe to avert a major IMF crisis and a major European crisis.

There is nothing wrong to use new techniques.

When on May 10, 1940 the 65 year old Winston Churchill was appointed prime minister, he sent his friend Lord Beaverbrook within one hour to take charge of the aircraft production of Great Britain. After two months the British aircraft production was equal to the German and when Lord Beaverbrook at the age of 60 flew over to Canada, he came back with commitments that the aircraft production of the English speaking world was getting bigger everyday and pilots were obtained sometimes from America.

In 1940 it is aircraft. In 1942 it was Stalingrad. In 2012 instead of another financial collapse or another financial crisis, or another financial scandal, the intelligence of our people can mobilize the residual value – the real value of Europe and perhaps other countries and monetize our assets and can proudly say this was the crisis that almost wasn’t.

The Example of Hungary

Hungary presents potential historical solution and historical example.

The country owes about $25 billion to the IMF and finds it difficult in conventional terms to pay the interest or the amortization.

The government put very serious restrictions on spending and enforced savings and it is dancing around the $25 billion level. The situation is not satisfactory either for the country, for the Hungarians, or for the IMF.

In the world of monetary history confrontation is the least satisfactory solution.

Undoubtedly the IMF could cut the $25 billion to $23 billion; the government could squeeze the people and similar confrontation and restrictive measures can be applied.

I go back to what I said earlier. Who owns the Eiffel Tower?

Hungary is an agricultural country and both individuals and the state own farmland. It has now and even greater future production of wheat and soybeans and corn. It has simply never applied and didn’t get to the parliament to consider the ordinary course of residual index financing. If, and I throw a number in, the country sell $5 billion worth of paper and gradually repay the IMF, the internal restrictions on daily spending would be lifted. The market price of the securities would go up; the real estate would go up; a country which is rich not only in agricultural products but also in tourist real estate and a very attractive city in Budapest, could have a major economic upswing, save another $2-$3 billion and the debt would be reduced to $20 billion and afterwards, a solution can be found for amortization.

My theory is that Europe in monetary terms, lost the battle but it didn’t lose the war. This war is the first world war of monetary forces – a war which is totally unnecessary, a war which can be converted to what I call the The Crises That Almost Wasn’t.

Disclaimer

Information contained herein is based on data obtained from recognized statistical services, issuers reports or communications or other sources believed to be reliable. However, such information has not been verified by us and we do not make any representation to its accuracy or completeness. Any statement non-factual in nature constitutes only current opinions which are subject to change. BERAL INC. or their officers, directors, analysts or employees may have positions in the securities or commodities referred to herein, and may as principal or agent buy and sell such securities or commodities. An employee, analyst, officer or a director of BERAL INC. may serve as a director for companies mentioned in this report. Neither the information nor any comment expressed shall constitute an offer to sell or a solicitation of an offer to buy any securities or commodities mentioned herein. There may be instances when fundamental, technical and competitive opinions may not be in concert. This firm may from time to time perform investment banking or other services for or which investment banking or other businesses from any company mentioned in this report.

 

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Andrew Racz. 300 East 54 Street, Suite 26C, New York, NY 10022
Phone: (212) 319-6949 Fax: (212) 753-1944. E-mail: mlikar@aol.com

Copyright © 2011 Andrew Racz. All Rights Reserved.

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