All Good Things Must End
Today, I’m going to tell you about the end of the world. Not the end of the world exactly. But the end of the fiat money system President Nixon gave birth to in 1971… when he cut the dollar loose from gold.
And it may feel like the end of the world, because of the social chaos it will provoke. What follows is taken from a speech I gave at Doug Casey’s La Estancia de Cafayate …
Meet Rorschach, from Alan Moore’s “Watchmen”
Drowning in Credit
I’ve been predicting the end of the world – at least the end of the post-1971 monetary world – for a long time. I hope I’m wrong about it. But sooner or later, I’ll be right. In the meantime, I’m like a surgeon who has just botched an operation. He sees the patient stiff on the table and wonders if he should go back to the textbooks. Maybe the anklebone is not connected to the shin bone after all.
But the textbooks are hopeless. They’re written by modern economists. And they believe an economy is mechanistic, not humanistic. These folks have fixes for every problem and wrenches in both hands. They also run our central banks. And they think they know what is going on… and what they’re going to do about it.
So they give you “forward guidance.” But it is worthless. Worse than worthless, it suggests knowledge and foresight – neither of which the authorities possess. Do you remember the Fed giving us “forward guidance” before the crisis of 2008? I don’t.
Neither Ben Bernanke nor Janet Yellen had any idea what was happening. They couldn’t give any forward guidance about that crisis and can’t give any about the next one. They just react to events. They neither see them coming nor control them. And they have only one major reaction – even more credit.
But you can’t solve a debt problem with more debt. That’s what the Fed is offering. And that is what the European Central Bank and the Bank of Japan are offering too. They are committed to this policy of providing more and more credit to a world that is already drowning in it.
Global central bank assets as a percentage of GDP (i.e., a chart that subtly understates by how much they have grown. Source: Financial Times, IMF, Haver Analytics, Fulcrum Asset Management LLP) – click to enlarge.
Ham-Fisted Grease Monkeys
I should stop here and say a few words about how the economy really works. These clumsy mechanics at the Fed, the European Central Bank and the Bank of Japan think they can turn knobs and adjust levers. But an economy is a complex dynamic system with intricate feedback loops.
It responds to the ham-fisted grease monkeys at central banks, but not necessarily the way the feds want. It is far more complex than they can ever understand, let alone control. Right now, they are getting away with jaw-dropping policies. The markets are not yet punishing them. In fact, investors seem to be rewarding this kind of innovation.
For example, what is 1.1% yield on a Spanish 10-year government note if not an invitation for trouble? Or how about a 10-year German government note with a yield of 0.2%? It’s impossible to know what will happen exactly. But someone is going to lose money. These yields are unnatural. And downright dangerous.
But the risk is not just that the pace of consumer prices will outstrip these puny yields; it is also that bond issuers will default. Europe’s governments are deeply in debt. And the ECB is now making it easier for them to go further into debt. Europe’s bond yields are at their lowest level in 150 years. About one-third of the total new issuance carries a negative nominal yield (that is before you account for inflation).
What sense does it make for the ECB to drive yields lower still … by further pushing up prices? (Bond prices, remember, move in the opposite direction of yields.) None at all – except that many European governments and corporations now get paid to borrow money!
Spain’s 10 year note yield is at a munificent 1.16% – this is actually an all time low (and Spanish government debt has been around for a few centuries) – click to enlarge.
Financial Kamikazes
And the clever Japanese have another trick up their sleeves. Not only is the BoJ directly propping up the market for Japanese government bonds. It’s doing the same with the stock market. Our head spins. But it’s true.
When it comes to overdoing it, nobody overdoes it better than the Japanese. Remember, near the close of World War II, when Japanese pilots strapped themselves to flying bombs? Kamikazes took to the air hoping to die in a fiery explosion on the deck of a US aircraft carrier. Today, it’s Japan’s monetary policies that are kamikaze.
Mr. Kuroda explains his painting of an exponential curve to journalists – no, he’s not a value hunter …
Photo credit: Yuya Shino / Reuters
The Bank of Japan is set to buy $1.4 trillion of government bonds under its current QE program. This allows the Japanese government to continue going deeper and deeper into debt. But the BoJ has more explosives to strap onto its financial kamikazes. Why stop at buying bonds? Why not buy stocks too?
The BoJ has been a buyer of Japanese equity exchange-traded funds (ETFs) since 2010. And in September 2014, it bought a record amount of stock through its ETF-buying program. This makes it the single largest holder of Japanese stocks in the world – with 1.5% of total capitalization. The BoJ chooses to buy the dips too.
I doubt this is because BoJ governor Haruhiko Kuroda is a value hunter. Instead, it is almost certainly because he wants to manipulate stock prices directly, just as he does with the bond market. The BoJ has waded into the stock market one in every three days since 2010, reports the Wall Street Journal. Where does this lead? To a fiery crash!
Look out for Part II of my speech from Cafayate tomorrow.
Japanese mudjaheddin of yore: Chiran school girls are waving good-bye to a departing Kamikaze pilot with cherry blossoms raised in a taut military salute.
Photo via Wikimedia Commons
Charts by: BigCharts, Fulcrum Asset Management, Haruhiko Kuroda 🙂
Image captions by PT.
This article appeared originally under the title “I Hope I’m Wrong About This” at Bonner & Partners.
Close. So close.
You’ve heard of the “wealth effect.” Central Bankers have decided that it is the only thing that matters.
For 40-50 years, the wealth-value (in dollars) of actual wealth (land, businesses that make things and sell them profitably, patents and manufacturing processes, buildings, etc.) has soared, and the final titles of ownership have changed hands, but above all, a VAST ocean of ILLUSORY WEALTH has grown from nowhere.
That wealth is an ocean of IOU’s, a promise to give you title to actual wealth (land, etc.) and/or title to wealth that will be produced between now and when the IOU’s come due.
Only, most of those IOU’s are intended to simply be rolled over into IOU’s for a yet farther future.
What title to wealth actually changes hands? NONE. But in people’s minds, they think they’re wealthier by the value of the PROMISE implied by that IOU.
This is what central banks are pumping.
They are pumping (metaphorically) a vast Hindenburg Airship of volatile hydrogen gas credit, because people today want to fly, are addicted to flying, will have a Gran Mal Seizure if they don’t fly, and so we pump more and more hydrogen and rise higher and higher.
Most of the wealth people now perceive is illusory. They don’t hold title to wealth, they hold a promise to deliver, a promise the issuer never intends to satisfy because the priests of Keynes tell us that they NEVER NEED TO satisfy the promise.
This is all mass psychology and nothing more. The events in the 1960s and 1970s allowed Groupthink to launch a vast delusion, that money is unrelated to “stuff” (and ownership title to stuff), and that simply by pumping up the perception of shared wealth, monetary system “deciders” could cause a risk-free, costless increase in economic output, raising standards of living far above what an honest and coherent system of growth could achieve.
Most Americans are now debtors. Debtors DON’T OWN TITLE. Someone ELSE owns title.
When the end of this ridiculous trip into the ditch arrives, it will be all the ILLUSORY wealth that will disappear. The land will still be there. Houses (that don’t burn in rioting, or rot vacant) will exist. The few manufacturing firms left in America that can shrink to a level of sustained profitability will survive.
Real wealth will still exist. It’s just that the vast majority of Americans won’t hold title to it.
Bank accounts will evaporate in failures, FDIC collapse and bail-ins. Retirement accounts, pensions, insurance policies and annuities will collapse along with the nominal value of all the illusions in which THEY invest (stocks, bonds, real estate, even commodities.)
Bonner is right. For a period of time, people will be desperate for cash to buy food, fuel, and attempt to avoid bankruptcy by remaining current on their bills. Creditors (including every level of government) will attempt to keep their money flowing in by ramping taxes, fees and robbing citizens by stealth at every opportunity.
Eventually, the “brilliant” decision will be to print up enough banknotes to reflate things, and that will doom the dollar for all time. I doubt the USA will be first to do this, I think it will take months or even years for the decision to be made when it comes, and the first sign of it will be when they relax the prohibition on printing denominations higher than the $100 bill. This decision will not be made until at or near the bottom of the cycle.
Between now and then we have the current paradigm (growing credit inflation), a credit-market collapse, a stock market collapse, a real estate market collapse, vast political chaos, citizen-government clashes, soaring visible unemployment and a whole host of other ills so obvious that no amount of cover-up will hide them.
The point: Most of what people today think is wealth isn’t. The appetite of the FSA and bureaucrats will render the value of visible wealth down, because they’ll tax and seize it just like they did in the 1930’s when most foreclosures weren’t for missing mortgage payments, they were for failure to pay soaring taxes. Even the prudent person today who owns his property outright (no debt) will have difficulty holding it when the tax man gets desperate.
Being rich today is not likely a condition that will last. Shared poverty is going to be the new fashion.
Right on dc. sunsets!!
“Bank accounts will evaporate in failures, FDIC collapse and bail-ins. Retirement accounts, pensions, insurance policies and annuities will collapse along with the nominal value of all the illusions in which THEY invest (stocks, bonds, real estate, even commodities.)”
Remember that the FDIC only has about $0 .05 for every dollar in deposit. It was designed for single member failures – not all banks at once. All banks use “Fractional Reserve Banking” which means they can leverage every dollar on deposit up to 7 times! POOF! your deposit evaporates
Point 2
” I think it will take months or even years for the decision to be made when it comes, and the first sign of it will be when they relax the prohibition on printing denominations higher than the $100 bill. ”
Ever notice that some businesses won’t except $100 or even $50 denominations? Why?
Because they don’t have to in a fiat environment. They claim that they are not a bank, and don’t have the change. No…. in a fiat environment, the banks don’t and won’t cover your losses due to fraudulent printing. Your on your own, so it becomes too hot to handle! If I were a business man I wouldn’t handle it either.
No in a world of fiat, think of fiat money as an upside down pyramid….. with your dollar as the base. the leverage is at the top, and when the pyramid finally falls over, the small guy with his dollar at the base gets crushed.
In 1933 the FDR Administration basically confiscated people’s money (gold) and gave them a grossly devalued chit instead.
In 1964 the USA took silver out of coinage, eliminating anything real in the money used by Americans, and in 1971 Nixon ended gold payments to foreigners, ending their line to anything as well.
In a crisis, the people running the government and the monetary system will do it all again, only this time it won’t be quite the same (it never is.)
Our challenge is to make one or more educated guesses as to what to hold and (more importantly) WHEN to hold it, and attempt to sidestep the absolutely inevitable wealth grab that will accompany the low point in finance and economics, which will be a desperation high point for the political system and its endless co-parasites.
I have my ideas on what to hold, but they are just as likely to be wrong as anything else. Each man and each woman should be trying to discern this as best they can, for themselves, based on as much research as seems prudent.
It would not surprise me at all to see the government recall all cash banknotes at some point and attempt to convert them to something will less purchasing power, just as was done in 1933. The difference is, in 1933, a distrusting person could bury their gold with the hope that someday their kids or grandkids could dig it up and benefit from it. Burying paper banknotes would be a laughably useless action, in comparison, as in the future no one will honor defaulted fiat currency. The grandkids might be able to sell it as curiosities, or as wallpaper….or use it as toilet paper if it truly is TEOTWAWKI.
I wish I knew what my future neighbors were REALLY going to want, and that was apt to be in short supply. At the moment, I can think of nothing because each potential version of the crisis suggests completely different things.
Crystal ball, anyone?
I wonder if the dollar being replaced as the reserve currency will be the final straw? The Chinese and the Russians could do it together and destroy what is left of our country without firing a shot.
They both have been buying Gold.
The communist win? Didnt Castro say that the Americans would do themselves in?
I don’t know about the whole reserve currency thing, but I suspect it hinges on:
1. world trade and the US being the biggest actual economy.
2. the rest of the world being in even worse shape.
I think China is vastly over-rated. “Red capitalism” is not capitalism. It’s even less “capitalism” than the US’s perversion. Russia, too, is vastly over-rated.
Others may have clearer vision on this than do I, but the whole sorry mess is so off the reservation that I don’t know what it looks like to get back.
My worldview rests on the level of trust and the size of so-called circles of trust. In a globalized economy, we trust EVERYONE. I think that’s absurd, and an artifact of the final surge in optimism of a 300 year rally in it.
When we plumb the depths, I think global trade will be all but zero. Think about that. Who needs a world reserve currency if every nation-state is nearly at war with each other, and each nation-state is in chaos itself?
Where is everything made now? Not in the USA. Imagine what happens when trust is completely inverted from now, and China, Russia, the UK, European nations and the USA are all eying each other through rifle scopes?
Imagine how long we have iPhones and smartphones and such when nothing is moving from nation to nation (except, perhaps, Reaper drones)?
Do we have any idea what essential parts for agricultural machines are now exclusively made in Mexico, China, Malaysia or South Korea?
Can the USA be autarchic even in the manufacture of a #2 lead pencil?
(Read “I, Pencil” by Leonard Reed for an idea of how not so ludicrous this may be.)
My suspicion is that while I’ve waited 20 years (and counting) for this paradigm to shift, when it does so we’re going to discover (the hard way) that we were asking all the wrong questions (and making all the wrong assumptions ) about what comes next.
And “next” could be in just a year or two (to see the kind of blind-siding changes arrive that seem baked into this toxic cake.)
We may discover that there are NO SHOES made in North America any more, and if the boats stop moving, a new pair of shoes may cost as much as a new set of tires for your car.
Maybe getting in on the ground floor of a new wave of resale shops will be the path to future success.
What we can assume, however, is that the assholes who rule us will not remove the vast impediments to manufacturing and business establishment that currently punish entrepreneurs.
Think poor. Beat the rush.
DC I hope like hell you are wrong. I think and fear you and Bonner are right.
ya DC I constantly wonder if im asking the right questions .
DC sunsets, It’s interesting to me that you mentioned shoes. Many years ago I had the opportunity and good fortune to live near a wonderful old German couple who emigrated to ‘Murica back when it was still America in the 1950’s. They lived through Hitler, the War, the bombings…..the whole horror show.
Much to their surprise, they discovered that I was very interested in the way things were day to day back then. What they told me was that certain items were always difficult to get, in a world of rationing, shortages and a command economy.
What was really hard to get at almost any price were; new shoes, bicycle tires, woman’s lipstick and perfume, pots and pans, and above all, luxury food items, like chocolate, good liqueur, canned ham and so on. They talked about other things, but I forget.
At wars end it was very hard to find food. There wasn’t any. And the money was no good, even if you found some.
There are several good reasons why Germany at the time was short on such things, but lack of manufacturing wasn’t one of them. It was just that manufacturing was diverted to total war production. To a much lesser extent, it was the same deal in 1940’s America.
But now, as you pointed out, shoes and many other things aren’t made here anymore. Does anyone know if batteries are still made here? Or car tires? Clothing, other than high-end stuff? People are going to be really screwed because most of ‘Murica’a manufacturing got shipped overseas. We are screwed now in that the jobs are gone, but I mean screwed in that there won’t be cheap and easily acquired shoes, bicycle tires, etc.
That picture is a KI-84 1a Hayate (Frank) A badass late war Japanese fiighter that was equal or superior to any US fighter. I highly doubt it would have been used in a kamikaze attack.