My unpublished (100,000 word) book “The Financial Jigsaw”, is being serialised here weekly in 100 Issues by Peter J Underwood, author
Quote of the Week: “You can cut all the flowers but you cannot keep spring from coming.”– Pablo Neruda
We start out this week with the final Chapter 13 – The New Emergent Economy and the last one in the book. It might be appropriate to consider the current trend of negative interest rates on bonds of which there are now 17Trn USD globally and growing. If a new economic model is to prevail after the next crisis, interest rates must return to positive because no economy can survive with negative rates. This has been caused by central banks manipulating their economies and creating artificial values for asset prices. Here is a short article explaining this unique and unprecedented situation:
Here’s what ‘Mish’ says further: “There is no evidence negative rates produce a stronger economy or lower unemployment. There is evidence banks are hurt. Look at Deutsche Bank, French banks or Italian banks. Deutsche Bank allegedly has 1.63 trillion in assets as of June 30, 2019. The market questions those assets and so do I. Whereas the Fed bailed out US banks by paying interest on excess reserves, the ECB charged banks interest on excess reserves draining bank profits. Negative interest rates unquestionably hurt EU banks and there is no evidence of Lagarde’s proposed counter-benefits. A European banking crisis awaits.”
Everyone has been used to almost zero interest rates for so long that when this changes suddenly under a new post crisis regime, assets prices will collapse and we will be faced with such massive debt defaults that the whole system will crumble and could return us to conditions last experienced many centuries ago. This Chapter seeks to speculate one possible scenario for what we may soon face as the crisis grows.
Here is the link to last week: Issue 67
Now that Brexit will not be coming to a final conclusion yet, I will continue to provide weekly updates as events progress:
Brexit Update – 6th September 2019
The Brexit deadline remains 31st October 2019 and stays in place unless Boris can get Parliament to agree a new exit plan. Parliament have taken control and issued a Bill to stop a no-deal Brexit which Boris had planned. It has passed the votes in the Commons and now is in the hands of the House of Lords and is hoped to be law by next Tuesday.
Boris’s call for a general election was defeated in the commons as MPs want to fix the no-deal legislation first to be sure that Boris can’t affect their plans.
Brexit Hot Press – Parliament suspended
This week sees a massive conflagration for who will win the various challenges being issued and this article by ‘Mish’ explains all the details and options prevailing at the start of the week – updates will be provided as the week’s battles progress:
Parliament returned on 3rd September – but for how long?. Details of Parliament’s deliberations can be found here:
CHAPTER 13
The New Emergent Economy
“Winning is a habit. Watch your thoughts, they become your beliefs. Watch your beliefs, they become your words. Watch your words, they become your actions. Watch your actions, they become your habits. Watch your habits, they become your character.” – Vince Lombardi
“Everything is determined, the beginning as well as the end, by forces over which we have no control. It is determined for the insect as well as the star. Human beings, vegetables, or cosmic dust, we all dance to a mysterious tune, intoned in the distance by an invisible piper.” – Albert Einstein
“The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger — but recognize the opportunity.” ― John F. Kennedy
We now have all our jigsaw pieces in place and we are able to view the completed picture as projected on the back page of this book. We now need to consider how the jigsaw falls apart and where the individual pieces end up.
We are at the end of a 20-year credit bubble that has basically inflated the world economy beyond any sustainable level. We’re now facing the day of reckoning in which we’re going to suffer from a huge deflation for years to come and possibly followed by hyper-inflation and the destruction of currencies as we have known them.
The global economy is in a place we’ve never been before. We have never experienced ten years of effectively zero money market rates, even during the lowest point of the Great Depression in the 1930s; we have never had a credit bubble in the world economy anything close to what we have now.
In 20 years, central banks have taken their balance sheets from about $2 trillion in 1995 to $21 trillion today. The global economy is now buried under a $225 trillion mountain of debt, if you can imagine a number that large. This Chapter is about the future and as Yogi Bere ruminates: “Making predictions is risky, especially about the future”.
Many pundits have written tomes on the likely outcome of the post-collapse economy and to this I add my own. Mine is not a prediction or even a forecast; it is merely my best guess about how the future new economy is likely to emerge following the coming global economic and financial crisis.
The ruling elite will fight tooth and nail to preserve the status quo so I expect the next crisis to progress in a series phases, each compounding one on another, beginning with a stock market and dollar collapse in America and cascading like a virus throughout the global economy or perhaps it will be ignited in China; we have no way of knowing.
We will be faced with a ‘greater depression’ as deflation rips through most countries and governments are forced to severely cut back on their bloated budgets, especially in the areas of welfare and services of all kinds.
GDPs will fall drastically as production is cratered and unemployment escalates; it is likely that riots and protests will emerge on the streets as disorder rules until the militarised police and the armed services are forced to take drastic action.
Some will say that this is all part of a conspiracy planned and perpetrated by the ruling elite and will point to the many examples of public announcements issued from time to time through official organs. One such example: At the Gorbachev-led State of the World Forum in 1995, Council on Foreign Relations member Zbigniew Brzezinski had this to say:
“We do not have a New World Order. … We cannot leap into world government in one quick step. … In brief, the precondition for eventual globalization — genuine globalization — is progressive regionalization, because thereby we move toward larger, more stable, more cooperative units.”
I prefer to believe that planning of this kind, on a global basis, is unlikely to be hidden for the many decades required to prepare and act. More probable is that our complex systems, as described in the foregoing Chapters, contain the seeds of their own destruction and the outcome is impossible to plan or control even given the immense power wielded by our Masters of the Financial Universe.
Gold analyst Mike Maloney believes that traditional assets will plunge and the collapse will unfold in two stages: In the first, investors will flood into the perceived safety of bond markets, causing a temporary spike, as stocks and real estate markets collapse. Then all three markets will then plummet as the collapse of a catastrophic pile of debt and derivatives causes a failure in the United States hegemony of the global, dollar-based monetary system illuminated through the ‘petro-dollar’ which has held sway for almost 50 years.
This scenario will have a severe negative impact on the American economy; it is not difficult to project the probable results and we already have verifiable evidence to postulate the likely progression of such a crucial change in global monetary stability.
A repeat of 2008 may be worse than can be imagined
We know what happened in 2008/9 and I promised not to dwell on the details of this most recent of crises. We do know that the major OECD countries have been forced to create at a minimum $21 Trillion out of thin air to prop up the mega banks, major financial institutions, bond and stock markets.
The controlling currency was and remains the US dollar without which these bail-outs could not have happened. Now we are going to be confronted with another global financial collapse, orders of magnitude greater than the last, but without the benefit of the US dollar as a safe haven.
When the global financial operating system crashes, nothing much will work until the system is rebooted. I believe the next few years will see that crash. As financial contraction, and immediately following a transport disruption, is set to occur first, finance will be in focus for the next few years.
Following this we will have to deal with an energy crisis, other resource limitations, crisis in employment and demographics as well as embracing geopolitical issues.
Economic depressions themselves are caused by the malinvestment that takes place during the era of too low interest rates and explosion of credit. The healing process of liquidating this malinvestment is the pain of higher interest rates and the fall of asset prices.
This healing process is what the Fed actively works to prevent by refusing to actually normalize their balance sheet, by which we mean not replacing the bonds they have bought but allowing them to expire at maturity and thus reduce their overall holdings gradually over time.
It is possible that the major central banks, working in concert, will continue to prop up markets for the next few years or so barring a sudden ‘Black Swan’ event. Here is what Doug Noland, of the ‘Credit Bubble Bulletin’, said in May 2017:
“I expect U.S. system credit growth to surpass $2.2 Tn this year, roughly broken down by the government sector ($850bn), Business ($750bn), Household Mortgage ($350bn) and Consumer Credit ($250bn). Another big federal deficit is expected, with the perception of a blank check book ensuring that deficits inflate until the markets decide otherwise. Rising home prices coupled with low mortgage rates ensure a 2017 expansion of mortgage borrowings. Loose financial conditions and record debt issuance would seem to ensure another big year of business debt growth. And while there appears to be some tightening in subprime auto and credit cards, I would be surprised to see Consumer Credit expand by much less than 2016. As such, the relatively stable outlook for U.S. Credit growth certainly supports the global liquidity and market backdrop.”
What he is saying is that due to the continued issuance of debt on a massive scale the markets, being flooded with liquidity, will remain stable for the time being. Nevertheless, we do know through history alone that a “reversion to mean” i.e. a crash of some sort is baked in the cake and is expected to happen at some time in the near future.
What will happen next is my conjecture, but again it is my best guess based on the evidence of others well placed to know. One measure of how near we might be to a crisis is the delinquency rates of various loan types within the US economy. You can judge for yourself what the following quote means in terms of how much further we have to go before a crisis or a correction takes place.
The Mises Institute published this item in May 2017 by Ryan McMaken: “With the exception of student loans, however, delinquency rates are not exceptionally high, and the current boom — while weak by historical standards — appears to be continuing. The trouble will come when consumers can no longer keep up with debt payments and money begins to disappear from the fractional-reserve banking system, setting in motion deflation and recession. It’s a correction that’s badly needed, but as of the first quarter of this year, at least, the money continues to flow, and debt is enabling many Americans to keep expanding their spending for now.”
To be continued next Saturday
Global Warming, Depressions and Social collapse are the consequence of liberalism. Create the Welfare Society (1964) and a Fiat Currency (1971). Expand both to create and fill thousands of Urban Heat Sinks with Welfare Maggots which then destroy the Climate, the Society and the Economy. Blame it all on Republicans and demand more Welfare (2020). What could go wrong? My friend, you are right: the Currency Foundation is Sand. The Financial System is a Ponzi Debt Scheme giving the Welfare Maggots the Life of Riley and the Elite the Life of Kings, but it will all soon end like box cars colliding in a train wreck, leaving the Western Urban Maggots and Elite stranded like the homeless on the Grand Bahamas after Dorian. Be a Prepper not a Schlepper.
Thanks Robert – it’s nice to know that there are others who fear the future is already baked into the cake and there can be no resolution short of the final collapse. The problem is that the vast majority of the people know nothing of this and have no wish to find out. Be a Prepper indeed!
Thanks AP. Appreciate what you are doing.