“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered… Thomas Jefferson, 1802
If policy makers are not careful, present dynamics may precipitate a worldwide Trade War culminating in a worldwide DEPRESSION, brought about by protectionist pressures exacerbated by Global, political “Beggar Thy Neighbor” motivations. (it’s happened before: There is no end to the stupidity of politicians)
Past evidence of cycles suggests that we are about a third of way through what might be a 16 to 20 year DEPRESSION. However, “debt deflations”, such as the one that we are in, will be much worse than typical cycles, which are also Government induced but brought on by the FED increasing interest rates and tightening credit (a la Paul Volcker in 1980). One key indicator that can be used to illustrate this idea is the ratio of the level of the S&P 500 Index to the price of an ounce of Gold, which hit a high of 5.5x towards the end of the Tech Bubble in 2001. The ratio has since collapsed to below 1x. While this is not the lowest it has been, it is an indication that confidence in owning paper assets has evaporated (that is probably what the ever shrinking volume is telling us) and the classic hard asset of Gold has won out as the only reliable STORE and preservation of Wealth, which is now fast becoming investors main concern. Similar collapses in the ratio were seen after the 1929 crash and the 1973 oil crisis.
A fiat currency is only as strong as the belief it inspires to its holders.
I have been postulating that Treasury Bonds are in an expanding bubble and have become the New Toxic Assets that will end up being the Biggest Exploding Ponzi Scheme in history. At some point in the not too distant future, the markets will realize that the amount of Treasuries outstanding are so large that they can never be repaid and the currency in which they are denominated is dropping in value like a stone. So if they are to be repaid at all, they will be repaid in worthless Fiat Dollars. When such realizations finally become obvious, a massive exiting out of Treasuries will begin, resulting in a huge shift to commodities and precious metals as a safe haven. But here is the tragedy: Increased inflation will not be perceived – at least not at first – as anything to worry about. As each monthly rise will be considered as a good thing because of the current IRRATIONAL fear of the deflation that we are in. Therefore any pickup in the inflation index will be interpreted as a pickup in the overall economy. Eventually, however, as inflation continues its steady month over month rise, the price increases will begin to really hurt and the job market, instead of improving, will actually get worse. Suddenly the American people will no longer be swayed by phony government statistics and wake up to the fact that we are in a Major Depression as the inflation rate soars past the 1979 high of 14%.
But there is a key difference between today and 1980: Bernanke and the Federal Reserve cannot raise rates to reign in incipient hyperinflation, like Volcker did. Back in 1980, there was no such thing as Derivatives that now total 1000 times more than World GDP of $60 trillion, which if interest rates begin to rise as they did back then, will bring the whole world’s financial system crashing down.
Apart from the obvious fact that Bernanke is not half the man Paul Volcker is (both literally and figuratively), he lacks the backbone and more importantly, the common sense to realize that he has been making a mistake all along. If there is a run on Treasuries, Bernanke will not be able to raise interest rates to hold Treasury Investors – if he did, he would wipe out all the Too Big To Fail banks, and break the Treasury of the U.S. Federal Government (both of which depend on the Fed’s cheap money as completely as if it were oxygen). What is even more dangerous is what rising rates would do to the quadrillions of dollars in Derivatives (something that I have been warning about since 2006). To make matters worse, FINREG did nothing to even address the Derivatives or any of the other Deep Seeded major problems.
Back in 1980, Volcker didn’t have today’s constraint. He could raise rates – but even so, he paid for it with a 4% increase in unemployment.
However, unemployment today is already at 10% (17% to 22% in reality) and that’s in a soft credit environment. So even if he didn’t have the TBTF banks and the Federal Government on cheap money life support, Bernanke cannot raise rates in order to stop a run on Treasuries, stop a run-up on commodities, and stop incipient hyperinflation. The economy is too weak. Adding 400 basis points to the current unemployment situation – that would drive US unemployment to 14% (25% in reality, the same as the highest rate hit during the 1930′s) or more. It would cause political pandemonium, not to mention riots.
Finally, Bernanke won’t raise rates – can’t raise rates – because of the disease of the mind that he has: Due to Alan Greenspan’s pernicious, destructive influence, which I have discussed at some length in the past. Bernanke is a Keynesian Ideologue and thoroughly believes that only liquidity injections and cheap money can save the economy – he is doing his best to create inflation. He is so terrified of the American economy going down the deflationary drain that he is deliberately going in the other direction.
Bernanke doesn’t realize that inflation is a symptom that can augur many things. He is convinced that inflation means growth – the opposite of deflation. So all his liquidity windows, all his cash infusions to prop up the Too Big To Fail banks and their huckster operators, QE, QE-lite, and the forthcoming QE2 – all of it is being carried out by Bernanke so as to cause inflation. He is convinced that inflation will signal that the economy is recovering and that the Federal Debt will be inflated away, and then we can all live happily ever after.
Learn how to buy gold and make great money doing it! Gold is the best investment in ANY economy!