Once the government fully abolished the gold standard in 1971, it was inevitable that a debt fueled bubble would emerge.
What caught many off guard however, is just how big the bubble has grown. Take a look at the amount of debt floating around in our country has grown since that day in 1971.
The growth of the debt is clearly exponential. Now take a look at the growth of the nominal GDP line, which remains and will probably always be on a linear growth rate. The disparity is staggering; from total debt and GDP being almost equal to total debt now standing at over three times that of the GDP.
Take a look at the graph, and ask yourself – is this sustainable?
How long can the charade continue before the entire house of cards come tumbling down? The evidence is clear, the removal of the gold standard, coupled with the fractional reserve banking system has created a precariously fragile financial system.
But don’t just take our word for it; hear what the bond king himself, Bill Gross, has to say in his latest global investment outlook for March 2017.
“It still mystifies me,” I told them, “how a banking system can create money out of thin air, but it does.” By rough estimates, banks and their shadows have turned $3 trillion of “base” credit into $65 trillion + of “unreserved” credit in the United States alone – Treasuries, munis, bank loans, mortgages and stocks too, although equities are not officially “credit” they are still dependent on the cash flow that supports the system….
But our highly levered financial system is like a truckload of nitro glycerin on a bumpy road. One mistake can set off a credit implosion where holders of stocks, high yield bonds, and yes, subprime mortgages all rush to the bank to claim its one and only dollar in the vault. It happened in 2008, and central banks were in a position to drastically lower yields and buy trillions of dollars via Quantitative Easing (QE) to prevent a run on the system. Today, central bank flexibility is not what it was back then. Yields globally are near zero and in many cases, negative. Continuing QE programs by central banks are approaching limits as they buy up more and more existing debt, threatening repo markets and the day to day functioning of financial commerce.
I’m with Will Rogers. Don’t be allured by the Trump mirage of 3-4% growth and the magical benefits of tax cuts and deregulation. The U.S. and indeed the global economy is walking a fine line due to increasing leverage and the potential for too high (or too low) interest rates to wreak havoc on an increasingly stressed financial system. Be more concerned about the return of your money than the return on your money in 2017 and beyond.”
There are already signs that despite the booming equities market parts of the bubble are already starting to burst. On the domestic front, the ‘retail apocalypse’ continues, with the latest victims being JC Penny, Family Christian Stores, and HHGregg. JC Penney has announced that they are firing 6,000 workers and closing 140 stores while Family Christian Stores is closing its 240 stores with 3,000 workers for good. HHGregg is filing for bankruptcy and will close 88 stores and lose 1,500 workers.
And with retail stores being some of the main anchor tenants for many of America’s malls, the ongoing bankruptcies and closures of various retailers will have a knock-on effect; a very large knock-on effect. Retail analyst Jan Kniffen, in an interview with CNBC has stated that he expects a third of all American malls to close within the coming years.
Things really aren’t much better on the international front as well. Global growth is not and will never be sufficient to catch up to the rate of debt acquisition. And even less so when growth is faltering all over the world.
Remember the once-booming ‘Jewel of the Amazon’, Brazil? Turns out they’ve entered the worst recession on record. GPD is down 9% from the pre-recession peak and unemployment has increased by a staggering 76% to almost 13 million!
So what happens when governments take on too much debt? Who pays?
Make no mistake, the answer is always the taxpayer, in one way or another.
One form of reducing the debt burden, which is already being imposed in some parts of Europe is real negative interest rates. Negative interest rates not only lower the government’s debt servicing costs but lower the real value of the debt themselves. Of course, people can avoid negative interest rates by hoarding cash, which is a major reason for the current war on cash we see going on worldwide.
How can you protect your assets when the debt merry-go-round finally stops spinning? What about assets that have value no matter what happens? Intelligent investors are already converting parts of their portfolios into ‘hard value’ assets such as gold and silver.
P.S. Here’s what Bill Gross has to say regarding the fractional reserve banking system, as he explains it to his family.
“But I jump ahead of myself. “Pretend,” I told the “fam” huddled around the kitchen table, that there is only one dollar and that you own it and have it on deposit with the Bank of USA – the only bank in the country. The bank owes you a buck any time you want to withdraw it. But the bank says to itself, “she probably won’t need this buck for a while, so I’ll lend it to Joe who wants to start a pizza store.” Joe borrows the buck and pays for flour, pepperoni and a pizza oven from Sally’s Pizza Supplies, who then deposits it back in the same bank in their checking account. Your one and only buck has now turned into two. You have a bank account with one buck and Sally’s Pizza has a checking account with one buck. Both parties have confidence that their buck is actually theirs, even though there’s really only one buck in the bank’s vault.
The bank itself has doubled its assets and liabilities. Its assets are the one buck in its vault and the loan to Joe; its liabilities are the buck it owes to you – the original depositor – and the buck it owes to Sally’s Pizza. The cycle goes on of course, lending and relending the simple solitary dollar bill (with regulatory reserve requirements) until like a magician with a wand and a black hat, the fractional reserve system pulls five or six rabbits out of a single top hat. There still is only one dollar bill but fractional reserve banking has turned it into five or six dollars of credit and engineered a capitalistic miracle of growth and job creation. And importantly, all lenders of credit believe that they can sell or liquidate their assets and receive the single solitary buck that rests in the bank’s vault. Well . . . not really.
“And so,” my oldest son, Jeff, said as he stroked his beardless chin like a scientist just discovering the mystery of black holes. “That sounds like a good thing. The problem I’ll bet comes when there are too many pizza stores (think subprime mortgages) and the interest on all of the loans couldn’t be paid and everyone wants the dollar back that they think is theirs. Sounds like 2008 to me – something like Lehman Brothers.” “Yep,” I said, as I got up to get a Coke from the refrigerator. “Something like Lehman Brothers.”
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