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Erroneously
believing themselves the
cause of their good fortune, Americans
continue to deny a changing
world
In 2006, when I
began writing my book on the coming economic collapse, I didn’t
know what the Fed would
do regarding liquidity. At the time, whether the Fed would raise or lower interest rates was a soon-to-be
multi-trillion dollar question.
In the past, central banks walked a tightrope between higher and lower interest rates. Raise rates too high and economies would slow and/or contract. Keep rates are too low and inflation would result.
Today, the central bankers’
monetary tightrope has become a gangplank.
DROWNING
IN AN OCEAN OF LIQUIDITY
On December 12th, Fed Chairmen
Ben Bernanke announced
the Fed would be doubling down on its bond buying program. Ostensibly in order to create more jobs, the
Fed would now buy an additional $45 billion a
month of US debt.
The bond buying
announced today will be in addition to $40
billion a month of existing
mortgage-debt purchases.
The FOMC said asset buying will continue “if
the outlook for the labor
market does not improve substantially”
and hasn’t set a limit on the program’s
size or duration.
The reason for the Fed’s accelerated bond buying has only a tenuous connection with the US labor market. The real reason is that
unless the Fed is the
dominant buyer of US debt—which it now
is—market forces (remember those?) would cause US interest rates
to rise, eventually bankrupting the US Treasury.
RUNNING THE
PRESSES
More and more
central banks are opting
for the endgame ‘solution’, a fatal descent into ‘monetary easing’, i.e. today’s laundered term for running the printing presses. The Swiss National Bank, the European
Central Bank, the Bank of England and the Bank of Japan have all joined the Fed
in money printing hoping desperately
to save their ponzi-scheme of credit and debt.
FED
FLOODS MARKETS WITH US DOLLARS
Today, the Fed is providing increasing amounts of liquidity at ever cheaper
rates to central banks in the hopes
of preventing another catastrophic credit crunch. But there is another reason
the Fed has doubled its purchases of US debt and won’t set an upper limit on those purchases; and that reason indicates the US economy is in far more danger than Ben Bernanke and the Fed want anyone to know.
Modern economics is not rocket
science; it’s a con game
that utilizes the bankers’ debt-based banknotes to transfer societal productivity and wealth to bankers. But to optimally do so, the balance between credit and debt must be constantly maintained and economies must constantly expand.
After gold was removed as a constraint on the
global money supply in
1971, credit and debt aggregates exploded in size.
Ben Bernanke’s error-prone
and sometimes brilliant
mentor, Milton Friedman, had assured
President Nixon that floating exchange rates would naturally balance trade flows. They didn’t
and soon the US was responsible for the largest trade imbalance in history.
Japan was the
first victim of the US burgeoning
trade deficit. In the
1980s, the US trade imbalance
with Japan reached unprecedented levels. In my book, Time of the Vulture:
How to Survive the Crisis and Prosper in the Process, I describe what happened.
… money was
flowing into Japan at an unprecedented
rate. Prices were beginning to move upwards and
new money was flowing into the stock market at an unprecedented rate, causing the Nikkei to rise faster than market
fundamentals might dictate.
By the mid-1980s, the Japanese Central Bank decided
to slow the economy down by raising
interest rates. This action would
dampen any inflationary tendencies and prevent a stock market bubble from forming.
However, as logical as this solution was, it was to be
opposed by the US government
and never implemented.
At
the time, most of the Japanese
money was being invested in US Treasuries, as
the Reagan administration was borrowing
heavily to fund its military buildup. During Reagan’s presidency, US government debt tripled from one to four trillion
dollars, the greatest percentage
increase of US debt in history.
The US knew that any rise
in Japanese interest
rates would slow the flow of Japanese
funds to the US. Japanese
investors would much prefer to keep their money in Japan if interest rates were high enough.
But during this time, the Reagan administration needed
a constant flow of foreign dollars to pay for its military
expenditures and when it heard about the plans of the
Japanese Central Bank, it
did more than register a protest. It threatened Japan with economic sanctions.
If the Japanese
went ahead with their interest
rate increase, the US threatened
to retaliate with import tariffs on Japanese
automobiles, electronics, and consumer goods. This threat was real enough to cause the Japanese to cancel their interest rate increase.
As a result,
the US military buildup continued and the price of Japanese real estate and
stocks, fueled by excessive amounts
of liquidity, exploded upwards. Japanese real estate prices increased 70 times over and stock prices
increased over 100-fold, with
the Nikkei reaching a market
top at 38,992 in January
1990.
As with all speculative bubbles, the Nikkei
collapsed—and the collapse of the Nikkei in 1990 unleashed deflationary forces not seen since the Great Depression of
the 1930s. Prices of stocks and real estate in Japan began a long and steep multi-year descent.
Commercial real estate
lost 80 % of its value in
the next decade and the
Nikkei fell from 38,992 in 1990 to 8,237 in 2003. Deflationary cycles are long and protracted
and if not stopped will become deflationary depressions, an economic phenomenon for which there are no ready answers.
In a deflationary
cycle, prices fall because of decreasing demand for services and goods. Should deflation take root in the US, real estate prices, stock prices, and prices of services will fall for years until a bottom is eventually
found. And in a depression,
when a bottom is found there
will be no upward bounce. The economy will merely lie inert as it did during
the 1930s.
pp. 53-55, Time of the Vulture:
How to Survive the Crisis and Prosper in the Process, 3rd ed.
(2012).
Today, Fed chairman Ben Bernanke
is well aware of Japan’s 22 year struggle with deflation; and had argued in 2000, that Japan had
not done enough to increase the money supply. Now, after his
own futile attempts to increase America’s money supply, Bernanke might be more understanding of the vast powers of deflation.
Milton
Friedman, Bernanke’s mentor, had convinced Bernake that by increasing the money supply,
central bankers could
have prevented the 1930s deflationary
depression. But Friedman was
wrong—again.
When the 2008 collapse threatened
to send the US economy into a deflationary descent, Bernanke immediately applied Friedman’s patent medicine—believed to be 100% safe and guaranteed to work—by flooding the US economy with credit and money.
But Milton Friedman’s monetary medicine didn’t work. Despite Bernanke’s injection of massive amounts
of liquidity and bond buying,
i.e. QE1 and QE2 etc, the US economy
didn’t respond as expected. Trillions of dollars borrowed
and spent did not revive
US employment or raise
real estate prices.
 
Bernanke’s ‘drastic
liquidity injection’ in
2008 also failed to increase the quantity of money
in circulation, see M2 (the blue
line in exhibit 7 below).
In the end, Friedman’s theories
had given Bernanke false hope, not a
solution to severe deflationary
contractions.
At Friedman’s
90th birthday party in
2002, Bernanke had assured Friedman that because of his theories a depression would never again
happen. He also apologized to Friedman on behalf
of central bankers for having
caused the Great Depression—and
for that apology, Bernanke owes an apology to his fellow central bankers.
FOLLOWING
JAPAN TO THE CEMETERY IN A BALANCE SHEET RECESSION HEARSE
Central bank economists given the impossible task of reviving the fatally-damaged credit and debt con game are aware of the work of Nomura economist,
Richard Koo. Koo has described the current economic crisis as a
‘balance-sheet recession’;
and, in so doing, Koo has ‘zeroed in’
on the cause of the Great Depression and similar collapses.
Koo determined that a collapse in private demand which happens after the collapse of
massive speculative bubbles,
e.g. 1929 US stock market
crash, the 1990 Japanese Nikkei crash, the 2000 US
dot.com and 2007 US housing bubble
crash etc., can only be offset by increased government borrowing and spending, the course that almost all central banks are now following.
Note: Because of Koo’s findings, apologies to Keynes may
be in order.
Unfortunately, however, Koo’s solution is no
solution at all. At best,
it’s a short-term strategy to keep an economy functioning until, hopefully, deflationary forces have run their course; but, today, Japan—Koo’s poster economy—is itself on the verge of finally succumbing to the deadly deflationary forces it successfully resisted for 22 years.
The US, the
UK, Europe, etc. will not be
so lucky. They do not have the massive savings
Japan drew down in its 22-year battle to survive nor do they have the export
industries needed to maintain
GDP growth while domestic demand withers.
For 22 years, Koo’s balance-sheet solution worked for Japan; but it is highly questionable
that it will work for 23; and for today’s slowing and contracting economies, 2-3 years may be
the most that can be hoped
for; and while Koo’s
balance-sheet solution can
prolong the life of terminally
ill economies, it can’t cure them.
GOLD, 2012 AND
THE END TIMES
I recently gave an interview to sgtreports,
a gold and silver site, regarding
my views on the future. Titled, Collapse of the World’s Power Structures, the response has been overwhelmingly
positive which reflects my own views
about the future. I have always believed
the economic crisis is part of a far greater shift with spiritual implications, although
a cataclysmic financial rendering is an integral part of that shift.
Today, I was asked by Gold Silver Worlds to give my views on the significance of the end of the Mayan
long count calendar, its
relevance to gold and silver and the changes that are today in motion. The GoldSilverWorld interview will be posted at
http://goldsilverworlds.com/ appropriately on December 21st,
the supposed end date of the 5,125 year long count Mayan calendar.
I believe in the interconnectivity
of events and that includes today’s upward trend of gold and the concomitant collapse of paper-based financial markets. Change takes time and fundamental change is no different except it is far more disruptive.
We are in the end game
of the present economic paradigm. That it coincides with the end of the Mayan long count calendar may not be coincidence.
One of the signs of the end times given in the Bible is the
verse, The first shall
be last and the last shall
be first (Matthew 20:16).
The words, the last shall be first, may indeed indicate
the end times are truly at
hand. This year, the San Francisco Giants won the World Series,
the San Francisco 49ers are in the running for the NFC championship
and San Francisco’s usual
bottom dwelling Golden
State Warriors basketball team is
coming off a 6-1 road trip having
defeated last year’s
NBA champions, the Miami Heat, in the process. The end times may be far better than I expected.
MERRY CHRISTMAS
“WHAT
HAPPENED TO ALL THE GOLD? WASN’T THERE MORE?”
My current youtube video, The Cat, Mouse & the Fiscal Cliff,
presents capitalism and America’s fiscal dilemma
in a hopefully more understandable
context. Best wishes to
all in the coming New Year.
The next Mayan long count
calendar cycle is about
to begin and it’s going to be far, far better than the last cycle.
Buy gold, buy silver, have faith.
Darryl Robert Schoon
www.survivethecrisis.com
www.drschoon.com
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