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For six years, the world has operated based on faith and hope that Central
Banks somehow fixed the issues that caused the 2008 Crisis.
All of the arguments supporting this defied common sense. A 5th
grader knows that you cannot solve a debt problem by issuing more debt. If
the below chart was a problem BEFORE 2008… there is no way that things are
better now. After all, we’ve just added another $10 trillion in debt to the
US system.
Similarly, anyone with a functioning brain could tell you that a bunch of
academics with no real-world experience, none of whom have ever started a
business or created a single job can’t “save” the economy. Indeed, few if any
of the Fed Presidents have even run a bank before. And yet they’re in charge
of the banking system.
However, there is an AWFUL lot of money at stake in maintaining the
illusion of Central Banking omniscience. So the media and the banks and the
politicians were happy to promote them. Indeed, one could very easily argue
that nearly all of the wealth and power held by those at the top of the
economy stem from this fiction.
So it’s little surprise that no one would admit the facts: that the Fed and
other Central Banks not only don’t have a clue how to fix the problem, but
that they actually have almost no incentive to do so.
So here are the facts:
1) The REAL problem for the financial system is the bond
bubble. In 2008 when the crisis hit it was $80 trillion. It has since grown
to over $100 trillion.
2)The derivatives market that uses this bond bubble as collateral
is over $555 trillion in size.
3)Many of the large multinational corporations, sovereign
governments, and even municipalities have used derivatives to fake earnings
and hide debt. NO ONE knows to what degree this has been the case,
but given that 20% of corporate CFOs have admitted to faking earnings in the
past, it’s likely a significant amount.
4) Corporations today are more leveraged than they were in
2007. As Stanley Druckenmiller noted recently, in 2007 corporate bonds were
$3.5 trillion… today they are $7 trillion: an amount equal to nearly 50% of
US GDP.
5) The Central Banks are now all leveraged at levels greater
than or equal to where Lehman Brothers was when it imploded. The Fed is
leveraged at 78 to 1. The ECB is leveraged at over 26 to 1. Lehman Brothers
was leveraged at 30 to 1.
6) The Central Banks have no idea how to exit their
strategies. Fed minutes released from 2009 show Janet Yellen was
worried about how to exit when the Fed’s balance sheet was $1.3 trillion
(back in 2009). Today it’s over $4.5 trillion.
We are heading for a crisis that will be exponentially worse than 2008.
The global Central Banks have literally bet the financial system that their
theories will work. They haven’t. All they’ve done is set the stage for
an even worse crisis in which entire countries will go bankrupt.
This process has already begun abroad.
In January 2015, the Swiss National Bank (SNB), backed into a corner by
the ECB’s QE program, had a choice: print an obscene amount of money to
defend the Franc’s peg or break the peg.
The SNB chose to break the peg. In a single day, the bank lost an amount
of money equal to somewhere between 10% and 15% of Swiss GDP. More than that,
it let the Franc appreciate… in a country in which 54% of the GDP is based on
exports.
The next bank to lose its grip is the Central Bank of China.
With an economy in free-fall (GDP is growing by 3% at best),
a dual house and stock bubbles bursting simultaneously, China’s regulators
went on the offensive: freezing the markets, banning short-selling, arresting
short-sellers, and pumping tens of billions of Dollars into the market
per day.
Despite this, Chinese stocks continue to crater. And its economy hasn’t
budged.
Now Europe’s Central Bank is losing control.
The ECB announced Negative Interest Rate Policy (NIRP) in June 2014. At
that time EU inflation was around 0.5%. It plunged soon after sinking to a
low of -0.6% in January.
That is when the ECB announced QE (something that the EU’s charter deemed
illegal). The result? Six months of an uptick in inflation, before it
rolled over again. We’re back into deflationary levels. Hence why ECB
President Mario Draghi has suggested increasing QE.
 
To give you an idea of just how bad this is, consider that the January
2015 low for the EU’s inflation was virtually the same as that of 2008-2009.
Put another way, despite NIRP, and record stimulus, the EU’s inflation
rate hit levels associated with the worst economic collapse in 80 years.
Small wonder the ECB is terrified.
The fact of the matter is that despite public opinion, there are problems
that are so big that the Central Banks cannot fix them. We’ve seen this in
Switzerland and China and now in Europe. It will be spreading to other
countries in the near future.
A stock market crash is coming.
Smart investors are preparing now. The August-September correction was
just a warm up. The REAL drop is coming shortly.
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