How often have you heard the phrase “the government will never let it happen”? It almost doesn’t matter what the topic is you are talking about, nothing “bad” can ever really happen …or so it is thought. The reason of course is because we are so many years into “MOPE” (management of perspective economics). No matter what has happened in the past, the media, Wall Street, and the government have constantly spun the narrative to lead the “perspective”. MOPE has been with us for such a long time, it is not surprising the public is conditioned into believing nothing bad will EVER happen.
We could go through the exercise of “how” and even “why” MOPE came about but that might end up being a novel. Rather, I believe there is a core how and why. Put simply, MOPE became a necessity to protect the ability for the U.S. to borrow …AND to issue the dollar as the world’s reserve currency. This topic by the way is a chicken or the egg question but really no longer matters as we are in the very late innings of the credit game.
You see, the U.S. has run a budget deficit every year since 1960 which means they had to borrow funds to keep the doors open and the machine running. Foreigners provided for many years to cover the shortfall and also willingly (for the most part) accepted and used dollars for trade. Rather than live within means, the U.S. fell into the trap of borrowing more to pay back past debt with more new debt and not allow living standards to “clear”. Mother nature saw this and began to drain the Treasury of gold in the late 1960’s which led to the U.S. defaulting on Aug.15, 1971 …which kicked off the need for MOPE.
Fast forward to present, “credit” has been used all these years to fund MOPE …which created the need for even more credit, dollars issued and thus the further need to manage perspectives. The treasury market, and the ability to issue dollars as payment for trade deficits are THE core reasons for all the lies and subterfuge these many years. Without the ability to borrow new funds, or the ability to create dollars that are accepted for the import of real goods, the U.S. would be completely cooked. The result would have been and will be …much higher interest rates and far lower exchange rate (purchasing) powers. In other words, we over lived our means for many years. Adjusting to a real and sustainable standard of living will be seen as complete collapse even though it will only be levels that were natural in the first place.
The above leads us to what has happened over the last few years and where the U.S. is now. The world embarked on “QE” some nine years ago. The rest of the world went along with it so it was considered an “experiment”. It was not an experiment, plain and simple it was monetization. In a real and sustainable financial market, the real economy generates earnings and cash flow sufficient for investment. This is no longer the case. The real economy has been usurped by the needs of the financial economy via central bank monetization. Bluntly, because the financial markets have become more important than the real economy, all stops have been pulled and no limits exist on supporting banking, credit and the ability to extend the Ponzi scheme.
Over the last few years, serious inroads have been made into the use and acceptance of dollars for trade. We have chronicled it along the way for you and it looks like the big one will be later this month when China begins to trade yuan for oil on the 26th. China also peaked in their holdings (maybe not coincidentally) of U.S. Treasuries over four years ago. They now hold 10% fewer U.S. Treasuries than they did at the end of 2013.
The question needs to be asked, who will buy U.S. Treasuries at the very moment U.S. borrowing needs look to be exploding? The answer of course is no one. The only entity who will purchase U.S. Treasuries in size will be the Federal Reserve. They will be forced to purchase much of the new issuance. They will also be forced to purchase what is sold into the markets by foreigners and foreign central banks.
There is of course a problem, a HUGE problem. The Fed has already announced and begun “QT” (quantitative tightening), the reverse of QE. How is it possible for the Fed to actually sell treasuries into the market that already has too much supply? In my eyes they have a choice but not really. They can continue to lower their balance sheet and allow Treasury auctions to fail with not enough bidders …along with outright sales from foreigners. This will result in interest rates clearing at God knows what level, maybe 7% or higher? …Which will destroy the last of our real economy and topple the grotesque financial leverage. Or, they will hyper monetize and reverse again to outright QE?
The bottom line is this, they MUST monetize or interest rates will begin to clear. This option will usher in the end of the dollar because dollar holders will not want to be the ones holding the bag. The Fed cannot support the dollar with the issuance of new dollars as that creates more supply. Because the Fed holds almost no foreign currency and probably even less gold, they own nothing they can sell to purchase dollars with. I have said for many years, the dollar is the ultimate Achilles Heel because the Fed could not support both financial markets and the dollar at the same time. For a while, and with the use of “MOPE” they have done this but issuing new dollars to buy dollars is a formula with only one, Weimar like ending!
To finish, we are witnessing the end of an empire and they all rhyme in fiscal and monetary bankruptcy. History will show “the government will never let it happen” to be back assward because the government will be to blame for the ending and everything leading up to it. The ending is not in any doubt whatsoever due to mathematics, only the timing can be altered. Anyone asking the question “why didn’t anyone see this coming” paid no attention to history at all. If monetizing one’s debt was the road to financial and economic nirvana, there would be no recessions, no wars, no poverty, nothing even concerning. Outright monetization has been tried thousand’s of times in the past, never worked and always ended in disaster. Just because the rest of the world went along with it for a short while this time does not mean it will end any differently. In fact, because it has been the reserve currency being monetized means the disaster will be that much worse and far reaching.
Correcting something I wrote above, this is actually an “experiment” …one that failed thousands of times before and has always, with the same definitive ending. MOPE is easy because man never wants to hear the truth if it hurts!
Standing watch,
Bill Holter
Holter-Sinclair collaboration
comments welcome bholter@hotmail.com
