Among the alternative financial press (the so-called bloggers of finance) there is a renewed buzz regarding a slowly unfolding crisis. Many believe we are near an inflection point.
The fear is certainly justified. Money or credit creation is now exponential. The US Federal Reserve is on a path toward monetizing anything and everything, while the European Central Bank is about to unleash its own bond buying program.
Japan is equally a basket case. Paving the way for long-discussed direct monetization of equities is becoming evermore a reality. The US central bank, together with its Japanese counterpart, is monetizing an unprecedented $125 billion in direct bond buying.
Despite shrinking deficits, there is no way either central bank can taper these purchases without pricking the latest in yet another series of asset bubbles. Both central banks have morphed into politically controlled arms of their respective Treasuries.
Meanwhile, equities are trading at all time highs. We are back to dot-com IPO’s by which well-meaning companies ultimately take all the risk, helping Wall Street make money for nothing without risk of failure.
Home prices have soared back from the lows experienced 5 years ago. At the same time, nearly fifty percent of all home purchases made with cash in the 3rd quarter of 2013 in the US are acquired by private equity and hedge funds.
All the while, inflation is considered tame by mainstream consensus. Basically every major economic data point or indicator is so completely manipulated that there is no wonder that most investors cannot see the true state of risk.
Gold and silver continue to suffer from “painted-tape syndrome”. This is a situation in which overnight sell orders have routinely broken the CME trading platform on at least three occasions in the previous 6 months. These moves occur surrounding zero economic or financial developments.
Recently, the US Census Bureau has become embroiled with scandal. Among such scandal is that, as long suspected, the data collected for the all important unemployment rate was found to be grossly manipulated around the last presidential election.
We are at the critical juncture where the population is split mainly between the unknowing and those whose paycheck depends on not knowing. The rest shake their heads and prepare for the worst.
We Have Been Here Before
History repeats in large cycles. The relatively short interval of these cheap credit drive super cycles is evidence that the system is now spinning out of control.
While the alternative media has long pointed out the unsustainability of the current world financial system, we are now witnessing the likes of very carefully orchestrated, albeit political, posturing. Such posturing takes the form of warnings coming from some of the larger investment firms and institutions.
The fact that the larger voices document their positions in this way could be an early sign of the end of confidence.
The Inflection Point
We are going to hit the monetization inflection point at some point soon – if we haven’t already. The likely trigger could be indirect; it could even be something small. A bank failure or crisis in China (happening now) or a smaller conflict will be enough to push confidence over the edge.
The conduit for money velocity will be the Treasury, via the Federal Reserve. Government spending on its own will bid up prices for its own economic and political survival.
It is harrowing that modern systems, hopelessly lacking in redundancy and yet working on the surface, are treading on so much fragility.
All hyperinflations hinged on the budget deficit point of no return, where more than 50% of annual deficits are monetized directly or half spending more than half of what was collected. The Obama administration’s recent budget requests contain $2.902 trillion in receipts and $3.803 trillion in outlays for a deficit of $901 billion, or around 24% of government spending.
The closer we get, the more important it is to hold various assets as insurance – precious metals being an obvious choice – high on the list.
Many regard the risk of inflation as low, since the Fed’s money distribution or credit mechanism is limited by how the banks decide to lend. While credit worthy businesses and consumers are still de-leveraging, the transmission mechanism will eventually come. This will occur, for the most part, thanks to the Treasury.
So then how can the Fed push money into the economy?
The government has no real limit on the amount they can borrow and spend. They have a debt limit but they increase it any time they get close – so it is not a real limit.
Unfunded liabilities, without taking into account the ongoing dollar debasement, will be a giant portion of future budget deficit. This government deficit spending is financed by the central bank making new money; it is the real source of inflation.
Even though the Fed is making lots of money, the banks are just hoarding the funds so that there is no visible inflation.
The Fed is making money and loaning it to the banks. The banks then use it to buy Treasuries or earn interest from the Fed on their excess reserves. In both of these instances, the money is out of circulation in order for the banks to earn interest.
And at some point, the banks will be able to earn higher interest by loaning to companies and people who will, in turn, distribute the money into general circulation. Then they will redeploy their excess reserves and the money from Treasuries as they come due.
It is estimated that the US has already spent more than $37 trillion dollars over the last few years.
ZeroHedge summarized recently:
In just the first 9 months of 2013, DM countries have injected $1 trillion in liquidity sourced exclusively by central banks; EMs have injected another $2 trillion driven by bank loan demand.
• The total global M2 is over $66 trillion, growing at an annualized pace of over 6%.
• The amount of excess liquidity, i.e. the infamous “liquidity bubble” in the global fungible system is “the most extreme ever in terms of its magnitude”.
And that’s really all there is to know: the music is playing and everyone has to dance… just don’t ask what happens when the music ends.
While money velocity rates continue to fall (thanks to artificially low interest), there are at least 200 trillion reasons why the Treasury will be forced to open the flood gates.
Contrary to popular assumption, the Fed will get its inflation, along with every other central bank armed with an unbacked currency. But far from the inflation of flawed theory, what they will get is a stampeding heard of rhinoceros.
The establishment is blind to the issue.
Recent Nobel Prize winning economist Eugene Fama has stated on several occasions that either bubbles don’t exist or they have little impact.
“I think most bubbles are 20/20 hindsight,” Fama told Cassidy. When asked to clarify whether he thought bubbles could exist, Fama answered, “They have to be predictable phenomena.”
Incoming Federal Reserve Chairwomen Janet Yellen could not see it and the current Fed Chairman, Ben Bernanke, famously assumed the housing crash would have limited impact.
The Velocity Mechanism
Rising rates caused by the gradual or sudden exit of captive buyers for government debt will leave the FED with very little choice but to print more and more of the deficit; thereby bidding up the prices of everything on its own.
Our monetary system of fiat money was created by a central bank. It is the same as the systems used in more than 100 cases of hyperinflation.
The current monetary system, where the currency is completely fiat, has been tried countless times and documented in more than 100 cases.
In every case, the government simply runs out of bond buyers and the central bank is captured to print the difference. For the most part, the currency is printed to worthlessness and dies.
Future obligations are real promises, regardless of the currency in which they are denominated.
As the government prints more money, the prices for these real world obligations go up. This means they have to print even more, which makes the prices go up further, etc. If the government just had debt, and no deficit for real world obligations, there would be no risk of hyperinflation.
In the end, we will find prices rising. This inevitability will not be the result of consumers bidding up prices using the very limited dollars they hold. Rather, it will be a consequence of the money printed and spent into the economy by the government.
Courtesy: Dr. Jeffrey Lewis
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