For decades after 1971, when Nixon cancelled the US dollar’s link to gold, the dollar’s plunge caused energy prices to skyrocket. Eventually an oil embargo rocked the US by 1973. Inflation soared for the rest of the decade until Paul Volker raised interest rates up to 20% to shock the economy in 1981. Inflation dropped to 4%. The post 1971 period began the 50 year period where the US economy stagnated and debt grew faster than the economy. It still is.
Five decades of trade and budget deficits ballooned thanks to unsound money. All financial markets eventually soared thanks to more easy money but economic and wage growth slowed further leaving more people behind.
Eventually, even that wasn't enough. Interest rates were lowered to zero to further “stimulate” the economy (with more debt) after the financial panic and banking crisis in 2008/09.
Further extremes of debt spending after 2009 and especially during and after Covid triggered inflation that forced the Federal Reserve to finally raise interest rates to 5% which, after 12 years at zero, is today causing yet another banking crisis.
The Financial Panic of 2008
Thereafter, in the developed countries, the emergency measures of zero, negative or extremely low interest rates, and "quantitative easing" have been the norm across the world since then—until last year.
Simultaneously, China was in a position to “save” the world economy by embarking on the most extreme debt-fueled spending spree in world history. They spent like drunken sailors; erecting entire cities with millions of high-rise apartments that remain entirely empty—even today. Building ghost cities and countless other useless and/or uneconomic stuff “saved”the world for a time by stimulating demand for commodities. Chinese debt soared from low levels to “crisis” levels in less than a decade. Unsurprisingly, even they are now struggling financially similar to Japan’s bust.
The decade and more of zero or negative rates in the EU and US eroded of the very foundations of capitalism itself; hurting pension plans, the banking system, savers, insurers and retirees all the while creating stock and bond market bubbles which enriched the already-wealthy and perpetuating an increasing number of "zombie" companies—or those that should have failed. Untold leverage and liquidity built-up throughout all the financial markets due to “free money.”
The rich got fabulously rich as the top 1% and 0.1% who have made trillions in the fraudulent, manipulated and bubbly markets, huge capital gains in housing giving the illusion of economic health in the gov’t statistics. But this masked the economic stagnation for the bottom 80 to 90% of US citizens. Poverty is expanding rapidly in most countries and in the USA. Wealth inequality is back to 1929 levels.
Social unrest is expanding.
Financial Crises Re-Emerge in 2019, Then The Covid Plandemic
Fast forward to the Repo Crisis of September 2019, when multiple financial entities were failing here and/or abroad and were secretly bailed-out/rescued through a vast expansion Central Bank Repos or short term loan money of at least 1/2 Trillion dollars. Read about it in my posts: Rising Risk of Financial and Economic Chaos Part 1 and Rising Risk of Financial and Economic Chaos Part 2.
Then came Covid and disastrous lockdowns. Some $6T of money was created out of thin air and SHOWERED on the population and businesses. Stocks and bonds soared and the rich got richer (of course). MOAR (FAKE) MONEY! Inflation has now soared.
The next generation’s future has been COMPLETLY RUINED. Young people entering the workforce are now unable to afford their own apartment or a house, a car and it’s insurance, a college degree or their own health insurance based on $10 or $15 or even $20 per hour pay. Hell, the only thing they can look forward to is an Uber ride and an I-Phone.
Don’t expect these people to establish homes and have any kids. How can they? There is no future!
Simultaneously, the “Biden Regime” has opened the floodgates of sad-sack brown/black invasion into the US. They’re flooding in with nothing and with nothing to offer. This is just more societal destruction and ruin. Marginalizing the White population is the goal.
The Latest Financial Crisis: Widespread Bank Failures and 'Whack-a-Mole” Bank Rescues
Once it was clear that the US was provoking war with Russia in the Ukraine, Jay Powell raised short term interest rates very quickly as inflation soared. Today short term interest rates are 5% or so. Mortgage rates are 6.5 to 7% and credit card rates are 20+%.
I never thought it would happen, that someone would try to establish sound money like Jay Powell has done. (I’m defining sound money is when the shortest term money earns close to, or at, the rate of inflation.) Maybe Jay Powell is an American hero—after being a zero? From zero to hero?? I don’t know. Or will it be hero back to zero?
Now money market accounts at brokerages yields nearly 5% while checking accounts at banks offer 0.2%. Yes, CDs are offered at higher rates. This has lead to a stampede of money out of bank checking accounts and into brokerage and higher yield accounts. Also, rapidly rising interest rates made the value of existing loans at banks drop, hurting the banks assets. Suddenly banks are going belly-up.
It’s hard to see how The Fed can continue. Most people are assuming that it’ll be back to zero rates soon. I also think so; except inflation is still high and may move higher with all the bank rescue money.
Already, the size of the few outright bank failures exceeds the 2008 bank failures. From Newsmax:
First Republic held $213 billion in assets under management, SVB had $209 billion, and Signature Bank had $110 billion at the end of last year.
By comparison, the 25 banks insured by the Federal Deposit Insurance Corporation (FDIC) that imploded in 2008, had a total of $526 in assets, adjusted for inflation.
That includes Washington Mutual, which held an excessive amount of subprime mortgages.
Of note, the 2008 figure doesn’t include the investment banking giants that crashed, including Lehman Brothers and Bear Stearns. To put the figures in further context, the U.S. banking system had $22.9 trillion in total assets in April 2023, double the $10.8 trillion in total assets in January 2008, Federal Reserve data shows.
Still, the fact that just three failed regional banks held as much as 25 of the biggest banking giants of 2008 underlines the brutal hit the U.S. banking sector has taken this year.
More failures are coming. And the TBTF Wall Street banks are getting bigger and bigger as more small and medium-sized banks fail. The rich are getting even richer.
Mopping up bank failures is just the latest excuse to create even MOAR money. Doug Nolan explains in his 5/20 post “Too Loose” all the various emergency money rescues:
Acute fragility ensures rapid central bank crisis management operations, including the Bank of England in September 2022 and the Fed’s $400 billion liquidity support in March 2023. And let’s not forget the herculean FHLB crisis response. In the year up to March 31, 2023, FHLB Total Assets surged $802 billion, or 105%, to a record $1.564 TN. Advances (loans to member institutions) jumped $670 billion y-o-y, or 179%, to $1.045 TN.
But FHLB liquidity measures went beyond advances. “Repo” assets gained $56.5 billion, or 83%, to $124 billion. “Federal Funds Sold” jumped 52% y-o-y to $87 billion.
This is extraordinary, systemically impactful liquidity creation.
Even I wasn’t aware of some of these measures. The result is that financial conditions are too loose. Inflation and asset inflation will very likely revive. Rates are not tight enough in Europe at 3.75% when inflation is 7%. Even in the US, 5% money is probably not tight enough given the printing pressses are going hard.
In other words, US financial conditions are TOO LOOSE. Inflation will not come down unless markets collapse, then it’ll REALLY BE MOAR MONEY to the moon!!
Investors are confident of being rescued. They are probably right. Buy US Equities (with a stop loss)? Buy Gold? Buy Everything?
World Debt Rapidly Expands Until……
Meanwhile world debt continues to surge. From the same post by Doug Nolan this morning:
“Total debt of emerging markets hit a fresh record high of over $100 trillion (or 250% of GDP) – up from $75 trillion in 2019.”
“At close to $305 trillion, global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue increasing rapidly.”
In their efforts to “save” the world economy, central banks have created a monster: a dysfunctional, extremely-speculative and highly-leveraged financial sector. Higher interest rates in the US is already causing large dislocations and bank failures.
The European banks, including all of their biggest banks, are teetering on the edge (and have been for a long time). A financial crisis has already been underway there and Governments keep propping up their bank zombies like Credit Suisse and Deutsche Bank. Whack-a-Mole.
When does the Whack-a-Mole “can-kicking” come to an endpoint?
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