THE GLOBAL FINANCIAL
Kristie Pelletier and Michael S. Coffman, Ph.D
September 7, 2013
Part IV—The Bond Market Crash
The jobless nature of the recovery is particularly unsettling. In June, the government's Household Survey reported that since the start of the year, the number of people with jobs increased by 753,000 – but there are jobs and then there are "jobs." No fewer than 557,000 of these positions were only part-time… In June full time jobs declined by 240,000 while part-time jobs soared by 360,000. Mort Zuckerman, Wall Street Journal, July 15, 2012
Zuckerman, chairman and editor in chief of U.S. News & World Report, titled his article: “A Jobless Recovery Is a Phony Recovery.” While the Obama administration and mainstream media would have us believe that we are in recovery and things will continue to get better – just trust the Obama administration. That’s exactly what the American people did in the 2012 elections; in spite of overwhelming evidence that President Obama didn’t have clue how to get the recovery on track. He still clings tenaciously to his progressive ideology that Keynesian economics of big government and even higher spending will solve the problems. Reality, as noted above, does not support that. In fact, Obama’s policies are making the these problemsworse.Much worse.
The only person in a position of power that has even less of an idea of how to fix the stumbling economy is Ben Bernanke, the Chairman of the Federal Reserve (Fed). Bernanke has put the U.S. Keynesian economic policy on steroids – Quantitative Easing (QE). Quantitative Easing is a socially acceptable, but misleading term for monetizing debt – the printing of money out of thin air. The Fed itself buys the money it prints and holds the U.S. taxpayer liable to repay it. It’s a pretty slick deal if you happen to be one of the 500 or so private stockholders of the Fed; print money for nothing, buy it, and then have the American taxpayers pay you back – if the system doesn’t collapse first.
Quantitative Easing – The Rich Get Richer
The primary reason inflation doesn’t show up in the government statistics (discussed in Part III of the Financial Death Spiral series) is that the Fed has been loaning all those freshly printed dollars from QE to the big banks for almost no interest. The banks, in turn, primarily reinvest it back into the Fed where they get a small (0.25 percent) return on their own cost of borrowing from the Fed in the first place. Or, the banks lend it to Wall Street investors at low interest rates who invest it in the stock market; driving the market to dizzying heights. It is money chasing money. It never reaches Main Street where you and I live.
There is a reason for this as Steve Forbes explains: "We all know what price controls (rent controls) do to the housing market,… they destroy it. The Fed has destroyed the credit markets for small and medium-sized businesses or certainly warped it in a very major way." If QE credit was loosened to Main Street, we would have higher inflation, but unlikely hyperinflation.
However, QE does allow the banks and Wall Street to get richer. Much richer.As noted in Part III of the Financial Death Spiral series, it will eventually come out of the middle class’s hide. In the meantime the rich get richer and the middle class gets decimated. How? Almost all of the Obama recovery has been in funny money; first in the Stimulus Plan and deficit spending, and then in the three QE’s – the printing of money out of thin air (monetization).
While the dollar fluctuated wildly during QE 1&2, the price of gold, silver and other precious metals skyrocketed. Gold soared briefly to $1800 per ounce as investors attempted to protect themselves from the expected high inflation resulting from the QE’s. The stock market also skyrocketed, profiting those who dared ride what seemed to be a risky wave. Still, there was no (obvious) inflation, at least not as measured by the CPI (Consumer Price Index). However, inflation did peak briefly at 13 percent in 2009 when using the 1980 method of measuring it.
James Rickards (economist and security advisor to the Pentagon, CIA and the Director of National Security), billionaire Steve Forbes (Forbes Media), Bob Wiedemer (economist and author of NYT Best-Seller Aftershock), and Sean Hyman (global currency analyst and advisor) report that about $4 trillion of funny money flooded the global markets (yes, foreign banks joined the feast – mostly to bail out the EU banks) and weakened the U.S. dollar by as much as 27 percent. Understand that means the average American became a victim of the Fed’s covert eradication of over a quarter of the value of their life savings and investments.
By the time the Fed announced QE3, investors had figured out that there was not going to be any inflation. They began selling their gold to buy stocks in late 2012.Gold has no earning (dividend) potential and is just a hedge against inflation. By July 2013, gold had plummeted to $1200 an ounce. What these investors had figured out was that all the funny money created by the QE’s was winding up in bank or stock market assets, not in hard capital assets like machinery, new factories and new production that create jobs.
That’s why the stock market is soaring to new records while no new real jobs are being created on Main Street and why the Obama “recovery” has been the slowest in history. The only real capital-based business expansion during the Obama years has been in oil and natural gas expansion, and Obama is doing everything he can to shut that down. Everything else in the economy is a house of cards dependent on QE3 continuing.
The Fed’s funny money flowing into the stock market also explains why, when Fed Chairman Ben Bernanke announced in April, 2013 that the Fed might start slowing down (“tapering”) the QE3 printing presses, the market started to plummet. Bernanke immediately backtracked on his taper proclamation which stabilized the market temporarily. However, the event graphically showed to anyone who wanted to look, that the Obama recovery is false and is totally dependent on the Fed keeping the printing presses running at full steam and the market recovered.
By the week of August 5, 2013, Fed officials began to signal that the Fed would start tapering at the September Board meeting. The various Wall Street markets began to fluctuate wildly immediately; signally what is called the “Hindenburg Omen.” According to Wikipedia, “the Hindenburg Omen is a combination of technical factors that attempt to measure the health of the NYSE, and by extension, the stock market as a whole. The goal of the indicator is to signal increased probability of a stock market crash.”
Although the Hindenburg Omen is not perfect, it does suggest that if the Fed really does institute tapering, it could precipitate the much-feared economic disaster. That is why gold started shooting up to $1340 an ounce from August 6-12 before hesitating. If the Fed backs down, as is likely, it will suggest tapering is impossible, and continue feeding its QE addition. It is also likely that Fed Chairman Ben Bernanke will want to retire at the end of 2013 with a strong market, not during a market crash. It will seem the Fed will have “saved” Wall Street, but instead will have merely delaying the day of reckoning.
Asset purchase programs like QE2 appear to have, at best, moderate effects on economic growth and inflation... Moreover, the magnitude of [large scale asset purchases] effects depends greatly on expectations for interest rate policy… This suggests that communication about the beginning of federal funds rate increases will have stronger effects than guidance about the end of asset purchases. This suggests that communication about the beginning of federal funds rate increases will have stronger effects than guidance about the end of asset purchases. (Italics added)
It appears the San Francisco Fed now understands that QE has had little effect on gross domestic product. Instead, it has been the Wall Street investor who has hung on to (and still does) every word coming out of the New York Fed. The August 12th announcement clearly shows how much the Fed’s “communication” is affecting Wall Street. The Dow Jones Industrial plummeted 675 points from on August 12 (15451points) to August 27 (14776). Only 176 points of the 675drop was because of the threat the U.S. would attack Syria following Syrian President Assad’s likely gassing of his own people.
The Fed must gradually announce a tapering if they hope to avoid a crash. If the Fed hinting continues, investors in the stock market should think about getting out of the market and back into gold or other precious metal. It is likely gold and silver has bottomed out and will make a good long-term (and probably short-term) investment against inflation. Gold has continued its recovery since it bottomed at $1200 an ounce on June 28 to1400 on August 28, 2013, a 17 percent increase. The rebound for Silver has been even more dramatic; from its bottom of $18.50an ounce June 27 to $24.70 on August 28, 2013, a 34 percent increase.
Every nation who has tried to print their way out of debt and recession/depression is finding that the printing press is like crack addiction, once you start it, it becomes an addiction that grips the nation by the throat. Economist David McAlvany of McAlvany Financial Group claims the QE3 is “a little like a crack addict waiting for news from his source.” He claims the real market would be 30 to 40 percent lower without QE3. That would drop the Dow from 15,500 (August 9, 2013) to between 9,000 and 11,800 and send major shock waves through the economy.
The Fed MUST keep stoking QE3. It cannot be “tapered” without exposing the major debasement (destruction of the value) of the U.S. currency.It would be terrifying to Americans. Another name for the debasement of a nation’s currency is inflation. They are two sides of the same coin. If the Third Currency War discussed in Part II of the Financial Death Spiral series significantly debauched the U.S. dollar, and/or China successfully destroyed the U.S. dollar as the world’s reserve currency, the dollar would approach zero and there would not be inflation, but by definition, hyperinflation.
Will that happen? No one knows. As limp as our economy is today, it has lasted a lot longer than many analysts thought it would. But the Bush administration’s Afghanistan and Iraq wars and Obama’s deficit spending on steroids, his currency war and his Quantitative Easing has made hyperinflation scenario increasingly likely to happen. Pray it doesn’t.
Obama’s and the Fed’s machinations are even more diabolical than at first glance. While testifying before Congress, James Rickards, advisor to the Pentagon, CIA, and Director of National Security warned, “Zero-rate policy [of the Fed] deprives retirees of income and depletes their net worth through inflation. This lost purchasing power exceeds $400 billion per year. And cumulatively exceeds $1 trillion.” Along with the use of false accounting in calculating the Consumer Price Index, this will eventually put retirees into the poor house. Even harder hit are the poor themselves. Obama’s and the progressives’ feigned concern for the middle class, retirees, and the poor is an absolute farce. He is destroying these people, and in doing so, the greatest nation in the history of earth.
The Collapse of the Bond Markets
It is already starting to happen. Williams isn’t the only one warning of the looming financial catastrophe. Almost every financial advisor with an international perspective, who doesn’t have a stake in supporting the official line, warns the same thing. Porter Stansberry of Stansberry Research, has demonstrated a sterling ability to predict where the stock/bond markets and the economy are going to go in the future. He warns, “the 2009-2013 bull market in financial assets (stocks and bonds) and real estate was created by the reckless policies of central banks around the world. These banks have been creating immense new amounts of fiat, paper money and using these funds to buy trillions of dollars' worth of financial assets (stocks and bonds). This is a paper pyramid of wealth. It will soon crumble.”
Back in May, 2013, Stansberry warned that shaky companies were issuing high-risk “junk” bonds at record low returns. Junk bonds usually have a high yield to attract investors to buy them. They have never been less than 5 percent, but in May and into early summer investors were so desperate to spend the Fed’s funny money that they were throwing money at thigh-risk bonds at around a 3 percent return. As discussed above, that’s less than the real inflation rate.
Stansberry is so confident that the bond market will collapse, he titled his May 10th, 2013 advisory: “Why there’s a 100% chance the bond market collapses.” By June, he was reporting that “issuers of these [junk bond] debts have also succeeded in placing clauses in the contracts that allow them to repay investors with additional debt securities rather than cash.” That’s insane in the current market. So, when the bond market crashes, warns Stansberry, “it will be the largest destruction of wealth in history.” Bill Gross, who is known on Wall Street as "the Bond King," said on May 10 this year he believed "the 30-yr secular bull market in bonds" had likely ended at the end of April.
If you don’t think it can get worse, it can. A CBO report in May that the $12 trillion of the $17 trillion National Debt is owed to domestic and foreign investors is almost 90 percent higher than at the onset of the financial crisis in 2008. Public debt is now 75 percent of GDP, up from 36 percent in 2007 and the highest level since 1950. That doesn’t include the debt owed to SS and other government accounts. If Congress reverses the automatic spending cuts forced through by sequestration on March 1, the CBO projects the public debt will raise to 83 percent.
About $2 trillion of our $17 trillion national debt is held by China and Japan, both of which are in serious economic trouble. (See Part II of the Financial Death Spiral series) They are no longer buying as much of our debt as they used to, in part because of their own potential problems and in part because they are not so foolish as to buy U.S. debt that is increasingly likely to be repaid in inflated or debauched dollars. Instead, China at least is buying gold and gold mines in a very aggressive attempt to destroy the U.S. dollar as the world’s reserve currency. This is extremely serious as discussed in Part I of the Financial Death Spiral series. If China is successful, and China is making serious inroads, it will mean the end of the U.S. as we know it.
The rest of the world is still buying U.S. dollars. As bad as the currency is, the U.S. dollar is still the least of all bad investment opportunities. This explains why bondholders bought into the dollar, not the stock market, when they fled bonds this spring. That suggests that while the stock market is soaring, the confidence in the market is not high – for obvious reasons discussed through the Financial Death Spiral series. The banks love it though because they make a commission on every currency exchange. The massive amount of government currency manipulation – paired with the potential for major price swings that is already happening – is making traders eager to jump in and make some money. Again, its money chasing money and does little to help Main Street.
However, even the dollar may not be a safe haven in the long run. Williams warns: “The U.S. dollar remains highly vulnerable to massive, panicked selling, at any time, with little or no warning. ”Bill Gross, who knows as much as anyone about bonds and the dollar was quoted by Bloomberg: “We've told all of our clients that if you only had one idea, one investment, it would be to buy an investment in a non-dollar currency. That should be on top of the list."
The financial world is literally coming apart at the seams. That doesn’t instill any confidence in the future.The U.S. Social Security Fund (SS) owns $2.7 trillion of the national debt. However, the annual cost of SS now exceeds the annual interest it gets from the U.S. Treasuries (U.S. debt), so it must sell its share of U.S. Treasuries when they mature in order to pay SS benefits.
In early 2012 the SS Trustees projected that SS will have run out of funds (become insolvent) by 2035. By May of 2013 the SS Trustees projected insolvency to be as early as 2024 because of projected deficit spending by the federal government and the Fed’s reckless QE3. So, who is buying most of the debt the U.S. sells every year? The Fed. Who is the Fed? Certainly not the U.S. Government. It is a few dozen U.S. and European families. They too are profiting at our expense because they are getting interest (albeit very low today) on every dollar they print out of thin air at no cost to them.
Why would these ultra-rich families be willing to loan the U.S. trillions of dollars at almost no return? Think about it. The Fed prints the trillions of dollars (or creates it digitally) at no cost. The Fed’s charter holds the American people responsible for every dollar lost. If the economy crashes, and the dollar becomes essentially worthless, the Fed will not be out that money. The citizens will. Since there is no way we can repay it, we will be at the mercy of the Fed. Or more accurately, to the elite families and individuals who own the Fed. Will they force America into an agreement we cannot afford to turn down? Many analysts believe this global cartel will use this increasingly probable catastrophe to create a world government with only very limited civil rights. Hopefully, this will not happen. Time will tell.
The Beginning of the End
Is your head beginning to spin? It gets worse yet again. U.S. Treasury bonds have begun to fall for the first time since Europe’s debt crisis in 2011. This is sending the yield of the U.S. bonds higher. The yield (the interest the U.S. pays to the buyers of the bonds, including the Fed), on U.S. Treasury’s 10-year nominal Treasury has skyrocketed from about 1.5 percent from August 2012 to 2.9 percent in August 2013 and still climbing. For every increase in 1 percent interest adds $170 billion to our $17 trillion debt – every year!
Stansberry cites the ironclad, but not so obvious truth: “But what will happen if the average real interest rate ends up being just 4% annually, and we pay it off over 30 years like a mortgage? Incredibly, we'll spend $34.3 trillion to simply repay what we owe right now. If the rate ends up being 6%, we'll spend $43.1 trillion. ”You get the point. Over time, our debt will eat us alive.
Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University warns that by 2023, the federal government is expected to spend $823 billion a year on interest payments, up from $223 billion today. Interest payments plus entitlement programs such as Social Security, Medicare, and Medicaid will account for 75 percent of the federal budget, and other programs will "gradually be squeezed out."
Even as the nation gears up for another debt cap crisis this summer, progressive liberals are demanding the debt cap be raised and spending increased. Either they ideologically believe deficit spending and debt is irrelevant, they want the U.S. economy to crash, or they are just plain stupid. There are no other alternatives.
Remember in the first paragraph of Part III, Louis Basenese said that increasing yields (interest rates) on bonds was a good thing portending better times. Do you think that now? Paul Krugman, the New York Times whiz economist does one even better. In the January 7, 2013 column he said:
“There's a legal loophole allowing the Treasury to mint platinum coins in any denomination the secretary chooses. Yes, it was intended to allow commemorative collector's items – but that's not what the letter of the law says. And by minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling – while doing no economic harm at all.”
This goes even beyond Keynesian economics and into the twilight zone of a total progressive disconnect from reality. It is positively frightening to realize this kind of thinking drives the entire progressive and Obama economic thinking.
Sovereign Growth Funds
Then there are Sovereign Growth Funds. Sovereign Growth Funds are an investment fund that's controlled by a government, or central bank. Today there are about $5 trillion worth in the world. Asia has 40 percent of them, while the Mideast has 35 percent. Europe has 17 percent (although the European troubles are threatening them) and North America has a mere 3 percent. To this mix, in 2012 China and Russia decided to create a joint Sovereign Wealth Fund so they could share intelligence with one another. And this occurred while one of Russia's Sovereign Wealth Funds was buying up U.S. technology companies, including one that focuses on bandwidth-intensive, high-speed communications networks.
Without putting up a fight in 2012, Washington, D.C. gave China access to some of the most sensitive financial intelligence our country possesses. The White House and Congress also didn't raise a finger in protest when the Fed green lighted three of China's largest banks opening up branches in the U.S. Warns Rickards: “That gives them access to the Federal Reserve's money transfer system — Fed Wire. It's critical to running America's finances. China is in our network, in the plumbing. And it's much easier to attack an adversary from the inside than the outside. Especially, when your Russian ally is buying up U.S. tech companies with their Sovereign Wealth Fund.” Remember, China is already suspected of attacking our financial infrastructure earlier this year.”
Will China use its gold and ability to tap into our financial network to attack the U.S.? Rickards has actually run a series of War Games for the Pentagon and CIA; from Israel attacking Iran to China just attacking the U.S. financial system directly. None end well. Most result in a complete meltdown of the entire global financial system. And the Obama administration allowed the U.S. and the world to be put into this situation. Pray it doesn’t happen.
This isn’t just a few economists and financial advisors saying the U.S. is in big trouble. Major, highly respected, people like Bill Gross, founder managing director and Co-CIO of PIMCO; billionaire Jim Rogers; billionaire Sam Zell; and dozens more have all proclaimed the same warning. Then there is billionaire Steve Forbes, James Rickards, Bob Wiedemer, and Sean Hyman who produced the video “Currency Wars.” “Currency Wars” reveals how the scenarios discussed in this series of articles have actually “been played out in war games held by the Pentagon, at classified facilities.” No one should take this lightly.
As we discussed in Parts I and III, the only other possible way out of this besides rampant inflation, even hyperinflation, is to slash the size of government, federal spending, unleash the free market by slashing mind-numbing regulations and tighten our belts for more than a few years. Steve Forbes of Forbes Media says to follow President Reagans’ lead. In 1981, Reagan promised the people that: “The concept [of] a free market unencumbered by barriers, government regulation and taxation will create the most growth-friendly economic environment was simple but radical.”
The liberal progressives in Reagan’s day howled in fury the same as they do today when their Keynesian theories are challenged. The economy in 1981 had double digit inflation and was limping along following the disastrous Carter administration. Like today, the progressives demanded that Reagan continue Carter’s Keynesian economic model despite its miserable failure.
The progressive liberals made every effort to derail the Reagan plan. Reagan said no, and with the support of a lot of blue dog democrats, the Economic Recovery Tax Act was passed reducing taxes for everyone and the economy took off like a rocket; a recovery that lasted, with ups and downs, until 2007. Unfortunately, Reagan only had marginal success in slashing regulations and the size and scope of the federal government. If he had, the recovery would have been even more spectacular.
Tragically, Obama today is following the Carter plan and doing exactly the opposite of Reagan’s plan. Our economy is suffering the same malaise as it did under Carter. The big difference today is that we no longer have the same depth and resilience to the economy that Carter had. Reagan used that underlying strength to jump start the economy within two years. Today’s debt and monetization policies have hollowed out any economic strength we did have. Obama’s destruction is obviously deliberate.
As we head into this potential disaster, Stansberry adds this observation: “It's no coincidence America's massive NSA spying program, which clearly violates the Fourth Amendment... the targeting of conservative groups by the IRS... or the harassment of bona fide journalists by the Justice Department, all occurred during this period of economic upheaval. These are the political policies of a bankrupt and desperate State."
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Most alarming is the purchase by the federal government (non-military) of over 1.6 billion rounds of ammunition – enough for well over 20 years of a war like Iraq and Afghanistan. Most of the ammunition went to Homeland Security, but every department seemed to get an allocation. Why? The federal government refuses to say. This is very troubling when DHS claims tea party and other “right wing” advocates, including veterans might be terrorists. Military training materials even call America’s Founding Fathers “extremists”while President Obama has forced the designation of “Workplace Violence” rather than terrorism, even though Major Nidal Hasan was directly linked to Islamic terrorists and screamed Allahu Akhbar (God is Great!) as he slaughtered 13 people and wounded 40 others. He even apologized to his fellow Islamists for not killing more Americans. Average Americans have become the enemy of the government.
It is the result of progressive madness, just as it has been for the past 400 years. There is a time-tested Proverb (14:12) that sums this up succinctly: “There is a way that seems right to a man, but its end is the way of death.” That sums up progressivism perfectly as will be discussed in Part VII of the Financial Death Spiral series. As a nation we have rejected God (remember the Democrats voted against God three times in their 2012 National Convention). God doesn’t even have to judge us. We are doing it to ourselves.
Part V will discuss why the progressive-based Keynesian economics has and will always destroy jobs and the economy, while leaving bitterness, hatred and divisiveness in its wake. Part VI explains why Austrian economics works to bring wealth creation and harmony.