- I've been warning of this for well over two years. My
primary warnings were:
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- 1) That 2008 was just a warm-up
- 2) That the REAL Crisis had yet to unfold
- 3) That the REAL Crisis would make 2008
look like a picnic
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- Well, the period I've been warning of is now here. What's
happening right now is not just a market crash, bear market,
deflation, or any other item related to just one asset class.
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- Instead, this is a collapse of the entire US monetary
and political system and the mentality of spending one's way to wealth.
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- For 80+ years, the US has operated under a crony capitalist
system in which politicians dole out political and economic favors to the
chosen few whose bribes/donations funded their campaigns.
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- This system was aided and abetted by the US Federal Reserve,
which dealt with any and all economic issues by printing more money. Whether
it was the Asian Crisis, Long Term Capital Management, or the 2008 Crash,
the Fed dealt with the issue by opening the floodgates and flooding the
financial system with liquidity.
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- Aside from making moral hazard (the notion that those
large firms who screwed up were never actually allowed to fail) the bedrock
of the financial system, the Fed also blew a credit bubble which in turn
funded bubbles in virtually every asset class: bonds, stocks, real estate,
emerging markets, even some commodities.
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- Indeed, the vast majority of US economic growth over
the last 40 years has been fueled by the Fed's loose money policies. Bill
King, an analyst and investor whom I admire, shared the below chart with
me a while back. It charts US GDP growth in nominal terms (the dark blue
line), the performance of the Dow Jones Industrial Average (the black line),
and REAL GDP growth or growth that accounts for inflation (the light blue
line).
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- As you can see, when we account for inflation, the US
economic "miracle" of the last 30 years is in fact not all that
miraculous. Take away easy credit and Fed funny money and the US GDP has
barely grown at all since the '70s
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- When your entire financial system is built on debt eventually
you hit a brick wall. We did this in 2008. The Fed barely held
the system together by going "all in" and funneling over $11
trillion in bailouts, backstopping the major US banks, and transferring
north of $2 trillion in garbage debt to the public's balance sheet (these
are just the moves we know about).
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- This effort has now failed as the world collectively
realizes that the Fed cannot hold the system together. This began
to become clear when QE 2 spent $600 billion and the US got at mostthree
months' worth of improved economic data (while inflation exploded throughout
the global economy, leading to riots, coups, and more).
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- In simple terms, we've now entered the Real Crisis, the
END GAME, for our current monetary system. Before the dust settles on this
mess, the US and its political, economic, monetary structure will look
very very different.
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- However, before we get there, we will see riots, civil
unrest, possibly martial law, for certain a Government shutdown, bank holidays,
a debt default/ restructuring, the re-instatement of the Gold standard
or something like it (possibly a basket of commodities), food shortages,
and more.
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- We will also see trade wars, possibly another World War,
a temporary backlash against globalization, a de-consolidation or fragmentation
of corporate America, and other items.
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