One of several known triggers from within one of the several current economic bubbles will cause a particular submarket to collapse, which will threaten all markets by causing a panic, and most likely cause a painful collapse of the greater economy if left unrestrained. At which time, the private bankers at the Federal Reserve will loan trillions of dollars, with interest, to the Government to backstop the slide before a complete and devastating economic collapse occurs….unless, for some reason, the global economy has decided to, or moved away from, the U.S. dollar as the reserve currency and/or ceases to continue loaning the U.S. money, in which case the Federal Reserve will not be able to prevent a more painful and severe collapse. However, it is not in the best interests, at least in the short term, for other major economies to allow the U.S. to collapse, therefore they will most likely continue to support the U.S. dollar and U.S. debt until they cannot.
At the point where the other major economies are unwilling (not likely), or unable to continue supporting U.S. debt, and the Government with the private bankers of the Federal Reserve is unable to stop the economic collapse, Americans will be forced to decide whether to allow the free market to self-correct the pervasive malinvestment that has been injected throughout the economy by the Government and the private bankers at the Federal Reserve in their repeatedly failed efforts to prop up the economy, or to grant the Government significant additional authority to take extreme measures to prop up the economy again using any means necessary, some of which will be considered severe and draconian but will be implemented in the name of “…abandoning free market principles in order to save the free market system” – rather than actually letting the free market system solve the problem.
Americans will inevitably allow the Government to engage in these extreme measures out of fear and a lack of understanding in economics, and this cycle will repeat, until it can’t.
“If something cannot go on forever, it will stop.”
~Herbert Stein, What I Think: Essays on Economics, Politics and Life
Q: Can the propping up of the U.S economy using debt go on forever?
A: Does debt matter? If issuing debt can go on forever, then yes. If it cannot, then it will stop.
When it will stop, nobody knows, but it will stop. So the prudent move is to prepare yourself for it to stop.
It is a fact that the government, including The Federal Reserve (the real Governing body), is never going to tell you that a market collapse is imminent; for two reasons. First, they could inadvertently cause the collapse by stampeding the herd with such dire prognostications (via the self-fulfilling prophecy), and second, because they may actually believe in Keynesian economic theory (or only believe it in insofaras it happens to be the theory that gives Government more control), which blames everything bad on unknowable, unseeable, unpredictable external factors the Government claims they couldn’t possibly have anticipated. Suffice to say, you’ll get no help from the people in charge.
Therefore, it is squarely on you to decide if the market is going to collapse, when it will collapse, what to do in preparation, and what to do upon its execution. To do that, we must also decide if debt matters, because beneath it all, fiat currency and the debt it generates is the fuel that drives everything we are experiencing today and the cause of tomorrows painful reality.
And let’s be honest…we are $21 trillion in debt. That means we, as working citizens, owe Citigroup, Goldman Sachs, Credit Suisse, JP Morgan, Merrill Lynch (the same companies that we have our credit cards with) and the other private banks that have loaned our Government money to provide “free” services to everyone. So who really has control of this country? The indebted congressmen and women that take out loans from Citibank and JP Morgan against your good credit (paycheck) to provide Americans with “free” stuff in exchange for their votes, or the private banks that decide whether to make those loans to Congress or not? Now you know who is really in charge.
“Let us control the money of a country, and we care not who makes its laws.”
KEYNESIAN vs AUSTRIAN ECONOMICS
I believe the market is going to collapse, and knew it was going to collapse last time, because I believe in and follow the Austrian Business Cycle Theory (Austrian Economics).
The Austrian business cycle theory (ABCT) is an economic theory developed by the Austrian School of economics about how business cycles occur. The theory views business cycles as the consequence of excessive growth in bank credit due to artificially low interest rates set by a central bank or fractional reserve banks.
Unlike Keynesian economic theory, ABCT economists, and supporters such as myself, don’t pretend that economic booms and busts are random, unpredictable events. The Government’s rejection of ABCT and belief in Keynesian economics is no accident, as Keynesianism not only empowers government with more control and wealth, it also excuses our government from the naturally occurring devastation that such control and wealth causes.
Tragically, individuals seem to understand and accept the need for skepticism when a mechanic exaggerates the need for maintenance on their car in order to sell more parts and labor, but when it comes to a Government adopting an economic theory that works directly for the benefit of that Government, a clear conflict of interest, while simultaneously rejecting an economic theory that empowers the individual at the expense of that Government, that dose of healthy American skepticism vanishes. This is unfortunate, and ultimately why we are where we are today.
So in 2005, while the race (and pressure) was on to buy ever more expensive housing all around me, I sought out an answer in economics (ABCT) while considering if I should join the stampede. Stumbling along the internet, I discovered an old paper by economist Robert Schiller, written originally on a typewriter, that I paid $3.00 for from the Yale archive. The paper outlined the predictable, cyclical nature of housing booms, and busts, and their causes – extremely useful knowledge to have and something that would have helped everyone suck all the mystery out of why housing was getting so expensive back then – and oddly something we were never taught in school (useless education system).
The housing boom at that time was several orders of magnitude larger than every bust that happened in the 80 years preceding it, which occurred roughly every decade. It was clear that a bust was imminent, even while Alan Greenspan and so many politicians and Government wonks were telling us everything was just fine. Now I knew the what, and the why, but what about the when?
Knowing there was a bubble, the key was to find the pin that was going to pop it. In this case, it was clear based on dozens of articles and Austrian economists (Schiff, Rickards, Sowell) that were light years ahead of anyone on CNN or writing in the WSJ or even in The Economist, that the loans being made by the banks were simply unsustainable, and that eventually those individuals would begin defaulting on those loans and that such defaults would be material enough to collapse the entire housing market, which, being such a large component of the overall market economy, would trigger a much broader, larger collapse (see my other posts on this).
Based on this information, we decided to wait to buy a house and moved instead to a new, more comfortable apartment, new construction, a corner carriage unit and we saved our money waiting for the crash.
After the crash, we bought a house in 2011 at the bottom of the market, that is now worth roughly twice what we paid (albeit only because we are in another housing bubble).
As an anecdote of the animal sprits raging around us while we were waiting for the
crash, I remember being told of a conversation my wife was having with her friends at lunch. Some of them were buying houses or talking about friends
that had just bought, and they asked her when we were buying ours. She said that her husband believed a market collapse was coming, so we were waiting. One of the women responded, “Oh, he’s one of those.”
The same factors that created the housing boom and economic bust are at work again, but the difference is, they’ve been at work for a decade – and no bust. Why? I suggest there are two reasons…
CENTRAL BANK COLLUSION
First, the private central banks that make up our Federal Reserve are the same private banks that make up many of the central banks around the world (it doesn’t need to be all of them, only the major nations in the global economy). And where they are not the same, they are cut from the same cloth, and there is more wealth to be had by all in collusion than in maintaining their independence.
By this token, as long as none of the central banks break ranks, it is possible for all of them to work together in managing a global economic monetary policy without actually creating a global currency. They each manage their own national fiat currency, independently, but in the same manner, collaboratively – and this yields the same result as if there was only one global currency controlled by one, or a very few, private bankers (and none of this would have been possible had Nixon not removed the U.S. from the gold standard in 1971, as he said then “temporarily”).
WHERE’s THE PIN TO POP THIS BUBBLE?
Second, the pin is not as obvious as before.
The pin was painfully obvious in the last market crash. You simply can’t loan hundreds of thousands of dollars to people with no jobs so they can buy a house and expect that to end well. It was no secret. Simply use Google, and you will find hundreds of articles prior to the crash about the massive increase in no-doc loans, NINJA loans, interest-only loans…all of them fueling a massive bubble in home pricing, and all of them completely unsustainable. Which really makes one wonder, how can a guy like me see all of this coming, and not a highly paid professional banking economist at the Federal Reserve like Alan Greenspan (hint: I’m not smarter than him – he knew what I knew, and that should scare you-think about what that means regarding what your government thinks of its citizens).
There are, in fact, many pins floating around today, almost all caused by the government and the private banks at the Federal Reserve; the student loan bubble, another housing bubble, criminally mismanaged and underfunded public employee pension funds, the bond bubble, the stock market bubble and the national debt.
But which one will be the one to collapse the entire system? And when?
The collapse in 2007 was due to the reality of loaning money to people who can’t pay it back. It was an objective, predictable, structural default. Individuals cannot print money to pay bills like the government can with the private bankers of the Federal Reserve and they can’t make laws to bail themselves out. So unlike the magic of Government fiat, individuals are actually subject to the laws of economics, like they are to the laws of physics. The outcome was entirely foreseeable. It was math.
THE STUDENT LOAN PIN
This time, none of the current pins are obvious contenders for a mathematical certainty of failure. Student loans can be forgiven, suspended, restructured, wages garnished. Heck, with a Public Service Loan Forgiveness application (PSLF), Obama gave students a way to forgive all their remaining loan debt if they just work for the government for ten years (private sector employees must still pay the entire loan).
An increase in the number of student loans does not create a shortage in student loans that would drive up the price of a student loan (whereas an increase in home loans lowers the number of homes available for sale, which drives up home prices, basic supply and demand. When a student fails to pay, they are obligated to pay the loan back and it sits on their credit record – but that doesn’t impact anyone else – unlike a squatter in a foreclosed house that can’t go back into inventory and lower prices, or reams of foreclosed homes sitting on the market for years that can’t go back into inventory for sale and lower prices.
The worst a student loan does is create a massive wealth transfer from workers (employed students during and after college) to the banks making the loans instead of that money going into the economy and driving growth (and a reduction in the standard of living for the individual, and their long-term ability to save for a house and retirement, theoretically increasing their dependence on government support in the future (Social Security, Medicare, etc…) which of course, is good news for the Government by creating more citizens dependent on its “free” stuff promises.
THE HOUSING BUBBLE & STOCK MARKET PIN
To understand these pins, we have to understand what created them.
The Private Bankers of The Federal Reserve
Due to the Federal Reserve, a group of private bankers, who have artificially suppressed the interest rate mechanism for a decade, there is no incentive for anyone to save money. Any savings or checking account, or any money market fund or CD that you save part of your paycheck to, will immediately lose a minimum of 1% of its purchasing power every year you leave it there. Why? Because the same Federal Reserve that loans trillions of dollars to the Government, with interest, to pay its bills (the national debt) then flows into the economy, which drives up prices (inflation).
You get screwed by your government three times…first, by having the purchasing power of your savings destroyed by inflation (due to the Federal Reserve loaning trillions to the Government that then flow into the economy). Second, by not being able to save your money anywhere that will protect it from that inflation (due to the Federal Reserve holding down interest rates). Third, by being on the hook as a taxpaying citizen (via higher taxes) to pay back all that money (the national debt) that the government borrowed from the bankers at The Federal Reserve (due to Congress’s endless promises of “free” stuff to voters and the cost of our military industrial complex).
Therefore, to avoid destroying your savings (while trying to do the right thing like saving for retirement or a child’s education fund), everyone is pushing their money into the stock market (i.e., 401ks), and hard assets like housing, to try and gain larger returns on their savings. The result? A massive stock bubble and a massive housing bubble. Either of these bubbles could collapse, and potentially cause a larger economic collapse.
Remember, the stock market is not going up because we have a booming economy, it’s simply being flooded with money, like a water balloon expanding on the end of a running faucet, as every American dumps all their savings into it because there’s no other option that protects them from the Federal Reserve’s inflation.
If ten kids have $10 each to buy the last five ice creams that normally sell for $3, they can bid against each other to a point – $10. They will bid up from $4, then $5 and so on – but $10 is the most the ice cream will sell for, even though it should have sold for $3. If you flood the kids (economy) with $1,000 each (Federal Reserve loans to the Government which then flow into the economy) the ice cream can now sell for up to $1,000 each when it should have only been $3. Is the ice cream really worth $1,000 each? Clearly, no. This is what is happening to stocks in the stock market, and houses in the housing market, and so on. And this is inflation in general, and bubbles in general (which is just out of control inflation in one particular segment of the economy).
Housing Bubble Pin
While we are in another housing bubble, the banks are not making poison pill loans anymore. Would-be home owners actually have to prove income, qualify, etc… Relaxed qualifications, in large part due to Government FHA loans, perpetually low interest rates due to the Federal Reserve, move-up buyers (selling an overpriced house to move into a bigger overpriced house), and foreign cash buyers in many markets (Vancouver slapped a tax on this problem as this practice had gotten so bad) have allowed another housing bubble to be inflated, but there is a limit to how large it can get this time. The most likely outcome of this bubble is simply a crowding out of first time home buyers, with a decline in the construction of SFR’s (single family residences) as a result, and a rapid increase in the construction of high-density housing (the only thing left anyone can afford (which is to say, qualify for)). How many apartments, condos, mid-rise and high-rise housing developments have you seen going up around you? In the cities…count the cranes. This is your evidence of this paradigm shift. It’s the end of organic housing growth, without the first time home buyers, nobody can move up – standstill.
Stock Market Pin
It is possible that the stock market collapses, but how? If debt does not matter (as I theorize below) then there is theoretically an unlimited supply of cheap capital for companies to expand with and pay their bills with (consider some of the FAANG stocks). Taking a page from the way our government works, when the interest on the debt consumes all your revenue, simply take out another loan to pay the interest. When you are both the bank and the customer, there’s no limit to what you can afford, if debt never matters. The interest on the debt that we pay the private bankers at The Federal Reserve is growing, and is the fourth biggest expense item behind only all the “free” stuff the Government has promised everyone. When I say “free” I mean paid for with more debt.
“The interest on the debt consumes 7.4 percent of the FY 2018 U.S. federal budget. That makes it the fourth largest budget item. The only four expenses that are bigger are Social Security benefits ($987 billion), military spending ($874.4 billion), Medicare ($582 billion), and Medicaid ($400 billion).”
Private companies can restructure their debt, buying time, pushing out the day of reckoning – this can go on for a long time when interest rates are kept low. They can merge, acquire, IPO. Even if the stock market does collapse, if debt does not matter, then even this will not lead to any significant correction in the overall economy as the government, via the Federal Reserve, will simply backstop the market by bailing out any significant collapses. This can include the Government actually buying stocks of companies, taking out large ownership stakes in collapsing companies or industries to prop them up. This will add trillions to the national debt, but if debt does not matter, then who cares?
THE PUBLIC EMPLOYEE PENSION PLAN PIN
Public employee pension funds, while massively underfunded, are time-bombs mostly for States, Counties and Cities (the Federal Government can just print more money to pay the federal pension fund debt by taking a loan from the private bankers at The Federal Reserve). Current unfunded liabilities for the public sector are $3.85 trillion. In order to paper over this number as much as possible, the city, county, state and federal governments simply increase the rate of return they expect to get on the investments that fund the pensions. So while the highest realistic return possible right now is 2.8%, these government entities are using a 7.5% rate of return so they can pretend everything is okay. Tick…tick….tick….is all that is.
The Federal government will take out another loan from Citigroup for their unfunded liabilities, but the result for everyone else will most likely be bankruptcy where possible, or a restructuring of the debt that will include higher contributions from members, and/or a significant reduction in benefits, and potentially the end of the pension fund benefit altogether for new hires. This will probably mean higher taxes for residents of those areas in order to pay for that debt, and reduced/eliminated services and/or reduced quality of existing services for residents.
THE DEBT PIN – DOES DEBT MATTER – THE ULTIMATE QUESTION
The national debt is rising 36% faster than the US economy. In a single day, the debt grew by $73 billion. In February, the debt grew by $215 billion, which is larger than the annual GDP of New Zealand, or Greece – in just one month. In just six months, the debt has grown by $1 trillion. In the past ten years, the debt has grown from $9.4 trillion to $21 trillion, a growth rate of 123% while the economy has only grown 36%, from $14.5 trillion to $19.7 trillion.
But nobody cares. And why should they? Everything is going along just fine…seriously…
Consider this, I bet you’d think it was impossible for the national debt to reach $120 trillion dollars. You might say, “There’s no way we could go from $21 trillion to $120 trillion without some sort of massive economic catastrophe occurring.”
And yet, the government is already $120 trillion in debt. The balance owed is the sum total of all of the unfunded liabilities that the government does not account for. These are promises to pay benefits to individuals in the future, such as Social Security, Medicare and Veterans benefits. It’s as if you bought a car for $40,000 and you only reported the $8,000 you owed this year, on a five year car loan, as your total debt outstanding – ignoring the other $32,000 you owe in the future – pretending those future required payments don’t exist. That $32,000 would be your unfunded liability. That is government accounting. That is how you get from $21 trillion to $120 trillion.
So in two paragraphs, I went from $21 trillion in debt to $120 trillion in total Government debt and nothing happened. Nobody cared. So…does debt matter? Will it ever matter?
If debt doesn’t matter, then any of the aforementioned pins that pricks any of our current economic bubbles will, in the end, not matter. As we have seen previously, the Government is more than willing to borrow money from the private bankers at the Federal Reserve against your future income as collateral to bail out whatever part of the market is causing distress to the overall economy. In 2007, that meant bailing out the banks. In the future, it will mean bailing out the banks again, or specific businesses, or an industry, or a State government, or plugging whatever hole in the dike threatens the whole system.
But make no mistake, upon a crash, the Government will bail out something, again, for the same reason, and in the same way as 2007. The market will have a significant, but not catastrophic rout, and then will slowly recover as before. The debt clock will tick up by one or two digits in the trillions placeholder, and this mess we pretend is a functioning economy will zombie-on as before.
And I believe that this can go on for a significant length of time, for a lifetime even. Debt fueled asset bubbles inflating and exploding, creating and destroying wealth for particular industries and individuals at the control and whim of the private bankers at the Federal Reserve until either the people of the country become educated enough in economics to understand what is being done to them, and have the will and strength to do something about it, or a significant number of other countries in the world decide the time has come to abandon the dollar as the global reserve currency and return to a gold backed asset form of money that prevents the mechanizations of central banks like the Federal Reserve.
As the largest consumer in the world, the major economies and their central banks are not incentivized to stop loaning us money. It’s as if you sold cars to your cousin, but also made the loans to him he needed to buy the cars. If you stop the loans, you go under. If you keep giving him loans, he keeps paying you interest on them, and he keeps buying your cars. The interest is your revenue, and the debt he owes you is an asset on your books. As long as he can do both, and since debt is just a number on a balance sheet that nobody cares about, why stop the loans?
It’s also possible a technological advancement in money (crypto) strips Governments and/or central banks from their monopoly on the financial systems of the world (but that’s assuming the governments/central banks threatened by it don’t regulate it to the point of uselessness (such as every transaction must be reported to the government, or recorded, or have a backdoor for government access), which is likely) – all of which are significantly greater challenges on tremendously longer timelines – thus, suggesting that debt, at least for the foreseeable future, does in fact, not matter.