Category Archives: World finance: when will the bubble burst?

The world’s financial systems are widely described as a disaster-in-waiting.  Whilst the US Fed, set in place in secret in 1913, was a turning point, greed and covert control by the most powerful banks ensured the unsustainable bubbles that are certain to burst.  The only question is, what will trigger the burst and likely repeat world depression, and when?

The great ‘reset’. Will fiat currencies and economies collapse? Then what?

Key parts of the world’s financial affairs have been hi-jacked by self-serving financial organisations, bureaucracies, country leaders and individuals.   The outlook is dire. 

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The biggest experiment in money creation ever

 The biggest experiment in money creation ever  By Peter Schiff, Via Zerohedge, 28 May 2020

 For years, I have been warning that during the age of permanent stimulus (which began in earnest with the Federal Reserve’s reaction to the dotcom crash of 2000), each successive economic contraction would have to be met with ever larger, increasingly ineffective, doses of monetary and fiscal stimulus to keep the economy from spiraling into depression. I have also said that the enormity of the asset price gains over the last 10 years had increased the danger because reflating the bloated stock, real estate, and public and private debt markets would bring on doses of stimulus that could prove lethal for the economy. But even though I expected that the next financial crisis would be catastrophic, I thought that it would come into the world in the usual way, as a credit crisis triggered by over-leverage. But the Coronavirus ripped up those stage notes, and instead ushered in a threat that is faster and deeper than I imagined, and I imagined a lot. It’s a perfect storm, a black swan with teeth.

Even in my most pessimistic assessments, I did not expect that so many seemingly distant sectors of the economy would simultaneously evaporate, almost overnight, or that government deficits would expand to nearly $4 trillion in the first wave of the crisis, or that the Federal Reserve would so suddenly launch its largest-ever experiment in quantitative easing, (with almost none of the forward guidance they have used to telegraph lesser moves), which would expand its balance sheet by more than $3 trillion in a matter of just a few months. Nor did I expect that at its outset the Fed’s new buying plan would include, for the first time, corporate bonds and high yield debt ETFs. (I thought those expansions would come eventually, not immediately.)

 

To make matters even worse, the crisis has struck in the midst of a presidential election year, which guarantees that every policy decision has been made through a political prism. Democrats are seizing on the crisis to paint the Trump Administration as incompetent, ineffective and uncaring, often twisting themselves into knots to do so. (Trump has done himself no favors by using his daily briefings to showcase his inconsistent policy positions, combative political style, and his tenuous grasp of medical concepts.) So, in contrast to prior national crises that had tended to pull the country together (think 9/11), this event is tearing us apart.

But there is one thing upon which both sides seem to agree: the need for the Federal government to shower the economy with newly created money, bail out everyone who can claim that the virus “was not their fault,” and to fully liquefy the financial markets. The result has been an increase in government spending that dwarfs everything we have ever seen in the past, including the government’s response to the 2008 financial crisis. The $3 trillion increase in Federal debt accumulated this spring may just be the beginning.

The major political differences now center on matters of degree, particularly how long the economy should remain closed and how many jobs, businesses, and family financial plans should be exchanged for each life that may be saved through extended lockdowns. This is where it gets ugly.

  • Most Democrats, claiming that they are solely motivated by a desire to save as many lives as possible, are pushing for extended lockdowns. But given the economic and scientific idiocy of their proposals (for instance, the failure to differentiate between relative risk levels across society), you can forgive those who conclude that they are at least partially interested in enacting the sorts of radical economic transformations that would have been impossible to push through in normal circumstances.
  • Republicans are leaning in the other direction, with many favoring the Swedish approach to the pandemic, which looks to quarantine the most vulnerable (the elderly and immuno-compromised) while seeking to build “herd immunity” among the majority of healthy citizens. This idea avoids lockdowns and social distancing (and tolerates elevated infection rates among the healthy) in order to suppress future infection waves, and more importantly, to prevent economic catastrophe.

Of course, the Swedish government, knowing that it alone would have to bear the cost of its decisions, did a rational cost/benefit analysis on its options. U.S. governors, who are relying on the Federal government to support the unemployed and to bail out state deficits, have been spared these hard choices. With costs shifted to the Federal government, states have underplayed economic considerations in their public health plans. No doubt many states have seized on the crisis as an opportunity to be bailed out of financial problems that predated the current crisis.

From his basement-based presidential campaign, Joe Biden has repeatedly asserted that trade-offs between safety and economic activity are a “false choice,” and that any policies that may just prevent “one more death” should be implemented, no matter the costs. Such claims are symptomatic of a politician who prefers cheap posturing to reality.

The insanity of this idea can be seen in California, a state under total control of the Democrats.

Despite a per capita death rate that is less than 30% of the national average, based on current data from Wolrldometer, the state seems to be prepared to commit economic suicide. In Los Angeles County, home to more than 10 million people as of 2018, the County Public Health Director just recommended that lockdown orders stay in place until August. On May 8 The Mercury News reported that California guidelines now dictate that counties remain closed until there are no COVID deaths, and no more than one new case per 10,000 residents, in the last 2 weeks. That bar is set so high that it seems designed never to be cleared.

Democrats’ preferred approach seems to be: Test everyone in the country for the disease, contact trace the tens of millions who are likely to test positive (even though that accomplishes nothing), lockdown until a vaccine is developed, and pass the costs on to the Federal Government. They seem to prefer this to a world in which Americans are empowered to make choices regarding their own health risks and economic imperatives. In so doing, some have equated calls for “liberty” with racism and greed.

Some of the government’s immediate responses have been laughably inept. Take the Paycheck Protection Program (PPP), which provides direct payments to workers who have lost jobs due to forced shutdowns. The problem is that the payments are often significantly higher than the former wages earned by many workers. That means that even when companies are allowed to open and rehire, many employees may not want to come back to work, at least not until their new unemployment checks run out. And based on the current drift in Washington and the stakes created by the election, there is a high likelihood that the generous payments will be renewed before the program expires in late summer. (Democrats want to extend the higher payments until January).

This is dangerous territory. As former Libertarian leader Harry Browne once said:

Government breaks your leg, and then hands you a crutch and says, “See, if it weren’t for us, you wouldn’t be able to walk.”

That is precisely what is happening here.

For countries that issue currencies that are not the world’s reserve (that is every country but the U.S.) the playbook is radically different. Down in the cheap seats, politicians are aware that the costs of trying to print your way out of a financial dead-end are likely to be higher than the temporary gain of immediate liquidity injections. Blatant “debt monetization,” whereby a government sells newly-created bonds to its central bank, usually ends in rampant, or even hyper, inflation, which wipes out the savings and the economic viability of the nation. But the dollar sits at the center of the global financial system, creating a built-in demand, as most cross-border transactions need dollars to execute. This advantage allows Washington to consider policy options that would be too risky for other countries.

And so while we can clearly see this new wave of debt forming on the horizon, few fear any real damage when it finally crashes onto shore. The fact that we have yet to pay a high price for our prior accumulation of debt, in terms of inflation and high interest rates, gives politicians and Wall Street cheerleaders room to suggest that there is no downside to the “government pays for everything” approach.

With this trump card tucked into our sleeve, the United States will now engage in the biggest experiment in money creation the world has ever seen. The hubris of American monetary exceptionalism may mean that no plan will be devised to steer us out of the dead-end of zero, or negative interest rates, no plan to confront our massive fiscal structural deficits, and no plan to create an economy that can survive without government life support.

But maybe the experiment in money creation can succeed in getting us through the COVID Depression without causing consumer prices to surge and cutting the legs out under the dollar? Maybe everything I have ever learned, or felt, about economics is wrong? Maybe money can grow on trees? I’m betting it can’t.

But this crisis will present different math than what we have seen over the last 20 years. We will be showering the country with money at a time when the supply of goods and services is diminishing due to work stoppages, production declines, distribution bottlenecks, and import restrictions.

Even if all restaurant and retail employees were to ignore the incentives and return to work, there is no certainty that customers will follow as fears of contagion will remain long after the economy reopens, and social distancing procedures will reduce the quality of the experience while increasing its cost. There are also no legal protections currently on the books to shield employers from lawsuits brought by workers or customers who may contract the virus on their premises. Under these circumstances, wide swaths of business sectors may just cease to be. In sum, there are many reasons to suspect that a very deep recession, or even a depression, will remain even after the disease subsides. All this means that the economic rebound may be much softer than expected.

So, we will have more money chasing fewer goods and services. This is a recipe for stagflation, whereby prices go up even while the economy contracts, creating a horrible economic situation for those at the bottom of the economic pyramid. Most dangerously, we see this happening now in the food supply, with meat processors and farmers facing difficulties in getting products to market. If you think social cohesion is breaking down now, wait until people have problems feeding their families.

When you get down to it, this crisis exposes just how deeply the decay of debt has undermined the economy. The forced shutdowns and social distancing would have been a serious blow to a very robust economy, but not likely fatal. In a healthy economy, individuals, businesses, and even governments, may have had the savings to draw on in case everything went wrong. Savings could have allowed us to freeze economic activity for a time, and survive to see it restart. But credit has become so cheap and so freely given in recent decades that the incentive to save has never been lower. Knowing that credit cards are handed out like lollipops, consumers have learned to live paycheck-to-paycheck. With interest rates near zero, small businesses have learned to rely on business lines of credit to pay current bills, and mega-cap corporations borrow to buy back shares, trading long-term stability for a short-term share price appreciation. In such an environment, any economic interruptions that constrain short-term revenues create an immediate crisis. Without the life support of savings, everyone immediately calls on the government to ride to the rescue. The problem is the politicians show up with the economic equivalent of pep pills and leeches.

So, we can see where this is going. Debt and monetary expansion look almost certain to increase. The dollar may eventually buckle under the weight, dragging the bond market down with it. It’s hard to say what the economy will look like once the bill comes due, but investors have plenty of warning. They should use the current period, where the dollar has yet to fall, to consider holdings that may provide real protection.

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18 Signs That We Are Facing A Record Breaking Economic Implosion In 2020

18 Signs That We Are Facing A Record Breaking Economic Implosion In 2020  By Michael Snyder, The Economic Collapse, 7 May 2020

 In just six weeks, the entire global economy has completely come apart.  All over the world we are seeing numbers fall faster than we ever have before, and the outlook for the rest of the year is exceedingly bleak.  Fear of the coronavirus is going to paralyze global trade for the foreseeable future, and the lockdowns in some nations will last for many months to come.  Here in the United States, some states are attempting to make an effort to “reopen”, but in most instances that will involve “multiple stages”.  Meanwhile, tens of millions of Americans have already lost their jobs, much of the population has already run through their meager savings, and financial institutions are becoming extremely tight with their money.  Even if COVID-19 disappeared tomorrow, our momentum would still take us into an economic depression, but of course this virus isn’t going to disappear any time soon.  After 9/11 our society evolved into an anti-terror state, and COVID-19 is going to permanently alter our society as well.  So anyone that was hoping for a quick “return to normal” can forget it, because “normal” is about to be completely redefined.

The pace at which economic conditions have deteriorated in recent weeks has been absolutely breathtaking, and the numbers just keep getting worse and worse.

The following are 18 signs that we are facing a record breaking economic implosion in 2020…

#1 According to economists surveyed by the Wall Street Journal, the April jobs report will show that the unemployment rate in the United States is now above 16 percent.

#2 U.S. manufacturing orders just crashed by the most ever.

#3 U.S. gasoline consumption just dropped to the lowest level ever recorded.

#4 Light vehicle sales in the U.S. just fell to the lowest level that we have seen since the early 1970s.

#5 The government program that was supposed to get small businesses through this crisis has been a tremendous failure

According to the CNBC/SurveyMonkey Small Business Survey released Monday, which surveyed 2,200 small business owners across America, while the $660 billion Paycheck Protection Program was instituted to give them a lifeline through the coronavirus and economic shutdown, only 13% of the 45% who applied for the PPP were approved.

#6 The “coming meat shortages” are already here.  According to the New York Post, Costco is now rationing meat and Kroger is warning customers of very serious supply problems…

Costco on Monday said it will be limiting customers to just three packages of meat per shopper, while Kroger supermarkets posted an alert on the meat section of its website warning that it may have limited inventory “due to high demand.”

Grocers have been bracing for a run on meat in mid-May as major meat processing plants, including Tyson Foods, have been forced to shut down production. But the shortages appear to have come earlier than expected as consumers worried about the meat shortage have been stocking up, experts say.

#7 Global smartphone shipments were down 11.7 percent in the first quarter compared to a year ago.  That represents the fastest drop on record.

#8 Hong Kong just recorded the worst economic contraction in the city’s entire history.

#9 U.S. consumer spending was down 7.6 percent during the first quarter of 2020.

#10 American Airlines posted a loss of 2.2 billion dollars during the first quarter of 2020.

#11 It looks like retail giants Neiman Marcus, J. Crew and JC Penney are all headed for bankruptcy.Crisis and Leviathan: …

#12 Fox Business is reporting that Hertz is preparing to file for bankruptcy due to plunging car rental ridership.

#13 Gold’s Gym field for bankruptcy on Monday.

#14 Edmunds is projecting that auto sales in the United States this month will be down by more than half compared to April 2019.

#15 In Mexico, manufacturing activity is falling at the fastest pace ever recorded.  The following comes from Zero Hedge

While few have lofty expectations for economic performance with the global economy still largely shutdown, what is happening in Mexico is simply unprecedented. Here are some striking observations detailing the unprecedented economic collapse of the southern US neighbor, courtesy of Goldman.

Business confidence declined sharply in April (the seventh consecutive monthly decline) with the index now sitting deep within pessimist territory. The Manufacturing and Services PMIs also fell sharply in April, and are now at the lowest levels on record.

#16 More than 30 million Americans have already lost their jobs, and economists are projecting that millions more will lose their jobs in the weeks ahead.

#17 In March, U.S. home sales declined by double digit percentages in every region of the country.

#18 White House economic adviser Kevin Hassett is warning that U.S. GDP could fall by up to 30 percent during the second quarter of 2020.

For investors, the good news is that stock prices have bounced back quite a bit after the initial crash, and many market optimists are hoping that this Fed-fueled rally will keep on rolling.

But others are warning that this is a trap for bullish investors, and Kevin Smith is openly telling everyone that this could be the “last chance to sell” before another huge move downward…

The stock market may be flashing some ridiculously bullish signals, but hedge fund bear Kevin Smith is sticking by his prediction that the Dow and S&P 500 are on the verge of a Great Depression-level crash.

In fact, the Crescat Capital founder warns, this is your “last chance to sell” before the impending collapse.

We shall see what happens, but for the moment the financial markets are doing their best to try to defy economic reality.

Unfortunately, economic reality is hitting most Americans like a ton of bricks right now.  We are in the middle of the greatest spike in unemployment that the United States has ever seen by a very wide margin, and most of the jobs that have been lost are never coming back.

And as bad as things are already, the truth is that this is just the beginning.

A whole lot more pain is on the way, and it is going to shake our nation to the core.

Our economic and financial bubbles lasted far longer than they should have, but now fear of COVID-19 has burst them all, and it isn’t going to be possible to reinflate them this time around.

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The Real Reason Why the Government Shutdown Caused an Economic Collapse

The Real Reason Why the Government Shutdown Caused an Economic Collapse  By David Stockman, International Man, 25 April 2020

International Man: Is the government’s reaction to COVID-19 worse than the virus itself? What are your thoughts?

David Stockman: I think for once, Donald Trump was right when he worried out loud the other day that the cure may be far worse than the disease.

Governors—mostly Democratic governors and mayors of major areas of the country—have imposed Lockdown Nation. It’s a complete economic disaster.

It’s a wrong policy from a public health point of view and an economic point of view.

It is hitting, like a ton of bricks, a highly fragile and vulnerable economy that was living hand to mouth anyway because of the kind of highly counterproductive monetary and fiscal policies and debt build-up we’ve had over the last 30 years.

If you look at the data for New York—which is the epicenter of the whole COVID-19 pandemic—it is abundantly clear that COVID is not some kind of latter-day Black Death plague that takes down the young, the old, the healthy, the sick, and everyone in between.

It is a kind of super winter flu that strikes fatally, almost entirely, the elderly population that is already afflicted with many life-threatening medical conditions—or what the technicians call comorbidities.

The shutdown, which I call the “plenary lockdown policy,” is wrong. Closing all the businesses except a tiny, arbitrary set of essential operations is courting disaster for no good reason.

Here’s what the New York data showed us recently.

New York is ground zero and the epicenter. But if you look at the breakdown of that number by age and by medical condition, it’s startling.

For those under 50 years of age in the state of New York, the death rate is slightly under 5 per 100,000.

That isn’t a disaster. That isn’t a plague or a calamity.

Five per 100,000 is half the rate of suicides per 100,000 annually among the 50 and under population. It is a small fraction of the 90 deaths per 100,000 annually that occur for all kinds of reasons: accidents and illnesses—including suicide.

You would not, in the slightest, in any kind of sane world, shut down an entire economy and lock down everything when you have a 5 per 100,000 death rate for the overwhelming share of the population.

On the other hand, if you look at the population 80 years and older in New York state—the death rate is 1,086 deaths per 100,000. In other words, it’s night and day.

The virus is not a fatal problem for the overwhelming share of the population.

Lots of people get infected. Most are asymptomatic. Some get sick and stay in bed for a couple of days, and they recover. A tiny fraction of the under-50-years population gets seriously ill and is hospitalized for treatment, and an infinitesimal number end up as fatalities. That’s the case for the healthy population under 50.

It’s in the over-70 age group, and especially in the over-80 age group, that the overwhelming share of these severe cases has developed.

The strategy shouldn’t be a plenary lockdown. The right approach is to trace, identify, isolate, support, and treat the vulnerable population that already has many illnesses.

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If we look at New York again, of those deaths among the elderly population, 60% had hypertension or high blood pressure, 31% had diabetes, etc. All of them, almost overwhelmingly, had one, two, or three comorbidities.

We don’t need Governor Cuomo to shut down the state. We need Governor Cuomo to tell the health department to mobilize the doctors and the healthcare apparatus of New York to identify the vulnerable elderly population. This population is already being treated in many cases for serious respiratory problems, heart ailments, and other diseases—and we are making sure that they’re as isolated and protected from this bad winter flu as they possibly can be.

It’s not merely a matter of degree. It’s that they’ve got it ass-backward.

You don’t lock down the population. You target the sub-population, the small minority of very vulnerable people, and do everything you can to shield them from this virus until it passes into the summer temperatures and the normal herd immunity that eventually will make it go away.

International Man: Those are excellent points. That’s not to mention that in the US, two out of three Americans are overweight or obese and have a pre-chronic or chronic condition. And of those people, the risk goes up substantially for those who have two or more conditions. It puts them at higher risk for something like COVID-19 to take them down.

David Stockman: I think that’s true, but even if you look at the New York data, again, it’s startling.

For the under-50-year-old population, I can’t emphasize it enough—it’s 5 per 100,000. That’s a rounding error in the scheme of things.

You can’t run a society based on the risk of 5 out of 100,000 people.

So, I think you’re hitting it right on the head.

What we need to think about is how much longer—and we’re not talking about months and quarters, we’re talking about days and weeks—we can possibly stand a shutdown that has already put 22 million people on unemployment claims in four weeks.

Let’s compare this to the worst four weeks of the Great Recession, which is the worst economic calamity that we’ve had since the Great Depression.

During the worst three-week period in the winter of 2008/2009, the cumulative new unemployment claims were 2.7 million, not 22 million. So, this is eight times worse.

We might add that it’s going to be 30 million, or close to that, very soon.

We have an economy that’s in free fall, unlike anything we’ve ever seen before, and we have a government that’s in total hysteria, trying to compensate for the economic collapse that is being ordered by the government itself.

What I’m talking about is the Everything Bailout that was signed without a record vote in the house, with no hearings—$2.2 trillion, on top of two or three other bills that had passed earlier. There’s another trillion that they’re talking about in the pipeline as a sort of a replenishment bill.

Even beyond that, then they’re talking about a stimulus and infrastructure bill, where the bidding starts at $2 billion. It is insanity.

Let’s just look at what’s happening in the here and now.

What the government is trying to do is hold everyone in America harmless, and every business in America harmless, for the massive dislocation, disruption of business cash flow, and interruption of paychecks that have resulted from these lockdown orders.

Where is it taking us?

This year alone—and these are not my numbers; they come from the most credible Washington DC agency, which I’m a part of, The Committee for a Responsible Federal Budget. That’s kind of an oxymoron, but it exists.

They had projected that during the fiscal year underway—which was half over before the whole COVID lockdown even got started—that the deficit is going to total $3.8 trillion.

I’m not talking about total spending. I’m talking about just the deficit. It’s roughly 19% of GDP.

It’s a deficit in the same order of magnitude as we had during the darkest days of World War II. During that time, the whole economy was producing military material and weapons, and nobody could spend any money on anything except necessities because everything else was rationed or wasn’t being produced. So they bought a lot of government war bonds.

So where we are right now, suddenly, overnight, is in a disastrous fiscal situation.

This self-inflicted shock has transformed the Trump-Republican trillion dollar per year deficits at the top of the business cycle.

It has transformed a terrible situation into a catastrophic situation, where they’re going to borrow $3.8 trillion this year alone. The number for fiscal 2021—which starts in October—is going to be another $2.5 trillion at minimum, or probably more.

Now the reason I bring this up is because we’re looking at a two-year period in which the combined deficits are likely to exceed $6 trillion in two years. These numbers are so humongous that they’re almost impossible for ordinary people—or even people who study this subject regularly—to grasp.

I think the best way to look at it is to see that $6 trillion of new debt in two years is equivalent to what it took 213 years and 43 presidents to produce—that’s how long it took to get to the first $6 trillion of public debt.

That’s how bad this has gotten, and it will destroy any remaining semblance of market capitalism we have in this country.

When you have a coast-to-coast soup line, with the government underwriting 100% of what everybody was getting in January 2020 by merely piling it onto the public debt, and then having the Fed printing money to fund it, you’re asking for a calamity—a financial and economic disaster of biblical proportions.

Editor’s Note: The ripple effects of the government lock down are only stating to take shape. That’s not to mention the unprecedented amount of money the that is being pumped into every corner of the economy by the Federal Reserve.

The consequences of which could be crippling to the the average person.

That’s exactly why Legendary speculator Doug Casey and David Stockman have just released this urgent new video which outlines exactly what’s happening and how it will impact retirees, savers, and investors. It reveals what you could do to prevent becoming financial roadkill. Click here to watch it now.

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