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Last week I described the story of my New Year’s Eve shenanigans where I conducted a very “informal” poll.  If you recall, my goal for the evening was to slip the phrase “when the banks close this year” into each conversation I had.  I did this to see what type of reactions it would elicit.  Sure enough, 100% of the reactions were either disbelief, or belief I was a crazy man.  If you also recall, in each and every conversation I asked the question “do you believe the government is broke?” and also received a 100% response of agreement.  The following exercise may again be very basic to you but it is my belief we all should revisit the basics every now and then to make sure our logic is on sound footings.

What I want to do today is show you just 3 charts, the monetary base, velocity and Treasury debt to GDP as a percentage.  The first chart below of the monetary base is a snapshot of the “size” of what our money supply is spawned from.  This is a “picture” of the Fed if you will.  Looking at this chart we can see several things.  First, if you look very closely in 1999 and then again in 2001 there are two little blips upward.  The first one was the Fed liquefying the system prior to the feared Y2K computer meltdown, the second one was their reaction to the 911 bombings.  Today, these reactions look miniscule because the current levels are so much larger.  I can assure you, at the time back then these “little blips” looked like explosions.


Looking at this chart from a broad perspective, it looks like just a steady upward grind until late 2008.  Something changed, we all of course know what that “something” was, the Great Financial Crisis struck!  The upward explosion in the monetary base is an illustration of the Fed’s reaction to the credit markets freezing up and the derivatives chain beginning to break, they flooded the system with money.  In retrospect, the Fed had no other choice than to PRINT!  And print they did, the monetary base today is five times larger than it was in the middle of 2008.

If you look at this chart from 2008 to present, something else stands out.   There are four very distinct upward thrusts.  These were of course QE1, operation twist, and QE’s 2 and 3.  If you recall, each time one of these programs were announced, we were told it was necessary and it would “save the day”, restart the system AND “be the last one necessary”.  Without going too far off on a side track, QE4 is only a “10% correction in the Dow” away.  You see, each one of the past “QE’s” (monetizations) was announced just as the markets were faltering.  Each one of these operations worked, temporarily.  Each one was ended and then followed by a new, improved, and for a lack of better terms, BIGGER QE!

It had to be this way and will have to be this way until a monetization ends in failure. The previous sentence needs a little explaining.  First, monetizing (printing) was and is the only tool available to the Fed, it is either “inflate or die”.  Each operation had to be bigger than the last one because the system itself (debt outstanding) continually got bigger.  The last part of the sentence is the important part.  All monetizations end in in failure, it is always just a question of when.  “Failure” can arise with many different faces but the result is always the same, a broken currency.  In today’s world, failure could be foreigners deciding to no longer accept dollars, it could happen because a single financial institution fails that sets off a chain reaction, it could happen by accident or it could happen on purpose.  The potential reasons for failure are so numerous a book could be written.  The important thing to understand is that ALL fiat currencies have failed and all monetizations have resulted in inflation’s.

This next chart is that of “velocity”


“Velocity” is basically the turnover of money.  This is a measure more or less how many times and how quickly money is being spent or used.  You can see velocity peaked out in 1996-1999 time frame.  If you can remember back then to “the good ole days”, this was when the dot com bubble was peaking and then blew up.  You might also recall we were in a fairly deep recession by 2000 that was turned around by the Fed slashing interest rates drastically for the first time and also by the military buildup of the Iraq war.

Between 2002 and 2006, velocity began to recover, this is explained by the “American home ATM machine”.  The country used the new lower rates to borrow and leverage up the housing industry.  During this period, many people refinanced their homes and took their new found equity out and partied like it was 1999 again.  Then, in 2007 the housing industry began to turn down which impaired borrowers, prices and then the banks themselves.  Other than the 2002-2006 reflation reversal and the one mini reversal in early 2009, velocity has continued its downward path.  This as many of you know is what is meant by the phrase, the “Fed pushing on a string”.  They can print as much as they want but they cannot make people borrow it or spend it, especially if the ability (debt saturation) to borrow is not there.  (Here in Texas there is a saying about leading a horse to water…)

This last chart is pretty self explanatory yet in most all probability “bogus”.


I say “bogus” for two reasons.  First, because this is strictly Treasury debt and does not include agency debt nor future obligations.  I have seen estimates where our total debt and future obligations are over $200 trillion.  Secondly, I do not believe our GDP numbers to be correct.  I believe there is certainly some double counting, made up numbers and useless “pork barrel spending” included.  In any case, assuming this chart is correct, the U.S. now stands with a debt to GDP ratio of 105%.  Historically, any country who broke the 100% level was considered to be entering “banana republic land”.

The U.S. has had a higher debt to GDP ratio only one time in her history.  This was after WWII and because of the amounts needed to fund our war efforts.  There was a huge difference between then and now.  Back then the U.S. had a manufacturing sector intact while much manufacturing overseas was destroyed by the war.  Also, individuals nor corporations held much debt at all, much of this was liquidated during the Great Depression and debt was feared like the plague.

Today, we have the opposite situation.  The U.S. has willfully (purposely?) dismantled her manufacturing sector and not only is the Treasury levered up, so is the population, the corporate structure and the banking sector.  Back then we had the ability to “work” our way out from under the debt, we had the ability to slowly inflate it away and we had the ability to borrow.  None of these tools are available today with the exception of devaluing the currency.  This by the way is the only tool available to and the final gasp of banana republics.  Devaluation is not rocket science by any means, it is simply historical fact of unbacked fiat currencies.

To wrap this up after looking at all three of these charts, what do they tell you?  They tell me something has really changed.  If I were in a coma from 2007 until present and woke up to see this, I would be terrified.  Don’t get me wrong, I am terrified and know exactly what is coming but after living through the last six years, I have also become a little “numb” just as the public has become totally numb.  The public believes the current situation is “business as usual”, this perception couldn’t be further from the truth!  No thinking and honest person could possibly look at these charts and not see that something just is not right.  Maybe the conclusion arrived at would be incorrect but it is undeniable that something very very big has changed.

If you look to history, then you get an explanation and an answer to what these charts are saying.  All past empires have done the same thing and these three charts always looked just like this as collapse occurred.  All past empires have gone too far into debt and watered down their currencies… the rest is history!

Regards,  Bill Holter