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
What is funny is that no empire has ever been greater and stonger than the US one of the late nineties and it was the only one which was creditor and not debtor !
At your party if you had said within 2020 for bank closures rather than 2015, I think you would have more affirmative answers.
Lastly,I think the fed has one more bullet : it is opaque (non explicit and public) market intervention namely in stocks so that the 10% correction will not happen and they will be able to raise rates to a quarter or even a half %.
Nonetheless, if for a reason or another, job numbers/GDP numbers are flirting with 0, they will make quite soon a QE4 but for now, they have still the control on the situation IMO.
“What is funny is that no empire has ever been greater and stronger than the US one of the late nineties and it was the only one which was creditor and not debtor”” Really? This is factually wrong, period! I also disagree with the rest of what you wrote but that is only opinion.
On the first point ie the force of the US empire at the late nineties, I cannot understand how you could disagree.
At the year 1999/2000 : US was the absolute leader in technology (which the export for cheap stuff like the england more than one century ago), military : no empire has ruled on so much countries with hundreds of bases around the world on the 5 continents. Culturaly : with pop “culture” and Hollywood which were copied everywhere from korea to germany to australia and so on, lots of poor people wanted to get the green card. Politically : the US system tended to expand elsewhere namely in the european colony, led by the germans who in exchange of their obedience has been given the european crown they always wished !
Obviously the US had already some poor and declining Fundamentals but from an historical point of view no empire has ruled like the USA did in the nineties : neither China in the 16th century, nor Rome 2 millieniums ago, nor ottoman empire after.
I am not arguing the “power” of the U.S. though it can be argued Rome was more powerful. Where you are completely wrong is the U.S. was and is a debtor, NOT creditor in both fiscal position and trade.
Yes I made confusion with the two words, that’s quite ironic that an empire of debt can be more powerful than an empire of wealth like all the previous ones (included UK before).
still wrong RD, ALL empires eventually went into debt and had trade deficits which …spelled the end to the empire.
I’m sorry but because I do not speak English very well, I may have made another mistake !
What is ironic is that with previous empire, when they were the most powerful, they have plenty of resources, wealth and all vassals owed them money.
I still believe that the nineties was the apogee of the american empire and contrary to before, they were already at that time an empire of debt namely with the us dollar.
yes the 90’s was the apogee but we had already gone down the path of fiscal and trade deficits, the exact same thing that marked the end of ALL empires before it.
Regarding your comment about writing an entire book of possible reasons for ultimate Fed failure, I’d say don’t bother because it would be out of date by the time you got it to the printer!
One the great services you continually provide to us is your ability to “Get the hay down where the horse can eat it.” Thank you!
thanks Bing, it is the reason I have declined to write a book.
Bill, the public is more like comfortably numb! Since almost 50% all all households depend on the governmental largess each month! You name the “benefit” they want it!
Used to be with each dollar of debt, you would get back well over that amount in an improved GDP (honest) number. Now, you get back a few pennies (if your lucky) for dollar of debt!
The diminishing productivity of the utility of debt.
To put it simply: Less bang for the buck.
http://www.youtube.com/watch?v=y7EpSirtf_E
yes and yes.
Great analysis Bill. Your conclusion is exactamundo – Devaluation is in the $’s very near future, as in this year. Isn’t it amazing how in the informal poll people will all acknowledge the U.S. is bankrupt and not Think beyond that point as to – What then are the consequences? I said years ago when trying to explain some the problems the nation was in financially and that this had to be turned around or the nation was headed for disaster. It was like a calf looking at a new gate. Americans quit Thinking years ago. Keep up the great work Bill.
thank you Richard.
Ecc 1:9 That which hath been is that which shall be, and that which hath been done is that which shall be done; and there is nothing new under the sun.
Ecc 1:10 Is there a thing whereof it is said: ‘See, this is new’? – it hath been already, in the ages which were before us.
Ecc 1:11 There is no remembrance of them of former times; neither shall there be any remembrance of them of latter times that are to come, among those that shall come after.
if you don’t learn from history…
I would be curious to know if, when the reserve currency status changed in the past, it had as much to do with a replacement that was credible, readily available and possesses adequate size, rather than how bad a shape the dying reserve currency was in. Right now there are no credible, readily available, large enough alternatives as other countries are in as bad or worse condition as the US. I do realize that SDRs or even PMs could be looked upon as a substitute, but wouldn’t that take years?
this is an easy one, in the past there was always a currency that was gold back for you to flee to. This time there is no replacement (unless the Chinese back the yuan with gold)
Once again a home run, Bill. We eagerly seek to hear your daily comments as one of the few sane people in a country gone stupid mad. I’m thinking, however, that our government would never go broke. I say this crediting them with full criminality. For instance, one Congress can not bind the next, ergo, future benefits recorded to be over a hundred trillion dollars can just be cut off. Or trimmed down, or obsfucated like most government stuff these days. The limit would be to pay no benefits and no bonds payments, or defer these things “temporarily” till the crisis passes.
Likewise, the income potential of the government is quite large. Like a bail-in, your home’s equity is on the table for them to take, maybe sneakily, but they have ways. 401-k assets, potentially 100% of all wealth in whatever form.
The only check on government staying solvent would be the end of that government and the start of another, to put it obtusely.
Pura Vida.
“in a country gone stupid mad” yes. Foreigners no longer accepting dollars would do it.
Bil, can you sum up in a nut shell why you left costa Rica? Was it purely based on the fact that you’re not costa Rican? In your opinion how would the average Tico’s life be impacted vs an American citizen after the reset?I live in southern california i feel I’m screwed if I stay during a reset scenario. Population density coupled with limited resources equals shit strom. I just have this gut feeling I’d be better off in central or south America. I speak the language & cultures are interesting to me. Just feel like time is running out & I need to do something. Roll the dice or slip into my bunker? Either way it’s a choice.thanks
because of the target I see on the back’s of gringos. Life will change even if you are a a Tico, crime is already far worse than is reported. It will be chaos everywhere when the banks go down, Costa Rica included.
Not to mention it just got more expensive to leave. They must’ve seen it coming because they bumped up changing your citizenship 4X to ~$2300.
where?
The US. Read it today but darned if i could find it, too many sites visited, ha(gettin older aint helpin)
I really don’t look at charts and graphs anymore. To many statistical process control classes years ago in college…not to mention all of the manipulation that has gone on.
The monetary base chart is probably the only one imo that needs to be viewed. I completely understand what is going on…at least in my own mind! I do remember the humungous blips in 99 and 01…looking at this one simple graph sums it all up.
No way we make it through the year without collapse. I know everyone is saying it but I have to agree…there is nothing else for them to do but print.
…or just let it blow. I have to just leave it at that.
inflate or die.
Very nicely done.
thanks Dan.
Bill, if nobody “gets” this, than perhaps there is no hope for them (financially). I feel sad for them as they have been thoroughly brainwashed. Thank you for the article. I have passed it on.
I’ve seen a dollar index chart with a trend line that seems to show that the dollar is in a slow crash that will eventually make it to the bottom of the chart in 2015. I’ve also seen other charts which seem to show a trend line that bottoms out in 2016 or beyond. Not being an economist, I’m not sure what to believe. It seems that charts can sometimes mean whatever the one who puts it together wants it to mean. I’ve been preparing for the crash since 2011 and have now become known as “the paranoid one”.
even one second too late will equal a lifetime.
I agree Bill and that’s the thing, we have no clue if things will just break. Getting more metals may be near impossible without paying exhorbitant prices, one second late.
… or, they just won’t be available at any dollar price?
In this case, don’t you think that these currencies will exist more than a few days ???
they might exist but this does not mean anyone would sell their metal for any amount.
Hummm,,,now I must read Cor and Thess
God bless you.
Hey Bill, your writing in this article is right on target and one of the best I’ve read during my short time following your comments. I vacillate, however, between sharing and not sharing with some family/friends because this type of straightforward info tends to agitate them into, well, agitation, and not any sort of measurable preparatory activity.
Blessings,
thanks Shin, they will be knocking on your door with hands out.
I cannot help, but have to add my two cents in here for the history aspect. and providing that little bit of positive. all is not lost. all great empires became great, by attracting an enormous support basis at the beginning. by offering their average citizen/army, a better way of life than anywhere else. the place where dreams come true, and outsiders dream of joining. all great empires end, by letting the same historical vampires take control of their state, letting it get sucked dry. none of the citizens, or the standing armies that backed thus great empire support these vampires, or the vampires ideals and policies. yet somehow both the citizens and the army give these vampires legitimacy and the keys to the empire state? !!!! my southern brothers of the USSA, take back your country while u still can!! do not let these Vampires suck you dry with their age old tactics of divide and conquer!!! realize, that whether you are white, mexican, african, assian, first nations, poor, middle class, or upper class, soldier, or citizen!! as long as the person standing next to you, does not have the title elitist describing them, you are both 2 peas in the same pod!!! stick together and oust the vampires!! yours truly; the crazy canuck, BC Bernie
wonderful in theory, practically impossible.
Bill, it has been said that few people ever recognize a radical and dramatic change in the economic and social structure. Think September, 1929; when millionaires went bankrupt.
Here’s some additional food for thought. Cheers; and many thanks for your continuing and indefatigable efforts!
http://www.thedailybell.com/exclusive-interviews/35987/Anthony-Wile-Dr-Antal-Fekete-Blowing-Up-Modern-Austrian-Economics–in-a-Good-Way/#sthash.7Ug2YBop.dpuf%20
thanks eclectic.
CHF un pegged from the EUR early this morning. 16+ % in minutes. Not sure where’s it at now. Somethings brewing.
am already writing about it for tomorrow, it’s the beginning of the re set.