It is being said today’s FOMC announcement is “the most important of Yellen’s tenure,” I could not disagree more. In the past I have written pieces regarding the potential announcements by the FOMC and come to the conclusion “what can they possibly say?”. This is truer now, Janet Yellen et al cannot “say” anything of substance because they cannot “do” anything of substance. The Fed backed themselves into a corner of their own making several years ago, I believe it is only a matter of time before the markets “test” them.
What options does the Fed have? Can they raise interest rates at all? Can they tighten credit at all? Can they really go the other way and institute truly negative interest rates? The answers are all NO, they are “frozen” of their own making and have only one option (really two in tandem). The Fed can only remain in place with interest rates nonexistent and must continually create (fund) debt and grow money supply while a Treasury arm, the PPT must guide, massage and dampen volatility of markets …ALL markets. The only thing currently being discussed is “when” will the Fed tighten? I would ask, when will QE 4 be instituted? The answer of course is when the markets seriously begin to implode again which may not even be more than a calendar month or two away.
I am sure a part of their statement will include oil and energy prices. This is a market they cannot heal with monetary policy. The volatility has already occurred and the dead bodies already exist though we don’t yet know who they are. The dilemma the Fed has is they have no tools left other than outright support once markets begin to collapse. Their QE policies have already been seen as ineffective at supporting the real economy other than stabilizing decline. My question is this, when QE 4 becomes a necessity, will the markets “buy it” or will the phrase “three strikes and your out” come into play? What once worked to turn the real economy from contraction to recovery to an actual growth phase now has no power. The Fed only has an accelerator so to speak, the brake pedal is off limits. I have written many times on “velocity” and why it continues to decline. This is the sticking point, the money they create is being hoarded by the banks and not reaching Main St…
With regards to velocity, it is worth pointing out what is happening in Russia to illustrate a fallacy of main stream thought. As Jim Sinclair has tried to explain to anyone willing to listen, what comes our way in “dollar land” is a hyperinflation as a result of confidence breaking … a monetary event so to speak but one which results from human emotion. Western economists have incorrectly brainwashed the public into believing a hyperinflation can only be caused by “over printing”. This is ONLY one way, another way is when the currency itself loses confidence or credibility. Or, in the case of the ruble, loses its perceived “funding” (via energy revenues). Russia is in the midst of an early hyperinflation if the ruble continues to decline. Watch as their economy “takes off” …briefly. The Russian people see what is happening and are now in a rush to “exchange” (spend) their devaluing currency for “stuff”. THIS is another cause of hyperinflation, a currency going up in flames because of panicky velocity.
Tying this back to the U.S. and the Fed’s “FRN’s,” velocity is now at record lows …as are interest rates. Neither can turn higher or the game is over. We live in the most leveraged financial and fiscal system in all of history. Interest rates cannot go up as they have in Russia. Velocity on the other hand MUST turn higher but CANNOT, let me explain. For any hope of the real economy moving higher, velocity must bottom and turn higher. The problem is, once velocity turns higher, it cannot (I should say “won’t”) stop because this will mean the mindset or thought process has changed.
Look at it this way, the U.S. (the West) is facing the greatest potential margin call of all time. The entire system is a margin call waiting to happen. Less than 50% of the population supports a majority of the population. Some ungodly number of people in the U.S. live paycheck to paycheck and have no savings whatsoever. Real estate is completely levered, banks and brokers levered with all sorts of derivatives. State and local government finances are in disarray while the federal government is in debt beyond 100% of GDP …with admitted debt, 10 times over with future obligations. The Fed, for their part has become the biggest hedge fund in the world and have quintupled their balance sheet over 5 years …like I said, we await the biggest margin call of all time. Never forget this, the dollar has value ONLY because the debt underlying has “value,” a margin call will erase this in a panicked heartbeat!
When this margin call does come (and it may already be happening as judged by the oil market), “velocity” will turn violently and overnight. The turn in velocity will be a symptom/cause of our currency devaluing. The rush out of dollars and into “stuff” as the Russians are now experiencing will in my opinion be far greater and much more rapid. “Confidence” and “velocity” are inverse of each other. We are currently at the height of confidence and the depths of velocity. Confidence is truly the only piece of chewing gum holding the game together.
In the case of Russia, they have big brother China to stand by their side. China has set up currency hubs all over the world, we will soon see why. They also signed two major trade deals with Russia, the capital from these deals can and will be used to steady Russia. Who will steady the U.S.? Our markets have turned schizophrenic, up and down huge amounts on a daily basis. Who will step up to support the U.S.? In fact, if you look at the “direction” of the rest of the world, they seem to be trying to distance themselves from us. By the time this is over, the world will be operating under a New World Order, just not the one American elites have envisioned. In fact, I can see a world where power has shifted along with trading partners and alliances with the U.S. sitting in a self-inflicted and isolated corner with a tin cup in hand …and a dunce cap on top!
I plan to write just two more pieces for the year. One next week and one the week of New Year’s. Both ends of my mental candle are getting very close together, I need a little down time. Because so many have requested what I think it will look like “the day after,” I plan to write a missive from a hypothetical (but probably not so “fictional”) basis.
I wish everyone a Peaceful and Happy Holiday. Merry Christmas! Happy Hanukkah! Happy New Year!
The Fed are a bunch of liars in my opinion. I pay ZERO attention to any thing Yellen says!
Since, in my opinion, the Fed is a bunch of liars, maybe QE4 is already going on but they aren’t saying so.
What an interesting year 2014 has been.
Happy holidays to you and your family and everyone at Miles Franklin.
One question as I did not understand : why will the west lose confidence in their fiat as japanese experienced more than 10 QE and there has been nothing like in russia recently ?
Thanks for your help.
RD, Mr. G, or whoever you are, the Russians are not part of the club, the Japanese are …Russia has better finances than either Japan or U.S., they will stand one way or the other with or without Chinese help. Who will back the U.S. and Japan with their insane monetary and fiscal policies?
OK thanks. That’s clear that russia have better fundamentals than the west.
Maybe also that BRICS are not at the same Kondratieff cycles which is more “inflationnist” like ours a few décades ago ?
they have not hypothecated everything not nailed down.
That’s concerning the ruble of the BRICS currencies but regarding all their sovereign bond markets, BRICS has still not “succeed” (with the nasty consequences to do so) to make a bond market orgy fueled by western central banks policies.
Don’t you think that is because their Financial markets are not enough developed in order to boost long speculation on their local currency sovereign bonds which would also reduce the inflation and so increase the confidence on their currencies ?
Another excellent article. I will miss reading you over the next 2 weeks. Enjoy your well earned time off. Merry Christmas to the entire Holter family. Your wife is an excellent painter. What a talent.
thanks Lee, Merry Christmas to you and yours! Kathy is halfway done with another portrait, it blows the 84 year old away, I am amazed at her improvement curve!
Thanks once more Bill.
Have a very Happy Christmas. I hope you and all yours (including Principe who I guess you’ll see more of too :-)) enjoy a peaceful and restful break and look forward to your continuing most welcome opinions as 2015 heats up.
Maurice Lea UK
thanks and Merry Christmas to you Maurice. Principe’ and I plan to do a 20 mile ride next week …I haven’t told him yet but he’s more than up for it!
Bill, Happy Christmas and all the best in 2015. Thanks for your remarks. Al
thanks Al, same to you.
Great article again Bill. A very Merry Christmas to you and your family. Hope you have a enjoyable time a much needed rest. I have really appreciated your insights and putting them out here for all of us to read and think upon. Thank you
you’re very welcome Richard, Merry Christmas to you too!
Merry Xmas Bill..! You rock! Hopefully Principe won’t have to be your daily driver after the you know what hits the fan!
thanks Gil, you too! Unfortunately he will probably become my daily driver but I’ll need to “de sensitize” him to gunfire as he a hot blooded caballo de Espanol!
Bill, Koos Jansen over at BullionStar has a great article out today titled “We Are Headed For A Major Dis-location And It Revolves Around The Dollar”.
I quote, “Let me explain the previous sentence. Russian debt to GDP is roughly 14%. Their debt to GDP is pristine. Japan’s is 227%, Greece 175%, Italy 132%, and the US 105%. Now can someone kindly explain why a currency would implode like the Ruble when their financial condition relative to the West and Japan looks like a Ferrari among a bunch of Ford Pintos”.
Like you say Russia has better finances than Japan or the USA. Indeed they do!
Merry Christmas to you ST. …the answer is …because we imploded it forcefully on the paper markets.
From Spain, happy new year and thanks for all, Bill
Muchisimo Gracias Jose, Feliz Navidad y Feliz Ano Nuevo a ti!
I have just found that:
When they will turn, change direction? At what point, what may be braking point?
when they run out of fuel for electricity, to power plants and to stay warm.
if that will be so, and might be – they are really big time liars, bluffers, with no long term wisdom. And they lead nations.
yes, yes, and no long term plan.
A few years ago I had to write an article for our church newsletter
ONCE A MONTH. I don’t know how you can produce quality pieces
day after day after day. Two weeks off is not enough.
Merry Christmas to you and yours. – Bob
thanks and Merry Christmas to you Bob. Yes, I am a little burned out but finding topics to write about is pretty easy since they must lie bigger and bigger to cover past lies. I truly enjoy writing and am not a writer by trade, I write like I speak which always earned me very poor grades in English classes! Oh well huh?
bill, for the last 2 days Bloomberg has been reporting that Russia is starting to sell its gold.http://www.zerohedge.com/news/2014-12-18/russia-has-begun-selling-its-gold-according-socgen that makes absolutely no sense whatsoever, to me. is this MSM BS? what is your take?
thanks for your insight and common sense comments. dave
If I was allowed to write “BULLSHIT” I would but since this is a G rated bog I will just call “BS” on it. China will financially support Russia, Europe needs their oil and gas worse than Russia needs to sell it.
Wow Bill, hats off to another great article. Many think high inflation can happen only when employee pay goes up and demand from a growing, strong economy drives up prices, but as Russia, Zimbabwe and Germany have showed, lack of confidence leads to the highest inflation. A question I do have is whether the dollar holds supreme for years longer only because there is not an alternative of sufficient size (other than gold with a limitless value to the upside that can accommodate any size).
thanks Doug, the world is running on confidence alone.
You are quite right Bill, in your summation of Russia’s position. Not so isolated, nor broke as some would have you believe. Not in near as bad a shape as here.
A word of many thanks for your unswerving, “telling it like it is” with additional insight into the machinations of the global financial labrinth. You help many people.
A very Merry Christmas to you and yours. Enjoy your rest.
thanks and Merry Christmas to you! Russia is not a financial basket case.
How many times have we all heard the phrase, “the full faith and credit of the United States of America”? All too many from my viewpoint. But the phrase is in and of itself fascinating. Faith? In a secular government that was once MUCH closer to God than it now is but that has not been for some time? Yes, they still pay lip service to God but their hearts clearly are not in it. Credit? Whoa! With an $18T and rising debt, the US is about the biggest deadbeat around and it clearly is not worthy of any further loans, although they might manage a few just to keep the show running for a bit longer. But, at what cost? It’s too hideous to contemplate.
very good Ed!
Just for fun I wanted to synthesize your blog today
FRN-leverage QE Ponzi scheme, hedged with derivatives,backed by the full faith and confidence–confide–con of the American people, 3 meals and one margin call from total collapse
I’m continually amazed how the physical is aligning to support the spiritual. IMO, the one most eternal, is the one most real. 1 Cor: 15
history and prophesy.
With the U.S. having the worlds reserve currency and the petro-dollar in place, there is really nothing Russia or China can do. Does anyone know how many digital dollars are in the world today? No…if they want to press a button to add billions here, a trillion there, nobody knows. China and Russia sell U.S. treasuries and the U.S. buys it all back, no impact, nothing happens, the world goes on…ho hum. The gangster banksters on Wall St and the U.S. Gov’t will ensure all other countries will go down if there is financial contagion. Russians selling rubles & buying dollars. Dow up over 400 today. Got to hand it to the Fed, Treasury Dept & Wall St, they are the freakin best, with the BOE, BOJ, ECB and other partners.
how do you know Russia is not or won’t sell dollars for an undervalued ruble which are in short supply and may be demanded as payment for oil?
I’ve continued to read ALL of your articles, I just haven’t commented on them because I usually find myself unqualified to do so, but this is another well put observation. We will miss you in the next couple of weeks but you deserve the time to rest your brain. It will be fun to read your take on what “the day after” will look like and even though it’s just hypothetical it’s still a great way to end the year. It looks like you’re going to have all manner of interesting subjects to keep us entertained with next year.
thanks Lenn, please feel free to comment any time. it is a very big topic which I am sure could have a 15 chapter book written about it!
Russia and China and countries that never ever lay all of their cards on the table.
To believe that Russia and its large resource base is down for the count is plain foolishness.
China has in my view been planning to become a financial powerhouse for decades.
The greed of the West has allowed itself to be pulled into the trap, and now we can no longer pay for our excesses. Not to mention that we can no longer con other countries to believe we are that great good samaritan.
The USA, Canada and most of the western friendly countries of the world are all swimming in debt.
The waters are getting rough and it is getting harder and harder to dog paddle our way to survival.
We are only a match strike away from a fiat paper collapse and when the fire is finally extinguished Gold and Silver will be the basis for the next currency system.
Just like it takes some seeds to begin planting a harvest it will take gold and silver to rebuild ones financial house.
Greed and dishonesty has always been a temporary road to wealth.
Wealth for most of the world is a perception and not a reality.
Soon the population of the western world will get a big serving of reality.imho
“yes” to all of it.
China and Russia have no cards to play. If they do, what are they? Anything they do is of no financial consequence or impact. If Russia chooses military action/war and using nuclear bombs, then tell us who wins. The U.S. and their allies control every financial market and everyone else is their pawn. Explain this margin call in detail. A lot of things are said but where is the reality. I don’t create some false reality in my head and then wait my whole life for it try and happen. I deal with real day-to-day reality.
China and Russia have no cards to play? Really? The West is overleveraged from top to bottom and then back again, the entire system is a margin call waiting to happen. If you don’t understand or see this then …OH WELL? Nothing I can say will change your mind, good luck to you!
Some households have multiple credit cards using a new one to pay minimum balance on another, some have one card paying full bill each cycle, and some have no card, not spending until they have the cash.
Which is the strongest position?
I just recently started reading your posts and completely enjoy the education you are providing.We truly are living in the Alice in wonderland/George Orwell/Caligula days when if you are not taking anti depressant medication you feel really alone.Sanity has exited stage left but will return with a vengence.I look forward to your next article, thanks.
thanks so much Randy, if you’d like another dose of “truth” as I see it, please see my interview with Greg Hunter http://usawatchdog.com/financial-fantasy-land-continues-to-prevent-collapse-bill-holter/#comment-1083811 . It was supposed to be posted to our site prior to Christmas but apparently got lost in the eggnog?
totally unrelated to this particular post, I interviewed with Greg Hunter, it can be seen here …http://usawatchdog.com/financial-fantasy-land-continues-to-prevent-collapse-bill-holter/#comment-1083811 . It should have been posted already but someone had too much eggnog?