Last week I tried to explain how systemically there is one giant and global margin call occurring. Today, I would like to take a step backwards to explain some of the mechanics. Though this is very basic, you must fully understand the “how” in order to get to the “why”.
Everyone knows the U.S. went off the gold standard completely in 1971. Since then, (other than the Swiss until 1999), no nation has had any gold backing (or ratio backing) for their money. All currency has been “fiat” and was accepted on faith alone. Until the 1980’s we lived in a world where the “West” for the most part had clean balance sheets. You could say it was a lingering hangover from the Great Depression, debt, or too much of it was feared. From individuals to corporations, from local government to the federal government, debt, or too much of it was not really a problem.
The other side of the coin so to speak, “dollars”, were over issued which is why foreign governments were turning in their dollars and requesting gold in return. During the 1950’s the Federal Reserve issued more dollars than we had gold (at $35) to back them. This is why the world “ran” our gold reserves which were over 20,000 tons at one point until Nixon closed the gold window. We were left with 8,400 tons and the Fed was free to issue as many dollars as they chose.
Our economic world then changed along with “sentiment” or mentality. The lasting “prudence” from the Great Depression was gone, taking on debt was no longer a scary thing. It was no longer scary because the Fed was creating inflation which made asset prices go up and made existing debt “worth” less and easier to pay off. This is all basic economic history but it is imperative to know in order to understand what has happened. What has happened is that debt has essentially become money. The currencies themselves are debt based and you could say bonds which basically carry no interest are now considered money or even currency.
We have gone full circle from the depression days and are now back to 1929 on steroids. Debt is everywhere, and too much of it across the whole spectrum. The problem in a nutshell is this, there is too much debt and interest rates cannot be pushed down any further to make it serviceable. Add to this the very real situation that very little unencumbered collateral exists and you then get the full picture. You see, our system is set up as a Ponzi scheme on many levels. First, in order to pay off debt, more new debt must be taken on. Look at the U.S. Treasury for example, they have not paid ANY “net” debt down since 1960. Each and every year, new debt is issued to pay off old debt plus an additional amount to pay for the current year’s overspending. Going further and further into debt for the U.S. has never “been” (past tense) a problem. The logic goes like this …”it is not a problem and has never been a problem because …it has never been a problem”. But, it IS a problem. Actually, it is THE problem!
The U.S. “admits” to having over $18 trillion worth of debt (the reality is we owe, and have future promises of close to $200 trillion)! Our economy, even with fudged numbers, double counting and including “hookers and blow” …is only $17 trillion in size. You can go back into history to see time and time again, once the debt owed by a nation becomes larger than their total economic output, the country soon goes “banana republic”. This is not speculation, this is historical fact. The U.S., even with understated debt and overstated economic activity now has 105% debt to GDP. Simply put, we are now in banana republic land!
It is also important to understand “debt” from another angle than just government debt. Another part of the Ponzi scheme has come from the private sector, individuals and corporations. When plant and equipment is built out or acquired, often debt is what funds the action. Individually, when people buy a house or a car (or even go to McDonald’s), they borrow money. We reached a level back in 2006 that I termed “debt saturation”. The world collectively could not take on any more debt. Either the debt could not be serviced, or there was no collateral (unencumbered) to borrow against. This of course led to the markets dropping, real estate dropping and the economy faltering. In fact, one Sunday in September of 2008 we were only mere hours away from the markets and banking systems not opening. What actually happened? The Ponzi scheme ran out of “new money”, plain and simple!
In came Hank Paulson with his $700 billion “bazooka” called TARP. This, we were told is what saved the day. The reality is the Federal Reserve secretly lent out $16 trillion (created out of thin air) all over the world to financial institutions. This money was used to make sure “confidence” did not break. Financial institutions were losing trust in each other so the Fed stepped in and basically said “we will guarantee everything and everyone, if you trust ‘us’ then you can trust your counter party”. It worked. Bank A trusted bank B who in turn trusted bank C, all because everyone still trusted the Federal Reserve.
There was still a problem though. Ponzi schemes all need two things, confidence (which the Fed just took care of) and “new money”. Where would this come from? This came from central banks themselves AND sovereign treasuries around the world. The U.S. Treasury for example has gone $7.5 trillion further into debt over just these last six years.
The ECB and Bank of Japan have also exploded their money supplies. The treasuries of many European nations, Japan, Britain and nearly all Western nations have also gone heavily into debt. All of this new money supply and newly borrowed money has worked its way into and through the financial systems. Very little of it has reached the real economy nor Main St.. This is why it “still feels bad”. Not much of this “financial help” has made it into the hands of the public. In fact, “velocity” which is the turnover of money is making historic lows. On the one hand, the Fed is issuing money at breakneck speed and the Treasury is borrowing at historic levels. On the other hand, the turnover of money on Main St. is collapsing.
The problem is this, the Fed and Treasury cannot push the cart any further. The Fed has their balance sheet leveraged at over 80 to 1. This means they own $80 worth of assets (bonds) for every $1 they actually have as equity or net worth. This means a 1.25% drop in the value of their holdings is enough for the Fed to lose ALL of their equity! (Another way of saying this would be to use the word “insolvent”)
As for the U.S. Treasury, they are at the point where continuing to borrow at the current pace will mean tax revenues will not be enough to pay the interest. This is similar to a credit card borrower who cannot make the minimum payment. You see, interest rates were pushed downward not just to help business and individuals to borrow money. If interest rates were now just six or seven percent, the Treasury would be stretched to just pay the interest! Simply put, interest rates were pushed down so the Treasury could continue to borrow more but not pay more. This situation is now coming to a head because even at one or two percent interest rates, we are now paying as much interest as we were 10 or 15 years ago when the total debt was only a quarter of what it is now!
What I did above was point out the fact that the Federal Reserve is the biggest hedge fund in the world with well over $4 trillion in assets and the U.S. Treasury is the biggest bankrupt with over $18 trillion in debt. It is important to understand, foreigners are no longer buying U.S. Treasuries with the exception of the Bank of Japan. The Fed and BOJ are now by far the biggest buyers of Treasury bonds. The situation has become “circular” if you will between the central banks and their treasuries. The central banks are printing the money (monetizing) out of thin air in order to buy bonds from the Treasury in order to pay interest and pay back previous borrowings.
Let me wrap this up by explaining what a Ponzi scheme is and how they work …until they fail. All Ponzi schemes start with “confidence” (and thus the word ‘con-man’). The investor is promised a return on his money. The conman “uses” the investor’s money, in order for the conman to pay the fist investor he must find another investor. In order to pay these two investors, he then must find two more investors. Then four, then eight, then 16 and so on. The scheme grows and grows until there are not enough new investors left to pay off the existing investors. This is when the scheme fails publicly and everyone finds out they lost their money.
This is exactly what our banking and financial systems are, Ponzi schemes. We are told all sorts of lies to keep our confidence. We are told there is no inflation and in fact we “need” more inflation. We are told unemployment is at multi year lows. The problem is, more and more “marks” are figuring out the lies, confidence is waning. On the other hand, the ability to expand the Ponzi is also strained as the world had reached debt saturation in 2008. Sovereign governments stepped up and began to borrow heavily in order to keep the game going. Now even treasuries themselves have reached debt saturation and can borrow no more. Both necessities to a successful Ponzi scheme are now faltering, “confidence and new money”.
If you doubt this, then ask yourself “why”? Why have nearly ALL Western governments passed into law “bail in” provisions to their banking systems? A “bail in” is where you as a depositor lose part or all of your savings if the bank goes broke. In 2008 it was the government that stepped in and “bailed out” the banks, this time it will be YOU (and your money), the depositor who will bail out the banks. The legislation has been put in place over the last year to 18 months. Do you really believe there would be this type of legislation if they did not intend to use it?
Lastly, what can you do about all of this? I’ve shown you the government has crossed the banana republic threshold, the central bank has gone as far as is practically possible and the banking system has been prepared for a collapse …get out of “it”! “It” being the entire system because it is a Ponzi scheme. “It” being dollars issued by an insolvent central bank and lent to a bankrupt Treasury to borrow. “It” being these dollars held by you and held at a bank within a system which already has contingency plans for how to handle their collapse!
I tried to write this piece in as most basic terms as I could. Most who will read this will say to themselves “this is nothing new, even boring”. To this I say yes, you are absolutely correct but you now have a tool. The next time someone tells you, “you are just a tin foil hat nut job”, ask them one question. Ask them “do you believe the government is broke?”. Overwhelmingly you will hear words of agreement. Then, please copy and paste the above or just forward this to them. Facts are facts and there is no arguing with the above logic. Of course, you might hear the words “but, it’s different this time” …it never is!
For tomorrow I will do another very basic exercise using just three charts for those who are “visual”. As I mentioned above, please use this and the next piece as a teaching tool for those you love and care about because financial wreckage is coming as sure as tomorrows sunrise! Regards,
Bill Holter
Hi Bill,
A real pleasure reading your articles, your writing is extremely clear. I’m wondering how PM would be useful in a full and total collapse of the world economic system? people minds would be focus on the basic necessities life like food, clothing etc. not sure how PM would be practical (maybe silver)? A full total collapse would involve much more than having PM but way more important would be basics skills that my father’s generation had (raised on a family farm) but basically very few have nowadays.
Kind regards,
D.
thank you Daniel, silver will spend and gold will carry wealth to the next currency system. !!!PS. Everyone, I may not be able to reply or even post comments shortly until some time Wed.. Please be patient, your comments will appear and be responded to.!!!
Having watched the “gold price” action a lot in recent months, I THINK I detect the beginnings of an incipient panic into gold. The miners are moving!
That said, we have been cowed so many times and wrong-footed by the manipulators. Still, that constant slow upward price movement is occurring…
Yes Kredit, the “bear trap” began to close after mid November.
Really great article Bill. As you say, so we can have something to show and teach people about how we got into this mess and got where we are. Also, there are many very good reminders about things that are easy to forget regarding this financial mess the banksters got us into. Thanks again Bill for really excellent writing.
a pleasure Richard!
Excellent. I Copied and Pasted this one because those I love tend to hit delete before opening a link!
In 1999 no one listened and no one remembers the warnings, If there is still internet, this time is different
1929?
1999 Dot Com,
I have said to family that 2008 was 1920, 1929 is hard on our heels.
after this one is done, no one will even remember 1929.
No gold to take from the Citizens (subjects) ala 1933
far less and less widespread, this is for sure.
One sort of technical question.
Bail – ins
I don’t see bail ins as being effective, at least in the US, although they may happen. How would a Bail in be effective if the Bail in is merely to acquire FIAT FRN? If they had a value, the FED could print more.
1933 the bail in was Specie, not possible today
yes and no, yes the fiat has no value and can be printed for free, no because “they” need to take it to show it still has “value”.
Hello Bill..
I exited some long positions in the miners today on hopes of buying them back on a pull back. When ever I (or other people), sell for the sole purpose of taking a profit and wanting to buy again on a pull back…the pull back were looking for never happens.
This is the first time in almost a year one can sense the miners (mining shares) are moving significantly higher. I have always believed miners lead gold and silver. They led the metals lower….and are now leading them higher.
Absolutely great article today….can’t wait for the visual with charts!
-Rodger-
thanks, trying to “trade” this is a big mistake in my opinion as you will either be “in” or “out” when they turn the lights out.
Bill your series over the last couple of weeks have reached a new level of excellence. I have almost given up with most of my family and friends as I have been market wrong for nearly 4 years. My wife even ridicule’s me in private as other family members have made a bundle while I have lost 2/3’s of our nest egg in metals and the miners as well as other commodities. I remain steadfast as I see the truth but its been beyond humbling. With these efforts I will once again subject myself to the abuse as I feel you have really made it beyond simple to grasp. As you mention the times are showing more of the gaps in the truth and the bag is now looking a bit more scrawny. Will hope this time with your efforts I can burn thru the propaganda and get some of the crew to step up to the reality and cover their behinds. Bless you sir.
thank you KC, those very people will be at your doorstep looking for advice…and food when the lights go out.
I’m continually reminded of something Will Rodgers said: “I am more concerned about the return of principal than the return on principal.”
PMs return principal, for the next few yrs those that do not lose ground will be ahead!
those who arrive in the next system with wealth intact wins.
Thanks Bill for your insightful work. Although I am from Australia , I am convinced that your work is still very relevent here at the land downunder. I have nearly half of our assets in PM, some cash on hand and the remaining half in the bank. While I obviously like PM, I don’t think it sound practice to have all of my eggs in one spot. Your view would be appreciated. Cheers
If the ten largest US banks totally failed, most of us would still have our money in local banks. If no other country would accept dollars we would be more self sufficient than America in 1900.
If anyone refused to sell things for dollars in the U.S. they would soon be in jail. The government has the force to quickly make the basic economy work. Food, water, gas, housing will not go wanting if we have to execute examples in the street. I’d speculate that the Internet and telephones will also be kept running no matter what. TV is going to be on.
Will such World War One control of our economy provoke chaos? We closed all mines to force men into the war effort and did those miners or owners riot? Fear and hardship brings most of us together.
It may be a harsh new world, but let’s not start to think it will be unlivable. I doubt if it would be as hard as living in a sod hut in the winter in Iowa in 1852 when Iowa became a State. If men and women could do it then, we can do it with smiles in 2015. You city slickers may need to get back closer to the earth. Victory gardens this year might improve your standard of living and bring extra enjoyment to those lost on golf courses looking for nature.
Mike, you obviously live out in the country. I assure you it will be a disaster in the cities and not “more livable than 1900”. More than half the population cannot even start a fire to boil water, distribution will totally break down when credit does.
Survival of the fittest improves the herd. Those around Lake Arenal will hardly know Houston has a problem. Buying PMs is obviously common sense when the fiat is growing exponentially. But location, location, location. Is your community capable of being self sufficient with guns? Is there a single point of failure that could bring down your community? Costa Rica does not have food stamps, to mention the largest vunerability of the USA. My coin store thrives on Comex manipulation as the Joes sell me silver coines for $16 an ounce. If you can’t beat them, join them— temporarily.
Vivi’ en Costa Rica por cinco anos. Pense que los gringo van a tener un tiempo muy dificil para sobrevivir. …Entonces, vivimos con Tejanos con muchas armas y balas. Todavia pienso que los gringos en centro y sur America tienen puntos de espaldas cuando la systema caer. Vamos a ver? Is the crime not already too much for you to bare? Living in rural Texas in our opinion will be safer which is why we “paradise” behind.
Curious how Americans will act after a bail in. I almost think the country won’t accept it. Maybe this is what it will take to wake them up. It may light the fuse if their is any american spirit left. I hope we kick out central banks in the next system but I think the same powers will still be in charge
the people will rise up NLY is small balances are included.
Thank you for the excellent article, Bill. I will send this on to family and friends who still do not get it.
thanks Brandon.
Another great article Bill.
I have found it extremely awkward spreading the word without coming across as nut job. It’s also very hard to know where to start.
I now point complete newbies to http://demonocracy.info
which gives them visual impact in very short films and then I have some foundations to build from.
Hope this helps someone
I have written a “visual” piece for tomorrow.
Dear Bill, From the bottom of my heart, thank you for writing this series. You truly have accomplished a easily accessed, easy to interpret, factual documentation for the layman. All a man needs to appreciate the state of our current economic affairs, along with the accuracy in your reports is the very minimal amount of 1 of 4 characters/traits; a) a basic understanding in economic principles, b) the slightest intuition somethings not right, c) has realized they are a sheep, d) (no longer so) COMMON SENSE, e) the slightest ability to use an open mind… I can proudly state, that i have increased your following by at least 15 souls up here in Calgary, Canada. I am also personally indebted to you! for of my friends who have willing started reading your posts after I’ve shown them, i suddenly experience this awesome strange feeling that had been missing for a few years now. of someone close to me, giving me “that look, the 1 of Oh, it does make sense AND IS DOCUMENTED, You aren’t Bat shieat crazy”!!!! lol
But to the point. Up in Canada, with the massive decline in the CanD$ vs usD$, it has bumped both everyday costs on items, living expenses, and especially PMs like silver. Do u see the price of the dollars coming closer to parity before the total collapse? or should i not risk it, and go buy the extra silver maples, and 1 golden coin, today while its a guaranteed I can actually have the coins in my pocket at the end of the day? (i already have a lil bit saved). Or is there a time in the foreseeable future where i,ll most likely be rewarded for temporarily hanging on? Another question. What would be a good option to look for solar panels/off grid power system (small+affordable) any advice? and at this point to the collapse, is too risky to order from china? Lastly, although i live in a city of over a million. i have a family ranch 4-5 hours drive from here. at what stage or signs showing, do i pack the family and head on out, leaving behind job and gfs post secondary schooling? both being able to b picked up with no harm done if we were to take no more than a “2 week vacation” to come back from pending an act from god preventing a full collapse of everything?
thanks so much, best regards: BC Bernie
thank you for the wonderful comment Bernie. It’s always good to hear once in a while we are making a difference. As for the Looney, I do believe it will again move higher versus the dollar, but, I would not wait and try to time metals purchase. As you say, the day will come when you cannot get them. As for “when” to bug out, you will know but make sure you have the gas to get where you are going! ======== THIS WILL BE MY LAST POST OF COMMENTS UNTIL AT LEAST TOMORROW AFTERNOON:, WILL MODERATE ABD RESPOND TO ALL THEN-========
Bill,
That was an outstanding article I’ve read hundreds trying to keep my sanity daily wondering if I’m the crazy one, I know it’s coming like a train I hear the whistle and there’s this bright light just don’t have the arrival time. Thanks for the clarity u and Andy are two of the best in your field.
welcome Don.
Thank you Bill. You can never remind people of basic principles and truth enough. Because we have short memories, are complacent and lazy we need to be told over and over again. If not we will surely fall for the same lie over and over again.
A recurring refrain in the Bible is: Remember,Teach and Observe!
mark in Victoria, BC
yes!