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Last week I mentioned that the central
banks are battling world delevering with what I
estimate to be $30 trillion worth (using USD measure) of financial backing to
banks and insurance companies and brokerages to battle the delevering happening since the beginning of this great
financial crash which started in 2007 with Bear Stearns. Funny because I
worked as a security guard in one of those places when I was studying math
and history at UCLA...around 1984.
I remember seeing these lucite plastic cubes with minature
ads proclaiming their latest hundred million dollar deals on their desks.
Clearly those were trophies. This stuff is well known and they display them
on their desks. Or they used to do that, in the 1980s.
Hmmm.
Trophy deals.
Financialization of the
entire economy
Fundamentally what these people did was
to financialize everything, or to take all goods
and services and companies and capitalize them (this means to take the income
each year and compare it to a bond with an interest rate say of 5%) and then
sell everything as a security or stock or bond or whatever. The entire US
economy at this time was securitized, and the basic form of that was enhanced
greatly since 1980 to the present. I have to use a very broad brush here to
keep this from being a long piece.
At the same time, money and savings were
being accumulated by the baby boomers, and at the same time the stock
industry promoted everything, particularly tax deferred investment accounts,
and promoted investment in the US stock market.
So as everything in the US was
securitized, right after the gold crash from around 1980, when it was $870,
an entirely new paradigm was created. To securitize every economic producing
activity and to buy it up and aggregate it. Greenspan knew there would be an
end to this party. He stated that he wanted to be the US Fed Chief when the
next great depression came because he thought he could beat it.
As long as the baby boomers continued
working and saving this growth and securitization model worked. Of course we
had the usual recessions and so on.
Tech Boom
The US even continued in its technical
innovation, and we had the Tech Boom concentrating on first the personal
computers, then the internet (networking build out) and that also combined
with information machines called databases where huge collections of
information about whatever you wanted to focus on would be
possible…This created new unimaginable wealth.
The information revolution speeded up
three things
·
It speeded up wealth
aggregation
·
It speeded up globalization
·
It speeded up securitization
Now we get to the Greenspan Gambit
A gigantic world economic boom began
lasting from roughly 1983 to 2001 and the tech crash, followed by a speculation
and housing boom from 2002 roughly to 2006.
When the tech crash came, the principle
of the Greenspan Gambit came into focus. It was to use the US central bank to
monetize the losses of the banks and financial sector to prevent a great
economic depression as I understand it. The US cut interest rates to very low
levels. This was the first step. This caused the home finance boom and home
bubble in the US.
They used ultra-cheap central bank money
to try and recover from the tech crash and caused a larger bubble the housing
and commercial real estate bubble. Interest rates just before this time were
about 6%.
Securitization of everything continues,
especially with Tech boom capability
In the meantime, all the securitization
of all productive (income producing) activity in the US, which started around
1980, continued apace. This was typically called the Financialization
boom.
Also the continuation of ‘globalism’ and exporting US production
and jobs overseas.
Housing bubble collapse is the beginning
of the great collapse
Once the housing bubble collapsed, the
US Fed was faced with unprecedented bank crises around the world. It started
to basically buy up or guarantee all bad debts of first US banks. Then the US
found itself having to back up other world banks in Europe and so on.
The Greenspan Gambit I believe (which is
not clearly publicized) was to monetize whatever markets were necessary when
they crashed to avert an economic depression. At first we heard it was to be
$800 billion dollars in the Tarp plan amidst great debate. In a basic sense
the risk and losses were transferred to the US currency in principle
and the US public in the increased national debt.
In a few years since the beginning of
this mess with Bear in 2007 and Lehman in 2008, the US has either bought,
guaranteed or did currency swaps estimated to be $20 trillion dollars, using
the Greenspan Gambit to use the presumably unlimited power of the US Fed and
US treasury to basically monetize all bad debts. BUT…
It was only the bad debts of the banking
system. The public was not bailed out. Rather they were borrowed against. The
US student loans out are crushing our young people. It’s a mere $1
trillion compared to the $20 trillion the US put up backing the world bank
system. The entire US mortgage debt of around $14 trillion could have been
paid off!.
So far, the Greenspan Gambit, which I
assume Bernanke is implementing, and I could be wrong, has cost the US $20
trillion in various commitments. And all we got out of this was a horizontal
to down US stock market. A collapsed US housing market. And a collapsing US
middle class.
Gambit causes US national debt to
explode in a few years
The US national debt exploded from very
roughly, $7 trillion (various estimates) around 2005 to now $15 trillion.
That is direct borrowing. The other amount of the $20 trillion is
hypothecated debt and promises which we will end up paying one way or
another.
The Greenspan Gambit has failed.
Gold will explode at some point
At some point, gold will explode. But
first, the US and the rest of the world is facing debt deflation. And we have
not seen the real effect yet. Just wait till corporate earnings start to fail
this year. We are at risk of a major world stock crash.
Ironically, things like gold and metal
stocks sell off at first in these situations. If that happens. That is so the
mega funds can cover margin calls on other things. Gold is like cash to them.
In the meantime, until the Fed fires its
last bullets, QE3,4,5 etc,
the US will continue supporting the world banking system losses of all types,
and the EU as well, until the US treasury is unable to borrow anymore. That
will be a fateful time. The other central banks are also doing the same
thing. We are all on borrowed time for this present world as we know it.
Gold and Cash
In the US, gold miners like Homestake did well in the Great Depression of the 1930s,
while the stock markets were trashed. I would think this will reoccur. But
first we will probably see a massive world stock crash, once they all realize
earnings in the West are falling through the floor, and sovereign debts are
going bad. In the meantime, it seems cash and some reasonably measured gold
and gold stock positions are the safest bet, aside from also buying up real
assets for cash (paid off). But as I have stated before, we are first in a
debt deflationary environment, and metals and especially general commodities
will suffer in the first crashes. But later they will be probably one of the
few havens left.
Gold USD and Euro
At some point the USD will pay for all
this, in the bond markets. Gold at that time will explode. The same would go
for the Euro, which is closer to the abyss. We might see both gold and the
USD rise together for a while in that scenario. Interesting times…
Anyway, we forecast gold to range from
$1500 to $2000 for 2012 back in Winter 2011, and have been right. We also
caught the last gold price collapse from near $1800 this year by two days
warning subscribers. We also predicted the USD rally last year April 25, 2011
by about one or two weeks’ notice and no one I know of did that. We
also predicted in Summer 2011 the great general commodity crash.
Chris Laird
Prudent Squirrel
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