2022 - Countdown To Collapse

Beware the Ides of March    Shakespeare, Julius Caesar

On March 15^th, the Fed decided on a series of rate hikes that will be as consequential to capital markets as the Ides of March was to Julius Caesar in 44BC. The demise of financial markets, however, will not be sudden and unexpected like the assassination of Caesar. The collapse of capitalism will be as protracted and volatile as it is inevitable.

Fed sees March rate hike but no roadmap after that. Reuters, January 31, 2022

In capitalism’s endgame, there is no roadmap. In Betting In The Endgame (2010), I wrote: The endgame of capitalism is a uniquely different environment where investors find themselves faced with increasingly dangerous options. In the endgame, proven strategies are improvident, buying and holding becomes a time bomb and speculators are favored over investors because of excessive liquidity and volatility.

Capitalism, a system of credit and debt that produced 300 years of growth is now dying. The bankers’ debt-based money has created such levels of debt that even 0 % credit can no longer induce sufficient growth to pay and/or service today’s aggregate debt . In the endgame, the problem is not the lack of credit—it’s the excessive amount of debt.  

Historically, the Ides of March was the deadline when Roman citizens either settled their debts or faced imprisonment. In 2020, hopes of repaying capitalism’s constantly compounding debts of $226 trillion evaporated when global economic activity froze due to Covid-19.

The velocity of money in the United States was 1.104 in the second quarter of 2020, the lowest ever recorded in our country…Velocity of money measures the rate that money is exchanged in our economy for goods and services.

Velocity of M2 money Stock, St. Louis Fed

Had the Fed and other central banks not intervened, the sudden cessation of economic activity would have caused a catastrophic deflationary collapse and an even greater Great Depression. To prevent this, central banks immediately expanded the money supply.

In 2020 alone, the U.S. has created 22% of all the US Dollars issued since the birth of the nation. - bitcoin.com, October 5, 2020

The explosive growth of the global money supply unleashed powerful previously quiescent inflationary forces; and today, prices are rising at rates central bankers may not be able to control.

Some 55% of items saw price increases of 5% or higher in January [2022]…the current inflation is nearly everywhere, including around the world. The United Kingdom’s central bank expects inflation to exceed 7% this spring and for inflation-adjusted living standards to decline by about 2% this year. Inflation in the eurozone hit 5.1% in January, prompting the perennially dovish European Central Bank to start contemplating an interest rate increase.

The Editorial Board, Inflation Is Everywhere, The Wall Street Journal, February 13, 2022

We’re at more risk now than we’ve been in a generation…this could get out of control… One scenario would be…a new surprise…that we can’t anticipate…but we would have even more inflation.

James Bullard, President St. Louis Federal Reserve, February 17, 2022

In February 2022, inflation rose even higher. On March 10^th, AP News reported: US inflation soared 7.9% in the past year, a fresh 40-year high…“The numbers are eye-watering and there is more to come,” said Eric Winograd, senior economist as asset management firm AllianceBernstein. “The peak in inflation will be much higher than previously thought and will arrive later than previously expected.”

From January to February, nearly every category of goods and services got pricier. Grocery costs jumped 1.4%, the sharpest one-month increase since 1990, other than during a pandemic-induced price surge two years ago. The collective price of fruits and vegetables rose 2.3%, the largest monthly increase since 2010. Gas prices spike 6.8%, clothing 0.7%.

Inflation

Central banks have only one way to combat rising prices, i.e. to raise interest rates. Rising interest rates, however, will cause today’s multi-trillion-dollar bubbles in derivatives, stocks, bonds, real estate, and cryptocurrencies to burst.

Historically, the most frequent catalyst of a bubble-bursting is rising inflation and [rising]  interest rates.  George Athanassakos, The Globe And Mail, May 26, 2021

…rising inflation and interest rates tend to force stock market bubbles to pop sooner rather than later…The 2008/2009 Great Recession and collapse of the US housing industry happened at a time when interest rates were on the rise. From 2004 to 2997, the federal funds rate jumped from approximately 1% to 5.5%. Where does that leave us in 2021? Panic and fear fueled by rising interest rates and inflation could send investors running for the exits. If history is any indicator, a stock market crash of 40% to 60% would not be out of the question.

George Karpouzis, learn-to-trade.com, May 31,2021

Fed chairman Ben Bernanke’s now-fatal experiment with Milton Friedman’s helicopter drop of money, i.e. quantitative easing + zero percent interest rates, is about to destroy not only capital markets but the helicopters—the central banks—themselves whose newly-printed money inflated the colossal-sized bubbles now about to burst.

Source: HowMuch.net            RELATIVE SIZE OF TODAY’S BUBBLES       

BERNANKE IN BLUNDERLAND

Tread carefully the road you’re on

The time has come, Bernanke said

To talk of many things

Of crashes – cash – and the lack thereof

Of inflation taking wing

And why a helicopter’s needed

And why credit’s no longer king

But wait a bit, the crowd did cry

We’ve had enough of that

The froth’s too high and everywhere

And the one percent’s too fat

Bernanke, however, was undeterred

Remembering Friedman’s chat

That if a helicopter flew overhead

Dropping money from the sky

Combined, of course, with tax cuts

Then deflation would surely die

But try as they might in the real world

Those theories just don’t fly

But nebbish minions with learned minds

Are not so easily persuaded

To submit to truths and light sublime

When power and fame they’ve wedded

So keep your counsel in these darkest of days

And watch with whom you’re bedded

For the crowd you’re with determines much

Whether to darkness or light you’re drawn

The present world’s passing away

And the coming has yet to dawn

So twixt tomorrow and today

Tread carefully the road you’re on

drschoon, Monetary Liquifaction, Gold and

The Time of the Vulture, April 15, 2016

WHAT NEXT

The year before Wall Street banks collapsed in 2008, a severe liquidity crisis shook global markets. In the spring of 2007, I predicted a crisis would happen that summer.

It’s spring 2007 and the sun is shining in the US, backyard BBQs are being cleaned in anticipation of summer’s use. A severe financial crisis, however, is in the offing…This summer, America’s subprime CDOs are coming home to roost, and not just to the US.

       drschoon, Subprime America Infects Asia and Europe, May 2007

In July 2007, two multi-billion subprime Wall Street hedge funds collapsed and in August, French bank BNP Paribas barred investors from accessing $2.2 billion worth of funds invested in subprime mortgages.

The complete evaporation of liquidity in certain market segments of the US securitization market has made it impossible to value certain assets fairly…the valuation of the funds would resume as soon as liquidity returns to the market…that in the continued absence of liquidity, additional information on the envisaged measures would be communicated to investors within a month.

New York Times, BNP Paribas Suspends Funds Because Of Subprime Problems, August 9, 2007

THE COMING COLLAPSE OF CAPITAL MARKETS WILL BE ACCOMPANIED

BY A LIQUIDITY CRISIS OF UNPRECEDENTED PROPORTIONS

AND THE METEORIC RISE OF GOLD AND SILVER

To revive the economy after the collapse of the 2000 dot.com bubble, the Fed cut interest rates to 1%. The 1% rates combined with the sale of subprime mortgages to unqualified buyers not only restored economic growth but created another dangerous bubble in US real estate. To pop the new property bubble, the Fed quintupled interest rates from 1% to 5.5%, triggering a liquidity crisis that led to the collapse of Wall Street investment banks in September 2008.

The damage to the economy by the collapse of two financial bubbles, however, had been done. In 2009, central banks were forced to print even more money to keep economies afloat, hoping against hope that time would provide an answer.

Time, however, didn’t comply. When global economies froze due to Covid-19, central banks, printed yet even more money; and now, once again, we are about to learn that the more money you print, the less its worth, i.e. inflation

If you do not change direction, you might end up where you are heading.  Lao Tzu

The Fed’s last experience with inflation was in the 1970s. In January 1971, inflation was 4.25 % and Fed interest rates were 5.0 %. That year, on August 15^th, the US delinked the US dollar from gold. Three years later, in 1974, inflation had tripled to 12.2 % and interest rates were at 13 % to force inflation lower.

In 1976, inflation was 5.8 % and Fed interest rates were 4.75%. The continuing expansion of the money supply, however, caused inflation to again surge. Three years later, inflation more than doubled to 12.2 % and Fed rates were raised to 11.5 %. In January 1980, inflation was 14.2%  and, in February, the Fed rates were again raised to 15 %. In March, with inflation skyrocketing upswards, the Fed rates reached a historic high of 20%.

Note: In 1980, I was importing hand knotted wool and silk carpets from China when interest rates on our line of credit surged to 24%.

Today, inflation is again the Fed’s highest priority. With inflation at 7.9 % (the highest since the 1980s), the Fed will be forced to raise interest rates until inflation subsides. In 1980, 20% rates were required to do so.

On March 7th, Michael Pento wrote in A Recession Unlike Any Other:  …the Fed is now forced to combat inflation whether it really wants to or not…If Mr. Powell prosecutes his plan to raise rates six or more times this year—just as the Fed destroys the money supply by shedding a trillion dollars in Treasuries and mortgage-backed securities—the upcoming recession could quickly morph into a depression.

So, which is it, Mr. Powell? Keep monetary policy loose and risk an intractable rise of inflation and the complete loss of confidence and credibility of the central bank. Or tighten monetary policy enough to deflate the massive bubbles in bonds, real estate and equities. Either strategy is now destined to end in disaster for the market and economy.

The Fed is trapped; so are we.

INFLATION, WAR, COLLAPSE, REBIRTH

David Hackett Fisher, author of The Great Wave, Price Revolutions and the Rhythm of History(Oxford University Press, 1996) observed that price-revolutions, i.e. great waves of rising prices, brought about the collapse of the Middle Ages, the Renaissance, the Age of Enlightenment, etc.

Fischer identified three complete monetary waves in European history, each consisting of a price revolution, featuring high inflation, followed by a war crisis, followed by a new equilibrium. A fourth wave began, says Fischer, with the persistent monetary inflation of the 20th century.

https://en.wikipedia.org/wiki/The_Great_Wave_(book)

Today, a price-revolution of even magnitude greater is about to cause the collapse of the present age, making way for a new and better world, i.e. a new equilibrium. As in each inflationary wave:  … Food and fuel led the upward movement. Manufactured goods and services lagged behind…Eventually, prices went higher, and became increasingly unstable. They began to surge and decline in movements of increasing volatility. Severe price-shocks were felt in commodity movements.

The money supply was alternately expanded and contracted. Financial markets became unstable. Government spending grew faster than revenue, and public debt increased at a rapid rate. In every price-revolution, the strongest nation-states suffered severely from fiscal stresses: Spain in the 16^th century, France in the 18^th century, and the United States in the 20^th century.

Wages, which had at first kept up with prices, now lagged behind. Returns to labor declined while returns to land and capital increased. The rich grew richer. Inequalities of wealth and income increased. So did hunger, homelessness, crime, violence, drink, drugs, and family disruption.

Of these times, Professor Fischer wrote: We are living in the late stages of a very long price-revolution, perhaps in the critical stage. It also tells us that these are global processes. Our destiny is now closely linked to the condition of all humanity. The patterns of the past also suggest that what will happen in the future depends in no small degree on the choices that we make. Human beings do not hold everything in our hands, but our collective power to shape historical processes has grown enormously in the past 800 years. We can use this power wisely or foolishly. Our choices will make a difference for our children and grandchildren, and for generations yet unborn.

Choose well.

When houses are built on sand

And money is based on debt

And the end times are beginning

You ain’t seen nothing yet

Gold and silver will help

When money’s no longer gold

But only faith will give you the strength

To make it to the end of the road

These are most interesting times. My new website is posted again at www.drschoon.com.

Buy gold, buy silver, have faith,

Darryl Robert Schoon

www.drschoon.com

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