I was at a recent conclave in the Rocky Mountains with a couple central bankers, one from the Federal Reserve and one from the Bank of England. They’ll say things privately that they won’t say publicly.
And I was handed a copy of Janet Yellen’s playbook.
The Fed is trying to kind of use propaganda…lie to us about economic prospects, talk about green shoots, use happy talk to try to get us to spend our money.
The Fed doesn’t know what they’re doing. Don’t ever think that they know what they’re doing.
You can print all the money you want, but if people are not borrowing it, if they’re not spending it, then your economy is collapsing, even with money printing.
So you can understand it this way…
Let’s say I go out to dinner and I tip the waiter. And the waiter takes my tip and he takes a taxicab home. And the taxi driver takes the fare and puts some gas in her taxicab.
Well, in that example, my dollar had the velocity of three. $1 supported $3 of goods and services: the tip, the taxi ride, and the gasoline.
But, what if I don’t feel great? I stay home, and watch television. I don’t spend any money. Well, that money now has a velocity of zero. I leave my money in the bank, but I don’t spend it.
Let’s look at what’s actually happening with the velocity of money.
It’s plunging… It’s going down very rapidly.
But compare this decline of velocity today to what we saw leading up the Great Depression.
Now, in the depths of the Great Depression velocity was even lower…
If you compare what’s going on today to what happened in the late 1920s just prior to the Great Depression, there’s a very striking resemblance.
So, it doesn’t matter how much money the Fed prints.
Think of it as an airplane that’s coming in for a nosedive. It’s crashing… crashing… getting closer to the ground. The Fed is trying to grab the joystick and pull the plane up out of the nosedive and get it back in the air…
But, unfortunately, it’s not working, we’re heading for a crash.
There are a lot of signals out there and they’re very, very troubling.
One of the ones I’m watching closely, and I know people in the Intelligence Community focus on also, because it covers so much ground, is called the Misery Index.
The Misery Index = Real Inflation Rate + Real Unemployment Rate
If you look at the Misery Index today compared to the period of stagflation in the late 1970s and early ’80s that Americans remember so well…
It’s actually worse.
This can lead to social instability…
Take this back to the Great Depression… The Misery Index in the Great Depression was 27.
Today it’s 32.89.
Believe it or not, it’s worse today than it was during the Great Depression. What happens as a depression worsens? Businesses can’t pay their debts. The bad losses fall on the banks. The banks ultimately fail.
That’s happened before. The Fed has had to bail out the banks.
But what happens when the Fed, itself, is in jeopardy?
You have to compare the capital to the balance sheet. How much in the way of assets and liabilities is the Fed’s capital supporting?
When you look at that it’s a much scarier picture, because the actual liabilities, or debt, if you will, on the Fed’s books is $4.3 trillion.
So you’ve got $4.3 trillion sitting on comparatively skinny little capital base of $56 billion…
That’s very unstable.
Prior to 2008, the Fed’s leverage was about 22 to 1. Meaning they had $22 in debt on their books for every $1 of capital. Today, that leverage is 77 to 1.
But, the problem is not limited to the Fed. It’s infecting the private banking system as well.
There’s about $60 trillion of debt on the balance sheets of our banking system.
For a long time, debt and the banks grew at about two times the rate of growth in the economy. But lately, this has exploded. Today it’s up to 30 to 1.
In other words, for every dollar of economic growth, there’s $30 of credit being created by the banking system.
I can give you a very good example of this and this actually comes from physics.
If you had, let’s say, a 35-pound block of uranium shaped like a cube, it would actually be fairly harmless. It’s what we call sub-critical. It’s radioactive, but it’s kind of tame. But now imagine you engineer it. You take that 35-pound block. You take one piece and shape it into something about the size of a grapefruit. Take another piece, shape it into something like a bat. Put the ball and the bat in a tube and fire them together with high explosives.
That sets off a nuclear detonation. That destroys a city.
The way it’s been shaped and configured is what takes it from what we call sub-critical to super-critical.
Even our stock market has reached a super-critical state.
One of the signs that’s really fundamental, and really important, is the ratio of stock market capitalization to GDP.
Because, remember, the value of all the stocks in the stock market, that’s supposed to represent the fundamental economy. It’s not supposed to be off in a world of its own. But if you look at what’s been happening to that ratio recently, it’s going sky-high.
Just prior to the recession…
That number was 183%.
Go back to the famous tech bubble, the dot com implosion of 2000.
At that time, it was 204%.
And if you want the scariest news of all…just prior to the Great Depression that number was 87%.
In other words…
The stock market capitalization, as a percentage of GDP, is twice as high as it was just prior to the Great Depression.
So, that’s a really good metric for saying, “Hey, is the stock market heading for a crash?”
All the data says, “Yes, we are.”
[from an interview with Jim Rickards, Financial Threat Advisor to the CIA]
NORM ‘n’ AL Note: More tomorrow from this same interview.
As always, posted for your edification and enlightenment by
NORM ‘n’ AL, Minneapolis