Financial Precipice à la 1929?

Men Eating Soup During Great Depression13 Feb 2016 – Are we standing on the precipice of a major financial collapse? I’ve become somewhat obsessed over the past two years with economics and monetary policy, not because I am money-crazy, but because I firmly believe a 1929 style market crash will usher in an area of pain, and I want to be ready for it. In this post, I will present several trigger factors that could set off such a crash event and then what the powers that be are likely to do in the aftermath that would affect every man, woman, and child in the developed world, you included. Finally, I’ll offer some measures you can take now to help yourself in the future.

These are all topics that have been absolutely flashing red in my news feeds over the past 1-2 weeks.

Trigger Factors

A Poor Underlying Economy

People on Food StampsThe talking heads on TV have long been trying to convince us the economy has recovered, but if you dig around in the right spots you quickly realize there is trouble lurking under the covers, and has been for a while. The unfortunate truth is that the economy is sick. Although Obama proudly proclaimed in his final State of the Union address that jobs have been added, unemployment is down, and the economy is robust, the sad truth is that a 5% unemployment number ignores a huge portion of the population that is excluded from the official government calculation. When looking at not just the number of jobs but the actual percent of working age Americans who have jobs, the number has dropped from over 50% to 46% since he took office. [1] Additionally, the increase in jobs is actually the net effect of losing 1.4 million manufacturing jobs and replacing them with 1.6 million waitresses and bartenders – not the high quality engine for productive growth you would hope for. What happens when people stop eating out because they’re broke? Finally, the number of people on food stamps has skyrocketed by nearly 50% since taking office – in fact, more than 1 in 6 Americans are now on food stamps. Tell them the economy has recovered! [2]

Price of OilThere is a huge laundry list of leading economic indicators I could point you to for visualizing the sick economy, but perhaps the king of all leading indicators is the price of oil. It has absolutely cratered in the past year and a half. It’s gone from well over $100 per barrel to now hovering around $30 and flirting with the idea of going lower, a 70%+ decline. Now why would oil drop in price so dramatically? Is it because the Saudi’s are trying to drive the American shale industry out of business? No, it’s much simpler than that. People simply don’t need as much oil because they aren’t producing enough goods because there aren’t enough people willing to buy those goods. When demand dries up, sellers are forced to lower prices to entice buyers to keep buying.

Distressed Banks from Debt Overload

With oil becoming increasingly expensive to extract from the Earth, oil companies have taken on excessive levels of debt to finance their drilling operations. It may have made sense to do this at prices over $100 per barrel, but certainly not anywhere below that, let alone at $30. Now many oil companies are facing bankruptcy, which means many banks won’t get all that money back.

US Debt to GDPBut the problem runs much deeper than oil, no pun intended. The truth is that the world has been overloading itself with an unsustainable debt for decades, and it has only gone up even more since the 2008 crisis. Global debt is now over $200 trillion and 286% of GDP, far outstripping the rate at which the economy has actually grown. The US in particular has seen debt grow twice as fast as GDP, meaning we’ve taken on far more debt than we can ever hope to pay off. [3] What’s worse, if you consider that government spending is actually included in GDP (essentially meaning that taxes and government debt are now considered productive economic output, which is ludicrous), and that government spending has of course risen, then you realize that the debt-to-GDP figures are probably hugely and optimistically skewed. [4]

Italy Non-Performing LoansWhat all this is adding up to is the simple fact that the banks will not get back all of what they are owed, and the world is starting to figure this out. The problems will first manifest themselves on the edges and work their way inwards. Take Italy for example. Shockingly, over 16% of the entire country’s borrowers have stopped making payments on their loans. This is huge. Given that most banks don’t keep any more than 10% reserves, this means that if 16% of their assets go bad then they are basically bankrupt. [5] With how interconnected the global economy is, don’t think banks in the major economies such as the US are immune to such a contagion.

A Major Bank Collapse

Deutsche-Bank Record LowOne event that could certainly propel the world (US included) into a major crash event would be if a major bank were to fail. This is not as far-fetched as you might think, and in fact I’ve been hearing tell of trouble at Deutsche-Bank for over a year now. Well, if the chatter of the past two weeks is any indication, this bank is very close to something going terribly wrong. Although nobody knows exactly what happens behind closed doors, there’s a lot of smoke telling us a fire is probably burning inside. For starters, they lost $6.6 billion in 2015 and their stock price has gotten pummeled by 36% since the start of 2016. [6] In the chart at right, you can see this puts their current stock price at a record low, even below that at the depths of the last economic crisis. [7]

If you’re an American or if you don’t follow finance then you probably don’t know anything about that bank and why it should worry you, but you should. It’s arguably the most important bank in Europe and its derivatives exposure is literally 20 times the entire size of the German economy. [7] In the words of Jeff Berwick, “A Deutsche Bank collapse would set off a worldwide banking contagion that would make Lehman Brothers look tame.” [6] As a memory refresher, the collapse of Lehmen Brothers in 2008 helped usher in the so-called Great Recession that we’re still recovering from today.

The trouble at Deutsche-Bank is finally starting to go mainstream, and needless to say the employees and investors at the bank are worried. Consider the following:

It was reported this morning [9 Feb 2016] that the bank’s CEO released a memo to employees in which he assured the “troops” that everything was fine. Most people do not remember this but I’ve been cursed with a great memory for certain details. Jimmy Kayne, the CEO of Bear Stearns, when Bear blew up gave the same type of pep talk to Bear employees shortly before Bear was flushed down the toilet. Reaching even further back in the annals of epic corporate fraud induced collapses, Ken Lay gave the exact same kind of pep talk to his people right before Enron collapsed.

As the adage goes, once a rumor is denied at least three times, the fact-basis of the rumor has been confirmed. [8]

Suffice it to say that the executives at Deutsche-Bank have told people “everything’s okay” so many times in the past couple of weeks that it’s almost proof positive that something is indeed horribly wrong.

Chinese Banking System Implosion

The Big ShortI would be remiss if I left out China, which has also been flashing across the news feed over the past two weeks. It’s well known that their economy and stock market has been cratering. This caught many people by surprise but if you consider the fact that their country has been building entire ghost cities with nobody living in them, and paying for it with astronomical levels of debt, then it shouldn’t have come as any surprise to anybody.

One thing from articles I read this week though that caught my attention was that the “Big Short” guy, Kyle Bass, is now calling for a complete implosion of the Chinese banking system within five months. [9] If the banking system supporting an economy the size of China collapses, you better believe the rest of the world is going to be dragged down right with it.

A Run on ETF’s

Another thing that could trigger a major crash would be a run on ETF’s. ETF’s (exchange traded funds) have become popular investment vehicles that basically mirror certain indexes. For example, if someone wanted to place a bet that the stock market was going to go up, they could buy stock ticker SPY, which is an ETF that mirrors the performance of of the S&P 500 stock market index. Now, in order to mirror the performance of the stock market, the managers (and computer algorithms) have to buy and sell shares of companies so that their performance mirrors the market. So, if the stock market starts crashing hard then that means the ETF’s have to start selling hard as well. To make matters worse, if people who have placed bets on the stock market get panicked because they’re losing massive amounts of money, they will sell their shares of the ETF. In order to pay back the shareholders, the ETF needs to start selling their underlying assets in order to provide the cash, which further accelerates the selling in the market place, forcing prices to drop even quicker. [10-11]

Conclusion

The take away here is that there are a lot of things that could become triggers for a large economic crisis, and one must remember that it’s not important what the trigger is – the important thing is that the system is so fragile that any number of triggers could bring it down. Will it be the simple fact that the economy is tanking? Will it be that the low price of oil sets off a massive chain reaction of bankruptcies? Or will it be that Deutsche-Bank or some other major global bank suddenly goes bust, or even the entire Chinese banking system for that matter!? Whatever it is, in the age of computer algorithm driven robo-trading, a little known chink the armor like ETF’s could massively accelerate a crash once it starts to pick up steam.

Next, I will explore things that will likely occur following an event that would likely impact every single person on the planet. These are not conspiracy theories – they are things that are actively happening in peripheral countries and will almost certainly happen in big countries shall things start to fall apart.

Negative Interest Rates

What is NIRP?

One of the big stories of the year, and of central bank desperation, has been the imposition of negative interest rate policy (NIRP). Negative interest rates basically mean that rather than earning interest on your bank deposits, you lose money on your bank deposits. As described in my post Inflation vs Deflation, I explained how central banks fear a shrinkage in the issuance of new debt because it means the current fractional reserve banking system we have falls apart. At the central banking level, negative interest rates operate by essentially imposing a fee on banks that keep money on deposit overnight. The theory is that if they can make it more expensive for banks to sit on cash, then they will be more likely to loan it out to people and businesses. As the theory goes, those people and businesses will go spend it on things in the economy. To be honest, they don’t care that those people are out spending money – they care that those people are taking out loans. Without constant new debt creation, the banking system falls apart.

It Doesn’t Work

Unfortunately, NIRP doesn’t work. Because banks aren’t completely idiotic and don’t want to just throw away their money to anybody who has no hope of ever paying it back, they still keep their money on deposit overnight at the central bank. So essentially, NIRP becomes a tax on banks, causing the banks become less profitable. To counter this, they then punish their own depositors (you and me) by increasing bank fees, lowering interest payments to effectively zero, or even passing on the negative interest rate entirely. Therefore, not only do the banks feel pressure, the entire population gets punished by this invisible tax. Furthermore, banks such as Deutsche-Bank are starting to go public with their frustration. They claim, rightly so, that NIRP will only make it easier for the system to break down.

Well don’t look now, but central bankers’ headlong plunge into NIRP-dom has created another “doom loop” whereby negative rates weaken banks whose profits are already crimped by the new regulatory regime, sharply lower revenue from trading, and billions in fines. Weak banks then pull back on lending, thus weakening the economy further and compelling policy makers to take rates even lower in a self-perpetuating death spiral. Meanwhile, bank stocks plunge raising questions about the entire sector’s viability and that, in turn, raises the specter of yet another financial market meltdown. [12]

This Can Happen in the United States

Although the Federal Reserve (Fed) raised interest rates in December, albeit negligibly, don’t think they won’t quickly reverse course if a major crash starts picking up steam. The European Central Bank, Danish National Bank, Swedish Riksbank, the Swiss National Bank, and now Japan have all already started imposing negative interest rates. Janet Yellen, chair of the Fed, is now on record saying that negative interest rates would be on the table if things got bad enough. If she’s saying this publicly, then you better believe she’ll do it. This has investors scared in the US and fund managers are already saying that they would likely pass on such charges directly to customers or even close their doors completely. [13]

Without bogging down too much in the details, remember that if your savings accounts begin losing value, that this means the purchasing power of your paycheck and savings will start dropping even more quickly than it already is. This very much WILL impact every person in the US if the policy becomes implemented.

War on Cash

What’s Happening in Europe

As scary as NIRP is, it still relies on people keeping their money in the bank. The natural reaction of people who begin losing money by keeping it in the bank is to take it out and “stuff it under the mattress.” Unless… yes, unless of course cash became illegal. Is this crazy talk? No, absolutely not. It’s already starting to happen! Germany just passed legislation that will make cash transactions exceeding 5,000 euros illegal. [14] What’s more is that European officials are also talking about eliminating the 500 euro bill, which would essentially require people to either exchange each 500 euro note for 5 x 100 euro notes, or deposit the funds into a bank account. The officials say the reason for all this is to combat money laundering, terrorism, and other illegal activity, but this argument doesn’t hold water, as we’ll explore a bit more further below. [15]

Here are some other headlines on the topic: [16]

This Can Happen in the United States

$100 Bills in CirculationThink this can’t happen in the US? Think again. A Bloomberg op-ed recently just called for an end to cash in the US. [16] CNBC recently had a guest on advocating that the US eliminate $100 bills in order to “deter tax evasion, financial crime, terrorism and corruption.” This continued argument that it would be a measure to fight crime simply does not hold weight. A staggering 56% of all money in circulation in Europe and the US is in the form of 500 euro or $100 notes. [15] Do they really expect everybody to believe that they would render a whopping 56% of all cash in circulation illegal in order to stop a few thieves and terrorists?

No, the real reason why central banks want to abolish cash is so that people are forced to keep their money inside the bank. This allows them complete control over the money supply, essentially trapping capital inside of it, and allows them to impose things like negative interest rates and other capital controls without any risk of people running and hiding. [15] It also of course reduces the risk of a run on the banks in the case of a major bank collapse.

Need more proof this isn’t really about criminals? Check out this absolutely disturbing slide in a presentation given by a member of Morgan Stanley:

Morgan Stanley NIRP

There it is in blue and white: an insider at Morgan Stanley, a major US bank, advocating for a quick move to a cashless economy precisely so they can introduce negative interest rates! [17]

And finally, one of the most eye-opening articles I read over the past couple weeks had several quotes taken directly from David Andolfatto, the Vice President of the Saint Louis Fed, openly admitting that they have discussed the possibility of creating a Bitcoin-like digital version of the US dollar, called Fedcoin:

…the notion is Fedcoin, which is a term not original with me, its something I came across in the blogosphere. JP Koning was the first to coin the term, but basically what this is is the idea of combining the bitcoin payment system, or the protocol with the US dollar.

We believe that the fed can maintain the fixed exchange rate system [between the currencies] because the fed [would] ‘print’ both types of currency, and no other private sector [entity] can print dollars, giving the Fed a comparative advantage.

And so, here is where the idea of Fedcoin comes in. Imagine that the Fed, as the core developer, makes available an open-source Bitcoin-like protocol (suitably modified) called Fedcoin. The key point is this: the Fed is in the unique position to credibly fix the exchange rate between Fedcoin and the USD (the exchange rate could be anything, but let’s assume par). [18]

The author of the article that brought this to my attention went on to surmise that if the Fed were to be able to fix the exchange rate between cash dollars and “Fedcoin” dollars, they could easily make it so the cash dollars are worth less than the electronic dollars. This would serve two purposes:

  1. Encourage savers to move their savings from cash into digital form, thereby entrapping their capital in the banking system.
  2. Allowing governments, banks, and debtors to keep their outstanding debt denominated in cash dollars, which would allow the relative value of their loans to go down. [18]

All the pieces seem to fit so nicely, it’s hard to believe this doesn’t happen. The government and banks get out of paying down all their debt while the savers and general public get trapped deeper under the control of the bankers.

Helicopter Money

What’s Happening in Europe

Finally, I noticed a bit of chatter over the past two weeks on the subject of helicopter money. Basically, helicopter money is the idea of giving money directly to the people in order to promote spending within the economy. This has been discussed in the far reaches of the blogosphere for some time, but it’s finally arrived. Switzerland is about to vote on a new law that would distribute $2,500 per month to each adult and $750 to each child, a whopping 30% of the entire country’s GDP! [19]

This Can Happen in the United States

Helicopter MoneyMartin Wolf, the Chief Economics Commentator for the Financial Times, just went on record saying that we should try this in the United States, that giving people money, either directly or via tax rebates, would stimulate additional spending in the economy. [20] If this were to actually happen, which is entirely possible given that there are so many reasons why the banks would desire it, it would quite possibly usher in an era of high inflation. By increasing the supply of money, the relative purchasing power of each dollar goes down. Since 2008, the central bank has essentially been printing money and pumping it into the financial sector, which has generated mass inflation in financial instruments such as the stock market, but if they were to do the same to everybody in the population, this would cause inflation on every day goods. Inflation is what led to people of the Weimar Republic famously carrying around money in wheel barrows, and it is what has just driven Venezuela to literally hire three dozen 747’s to fly entire cargo plane-fulls of cash into the country to deal with the hyperinflation currently being experienced. [21]

Now, do I think the US will turn into Venezuela any time soon? No, but one thing is for certain in my mind: if we start handing out free money to everybody, this will lead to significant inflation and therefore a depletion of the value of people’s savings. This is a very real danger, and here is a great quote inferring what could possibly go wrong:

Why has no-one thought of this before! Actually, someone has – Emperor Diocletian, for instance. It is probably no exaggeration to state that his decision to let the Roman Empire’s equivalent of the money helicopters fly was the main reason why Latin is a dead language today…. [20]

Conclusions

Tying it Together

cartoons-from-around-the-world-about-the-market-crash.jpgPeople may not realize it yet, but we live at a very critical moment in history. A giant decades-long expansion of debt on a global scale that has outpaced the actual growth in the economy is finally starting to come to an end. Between a crushing level of debt and an increasing scarcity of oil, the cost of production has become too high and the economy is choking. Banks are distressed to the point of insolvency, especially those in China and the “too big to fail” bohemiths like Deutsche-Bank. Computer-driven trading that drives popular investment vehicles like ETF’s will likely cause a mass acceleration of any major market crash, which will make it fast and furious once it starts to pick up steam. Central banks are becoming desperate to save themselves and have started implementing negative interest rate policies around the globe and are actively entertaining the idea in the US. An increasing number of cries from major banks to move to a cashless society aims to entrap people’s capital so the banks can have access to your money when they start facing bankruptcy. Finally, helicopter money is even being floated as a viable option, both in Europe and the US, in order to keep our monstrous debt and consumption driven banking system alive. Of course, none of these measures will actually work, at least not for the masses. It will help the banks weather the storm and survive to see another day, but it will destroy the savings of people like you and me.

What You Can Do

Great DepressionRather than talking about specific financial measures you can take to help protect yourself from a 1929 style market crash, I thought I would stay on my theme of “things I’ve read in the past two weeks” and share “12 Life Lessons Learned from the Great Depression” that I came across written by Rachel Falco of the blog How to Provide for your Family. [22]

I found these to be great lessons that are not just helpful in surviving a Great Depression, but also just in leading a better life in general. With that, I leave you until next time!

  1. Cowboy Up! No One Should Do This For You: We, as a people, are too dependent on the government. We are not entitled to receive anything accept that which God has given us. We need to step up and provide for ourselves, our family, friends and community. Sorry if this is harsh, but I know you can do this! 😉
  2. Devastation Happens Quickly, Be Prepared: The stock market crash occurred in October, 1929. By 1932, a year and a half later, 15 million workers lost their jobs and were unable to find other work. Our economy is now a world economy. Any crash will cause significant ripples not only in the USA, but worldwide. It will happen much faster. Be prepared.
  3. You Have No Control Over The Value Of The Dollar: Invest in other assets or invest in yourself and build on your set of skills.
  4. Have A Plan For Tough Times: Knowing what you will do when income isn’t coming in they way you expect helps to decrease stress and eases you through a difficult transition. What type of work will always be needed, regardless of the circumstances?
  5. A Positive Attitude Sets You Free: My great-grandparents were adults and my grandparents were children when they went through the Great Depression. One set of great-grandparents had a positive state of mind, while the other set did not. While both sets of great-grandparents suffered devastating losses, the set that remained positive didn’t agonize over these losses. They were much better off.
  6. You Do Not Need As Much As You Think You Do: You can get by on far less. Allow this to become your mantra, “Do I need this?”

  7. Go Local – Family, Friends & Community: The more self reliant your family, friends and community are, the less the effects will be felt.
  8. Become Resourceful – Adapt & Diversify: See if you can re-purpose that or maybe you can create value out of that resource. Thinking outside of the box will help you immensely.
  9. Skills Are More Valuable Than Things: Many jobs disappeared during the Great Depression and many worldly possessions were, ahhh repossessed. If you have a large skill set, you can better adapt to the times, and no one can take those skills away from you.
  10. Become a Do-It-Yourself-er: Learn basic plumbing, carpentry and electrical skills, baking, cooking, herbal medicine, sewing and knitting skills. The next time you need to fix something, do not make a call or an appointment. Fix it yourself.
  11. Produce Your Own Food: Think about where your food comes from right now and then think of ways to provide that food yourself. Have a garden, raise quail, chickens or rabbits. Practice these skills now.
  12. Waste Not, Want Not: Reduce, reuse and recycle. Before this phrase became a popular saying, our parents, grandparents and great-parents believed and lived the proverb, “Waste Not, Want Not.” My wonderful grandparents always had several toasters and lamps in their basement, they saved plastic bags and twist ties, saved wrapping paper, collected pan drippings (fat) in a can and many other things were re-purposed and saved. Depression-raised children wore flour sack clothing; fabric re-purposed from flour sacks. Think on that a moment and then re-purpose something today.

[22]

Sources

  1. Roberts, Lance. “The 2016 State of the Union.” Real Investment Advice, 11 Jan 2016. (Source)
  2. Stockman, David. “Why the Bulls will get Slaughtered.” David Stockman’s Contra Corner, 6 Feb 2016. (Source)
  3. Martenson, Chris. “The Return of Crisis.” Peak Prosperity, 9 Feb 2016. (Source)
  4. Foss, Paul-Martin. “Don’t Fall for the GDP Swindle.” The Ron Paul Liberty Report, 9 Feb 2016. (Source)
  5. Rubino, John. “2007 All Over Again, Part 3: Banks Starting to Implode.” The Dollar Collapse, 8 Feb 2016. (Source)
  6. Berwick, Jeff. “Deutsche-Bank on the Verge of Failure? Stock Price Collapses.” The Dollar Vigilante, 9 Feb 2016. (Source)
  7. Snyder, Michael. “A 918 Point Stock Market Crash In Japan And Deutsche Bank Denies That It Is About To Collapse.” The Economic Collapse Blog, 9 Feb 2016. (Source)
  8. “Global Economic and Banking Collapse on Deck.” Investment Research Dynamics, 9 Feb 2016. (Source)
  9. DiChristopher, Tom. “Kyle Bass: China Banks Months Away from ‘Danger Territory.'” CNBC, 3 Feb 2016. (Source)
  10. Bonner, Bill. “ETFs: Popular Investment Vehicles that Could Crash Hard.” Acting Man, 9 Feb 2016. (Source)
  11. “Mutual Funds, ETFs at Risk of a Run: David Stockman.” Bloomberg Business, 10 Feb 2016. (Source)
  12. Durden, Tyler. “This Is The NIRP “Doom Loop” That Threatens To Wipeout Banks And The Global Economy.” Zero Hedge, 12 Feb 2016. (Source)
  13. Clinch, Matt. “Why talk of negative Fed rates has everyone worried.” CNBC, 10 Feb 2016. (Source)
  14. Armstrong, Martin. “Germany to Enforce a €5,000 Limit on Cash Transactions.” Armstrong Economics, 5 Feb 2016. (Source)
  15. Durden, Tyler. “Here Is The Real Reason Why Authorities Want To Ban High Denomination Bank Notes.” Zero Hedge, 11 Feb 2016. (Source)
  16. Durden, Tyler. “So It Begins: Bloomberg Op-Ed Calls For An End Of Cash.” Zero Hedge, 1 Feb 2016. (Source)
  17. Durden, Tyler. “Something Very Disturbing Spotted In A Morgan Stanley Presentation.” Zero Hedge, 10 Feb 2016. (Source)
  18. “E Dollar Concept is Being Pursued by the POE, PBOC, and Yes, the Fed.” Debt Crash Report, 30 Jan 2016. (Source)
  19. Durden, Tyler. “Helicopter Money Arrives: Switzerland To Hand Out $2500 Monthly To All Citizens.” Zero Hedge, 29 Jan 2016. (Source)
  20. Bonner, Bill. “Here Comes the Money Helicopters!” Acting Man, 12 Feb 2016. (Source)
  21. “HYPERINFLATION! Venezuela Orders Bank Notes by Planeloads.” Economic Policy Journal, 4 Feb 2016. (Source)
  22. Falco, Rachel. “12 Life Lessons Learned From The Great Depression.” How to Provide for Your Family, 11 Feb 2016. (Source)
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One thought on “Financial Precipice à la 1929?

  1. Pingback: The Coming Revolution | Clan Against the Grain

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