From all indications we are nearing the end of the Debt Supercycle. Since the Federal Reserve Bank began it’s initial operations in 1914, the managed leveraging of banking has grown to the point of no return. Over time the banking industry has been able to compromise the reserve requirements from the original intent. Reserve requirements were intended to keep a reasonable amount of cash in reserve to assure depositors you could meet their normal withdrawal demands. This allowed banks to make loans to companies and individuals who satisfied the bank’s lending criteria.
In 1976 I took the Dunn & Bradstreet Credit course for banking institution loan officers. It taught the fundamentals of lending, the three “C’s”: Credit, Cash, Character. Did the borrower have good credit? Could he cash flow the loan? Did he have good character (was he reputable)? Your loan application was thoroughly reviewed and all previous loans were verified. Your income was verified as well as past income representations. Personal references were called. Banks were in business to protect the depositor’s money. That has changed especially in the larger banks.
There is now a shadow banking system. Banks participate in unregulated financial derivatives. These are contracts between two parties somehow insuring performance of a particular investment. They are only as good as the insurer’s ability to pay if an adverse event occurs. The “insurer” is not regulated by anyone. It would be no different than if you or I set up our own home insurance company and collected premiums without any oversight by a governing authority. If a home burned down, the insured could not collect if I did not maintain adequate reserves to pay his claim. Imagine this scenario with an industry who has written over one quadrillion dollars in contracts. Once the fiat currency system took over, it opened the door to such creative financial engineering.
Ben Bernanke has in essence signaled us that the crisis is intensifying. He has extending the zero percent cheap money policy into 2015. Inflation based on the 1980 government formulas and calculations is 9.3% according to shadowstats.com. If you invest in a 5 year CD at 3% then you are losing 6.3% in purchasing power each year. Pension funds and insurance companies have made financial assumptions in meeting their future outflows at higher rates of return than 3%. This means they will have a shortfall and must somehow make it up soon. Otherwise, they will be bankrupted. Insurance annuities may not be as safe as once thought. Pensions are at risk as well.
Ben has also signaled that his cheap money policy has not worked since the 2008 financial crisis. Cheap money is not adding jobs to the economy. Instead, it is simply protecting the banking system from mass insolvency.
The end of the Debt Supercycle is often accompanied by hyper-inflation. In our case, the demise of the U.S. Dollar as we currently know it may occur. Only by austere measures could any administration prevent this eminent event. Assets without liability are the best protection from financial disaster. Bernanke is “all in”. His commitment to the current system is clear. Will the large money stay with him? Only if they have as much to lose as him. If and when confidence leaves the U.S. Dollar, the Supercycle will reach a crescendo then it will painfully end. It will be no different than previous attempts of the past.