Servias Ministries Blog

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.

Yesterday the Federal Reserve led by Bazooka Ben set the course through 2015:

1) The creation of $40 billion a month out of thin air to purchase agency mortgage-backed securities at artificially low interest rates;

2) The continuation of Twist 2, and the shifting of Federal Reserve holdings of US Treasury Bonds into longer-term bonds;

3) Combined purchases of long-term securities between QE3 & Twist 2 of approximately $85 billion per month through the end of the year;

4) Quantitative easing without any pre-defined limit, meaning an open-ended commitment to keep purchasing securities at whatever level is judged necessary until the labor market improves "substantially";

5) The potential purchase of additional assets and the deployment of other policy tools as needed;

6) An extension of the 0.0% to 0.25% target range for the Fed Funds rate until at least mid 2015.

What does this tell us?  There is ugliness ahead.  Bazooka Ben and his squad had determined that the so called recovery has not truly materialized as “expected”.  We are now in the 2nd dip of that double-dip recession I wrote about during the 1st phase a couple of years ago.  Europe and China are stimulating their economies as well.  We are in a major global slowdown with no turnaround in sight.

The retirees and baby boomers are now funding this attempt to recover the economy… without their agreement.  Ben has affectively said that your savings rate will stay at near 0% through 2015.  Retirees are toast.  Baby boomers in their desperation will begin to place their savings in higher risk assets such as stocks and bonds.  Those who keep their money in savings will see their purchasing value decline.  As the long-running Christian TV cartoon show “David and Goliath” dog says:  We’ve been hosed Davey!

Now the risk of hyperinflation is even higher than before.  John Williams at Shadowstats.com is convinced that the event is close at hand.  The following details his view:

Only Our Heavenly Father knows the details of the ugliness ahead.  As we listen to HIM, we will know the Truth and the Truth shall set us free.

Disclaimer:

This website contains the ideas and opinions of the author. It is a conceptual exploration of financial and general economic principles. As with any financial discussion of the future, there cannot be any absolute certainty. What this article does not contain is specific investment, legal, tax or any other form of professional advice. If specific advice is needed, it should be sought from an appropriate professional. Any liability, responsibility or warranty for the results of the application of principles contained in the article, website, readings, videos,  books and related materials, either directly or indirectly, are expressly disclaimed by the author.

Ben Bernanke has effectively announced QE to infinity.  This means that he will print as much money as needed to grow the economy.  Gold, silver, and related stocks responded:

Gold up $36.80

Silver up $1.37

SVM up 7.36%

MUX up 7.48%

Open-ended Quantitative Easing is an indication that the Fed sees major issues ahead.  Further, the average person should stock up on groceries now since they will cost more in the future.  A two month supply is not unreasonable.  You should rotate your supplies to keep goods fresh.  If you have a freezer, you might want to load it up with protein based foods.  The price of gasoline will increase and you should prepare for the $4-5 per gallon gasoline range.  Some areas are already there.  As I have said countless times in the past- simplify.  Get rid of “stuff’” that weights you down.  Focus on your health.

Bazooka Ben may have just created the next manmade disaster.  It would not be surprising for a flock of Black Swans to fly be soon.  Look up, your redemption draweth nigh!

The German High Court paved the way for more quantitative easing in Europe.  Essentially, the European Central Bank can now start up the printing press.  The southern Eurozone countries are addicted to debt much like drug addiction.  European Leaders think they can wean the patient off of their lifestyle.  Think again.

Weaning people away from their lifestyle can only be done by a change in the heart.  Forced lifestyle changes will cause an adversarial relationship with the populous and will ultimately result in something akin to the Arab Spring.  The powerful are only in power while the citizens can be manipulated into thinking that all is well.  It is better never to give away an expectation of lifestyle than to set an expectation then remove it.  Nobody wants to give up something they are accustomed to.

The U.S. is in a similar situation but actually worse.  Lenders promoted instant gratification by mortgaging future cash flow.  In my earlier years, we were encouraged to buy the largest possible house we could afford.  The house would appreciate in value and we were almost certain to make a boatload of money.  This plan assumed that we would not lose our job and miss our mortgage payments.  Instead, my family decided to only buy what we truly could afford and saved the excess cash for the future.  Our plan worked and I slept better.

Extreme leverage will force someone to endure pain- either the borrower, the lender, or both.  On a macro scale I believe the answer will be both.  The fiat currency experiment of the last several decades will prove to conclude like those of history.  We are no smarter than our ancestors.  We only used a lot more technology to achieve the same result.  Technology does not improve wisdom and understanding, it only speeds up the judgment from poor decision-making.

Until an addict has a heart change, it matters not what you do to try to solve the problem.  The addict will move toward desperation in his attempts to satisfy his craving.  That is when it could get ugly.

The U.S. ended the war in Iraq.  However, there is another war raging and I’m not talking about Afghanistan.  The war I’m talking about is the global currency war.  The U.S. needs a weak currency to stimulate exports and if the U.S. Dollar get devalued, other currencies must get stronger.  It is a self-contained system that seeks an equilibrium of sorts.  In the global basket of currencies that allow trade among nations, they all have exchange rates that float on a daily basis.  Since there is currently no gold standard, the central banks will use the printing press to move their currency up or down.  If the U.S. wants a stronger currency, they slow down the printing presses and provide less dollars to the system.  Both the U.S. and China want cheaper currencies.  On the other hand, Europe needs its currency to rise because it is getting too cheap.  The sovereign debt crisis in Europe has reduced the demand for Euros as the big money has moved to the U.S. Dollar.  In the electronic age, money moves in microseconds, no ships needed.

The challenge of keeping currencies in balance is huge.  Central banks must do a balancing act with domestic employment and inflation on either side.  Without the gold stabilizer factor, this becomes a highly complex affair.  When one country begins to suffer high unemployment, the money printing presses start up.  Actually, the printing presses have been replaced with the stroke of a computer key.  That is the only simple aspect of this system.

Since 25% of the world’s GDP is the U.S., Bernanke wields the biggest stick.  The global commercial money is the U.S. Dollar thus the Federal Reserve Bank can fine tune the global payment system to the benefit of the U.S.  Each and every time another nation attempts to circumvent the current system, they tend to come up against insurmountable issues such as war, a military coup, UN sanctions, sudden death by lead poisoning (bullets), etc.

The strongest and most advanced military in the world polices the compliance requirement of the current system.  It is like I always say about those in control: if they have a gun, badge, and a prison, they make the rules.  Theory is does not matter when they show up at your door.

Nobody wants a strong currency when their economy is not growing and that is the case in most every country around the world.  A currency war creates a downward spiral in value of all the currencies around the world.  The currencies decreasing in value  relative to what?  Commodities.  Real assets.  If the downward spiral occurs to quickly, it is called hyperinflation.  If at the same time the currency devaluation has no effect on employment, the result is higher prices and higher unemployment.  If companies are paying higher prices for goods and services, they will cut staff and further exacerbate the problem.  The final outcome is a hyperinflationary depression.  If this occurs, the strongest country will confiscate hard assets in an attempt to stabilize the system.  Gold will be the target just as it was in the 1930’s.   This is why I prefer silver as part of my insurance policy.  Even then I have no guarantee that they won’t touch it or severely tax it as well.

Since much of the official gold of many countries is physically located in New York City, confiscation for stabilization purposes will be easy.  This concentration of reserves would allow the President of the United States to exercise his power for the “greater good” and move the reserves to a secure location away from NYC.  If that were to happen, you can be assured that the current financial system is in the final hour of its existence.

While the two political parties are slugging it out for the White House, the National Debt continues to climb.  Over the course of the last 6 years I have shared the economic realities facing America as well as the globe.  Peak Oil is still here though horizontal drilling has taken the focus away from the big issue of oil reserves.  Sure, you can extract more oil and gas faster but that doesn’t change the amount in the ground.

The economy is still not growing.  Every dollar of additional debt is only yielding about 4 cents of GDP (Gross Domestic Product).  What a poor investment!  No private company would ever consider that investment.  Inflation is busy robbing the savers of the hard-earned wealth.  It won’t be long before they say “Remember when hamburgers were only five dollars?”.

The barometer of value is gold.  It’s not that gold is increasing in value, the currencies are decreasing in value relative to gold.  Gold cannot be manipulated over the long haul although central bankers would love to be able to do that very thing.  Those of us who bough quality gold and silver stocks this summer are now being rewarded for our patience and courage to not sell when we saw our purchases dip lower.

There is much rhetoric among both candidates about reducing the debt, that is the “official” debt.  I am more concerned about the unofficial debt that is conveniently missing from the $16 Trillion number.  As reported recently, the overall unfunded liability of the U.S. is calculated at $222 Trillion.  Watch out below!

I have no particular love affair with gold or silver.  However Our Heavenly Father established the two metals’ value in Scripture.  If it is good enough for HIM, it is good enough for me as well.  Each generation of economic thinkers suggest an alternative to the gold standard.  Each and every time in the past when the gold standard was removed, the same thing resulted- failure of fiat currencies.  Why do we think this time will be any different?

As I can afford it, I continue to buy hard asset stocks and/or metal.  I must keep enough cash on hand to handle expenses and unexpected events.  At some point gold and silver will go parabolic in price.  At that time it may be wise to convert to other assets.  Until then, I will hold my positions and accumulate on price dips.

See: http://www.businessinsider.com/citi-2500-gold-six-months-2012-9#ixzz25jNMcMyf

Bill Gross of PIMCO likes the gold investment as well.  See:  http://bloom.bg/OPEmbE

What happens after six months?  One technical analyst see gold at roughly $32,000 by 2016.  If hyperinflation occurs, the relative value of the U.S. Dollar could produce the exponential graph shown in this link.  See: http://www.sharelynx.com/chartstemp/GoldeWave.php