By Prakarsh Jain
Year 2007 was when the underlying stability of global economy and that of the United States of America in particular was experiencing intense scrutiny by various economic analysts. The mortgage-driven pleasance that was depicted in early 2000’s just seemed too good to be true. Many of us, the educated and the non-readers, predicted that such a system, based on questionable debt instruments, livened up by the central banking voodoo of cash creation and arbitrary fractional reserve lending, could not possibly survive for very long period of time. The collapse was already in motion, but most of our fellowship, were either acting too stupid to recognize the problem or too frightened to accept the reality, which was just beyond the horizon.
Federal Reserve Cheated America:
The story started in the 1980’s, the decade of Globalization in the States. In my opinion, this brought with it disguised destruction. The Industrial Centre, the soul of American midsection, which created enormous wealth and bought platinum centuries for the country had been stripped and shipped overseas. It was then that the face of the US economy had actually changed. From that point forward until now, the population has been fully dependent on the brotherly love of central bank money creation and international bank lending standards. The collapse that should have occurred in the 1980’s was just delayed making it more volatile, as the Fed had to artificially lower interest rates and allow trillions of dollars in ‘Fraught with uncertainty’ loans to be generated; average citizens were suckered in royally. A perfect example of using the greed of an individual against him, as they collateralized homes people could not afford to buy. The rest of the story is known…
The Frozen Markets:
Presently, credit markets remain frozen. Lending is nowhere near to the levels they were in 2006. The housing market seems to be gaining life after being dead; but do we know the buyers, banks, and not the regular people are making the purchases, for centimes on the dollar. These belly-up properties are reissued for renting rather than for sale, obvious reasons. Maybe it happens that people would get the keys of the house, they used to previously own. Thousands of high-paying full-time jobs have been lost and now been replaced with lower-paying part-time wages, in simple terms slavery positions, but government claims unemployment is slashing down, the question is, in what sense. The shock is that image of American prosperity still carries on, but anyone with rational sense would certainly question, how long will this give life, before the truth clicks.
I am sure, the question arises, why are we re-examining all of this information? Is it not widely known? It is therefore time for us to apply some foresight given the known of the past.
Understanding the Behaviour:
What was that crept up on so many people in 2008?
Weren’t there analysts out there “prophesying the chorus”?
Weren’t there signals, signalling?
Weren’t there plenty of conclusions being made?
Yet, the world was left astonished. The verity is, humans have an all-pervading habit of ignoring the facts, in high hopes of using spiritlessness as a magical elixir for future successfulness. They tend to believe that catastrophe is a mind-set and that it is a bogeyman that can be defeated through blinded optimism. The refusal to accept that disaster was inevitable, was what caught the American people off guard in 2008, just as they are setting themselves up to be again.
The Fiat Injection:
The reality again seems to be quite clear; the Fed has propped up equities and bonds using currency created out of the air and to the extent that both the markets have become totally dependent and disturbingly hooked to the fiat injections. The distribution of this kind threatens the dominance of the dollar as the world reserve and invariably leads to the collapse of currency, which shall lead to, hyper-stagflation. This operation is more likely to reach its climax in the near future, given the rate at which quantitative easing has been undertaken within the system to date and the quickened rate at which our primary lenders, China, are dumping the currency in bilateral trade. The endgame is apparent, but the fear still exists within the country and around the globe, will the shock once again be renewed by a crash.
Argument still exists: “Things might be dicey, but apparently it won’t be as bad as all the doom-mongers claim”
However, let us make it clear; naysayers before umpteen shocks made similar statements, so why are we calling the sceptics wrong again?
Lifeblood of the Economy:
Let me put this in the simplest form possible: Stimulus, that’s what we call the lifeblood of the American economy. There is nothing other than this sustaining the nation. Stimulus has seen various forms, form of bailouts and Quantitative Easing are the ones keeping the stock market and bonds afloat. This only takes us to a conclusion that the continued existence of equities, retained existence of level-headed treasuries, the general economy, and an officiating government, is pendent on the Fed continuing to print.
In recent times, Ben hinted at a possible intention to reduce stimulus measures and remove them completely by the mid of next year, which would efficaciously shut down the support system machine and let the patient drown in his own fluids.
Mongers and common investors are not very bright, but the market understands it well, that no stimulus would mean no stock market and no bond market. This is evident by the response indices have got, which have become mercurial. Pitiably, the Dow Jones in recent times rallies up whenever there is a bad intelligence that hits the cable, as hare-brained investment groups pour in money in the hopes that dismal economic conditions might cause the Fed to extend the stimulus plan.
One word of God Ben (that is what we can call him), determines whether stocks have to dramatically rise or fall. The question arises, is this behaviour, attributable to healthy fiscal system?
American fundamental finance has been devastatingly murdered and clearly, such an abnormally large creation cannot last without it. Stocks are supposed to perform based on the true profitability of the businesses, and the external factors, which would be the impact of political and social health. The barbaric printing of paper is not in any way a catalyst for a successful economy. In any case, the issue of the Fed actually ending QE is ultimately irrelevant now.
No construction can survive when it abandons bedrock fundamentals for fantasy.
Either QE continues, which in turn shall become less and less effective in fending off negative results in stock markets, inspiring a flight from the dollar leading to a collapse, or it ends, exposing the inevitability of negative results in equities, leading to a crash. The difference that would exist in the two situations would be, if the Fed ends stimulus in the present, the process of collapse would merely take place faster than if stimulus remains.
However, if we go back in time and observe, every historic crisis has a specifying moment, a minute in which the surge turns overpoweringly sour for the public. The question now becomes, what exactly will trigger the roll down?
The Precious Metals Secret:
China’s intention to shift away from the US consumer & the currency shall be the trigger and the Chinese government seems to be dead serious this time. More than half of the major economies now have a trade agreement with China and the ASEAN Economic Bloc, which in turn removes the dependence on dollar, for trade. China has been serious with the agenda of making Yuan the global currency and therefore has constantly been issuing trillions in Yuan and Yuan denominated bonds around the globe, arranging a higher valuation and allowing Chinese consumer markets to replace American consumer markets. At this point, the dragon country has also increased its purchases of precious metals to the point that the nation in the next couple of years is set to become the largest holder of gold and silver in the world.
An evident preparation for a currency crisis event…
The buying fling in the Eastern World seems to be in direct contradiction of the paper market value of metals in recent weeks. Demand for gold and silver has only been upward moving, even in light of Fed suggesting a break to QE. Manipulations within metals markets explain the minuscule part of the story, but there may be other issues at work. It is not impossible, that the COMEX is now broken, and that gold and silver Exchange Traded Funds are decoupling from the street value of physical metals. In the near term, it is becoming evident and belief are becoming stronger, that premiums on physical will go towards the heaven, even as the official market prices of those metals are held down. In addition, at the same time, China, Russia, etc. are heavily invested in gold, which may break from Western COMEX completely and thereon using their own metals markets to establish their own prices.
The wait is until the dollar loses its world reserve status, as that happens, the countries holding the most physical gold in their caissons stand to weather the storm, and because America gold stores have never been audited, there can be no idea drawn if America has any reserve.
Coming Soon, Crushing Energy Prices:
Another issue arising, which and has been hidden, is the issue of energy. Despite diminishing oil demand caused by the 2008 collapse, energy prices have experienced little to no deflation at all. In addition, in recent times too when the Federal Reserve hinted at shutting down QE, oil has been, one of the few commodities that continued to rise. The common intuition would be that, this is due to lack of supply, but the same has not been case, as many American-based companies ramp up production during such times. The apparent fact is that the current regressive global demand and ample supply should have led to the gas prices dropping, not going higher. Second thought would be, speculation, in that case the price should have been far more volatile, with increases lasting days, but certainly not years. The only credible thought and explanation for this commodity activity is a weakening of its own currency (indicating petrodollar). The life of petrodollar seems to be ending, might not be in immediate, but certainly in the near future and what we can predict or believe is that the trigger shall be the next market exodus.
China has been supernatural in foretelling events, especially when it comes to economic calamities, and therefore it is not a shocker that it recently established a stupefying oil trade deal with Russia, which shall supply an alternative petroleum source for the next 25 years. Why am I talking of China Russia deal? That is to draw in an attention, that this deal has been signed with a bilateral trade agreement completely removing the US dollar. US dollar has been a world reserve and the only currency, which was used to purchase petroleum until many decades now. This deal has changed everything around; it is a trend towards removal of petrodollar function of the Greenback, which ultimately will destroy the currency.
The jumpy oil markets have also been caused by the social unrest in Egypt; the Suez Canal supervises transfer of a substantial portion of the world’s oil shipping. There are, as such two playing off factions within the country vying for power, and regardless of who is best fitted to US interests, the Egyptian people overall have no inclination for the West. There is a trenchant chance of a war, in the coming months in Egypt, possibly similar to Syria. In addition, Syria remains a volatile trigger point for regional war which will, in the end, result in the closure of the Strait of Hormuz (which handles 20% of the world’s oil shipping).
If we sum all of it up together, all trends point toward increase in gas prices, and the U.S. economy is barely able to survive on the cost of energy we have as of now.
So Close, but Can’t See it:
So close, it is coming again, but people of The United States of America cannot see it, or probably do not want to see it.
The plan for reduction in stimulus, which is the backbone of the economy post crisis, combined with adversely high oil prices, which are already on papers, may very well be the tumbling boulders to bring down the mountain. It goes back from the decade of 1980’s, when it all started, the ‘Destruction-ization’, that is what we can call it. This start never ended, some or the other factors kept hammering the natural growth of the economy. The stimulus measure has so mingled in the economy, that it seems impossible for the economy to grow without it.
The US ship is in the middle of the Ocean, it cannot move as the fundamental machine is out of order, either it floats where it is for a little long or then sinks into the bed immediately.
It is very close now, undeniable economic factors indicate that the very fabric of American government is disintegrating. In addition, China, the precious metal, and energy prices are increasingly creating pressure to sink the ship, right to the bottom of the ocean bed. The only look now remains, how long shall it be.
From a historical perspective, collapse has been carved and it seems to occur in the nearest future, but the searchlights of individual minds are still the dimmest, when the threat is the greatest, and when we are most comfortable in our ignorance.
Prakarsh Jain is a graduate from Jai Hind College, Mumbai and a Chartered Accountant. In full-strength to continue his passion for studying, he moved on to take up Masters of Global Business in Investment Banking & Wealth Management from S P Jain School of Global Management.In addition, he also acted as a delegate at the World Islamic Banking Conference: Asia Summit. Email ID: email@example.com
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