There is an economic storm of colossal magnitude on the horizon.
When will it arrive? I’m not certain, and neither
The objective of this article is to explore several (but not all) economic and political headwinds that will contribute to this coming crisis and then to discuss the potential crisis itself.
The Economic and Political Headwinds
The Fake Money System
As we have written previously, the Federal Reserve has manipulated the currency system basically since it’s inception. It creates fake money to rob the poor to feed the rich. How does it do this?
Well, between 2009 and 2019, the Federal Reserve printed around $3.6 trillion under the guise of “quantitative easing.” (That’s $3,600,000,000,000–an incomprehensible number.) The Fed used this money to buy up assets such as Treasury bonds, which sent bond returns plummeting. Therefore, investors sought better assets such as stocks and prices rose. Whenever the stock market seemed to be faltering, the Fed was there to swoop in and print more money.
The Federal Reserve also lowered the cost of borrowing (Fed Funds Rate) to effectively zero. This meant that they basically just gave away free money to borrowers (the big banks and the super rich).
In 2015, the Fed began “quantitative tightening” (burning money instead of printing it) and raising interest rates. However, the chairman of the Fed, Jerome Powell, recently announced that the Federal Reserve was holding off on interest rate hikes and would soon discontinue its quantitative tightening policy.
If history is any guide, recessions soon come after the Fed hikes rates and then stops. Take a look at the chart below.
Because of this fake money system and lax monetary policy, corporate debt now stands at an all time high of just over 45% of GDP. For context, the tech bubble burst when corporate debt reached 45%. Similarly, the housing bubble popped as corporate debt reached 45% as well.
Moreover, this system has created the largest bubble in the history of market bubbles – what many people like to call the “Everything Bubble.”
When this bubble pops, there will be much weeping, wailing, and gnashing of teeth.
The gap between the top 1% of earners and the average worker is larger than it has ever been. This is, in part, due to the fake money system promoted by the Federal Reserve. As you can see in the chart below, the disparity has exploded over the last 30 or so years.
You may think, “Well those people earned it. It’s their money.” It is, but it also isn’t at the same time. The system we currently have is not capitalism, it is cronyism – the unholy union of big business and big government where the rich get richer and the poor get poorer.
Unfortunately, not everyone sees it this way. If you take one look at the current Democratic presidential candidates, you’ll see that most of them want to “reform capitalism” by giving the government more power over businesses, which ultimately continues to make the rich richer and the poor poorer.
You would think that this would be met by resistance from Republicans or from members of the elite.
Fox News commentator Tucker Carlson has made his views clear on the subject that capitalism needs to be reformed.
Ray Dalio, the founder of one of the most successful hedge funds in the world recently told 60 minutes that “capitalism needs to be reformed” and that it is unsustainable.
Further, recent polling data shows that an increasing number of people favor socialism over capitalism.
With time, more and more voices will join these calls for reform.
The Yield Curve Inversion
You may have recently heard this term in the media. A yield curve inversion happens when long-term bond yields fall below short term yields. This typically means that investors see more hope in shorter-term assets than longer ones. In the financial world, this is considered an omen of an oncoming recession.
Just a few weeks ago, the 10-year Treasury yield fell below the 3-month yield – the first time since August of 2007. An inversion in the yield curve has successfully predicted 85% of recessions, including the last six.
If history is any indication, this could be no different.
Increased Democracy and Political Polarization
You may think that an increase in democracy is a good thing.
However, you would be sorely mistaken.
In democracies, majority rules. So if 50.1% of the population passes a law, the remaining 49.9% must abide. The founders of our nation understood this, and to protect the rights of the minority from tyrannical rule, they created a constitutional republic – a representative democracy.
Today, some of these constitutional safeguards are under attack. In the last several months, many politicians have called for the abolishment of the electoral college in favor of a simple popular vote.
To make matters worse, try telling a Republican that you’re a Democrat or vice versa. You might as well sign your own death warrant while you’re at it. Increasingly, people don’t know how to talk to those with whom they disagree.
It will be a sorry day for one side if pure democracy (mobocracy) rules. That
A Few Others…
These headwinds described above are just a few out of a multitude. It should also be noted that these turbulent economic and political conditions are not limited to the United States but to the global economy at large. Other important factors to take not of include:
- Slowing US GDP growth
- China’s slowing growth
- Germany is already on the verge of recession
- Brexit talks are breaking down
- Yellow Vest protests continue to rage in France and are spreading
- Turkey’s credit bubble is bursting
- Student and auto loan delinquencies are near all-time highs
The Coming Crisis
All of these things bring us to the coming crisis.
Should an economic recession (or depression) become a reality as a result of the popping of the “everything bubble”, the calls for reforms will get louder. These “reforms” won’t just be cosmetic changes. They will be fundamental system changes.
There will be increased calls from the citizens for the government to step in to “protect” the people from evil corporations, economic conditions, sickness, hunger, disease, job loss, etc.
Seeing an opportunity for power, politicians will promise to make things right and give the American people a “new deal”, “hope and change”, and to “make America great again.”
But it won’t work.
The government will continue to seize private property, individual rights, and to spend money it doesn’t have. And the people will continue to wallow in the mire.
If you don’t believe me, take a look at the Soviet Union, Mao’s China, Cuba, Argentina, or Venezuela.
The Loss of Freedom
There will be many casualties in a future such as this. One that I fervently hope does not come to pass. However, one of the biggest casualties will be the loss of individual freedom.
In an economic crisis of such magnitude, people will prioritize perceived economic safety over liberty. (When in reality, it is liberty that enables economic opportunity.) The government then becomes the de-facto protector and will begin to manage every aspect of each citizen’s life.
Under such harsh conditions, people will beg the government to take their freedom if they will only make the pain stop.
What Can You Do?
I hope that I am wrong.
There’s always a chance that the patterns of history won’t be accurate this time. However, the odds of that are not very good.
The best thing you can do is be prepared. No one knows what will actually happen or what things will look like. The best thing you can do is position yourself and your family well enough to ride out the storm.
- Spiritual and emotional preparation for hard times
- Having a store of food and water to last several months at least
- Keeping a 72-hour kit
- Knowing and understanding your political rights
- Mitigating risk in your financial investments
- Owning precious metals such as gold and silver as a hedge against inflation or total financial collapse
Should this storm come and go and I (and many others) am proven wrong, I won’t be too bothered by it. I would rather be wrong and prepared than right and destitute.
I can only hope that you feel the same.