History doesn’t repeat itself but it often rhymes.” – Mark Twain
Financially speaking, we are being told that things in the USA are good. Really good! Turn on CNBC or any news channel and the stock market is surging; the economy is “bouncing back.” The Fed is raising rates because future economic outlook “is bright.” The future is looking great, and we can all sleep tight with our money safely in the bank—secured of course by the government. Right?
Well, to quote Will Ferrell from Zoolander: “I FEEL LIKE I’M TAKING CRAZY PILLS!”
I know the contrarian opinion is never very popular; in fact, people seem to go to great lengths to blatantly ignore and/or outright bash any viewpoint even hinting that our economy is anything but sound. But if I don’t stick my head in the sand and I decide to open my eyes to some of the data in plain sight, I see a very different picture than everyone else.
Listen, I am not the smartest person in the room. But as I look around I get the crystal clear feeling we are NOT a-ok. We far from okay. We are MILES from “ok.” In fact, I can find literally nothing to be confident about. Below I outline what I see – in very clear English without any techno-jargon or esoteric double-speak.
Below is a mixture of terms, concepts, and truths about current affairs that cause me great concern. For simplicity, I will only give an “elevator pitch” on each one.
Some Terms to Cover the basics:
Supply and Demand
This is probably the most important concept to have a keen hold of in economics. It’s relevant to every other part of this article. When supply (the amount of something) goes way up (and demand stays the same), the price of it will fall. Similarly, when the demand for something goes way up (and supply stays the same), the price will skyrocket. These two elements work best and satisfy the greatest number of people when they are not subject to artificial forces. As an example, if gasoline were mandated (let’s say by the government) to cost $0.50/gallon then you might imagine how that would impact things. Consumers would purchase the current supply of gasoline and/or “hoard” it, leaving little or none for others. There would no longer be an incentive to produce/sell the product by suppliers. Those who needed it most (for example emergency vehicles such as ambulances or fire trucks) would not be able to get it when needed. This would be an example of supply not being able to keep up with demand. The market works best (meaning the greatest number of people are helped and can benefit by something) when prices are not set artificially. The price for gasoline best meets everyone’s needs when supply and demand are equalized naturally (without “help” from the government or anything else).
The FDIC – Our “Safety Net” Against Bank Failure
Ok, so here’s the deal and a bit of 6th grade history lesson for you. In 1933, during the Great Depression, the “FDIC” (Federal Deposit Insurance Corporation) was created and one of its principal components is to guarantee money we put into the bank (checking and savings accounts). This is why we see “FDIC Insured” boldly proclaiming our assets are safe at all major and minor banking institutions. But here’s the problem. There are 72.6 Billion dollars in reserve (as of 2016). That’s a lot of money, sure. This means that many deposits are insured IF banks start to go belly up. However, 72.6B would only cover 0.25% of all total deposits in the USA. In other words only ¼ of a single percent is covered in the case of a major banking/financial catastrophe. So our money is not really as “safe” as we think it is.
A great info graphic to cover all this in far greater detail is here: http://demonocracy.info/infographics/usa/fdic/fdic.html
The Federal Reserve (“The FED”)
The Fed is our central bank. It was created December 23, 1913 under President Wilson. It directs much of the flow and creation of our nation’s money supply, through use of the Treasury (which prints our paper money). Through its actions and policies men at the helm of the Fed can direct the interest rates of money in the United States via the purchase or sale of US Treasuries. The Fed has never been audited, and, with the exception of meeting minutes, what happens at the central bank of the US happens behind closed doors with little or no scrutiny or oversight. One of the biggest current problem with the Fed today is that it is creating money “out of thin air” by simply adding it to the ledgers of large banks. $100 bills aren’t physically even printed. There currently are ~1102 Billion (1.1 Trillion) physical dollars in circulation around the world. But there are ~9294 Billion (9.3 Trillion) dollars on the books (deposited in banks). The difference is largely made up with the “made up” money the Fed gives to the banks and generates out of thin air.
“Without big banks, socialism would be impossible.” – Vladimir Lenin
If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.” – Thomas Jefferson
I only wish the Constitution had addressed this evil more emphatically so that a central bank could NEVER have been permitted. Unfortunately, Hamilton knew that aristocratic business well, and as the first Secretary of the US Treasury he charted the first US central bank, the First Bank of the United States, against much opposition from Madison, Jefferson, and others. Jefferson killed it, though, as president and warned Americans never to attempt another. Of course without a Constitutional prohibition on central banking, the bankers never stopped attempting to institute another private central bank – E Archer, NYC
Fractional Reserve Banking
When we put money into a bank, that money is turned around and loaned out to others (i.e. as housing loans, corporate loans, etc). The bank maintains in its vault only a small fraction “in reserve.” In other words, the bank only keeps a fraction of the money on hand and lends the rest of it. That may be 20%, 10%, or often as little as 3%! In this way, money can effectively be created out of thin air via a “multiplier effect.” Here is how: the loaned money is lent as a note to a debtor and some portion of that money may then be put in ANOTHER bank; as such, the same system with the same reserve rate is in effect. Some is kept in reserves, but the remainder is lent out. Ergo, a single deposit of $1,000 can mathematically equate to over $100,000 in new money (assuming the reserve rate is 10%). That’s theoretically 10x new money created from a single deposit. That’s scary – but only if/when people want to pull their money out. Until then…all is well. The deck of cards is undisturbed. But in this way, the fractional reserve banking system creates more money “out of thin air” each year than any other monetary system.
In 1971 Nixon took the USA off the gold standard. Before then our money (paper American bills) actually had an equivalent amount of gold for each dollar printed. It was kept in Fort Knox and elsewhere. But more importantly: we did not as drastically misuse the power enabling the Treasury to PRINT money on a whim as we do now unless the US shored up a necessary amount of gold to back it. Now that we are off the gold standard, the only thing backing up our Benjamins is the steadfast word of Uncle Sam. This is called “Fiat currency” – in other words, nothing concrete actually backs the paper money we use except the promise that it is worth what the US government says it is worth. And this permits the system to carry through with practices (i.e. the unregulated printing and creation of money) which cause inflation to rise far faster than it might otherwise.
In 2008 the nature of a “bailout” was on everyone’s lips. Whether you agreed with the administration’s decisions made or not (hint: they were mostly all bad), the banking institutions were bailed-out by the American people after bad bets were made. In order to “save the economy” and “prevent utter collapse” we embraced the philosophy that some companies were “too big to fall.” This is not news to anyone.
Well, here’s where the next fallout will come: the “bail-in.” As a direct and knee-jerk reaction to public outrage and disgust (rightly so) the Dodd-Frank act was signed into law. One of the elements put in place with this legislation was the near-guarantee that banks will not be bailed out again (yay!). But guess what? A “bail in” is therefore most likely to happen instead. This means that the money you deposit in a bank is not really yours; the moment it reaches the teller it is now the bank’s and you are an ‘UNSECURED creditor.’ And as an unsecured creditor, you may be one of the last to be repaid should that bank go under. Why would the bank go under? Go back and see the notes about fractional reserve banking. In short, with the FDIC only able to cover a super small fraction of deposits (0.25% – that’s 1/4 of a single percent), individual depositors in banks may be screwed over in the end. This is not hypothetical; it’s what happened in Cyprus and likely will happen here when the banking system collapses again.
Inflation happens in a country when the money supply increases at a rate causing goods and services to raise in price because the value of the money is not holding value. In the USA, the Treasury is printing money with reckless abandon and the Fed is “creating” money at an unprecedented rate. Today (2018) the advertised rate of inflation is said to be ~2.5%/yr. I don’t believe that for a second. The “real” inflation rate is likely in the 3-5%/yr range (at best). This means for money (my money, your money, etc) to actually not DECREASE in value just by sitting dormant, it must be invested or placed in an account that makes 3-5% just to keep pace with inflation. This is now impossible to do in America. So, as a result, investors and retirees alike are flocking to riskier and riskier investments just to try to meet and beat inflation. So this leads me to …
So now we get to the meat and potatoes of this article/guidepost. There are many dangerous bubbles in the USA right now. I will list just a few of them and dive into more details below:
- The Asset Bubble (namely stocks, aka equity markets).
- The Bond Bubble (US Treasuries)
- The College Education Bubble
- The Credit Bubble (US Consumer Debt)
- The Social Security ponzi scheme
The US Stock Market Bubble
But how do we know when irrational exuberance has unduly escalated asset values […]? – Greenspan, 1996
An asset bubble, in this context, is essentially what’s happening to the stock market — it’s soaring to unprecedented highs and companies are (on the books) attaining valuations far and above their “real” worth. In other words, people are buying ownership in them not because they are worth more but because of the “speculation” side of things – their stock is going up and so it looks like it will always go up and as long as the NEXT person buys higher than you paid it must be worth that amount. (I strongly encourage you to read about the “Dutch tulip bubble” of the 1630s and the hilarious nature of people paying $1500 for a tulip bulb.) But I digress…
Here’s what’s important: WHY are so many people jumping into the market (thus overvaluing the stocks in the first place)? In other words, what got this boulder started rolling downhill to its doom?
In the past just “wild speculation” was often the cause, or the catalyst, of such a thing. Not this time, and that’s why the impacts will be SO much worse than the standard “boon and bust” cycles we have seen in the past.
The reason the markets are booming right now is because of the Fed. As mentioned above, the Fed manipulates the interest rates in the USA, which is the rate charged to the banks so they can provide loans. This has made it easier to borrow money in America; however, the drastic negative impact (flip side of the coin) is that it has lowered the value of the dollar AND makes the interest we can get for our checking and savings accounts go DOWN.
When it is left to the free market, these rates will rise or lower themselves based on consumer preferences and risk. However, when it is artificially lowered the rates do not account for risk as it should.
The interest rate in America today is at an almost unprecedented low – and kept there for a period far longer than ever before in our history. Why? Well after the last financial collapse in 2008 the fed decided we needed to recover and the banks needed more cash to shore up their reserves to keep from going bust; additionally the fed wanted/needed people and corporations to put more in the market to shore up investments and the pensions which were being killed by the downturn.
The interest rate being pushed artificially down (to almost 0%!) means that now there are no “safe harbors” for money in America. We once could at least beat inflation with a low-risk interest-bearing Money Market savings account or a high interest checking account or even a CD or a short-term treasury bill/note— but now we can’t even beat inflation with these “safe” (aka least risky) products!
So what do investors do — where does the billions upon billions of capital go? Investors of all risk appetites are unfortunately now forced to put money in the far riskier stock market to attain a rate of return that will just keep pace and beat inflation. Otherwise their money would lower in value each day and each month by virtue of the current high rate of inflation and lack of safe options. The annual inflation rate must be beat, otherwise they lose money each day. This unfortunately hurts those closer to retirement worst of all, as later in life is when they need their money to be safest not most at risk.
So anyway – the “asset bubble” is the stock market being artificially inflated due to safe harbors drying up as a direct result of the FED lowering (and keeping low) the interest rate.
The US Bond Market Bubble
Many are saying the US bond market is the next asset bubble to burst.
The thesis behind this is relatively simple: U.S. Treasury yields have dropped so low that there is little latitude for further decline. In the bond market, prices and yields move in opposite directions.
Just as it is causing havoc in the Stock Market Bubble, the primary reason yields are so low is the policy of ultra-low, short-term interest rates the FED has enacted in order to stimulate growth. (Are you sensing a pattern?)
As the Fed continues to raise rates, the artificial downward pressure on Treasury yields will be removed, and yields will rise sharply (as prices fall). As such, this bubble has NOT been caused by “mania” (as was the case in past bubbles), but because yields in the marketplace are higher than they would be without the Fed’s foolish and overly-aggressive action.
The College Education Bubble
The cost of college education has had a meteoric rise in America. And, no, this is not due to the drastic intrinsic value of college education (I would argue quite the opposite). This is a direct effect of supply and demand and the demand curve of the equation being artificially impacted. That’s just another way of saying: FREE MONEY has made college super expensive. Normally the price of college would be determined by supply and demand; however, vast amounts of college loans are being issued (especially at the public level) skewing the demand curve and causing college tuition to spike. The average college graduate’s loan balance upon graduating is $37,172; and the approximate amount of college debt in America is 1.5 Trillion dollars.
The major problem is that a college degree (now more than EVER) certainly carries with it no guarantee of a good job—or even a job at all. So more and more students (“the millennial generation”) are finding themselves living at home after college and no ability to pay their large school debt. This wasn’t all their fault; they were sold a bad bill of goods and a promise their diploma would be worth something. Instead, as these loans come due, Americans will likely be left on the hook for these bad debts. Until the government GETS OUT of the educational market completely, and stops issuing college loans, the price of college education will continue to soar and so will bad college debt.
The biggest concern here is that the college bubble will likely burst at the exact wrong time: right when unemployment is highest and also most likely right after the stock market and bond bubbles have burst. This will create the “perfect storm” of collapse taking us from a severe recession even deeper into a lasting depression. And the consumer debt bubble bursting won’t be far behind at that point…
The Consumer Debt Bubble
3.8 Trillion. That is how much we as citizens owe in what’s called “consumer debt.” This is what we owe on everything (credit cards, automobiles, etc). It’s often called a “manageable amount of debt” by Federal data sources and think-tanks, such as the US Commerce department. But here’s the rub: this debt is only ‘manageable’ today because of the low FED interest rates! So…as you probably have guessed, once that rate starts to increase (as is happening now), the debt we have piled on as a nation due to our “forget deferred gratification; I must have that now” mentality will cause this bubble to burst as well.
The average American holds around $16,000 in credit card debt. And we are growing the amount we spend and charge by around 8% a year! That’s unsustainable and shows an inability to wisely manage money. It’s going to make things that much more horrible when the crunch inevitably comes.
Social Security Myth/Lie
We mustn’t forget that we’ve been sold another bill of goods in America – the promise that all that money we have taken out of our paychecks each week to pay for Social Security will be there for us when we retire. Don’t count on it! There is simply not enough money to make the math work. The baby-boomers vastly exceed the number of workers. And the “lock box” originally promised and sold to America to start this program is nothing but a farce. Your money is taken out of your paycheck to fund an insolvent program and fuel other government promises, such as entitlement programs. This makes SS a Ponzi Scheme rather than a viable retirement sum you can count on.
Why does this matter? You heard about and know this already – you’re wise enough not to expect SS to be there when you retire. Well, the reason this is important in the near term is that once Social Security is shown to be financially insolvent (circa 2035) the public will lose faith in the American dollar. Either that – and/or we will be forced to print even MORE money than we already are. The results are the same: a surge in inflation which will make buying power greatly reduced and the inflationary tax burden on America a cruel blow adding salt to the wounds.
Lastly, in case you think we can just “grow our way out of this mess” as many politicians have ignorantly stated, the country would need to do double-digit GDP growth year-over-year for the next 75 years in order to pay for Social Security. Given a critical eye for data and an even rudimentary knowledge of our history in this matter: this will never happen. It’s a foolish and blustering thing to say about the issue.
The $21,000,000,000,000 (21 Trillion) US DEBT
This is probably the most damning element leading to a pessimistic outlook on future growth/investment. Like Pompei’s citizens happily conducting business in the streets hours before the volcano erupts, the US debt burden hangs over us and we are in its dismal shadow every day. We either choose to bury out heads in the sand and ignore it, or to try to rationalize away its impact and severity. NO! The fact is this debt is insurmountable and a death knell on our future economy. It will inevitably crush the American dollar’s value and stifle employment; it will make interest rates spike and money will dry up; businesses (especially over-leveraged ones) will close; banks will close; inflation will soar; the economy will go into a deep recession unlike one we have seen before. This debt has indentured our children and our children’s children. And every day it is ignored by our politicians and “leaders.” Make no mistake: if it remains ignored, our economy WILL collapse.
The Trump “Wildcard” Factor
While this cheat sheet is not in any way intended to be “political,” it obviously covers the nature of government interaction and regulatory impacts that will impact, and have impacted, our dollar and our markets. In that same vein, Trump likely will play a role, potentially as catalyst, to help induce the bubble(s) to pop and start much of the inevitable downturn. These issues and bubbles were 10+ years in the making with lies, greed, stupidity, and bluster; but Trump may be the pin to ultimately break the skin. Here is why:
- Trump’s abysmal unbalanced budget – though elected as a fiscal conservative, the President is actually spending more Federal money and asking for greater spending than Obama or Bush. This is a clear indicator we aren’t stopping the train of rampant spending, we are speeding it up
- An impending trade war with China (and others?) – the last thing we need, on top of everything above, is a reduction in jobs, decrease in American buying power, and a slowdown of GDP. But this is exactly what increased tariffs and a “trade war” will amount to
- False security – one of the most frustrating things about Trump’s presidency is how assumed ‘fiscal conservatives’ have rolled over on things like his budget and his impending trade war simply because Trump is “providing tax cuts.” Tax cuts are great and help move the needle—but they represent only one side of the equation. If we lower taxes while increasing spending, we have gained little ground. We need to focus on our over-spending issues as a country (and as a society) before tax cuts will have the growth and positive outcome they might ordinarily have.
- Economic and overall ignorance – Trump is a charlatan who has won many over with false promises and half-truths. His tax cut does not give him a pass on all things fiscal or economic. If he is a fiscal conservative as he says, he should stay true to the principals of the free market, fair (open) trade, reduction of government (not increases), and spending less than he brings in. Given that he has done very little of this to date, I fear that this ignorance will swell into so many other areas of economic policy. Trump, with Congress in tow, truly has the power and sheer ignorance to enact policies, laws, and tariffs which will devastate the economy.
I’m Not Too Bullish, am I?
We stand upon the edge of a knife, in perilous economic times. We have built a precarious deck of cards so high that, like fools, we sit perched at the top and with great hubris claim confidently we are kings and queens of the world. It is folly. The bubbles will burst. The castle of cards will crumble. And we will tear at our clothes and ask ourselves “oh how did we not see this coming?” But the signs are all around us; those with eyes or even a mind for history can see the cycle repeating. What I feel is true and fear most of all is that the next collapse that comes will trigger the bubbles one at a time, in ripe succession, to bring forth a collapse and a hole so deep and wide-reaching that we will spend decades building our way out of it.
Sadly, the United States is THE global, economic leader; following our decline we will spread this sickness and economic ruin to much of the world. It will not be isolated here. The sins and mis-truths of socialism, rampant over-spending, ignorance, and greed are not unique to our country or our continent. They will spread far and wide.
About The Author
“Be Fearful When Others are Greedy, and Greedy when Others are Fearful” – Warren Buffet
I wrote this article and cheat sheet to try help people like me – the average person – try to make sense of the economic/financial nonsense happening around them. I am not the smartest person on these topics (or any topic); in fact I probably got some of the low level details wrong and am happy to correct any statements above when presented with new information or data.
However, note that I’m leaning on a wealth of expertise on these subjects written by men and women far smarter than me. Every theory and explanation is using what I would consider “common sense” and a healthy amount of basic economic/financial logic. I also believe in, and have leaned heavily on, principals of the Austrian economic thinkers in terms of framing the opinions/viewpoints above.
I welcome constructive debate, discussion, and idea-sharing. I do not hold a monopoly on the truth and am but a free-thinker and explorer into the ideas and concepts I discuss.
Background / Supporting Articles: