The market has rallied again in the US. Gold is down a little. Oil is up. It’s as if the events of earlier this week were some bad dream.
This is a relief rally. Nothing has changed.
China has not miraculously found a higher gear for economic growth. Japan is still madly running the printing presses to finance their growing budget deficits and to selectively support their share market. The EU is still giving money to Greece so that Greece can hand it back to the EU to create the illusion the debt is being paid. The Fed is still suppressing interest rates. Every major country is still spending more than it earns…which in turn increases the already sky high public debt levels.
The illusion of prosperity continues…but not for much longer.
The next wave down in the market will draw back the curtain a little more on this charade. The unsuspecting public will be given a little more insight into the lie we have been living.
Deception is nasty business.
One day you’re in love and the future promises so much.
Then you learn your spouse’s name is on the leaked Ashley Madison list (an adultery website which was recently hacked and had its membership list revealed).
The next day you’re in court.
Trust is gone. And without trust, no relationship can ever move forward and flourish to its full potential.
The same principle applies to an economy.
‘Above all, trust enables people to do business with each other. Doing business is what creates wealth.’
Professors Paul Zak and Stephen Knack,
Trust and Growth
If you don’t trust a supplier to deliver the goods and the supplier doesn’t trust you to have the money, there is zero economic output.
Trust makes the wheels of commerce turn.
In 2008, the wheels almost ground to a halt. Trust was in short supply.
Research conducted by Professors Paola Sapienza and Luigi Zingales in 2009, revealed that at the height of the GFC (between September and December 2008), 52% of Americans lost trust in the banks and 65% lost trust in the share market. They concluded:
‘…a person’s trust in banks predicts the likelihood that he will make a run on his bank in a moment of crisis…Thus, trust in financial institutions is a key factor for the smooth functioning of capital markets and, by extension, the economy. Changes in trust matter.’
Our entire system operates on trust. We take out insurance cover trusting we’ll be paid if there is an insurable event. We trust the banks to hold our money in safekeeping and to return it to us when we need it.
When trust is gone, the system is thrown into chaos. Institutions are shunned. In 2008 it wasn’t just Americans that lost confidence in their banks, here in Australia we came perilously close a full blown bank run.
Here’s an extract from my book The End of Australia:
You may or may not remember the pressure the Australian banking system was under in 2008.
According to The Australian on 21 June 2010:
‘[Australian] Households pulled about $5.5bn out of their banks in the 10 weeks between US financial house Lehman Brothers going broke [September 2008] – the onset of the global financial crisis – and the beginning of December .’
The demand by panicked depositors for physical cash put a strain on the RBA’s cash reserves:
‘…the Reserve Bank’s strategic reserve holdings of $50 and $100 notes started to run low and the call went out to the printer for more. The Reserve Bank ordered another $4.6bn in $100s and another $6bn in $50s.’
In addition to depositors wanting to hold their cash close to their chest, overseas investors wanted their cash back as well:
‘Balance of payments figures show that in the immediate aftermath of the crash, Australian banks were called on to repay $50bn in short-term debt to international investors who refused to roll over their exposures.’
When people lose confidence, everyone wants cash…more specifically they want their cash.
In 2008/09, central banks and governments were able to restore calm and quell the panic. Offering $1 million deposit guarantees. Printing money. Reducing interest rates.
Trust was restored. Money steadily came back into the banks. Share markets recovered. Crisis averted.
But what about next time? And there is going to be a next time. The debt crisis in 2008 has not gone away, it has just grown bigger.
What if people lose trust in the ability of Government and Central Banks to protect them?
The situation can rapidly go from bad to worse.
The Fed’s multiple QE programs were credited with saving the world. With imitation being the best form of flattery, Japan and Europe followed suit and rolled out their own QE programs.
The Fed publicly stated QE was meant to provide banks with liquidity to once again begin lending to Americans.
Former Federal Reserve official Andrew Huszar made this frank admission in the Wall Street Journal (emphasis is mine):
‘The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.’
Was this the ranting of a disgruntled former employee? No.
Richard Koo, Chief Economist at the Nomura Research Institute (and one of the main architects of Japan’s QE program) said (again, emphasis is mine):
‘In a sense, quantitative easing is meant to benefit the wealthy. After all, it can contribute to GDP only by making those with assets feel wealthier and encouraging them to consume more.’
QE is an enabler for the wealthy to become even wealthier. It does nothing for the man in the street.
The wealthy don’t necessarily consume more. They tend to accumulate more.
Which is why the Wall Street Journal ran a headline recently saying the US recovery was the worst in 70 years, in spite of trillions of dollars being printed to aid recovery.
QE is a fraud.
The more kindly amongst you may think this was an honest mistake by the Fed.
The Fed and Wall Street deliberately misled the public on the real intent of their actions. It was all about saving the insiders. Creating currency (a pool of deposits) for commercial banks to then lend to borrowers was a complete furphy, and they knew it.
Several decades ago, the acclaimed economist Professor Hyman Minsky (of the ‘stability creates instability’ theory) proved a credit-driven economy functions the other way around.
It is borrower demand that creates deposits. Let me explain.
You go to the bank to borrow money to buy a house. Under the fractional banking system, the bank creates the money for the loan, and then the exchange takes place. You own the home and the former owner has the money, which they deposit into their bank. The former owner’s bank now has a deposit base that can be leverage up under the fractional banking system PROVIDED someone knocks on the bank’s door to ask for a loan. If they do, then the whole process is repeated again.
Minsky added this rider:
‘People and businesses are not inclined to borrow money during a downturn purely because it is made cheaper [by lower interest rates] to do so. Consumers also need a feeling of job security and confidence in the economy before taking on additional borrowing commitments.’
The Fed, with its army of PhD economists, would have known this basic cause and effect process.
The central bankers did not create QE to help the man in the street. It was all about Wall Street and propping up the global Ponzi scheme.
These institutions have fooled the public once, will they be able to fool them again?
When the next crisis hits and the public recognise that they’ve been hoodwinked by these so-called pillars of society, what happens to the trust factor so critical to the proper functioning of the system?
Confidence is lost. Job security is threatened. Any thoughts of borrowing are suspended.
Dropping interest rates is pointless. Printing more money to prop up Wall Street could well incur the wrath of the masses. We are not falling for that again.
The central bankers got away with a fraudulent rescue package in 2008. I’m not so sure they can pull the same trick again and expect a similar outcome.
During the worst of the GFC more than 50% of Americans lost confidence in the banks and the share market.
Imagine what will happen when those percentages are higher and the distrust lasts for far longer — and people don’t trust the government to act in their best interest?
This is how you get economic breakdown.
People feel betrayed, angry and distrustful. Everything they believed in has been turned upside down.
Hell hath no fury as a society scorned.
Editor, Markets and Money, Australia
Publisher’s Note: This week we’re running a series of short three-minute videos on Facebook, where I (Kris Sayce) ask Vern about his views on the world economy, and especially what it means for Australia. After four decades or more of almost unlimited credit growth, Vern says that the Australian economy in particular is heading for a major shock. Go here to watch these critical videos now.