Should central banks create money out of thin air and give it directly to governments and average citizens? If you can believe it, this is now under serious consideration. Since 2008, global central banks have cut interest rates 637 times, they have injected 12.3 trillion dollars into the global financial system through various quantitative easing programs, and we have seen an explosion of government debt unlike anything we have ever witnessed before. But despite these unprecedented measures, the global economy is still deeply struggling. This is particularly true in Japan, in South America, and in Europe. In fact, there are 16 countries in Europe that are experiencing deflation right now. In a desperate attempt to spur economic activity, central banks in Europe and in Japan are playing around with negative interest rates, and so far they seem to only have had a limited effect.
So as they rapidly run out of ammunition, global central bankers are now openly discussing something that might sound kind of crazy. According to the Telegraph, central banks are becoming increasingly open to employing a tactic known as “helicopter money”…
Faced with political intransigence, central bankers are openly talking about the previously unthinkable: “helicopter money”.
A catch-all term, helicopter drops describe the process by which central banks can create money to transfer to the public or private sector to stimulate economic activity and spending.
Long considered one of the last policymaking taboos, debate around the merits of helicopter money has gained traction in recent weeks.
Do you understand what is being said there?
The idea is basically this – central banks would create money out of thin air and would just give it to national governments or ordinary citizens.
So who would decide who gets the money?
Well, they would.
If you are anything like me, this sounds very much like Pandora’s Box being opened.
But this just shows how much of a panic there is among central bankers right now. They know that we are plunging into a new global economic crisis, and they are desperate to find something that will stop it. And if that means printing giant gobs of money and dropping it from helicopters over the countryside, well then that is precisely what they are going to do.
In fact, the chief economist at the European Central Bank is quite adamant about the fact that the ECB can print money out of thin air and “distribute it to people” when the situation calls for it…
ECB chief Mario Draghi has refused to rule out the prospect, saying only that the bank had not yet “discussed” such matters due to their legal and accounting complexity. This week, his chief economist Peter Praet went further in hinting that helicopter drops were part of the ECB’s toolbox.
“All central banks can do it“, said Praet. “You can issue currency and you distribute it to people. The question is, if and when is it opportune to make recourse to that sort of instrument“.
Apparently memories of the Weimar Republic must have faded over in Europe, because this sounds very much like what they tried to do. I don’t know why anyone would ever want to risk going down that road again.
Here in the United States, the Federal Reserve is not openly talking about “helicopter money” just yet, but that is only because the stock market is doing okay for the moment.
Most Americans don’t realize this, but the primary reason why stocks are doing better in the U.S. than in the rest of the world is because of stock buybacks. According to Wolf Richter, corporations spent more than half a trillion dollars buying back their own stocks over the past 12 months…
During the November-January period, 378 of the S&P 500 companies bought back their own shares, according to FactSet. Total buybacks in the quarter rose 5.2% from a year ago, to $136.6 billion. Over the trailing 12 months (TTM), buybacks totaled $568.9 billion.
When corporations buy back their own stocks, that means that they are slowly liquidating themselves. Instead of pouring money into new good ideas, they are just returning money to investors. This is not how a healthy economy should work.
But corporate executives love stock buybacks, because it increases the value of their stock options. And big investors love them too, because they love to see the value of their stock holdings rise.
So we will continue to see big corporations cannibalize themselves, but there are a couple of reasons why this is starting to slow down.
Number one, corporate profits are starting to fall steadily as the economy slows down, so there will be less income to plow into these stock buybacks.
Number two, many corporations have used debt to fund buybacks, but now it is getting tougher for corporations to get new funding as corporate defaults rise.
As stock buybacks slow, this is going to put downward pressure on the market, and we will eventually catch up with the rest of the planet. At this point, many experts are still calling for stocks to fall by another 40, 50 or 60 percent from current levels. For example, the following comes from John Hussman…
From a long-term investment standpoint, the stock market remains obscenely overvalued, with the most historically-reliable measures we identify presently consistent with zero 10-12 year S&P 500 nominal total returns, and negative expected real returns on both horizons.
From a cyclical standpoint, I continue to expect that the completion of the current market cycle will likely take the S&P 500 down by about 40-55% from present levels; an outcome that would not be an outlier or worst-case scenario, but instead a rather run-of-the-mill cycle completion from present valuations. If you are a historically-informed investor who is optimistic enough to reject the idea that the financial markets are forever doomed to extreme valuations and dismal long-term returns, you should be rooting for this cycle to be completed. If you are a passive investor, you should at least align your current exposure with your investment horizon and your tolerance for cyclical risk, which we expect to be similar to what we anticipated in 2000-2002 and 2007-2009.
When the S&P 500 does fall that much eventually, the Federal Reserve will respond with emergency measures.
So yes, we may see “helicopter money” employed in Japan and in Europe first, but we will see it here someday too.
I know that a lot of people out there are feeling pretty good about things for the moment because U.S. stocks have rebounded quite a bit lately. But remember, the fundamental economic numbers just continue to get even worse. Just today we learned that existing home sales in the United States had fallen by the most in six years. That is definitely not a sign that things are “getting better”, and I keep trying to warn people that tumultuous times are dead ahead.
And if global central bankers did not agree with me, they would not be talking about the need for “helicopter money” and other emergency measures.
Are the central banks of the world starting to lose control of the financial markets? Could we be facing a situation where the bond bubble is going to inevitably implode no matter what the central bankers do? For the past several years, the central bankers of the planet have been able to get markets to do exactly what they want them to do. Stock markets have soared to record highs, bond yields have plunged to record lows and investors have literally hung on every word uttered by Federal Reserve Chairman Ben Bernanke and other prominent central bankers. In the United States, it has been remarkable what Bernanke has been able to accomplish. The U.S. government has been indulging in an unprecedented debt binge, the Fed has been wildly printing money, and the real rate of inflation has been hovering around 8 to 10 percent, and yet Bernanke has somehow convinced investors to lend gigantic piles of money to the U.S. government for next to nothing. But this irrational state of affairs is not going to last indefinitely. At some point, investors are going to wake up and start demanding higher returns. And we are already starting to see this happen in Japan. Wild money printing has actually caused bond yields to go up. What a concept! And that is what should happen – when central banks recklessly print money it should cause investors to demand a higher return. But if bond investors all over the globe start acting rationally, that is going to cause the largest bond bubble in the history of the planet to burst, and that will create utter devastation in the financial markets.
Central banks can manipulate the financial system in the short-term, but there is usually a tremendous price to pay for the distortions that are caused in the long-term.
In Bernanke’s case, all of this quantitative easing seemed to work well for a while. The first round gave the financial system a nice boost, and so the Fed decided to do another. The second round had less effect, but it still boosted stocks and caused bond yields to go down. The third round was supposed to be the biggest of all, but it had even less of an effect than the second round. If you doubt this, just check out the charts in this article.
Our financial system has become addicted to this financial “smack”. But like any addict, the amount needed to get the same “buzz” just keeps increasing. Unfortunately, the more money that the Fed prints, the more distorted our financial system becomes.
The only way that this is going to end is with a tremendous amount of pain. There is no free lunch, and there are already signs that investors are starting to wake up to this fact.
As investors wake up, they are going to realize that this bond bubble is irrational and entirely unsustainable. Once the race to the exits begins, it is not going to be pretty. In fact, the are indications that the race to the exits has already begun…
During the month of June, fixed income allocations fell to a four-year low, according to the American Association of Individual Investors, as major bond fund managers like Pimco experienced record withdrawals for the second quarter. That pullback sent places like emerging markets and high-yield bonds reeling—just as the Federal Reserve signaled plans to taper its easy-money policies within the coming years. Benchmark bond yields ticked up on that news, and in an unexpected twist, the stock market nosedived as well.
A lot of people out there have been floating the theory that the Fed will decide not to taper at all and that quantitative easing will continue at the same pace and therefore the markets will settle back down.
But what if they don’t settle back down?
Could the bond bubble implode even if there is no tapering?
That is what some are now suggesting. For example, Detlev Schlichter is pointing to what has been happening in Japan as an indication that the paradigm has changed…
My conclusion is this: if market weakness is the result of concerns over an end to policy accommodation, then I don’t think markets have that much to fear. However, the largest sell-offs occurred in Japan, and in Japan there is not only no risk of policy tightening, there policy-makers are just at the beginning of the largest, most loudly advertised money-printing operation in history. Japanese government bonds and Japanese stocks are hardly nose-diving because they fear an end to QE. Have those who deal in these assets finally realized that they are sitting on gigantic bubbles and are they trying to exit before everybody else does? Have central bankers there lost control over markets?
After all, money printing must lead to higher inflation at some point. The combination in Japan of a gigantic pile of accumulated debt, high running budget deficits, an old and aging population, near-zero interest rates and the prospect of rising inflation (indeed, that is the official goal of Abenomics!) are a toxic mix for the bond market. It is absurd to assume that you can destroy your currency and dispossess your bond investors and at the same time expect them to reward you with low market yields. Rising yields, however, will derail Abenomics and the whole economy, for that matter.
The financial situation in Japan is actually very similar to the financial situation in the United States. We both have “a gigantic pile of accumulated debt, high running budget deficits, an old and aging population, near-zero interest rates and the prospect of rising inflation”. In both cases, rational investors should demand higher returns when the central bank fires up the printing presses.
And if interest rates on U.S. Treasury bonds start to rise to rational levels, the U.S. government is going to have to pay more to borrow money, state and local governments are going to have to pay more to borrow money, junk bonds will crash, the market for home mortgages will shrivel up and economic activity in this country will slow down substantially.
U.S. financial markets are exhibiting the classic behavior patterns of an addict. Just a hint that the Fed may start slowing down the flow of the “juice” was all that it took to cause the financial markets to throw an epic temper tantrum on Wednesday. In fact, one CNN article stated that the markets “freaked out” when Federal Reserve Chairman Ben Bernanke suggested that the Fed would eventually start tapering the bond buying program if the economy improves. And please note that Bernanke did not announce that the money printing would actually slow down any time soon. He just said that it may be “appropriate to moderate the pace of purchases later this year” if the economy is looking good. For now, the Fed is going to continue wildly printing money and injecting it into the financial markets. So nothing has actually changed yet. But just the suggestion that this round of quantitative easing would eventually end if the economy improves was enough to severely rattle Wall Street on Wednesday. U.S. financial markets have become completely and totally addicted to easy money, and nobody is quite sure what is going to happen when the Fed takes the “smack” away. When that day comes, will the largest bond bubble in the history of the world burst? Will interest rates rise dramatically? Will it throw the U.S. economy into another deep recession?
Judging by what happened on Wednesday, the end of Fed bond buying is not going to go well. Just check out the carnage that we witnessed…
-The Dow dropped by 206 points on Wednesday.
-The yield on 10 year U.S. Treasuries shot up substantially, and it is now the highest that it has been since March 2012.
-On Wednesday we witnessed the largest percentage rise in the yield on 5 year U.S. Treasury bonds ever. It is now the highest that it has been in nearly two years.
-We also learned that the MBS mortgage refinance applications index has fallen by 38 percent over the past six weeks.
If the markets react like this when the Fed doesn’t even do anything, what are they going to do when the Fed actually starts cutting back the monetary injections?
Posted below is an excerpt from the statement that the Fed released on Wednesday. Please note that the Fed is saying that the current quantitative easing program is going to continue at the same pace for right now…
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
So why doesn’t the Federal Reserve just stop these emergency measures right now?
After all, we are supposed to be in the midst of an “economic recovery”, right?
What is Bernanke afraid of?
That is a question that Rick Santelli of CNBC asked on Wednesday. If you have not seen his epic rant yet, you should definitely check it out…
On days like this, it is easy to see who has the most influence over the U.S. economy. The financial world literally hangs on every word that comes out of the mouth of Federal Reserve Chairman Ben Bernanke. The same cannot be said about Barack Obama or anyone else.
The central planners over at the Federal Reserve are at the very heart of what is wrong with our economy and our financial system. If you doubt this, please see this article: “11 Reasons Why The Federal Reserve Should Be Abolished“. Bernanke knows that the actions that the Fed has taken in recent years have grossly distorted our financial system, and he is concerned about what is going to happen when the Fed starts removing those emergency measures.
Unfortunately, we can’t send the U.S. financial system off to rehab at a clinic somewhere. The entire world is going to watch as our financial markets go through withdrawal.
The Fed has purposely inflated a massive financial bubble, and now it is trying to figure out what to do about it. Can the Fed fix this mess without it totally blowing up?
Unfortunately, most severe addictions never end well. In a recent article, Charles Hugh Smith described the predicament that the Fed is currently facing quite eloquently…
One of the enduring analogies of the Federal Reserve’s quantitative easing (QE) program is that the stock market is now addicted to this constant injection of free money. The aptness of this analogy has never been more apparent than now, as the market plummets on the mere rumor that the Fed will cut back its monthly injection of financial smack. (The analogy typically refers to crack cocaine, due to the state of delusional euphoria QE induces in the stock market. But the zombified state of the heroin addict is arguably the more accurate analogy of the U.S. stock market.)
You know the key self-delusion of all addiction: “I can stop any time I want.” This eerily echoes the language of Fed Chairman Ben Bernanke, who routinely declares he can stop QE any time he chooses.
But Ben, the pusher of QE money, knows his addict–the stock market–will die if the smack is cut back too abruptly. Like all pushers, Ben has his own delusion: that he can actually control the addiction he has nurtured.
You’re dreaming, Ben–your pushing QE has backed you into a corner. The addict (the stock market) is now so dependent and fragile that the slightest decrease in QE smack will send it to the emergency room, and quite possibly the morgue.
We are rapidly approaching a turning point. We have a massively inflated stock market bubble, a massively inflated bond bubble, and a financial system that is absolutely addicted to easy money.
The Fed is desperately hoping that it can find a way to engineer some sort of a soft landing.
The Fed is desperately hoping to avoid a repeat of the financial crisis of 2008.
Federal Reserve Chairman Ben Bernanke insists that he knows how to handle things this time.
This is no time to be complacent. Massive economic problems are erupting all over the globe, but most people seem to believe that everything is going to be just fine. In fact, a whole bunch of recent polls and surveys show that the American people are starting to feel much better about how the U.S. economy is performing. Unfortunately, the false prosperity that we are currently enjoying is not going to last much longer. Just look at what is happening in Europe. The eurozone is now in the midst of the longest recession that it has ever experienced. Just look at what is happening over in Asia. Economic growth in India is the lowest that it has been in a decade and the Japanese financial system is beginning to spin wildly out of control. One of the only places on the entire planet where serious economic problems have not already erupted is in the United States, and that is only because we have “kicked the can down the road” by recklessly printing money and by borrowing money at an unprecedented rate. Unfortunately, the “sugar high” produced by those foolish measures is starting to wear off. We are going to experience a massive amount of economic pain along with the rest of the world – it is just a matter of time.
But for the moment, there are a lot of skeptics out there.
For the moment, there are a lot of people that are declaring that the problems of the past have been fixed and that we are heading for incredibly bright economic times ahead.
Unfortunately, those people appear to be purposely ignoring the economic horror that is breaking out all over the globe.
The following are 18 signs that massive economic problems are erupting all over the planet…
#1 The eurozone is now in the midst of its longest recession ever. Economic activity in the eurozone has declined for six quarters in a row.
“I’ve sent CVs everywhere, I come to the unemployment agency every day, for 3 or 4 hours to look for work as a truck driver and there’s never anything,” said 42-year old Djamel Sami, who has been unemployed for a year, leaving a job agency in Paris.
#7 Unemployment in the eurozone as a whole has just hit a brand new all-time record high of 12.2 percent.
#8 Youth unemployment continues to soar to unprecedented heights in Europe. The following is from an article that was recently posted on the website of the Guardian that detailed how bad things are getting in some of the worst countries…
In Greece, 62.5% of young people are out of work, in Spain it’s 56.4%, then Portugal with 42.5%, and then Italy with 40.5%.
#9 Youth unemployment is being partially blamed for the worst rioting that Sweden has seen in many years. The following is how the Daily Mail described the riots…
Sweden is reeling after a third night of rioting in largely run-down immigrant areas of the capital Stockholm.
In the last 48 hours violence has spread to at least ten suburbs with mobs of youths torching hundreds of cars and clashing with police.
It is Sweden’s worst disorder in years and has shocked the country and provoked a debate on how Sweden is coping with youth unemployment and an influx of immigrants.
#10 An astounding 10 percent of all banking deposits were pulled out of banks in Cyprus during the month of April alone.
#12 Suddenly Australia is experiencing some tremendous economic challenges. The following quotes are from a recent Zero Hedge article…
-“We’re seeing a much sharper contraction in the Australian economy than we’d anticipated four or five months ago”. Coffey MD, John Douglas. The engineering group has seen its shares, which traded above $4 in 2007, hit 10c last week.
-“By 10am, the Fitness First gym in the city is packed full of brokers who’ve had a gutful of sitting at their desk doing nothing – salary cuts are starting and next it will be jobs” Perth broker
-“Oh mate, the funding market is dead. You are now seeing a few deeply discounted rights issues for those that are reaching desperate levels ….. liquidity has completely disappeared” Perth broker
#13 The financial system in Japan is beginning to spin wildly out of control. The Japanese stock market has now declined about 15 percent from the peak, and many believe that the yen will continue to get weaker and that interest rates in Japan will start to rise significantly.
#14 Global cash flow is declining at a rate not seen since the last recession. This indicates that we could be headed for a global credit crunch.
#15 Real wages continue to decline in the United States. Even though we are being told that the U.S. is experiencing an “economy recovery”, real weekly earnings have declined from $297.79 in 2010 to $295.49 in 2011 to $294.83 in 2012. (The preceding calculation is based on 1982-1984 dollars)
#16 Wall Street is buzzing about the fact that “the Hindenburg Omen” appeared at the end of last week. So exactly what is “the Hindenburg Omen”? The following are the criteria that are used to determine whether it has appeared or not…
1. The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day.
2. The smaller of these numbers is greater than or equal to 69 (68.772 is 2.2% of 3126). This is not a rule but more like a checksum. This condition is a function of the 2.2% of the total issues.
3. That the NYSE 10 Week moving average is rising.
4. That the McClellan Oscillator ( a market breadth indicator used to evaluate the rate of money entering or leaving the market and interpretively indicate overbought or oversold conditions of the market)is negative on that same day.
5. That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs).
When the Hindenburg Omen makes an appearance, it supposedly means that the U.S. stock market is likely to experience a serious decline within the next 40 days.
#17 As I wrote about the other day, the SentimenTrader Smart/Dumb Money Index is now the lowest that it has been in more than two years. That means that lots of “smart money” has been getting out of the market and lots of “dumb money” has been pouring in.
#18 Margin debt on the New York Stock Exchange has set a new all-time high. The following is from a recent Market Oracle article…
Margin debt—that’s the amount of money borrowed to purchase stocks—on the New York Stock Exchange (NYSE) reached its all-time high in April. Margin debt on the NYSE registered at $384.3 billion as the key stock indices hit new record-highs. (Source: New York Stock Exchange web site, last accessed May 29, 2013.) The highest margin debt ever reached prior to this was in July of 2007, when it stood just above $381.0 billion. At that time, just like today, the key stock indices were near their peaks and “buy now before it’s too late” was the prominent theme of the day
Whenever margin debt spikes like this, a stock market crash almost always follows. If you doubt this, just check out the chart in this article.
Wall Street has had a good couple of years, but it has been a “false prosperity” that has been pumped up by reckless money printing by the Federal Reserve. Just like all of the other stock market bubbles that we have seen in recent years, this one is going to burst too. And as Marc Faber recently pointed out, this bubble has been particularly beneficial to the wealthy…
The Fed has been flooding the system with money. The problem is the money doesn’t flow into the system evenly. It doesn’t increase economic activity and asset prices in concert. Instead, it creates dangerous excesses in countries and asset classes. Money-printing fueled the colossal stock-market bubble of 1999-2000, when the Nasdaq more than doubled, becoming disconnected from economic reality. It fueled the housing bubble, which burst in 2008, and the commodities bubble. Now money is flowing into the high-end asset market – things like stocks, bonds, art, wine, jewelry, and luxury real estate.
Money-printing boosts the economy of the people closest to the money flow. But it doesn’t help the worker in Detroit, or the vast majority of the middle class. It leads to a widening wealth gap. The majority loses, and the minority wins.
The fact that the U.S. stock market has set new all-time record high after new all-time record high in recent months means very little. At this point, the stock market has become completely divorced from economic reality. When this current bubble bursts, the adjustment is going to be very painful. Wall Street will likely whine and complain and ask for more bailouts, but they may find that authorities are not nearly as sympathetic this time.
Much of the rest of the world is already experiencing the next major wave of the economic collapse. Reckless money printing by the Fed and reckless borrowing and spending by the federal government may have delayed the inevitable in the United States for a little while, but those measures have also made our long-term problems even worse.
There was one piece of advice that Ben Bernanke included in his commencement speech to students at Princeton recently that I thought was particularly ironic…
“Don’t be afraid to let the drama play out.”
Will he take his own advice when the next great financial crisis strikes the United States?
That seems very unlikely.
Unfortunately, things are not going to be so easy to fix this next time.
What happened back in 2008 was just a preview.
What is coming next is going to absolutely shock the world.
Federal Reserve Chairman Ben Bernanke has done it. He has succeeded in creating a new housing bubble. By driving mortgage rates down to the lowest level in 100 years and recklessly printing money with wild abandon, Bernanke has been able to get housing prices to rebound a bit. In fact, in some of the more prosperous areas of the country you would be tempted to think that it is 2005 all over again. If you can believe it, in some areas of the country builders are actually holding lotteries to see who will get the chance to buy their homes. Wow – that sounds great, right? Unfortunately, this “housing recovery” is not based on solid economic fundamentals. As you will see below, this is a recovery that is being led by investors. They are paying cash for cheap properties that they believe will appreciate rapidly in the coming years. Meanwhile, the homeownership rate in the United States continues to decline. It is now the lowest that it has been since 1995. There are a couple of reasons for this. Number one, there has not been a jobs recovery in the United States. The percentage of working age Americans with a job has not rebounded at all and is still about the exact same place where it was at the end of the last recession. Secondly, crippling levels of student loan debt continue to drive down the percentage of young people that are buying homes. So no, this is not a real housing recovery. It is an investor-led recovery that is mostly limited to the more prosperous areas of the country. For example, the median sale price of a home in Washington D.C. just hit a new all-time record high. But this bubble will not last, and when this new housing bubble does burst, will it end as badly as the last one did?
Federal Reserve Chairman Ben Bernanke has stated over and over that one of his main goals is to “support the housing market” (i.e. get housing prices to go up). It took a while, but it looks like he is finally getting his wish. According to USA Today, U.S. home prices have been rising at the fastest rate in nearly seven years…
U.S. home prices in the USA’s 20 biggest cities rose 9.3% in the 12 months ending in February. It was the biggest annual growth rates in almost seven years, a closely watched housing index out Tuesday said.
In particular, home prices have been rising most rapidly in cities that experienced a boom during the last housing bubble…
Year over year, Phoenix continued to stand out with a gain of 23%, followed by San Francisco at almost 19% and Las Vegas at nearly 18%, the S&P/Case-Shiller index showed. Most of the cities seeing the biggest gains also fell hardest during the crash.
But is this really a reason for celebration? Instead of addressing the fundamental problems in our economy that caused the last housing crash, Bernanke has been seemingly obsessed with reinflating the housing bubble. As a recent article by Edward Pinto explained, the housing market is being greatly manipulated by the government and by the Fed…
While a housing recovery of sorts has developed, it is by no means a normal one. The government continues to go to extraordinary lengths to prop up sales by guaranteeing nearly 90% of new mortgage debt, financing half of all home purchase mortgages to buyers with zero equity at closing, driving mortgage interest rates to the lowest level in 100 years, and turning the Fed into the world’s largest buyer of new mortgage debt.
Thus, with real incomes essentially stagnant, this is a market recovery largely driven by low interest rates and plentiful government financing. This is eerily familiar to the previous government policy-induced boom that went bust in 2006, and from which the country is still struggling to recover. Creating over a trillion dollars in additional home value out of thin air does sound like a variant of dropping money out of helicopters.
And the Obama administration has been pushing very hard to get lenders to give mortgages to those with “weaker credit”. In other words, the government is once again trying to get the banks to give home loans to people that cannot afford them. The following is from the Washington Post…
The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.
President Obama’s economic advisers and outside experts say the nation’s much-celebrated housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession.
We are repeating so many of the same mistakes that we made the last time.
But surely things will turn out differently this time, right?
I wouldn’t count on it.
Right now, an increasingly large percentage of homes are being purchased as investments. The following is from a recent Washington Times article…
Much of the pickup in sales and prices has been powered by investors who, convinced that the market is bottoming, are scooping up bountiful supplies of distressed and foreclosed properties at bargain prices and often paying with cash.
With investors targeting lower-priced homes that they intend to purchase and rent out, they have been crowding out many first-time buyers who are having difficulty getting mortgage loans and are at a disadvantage when competing with well-heeled buyers. Cash sales to investors now account for about one-third of all home sales, according to the National Association of Realtors.
And as we have seen in the past, an investor-led boom can turn into an investor-led bust very rapidly.
If this truly was a real housing recovery, the percentage of Americans that own a home would be going up.
Instead, it is going down.
As I mentioned above, the U.S. Census Bureau is reporting that the homeownership rate in the United States is now the lowest that it has been since 1995.
For the average homeowner, the worst news is that these overleveraged and defaulting young borrowers no longer qualify for other kinds of loans — particularly home loans. In 2005, nearly nine percent of 25- to 30-year-olds with student debt were granted a mortgage. By late last year, that percentage, as an annual rate, was down to just above four percent.
The most precipitous drop was among those who owe $100,000 or more. New mortgages among these more deeply indebted borrowers have declined 10 percentage points, from above 16 percent in 2005 to a little more than 6 percent today.
“These are the people you’d expect to buy big houses,” said student loan expert Heather Jarvis. “They owe a lot because they have a lot of education. They have been through professional and graduate schools, but their payments are so significant, they have trouble getting a mortgage. They have mortgage-sized loans already.”
And the truth is that there simply are not enough good jobs in this country to support a housing recovery. In a previous article, I used the government’s own statistics to prove that there has not been a jobs recovery. If we were having a jobs recovery, the percentage of working age Americans with a job would be going up. Sadly, that is not happening…
And as I mentioned above, the “housing recovery” is mostly happening in the prosperous areas of the country.
In other areas of the United States, the devastating results of the last housing crash are still clearly apparent.
And all over the nation there are still “ghost towns” that were created when builders abruptly abandoned housing developments during the last recession. You can see some pictures of some of these ghost towns right here.
So the truth is that this is an isolated housing recovery that is being led by investors and that is being fueled by very reckless behavior by the Federal Reserve. It is not based on economic reality whatsoever.
In the end, will the collapse of this new housing bubble be as bad as the collapse of the last one was?
Please feel free to post a comment with your thoughts below…
The next Great Depression is already happening – it just hasn’t reached the United States yet. Things in Europe just continue to get worse and worse, and yet most people in the United States still don’t get it. All the time I have people ask me when the “economic collapse” is going to happen. Well, for ages I have been warning that the next major wave of the ongoing economic collapse would begin in Europe, and that is exactly what is happening. In fact, both Greece and Spain already have levels of unemployment that are greater than anything the U.S. experienced during the Great Depression of the 1930s. Pay close attention to what is happening over there, because it is coming here too. You see, the truth is that Europe is a lot like the United States. We are both drowning in unprecedented levels of debt, and we both have overleveraged banking systems that resemble a house of cards. The reason why the U.S. does not look like Europe yet is because we have thrown all caution to the wind. The Federal Reserve is printing money as if there is no tomorrow and the U.S. government is savagely destroying the future that our children and our grandchildren were supposed to have by stealing more than 100 million dollars from them every single hour of every single day. We have gone “all in” on kicking the can down the road even though it means destroying the future of America. But the alternative scares the living daylights out of our politicians. When nations such as Greece, Spain, Portugal and Italy tried to slow down the rate at which their debts were rising, the results were absolutely devastating. A full-blown economic depression is raging across southern Europe and it is rapidly spreading into northern Europe. Eventually it will spread to the rest of the globe as well.
The following are 20 signs that the next Great Depression has already started in Europe…
#2 Unemployment in the eurozone as a whole is sitting at an all-time record of 12 percent.
#3 Two years ago, Portugal’s unemployment rate was about 12 percent. Today, it is about 17 percent.
#4 The unemployment rate in Spain has set a new all-time record of 27 percent. Even during the Great Depression of the 1930s the United States never had unemployment that high.
#5 The unemployment rate among those under the age of 25 in Spain is an astounding 57.2 percent.
#6 The unemployment rate in Greece has set a new all-time record of 27.2 percent. Even during the Great Depression of the 1930s the United States never had unemployment that high.
#7 The unemployment rate among those under the age of 25 in Greece is a whopping 59.3 percent.
#8 French car sales in March were 16 percent lower than they were one year earlier.
#9 German car sales in March were 17 percent lower than they were one year earlier.
#10 In the Netherlands, consumer debt is now up to about 250 percent of available income.
#11 Industrial production in Italy has fallen by an astounding 25 percent over the past five years.
#12 The number of Spanish firms filing for bankruptcy is 45 percent higher than it was a year ago.
#13 Since 2007, the value of non-performing loans in Europe has increased by 150 percent.
#14 Bank withdrawals in Cyprus during the month of March were double what they were in February even though the banks were closed for half the month.
#15 Due to an absolutely crippling housing crash, there are approximately 3 million vacant homes in Spain today.
#16 Things have gotten so bad in Spain that entire apartment buildings are being overwhelmed by squatters…
A 285-unit apartment complex in Parla, less than half an hour’s drive from Madrid, should be an ideal target for investors seeking cheap property in Spain. Unfortunately, two thirds of the building generates zero revenue because it’s overrun by squatters.
“This is happening all over the country,” said Jose Maria Fraile, the town’s mayor, who estimates only 100 apartments in the block built for the council have rental contracts, and not all of those tenants are paying either. “People lost their jobs, they can’t pay mortgages or rent so they lost their homes and this has produced a tide of squatters.”
#17 As I wrote about the other day, child hunger has become so rampant in Greece that teachers are reporting that hungry children are begging their classmates for food.
#18 The debt to GDP ratio in Italy is now up to 136 percent.
#19 25 percent of all banking assets in the UK are in banks that are leveraged at least 40 to 1.
#20 German banking giant Deutsche Bank has more than 55 trillion euros (which is more than 72 trillion dollars) of exposure to derivatives. But the GDP of Germany for an entire year is only about 2.7 trillion euros.
Yes, U.S. stocks have been doing great so far this year, but the truth is that the stock market has become completely and totally divorced from economic reality. When it does catch up with the economic fundamentals, it will probably happen very rapidly like we saw back in 2008.
Our politicians can try to kick the can down the road for as long as they can, but at some point the consequences of our foolish decisions will hunt us down and overtake us. The following is what Peter Schiff had to say about this coming crisis the other day…
“The crisis is imminent,” Schiff said. “I don’t think Obama is going to finish his second term without the bottom dropping out. And stock market investors are oblivious to the problems.”
“We’re broke, Schiff added. “We owe trillions. Look at our budget deficit; look at the debt to GDP ratio, the unfunded liabilities. If we were in the Eurozone, they would kick us out.”
Schiff points out that the market gains experienced recently, with the Dow first topping 14,000 on its way to setting record highs, are giving investors a false sense of security.
“It’s not that the stock market is gaining value… it’s that our money is losing value. And so if you have a debased currency… a devalued currency, the price of everything goes up. Stocks are no exception,” he said.
“The Fed knows that the U.S. economy is not recovering,” he noted. “It simply is being kept from collapse by artificially low interest rates and quantitative easing. As that support goes, the economy will implode.”
So please don’t think that we are any different from Europe.
If the United States government started only spending the money that it brings in, we would descend into an economic depression tomorrow.
The only way that we can continue to live out the economic fantasy that we see all around us is by financially abusing our children and our grandchildren.
The U.S. economy has become a miserable junkie that is completely and totally addicted to reckless money printing and gigantic mountains of debt.
If we stop printing money and going into unprecedented amounts of debt we are finished.
If we continue printing money and going into unprecedented amounts of debt we are finished.
Either way, this is all going to end very, very badly.
The Federal Reserve continues to pump up this “bubble economy” by recklessly printing money and by setting interest rates artificially low, and the U.S. Congress continues to stand aside and allow them to systematically destroy our economy. The U.S. Congress could choose to end this madness at any time, but the truth is that Congress won’t even pass a law that would allow the American people to see what is going on over at the Federal Reserve. Congress has voted down every single bill that would authorize a comprehensive audit of the Federal Reserve. So the folks over at the Fed will continue to be able to destroy our future in secret. In fact, back in July Federal Reserve Chairman Ben Bernanke actually sent five thank you letters to members of Congress that gave speeches on the floor of the U.S. House of Representatives encouraging their fellow lawmakers to vote against the bill to audit the Fed. Since the U.S. Congress continues to refuse to do anything to hold the Federal Reserve accountable, the Fed will continue to print unprecedented amounts of money, it will continue to set interest rates insanely low and it will continue to pump up the greatest debt bubble in the history of the world. Unfortunately, all debt bubbles eventually burst, and when this one does it is going to be a financial nightmare unlike anything we have ever seen before.
It was Politico that first broke the story about the thank you letters that Federal Reserve Chairman Ben Bernanke sent to five members of Congress back in July. Bernanke acknowledged in the letters that there was never any worry that the “Audit the Fed” bill would actually get through Congress and be signed into law, but he was still extremely grateful that a number of members of Congress got up and publicly denounced the bill….
In July, the Fed chairman sent letters of gratitude to five Democratic members of Congress after they delivered speeches on the House floor urging fellow lawmakers to reject the “Audit the Fed” bill authored by retiring Texas Republican Ron Paul, the central bank’s chief antagonist.
Their efforts failed to defeat the bill, but they were not in vain, at least in Bernanke’s eyes.
“While the outcome of the vote was not in doubt, your willingness to stand up for the independence of the Federal Reserve is greatly appreciated,” Bernanke wrote in the letters, which were obtained by POLITICO through a Freedom of Information Act request.
So who did Bernanke send those letters to?
According to Politico, the thank you letters were delivered to U.S. Representatives Barney Frank, Elijah Cummings, Melvin Watt, Carolyn Maloney and Steny Hoyer.
By refusing to take action against the Federal Reserve, the U.S. Congress is silently endorsing their incredibly foolish policies.
Sadly, most Americans don’t even realize that the Federal Reserve has more control over our economy than anyone else does. Most Americans that are actually concerned about politics are busy arguing over whether Obama or Romney will be better for the economy when it is actually the Fed that controls the levers of economic power.
Just think about it.
The Federal Reserve played a major role in creating the housing bubble which severely damaged our financial system a few years ago.
As the chart below shows, after 9/11 the Federal Reserve dropped interest rates to historically low levels. This allowed potential home buyers to get into much larger mortgages, and the big banks (which the Fed supposedly “regulates”) started making home loans to almost anyone with a pulse.
When interest rates started to go back up to normal levels in 2005, many home owners discovered that their adjustable rate mortgages started to become much more painful. By 2007, we started to see a massive wave of mortgage defaults. In 2008, the financial system crashed.
In response to the financial crisis of 2008, the Federal Reserve dropped interest rates to record low levels. The effective federal funds rate is essentially at zero at this point, and the Fed has promised to keep interest rates at ultra-low levels all of the way into 2015.
But didn’t artificially low interest rates cause many of our problems in the first place? The central planners over at the Fed are convinced that this is the right course for our economy, but can we really live in a zero interest rate bubble indefinitely? Won’t this eventually cause even greater problems?….
The Fed is also destroying our economy by recklessly printing money.
Once upon a time, the U.S. monetary base rose at a very steady pace. But since the financial crisis of 2008, Ben Bernanke has been flooding the financial system with money and this has caused an unprecedented explosion in our money supply.
It isn’t too hard to see from this chart what the foolish “quantitative easing” policies of the Federal Reserve have done to our monetary base….
Fortunately a lot of the money from previous rounds of quantitative easing is being stashed by the big banks as “excess reserves” with the Federal Reserve, but when that money starts flowing into the “real economy” (and it will at some point), we are going to have a major problem on our hands.
But more than tripling our monetary base was not enough for Bernanke. He recently announced yet another round of quantitative easing which he says will last indefinitely.
Basically, Bernanke is taking a sledgehammer to the U.S. dollar. Our currency is being systematically destroyed, and the U.S. Congress is standing by and doing nothing.
For a lot more on why QE3 is going to be so incredibly destructive for our economy, please see the following five articles….
The Federal Reserve seems to think that printing more money is always the solution to whatever economic problems we are having.
But of course the Fed has been debasing our currency from the very beginning. The entire Federal Reserve system is designed to create inflation.
From the time that the Federal Reserve was created back in 1913, the purchasing power of a U.S. dollar has declined from $1.00 to only about 4 pennies today.
And now Bernanke seems bound and determined to wipe out those last 4 pennies.
The Federal Reserve system was also designed to create a never ending spiral of government debt.
Sadly, most Americans simply have no idea where money comes from. Most Americans have no idea that money that the Federal Reserve zaps into existence out of thin air is loaned to the U.S. government at interest. Most Americans have no idea that the primary reason why we are 16 trillion dollars in debt is because this is what the system was designed to do to us.
Today, the U.S. national debt is more than 5000 times larger than it was when the Federal Reserve was originally created in 1913. This did not happen by accident….
Not that our politicians should be off the hook for this. They have been spending money as if there is no tomorrow. Most of them have shown no concern at all about the legacy of debt that they are passing on to future generations of Americans.
If our politicians had been more responsible, the national debt would still be there, but it would be at a much more manageable level.
If we ever want to totally get rid of our national debt, the Federal Reserve must be abolished.
There is no other way.
And government debt is not the only bubble that the Federal Reserve has pumped up.
The following is a chart that shows the growth of all forms of debt (government, business, consumer, etc.) in the United States. The total amount of debt in the United States has grown from less than $2 trillion to more than $55 trillion over the past 40 years….
How in the world could we have been so foolish?
How in the world did we allow the total amount of debt in our country to get more than 27 times larger over the past 40 years?
As you can see, there was a slight “hiccup” in the bubble as a result of the financial crisis of 2008, but now it has started growing again.
At this point our entire financial system is based on debt, and if the debt bubble does not continue to expand the entire thing will collapse.
But no financial bubble grows forever. History has proven that to us over and over.
At some point this bubble is going to burst.
When it does, we will either experience a deflationary collapse or a hyperinflationary collapse depending on how “the powers that be” respond to what is happening.
History has shown us that financial collapse is often accompanied by social upheaval. Many times it even leads to war.
So what will happen to America when our economic collapse happens?
If the U.S. dollar is being devalued so rapidly, then why does it sometimes increase in value against other global currencies? Well, it is because everybody is recklessly printing money now. The 6 charts which you are about to see below prove this. The truth is that it is not just the U.S. Federal Reserve which has been printing money like there is no tomorrow. Out of control money printing has also been happening in the UK, in the EU, in Japan, in China and in India. There are times when one particular global currency will fall faster than the others, but the reality is that they are all being rapidly devalued. Unfortunately, this is a recipe for a global economic nightmare.
Right now you can almost smell the panic as it rises in global financial markets. Investors all over the world are racing to get out of paper and to get into hard assets. Just about anything that is “real” and “tangible” is hot right now. Gold hit a record high last year and it is on the rise again. In fact, it just hit a new five-week high. Demand for silver is becoming absolutely ridiculous right now. Oil is marching up towards $100 a barrel again. Agricultural commodities have exploded in price over the past year. Many investors are even gobbling up art and other collectibles.
Paper money is no longer considered to be safe. All over the globe investors are watching all of the reckless money printing that has been going on and they are becoming alarmed. An increasing number of investors and financial institutions are putting their wealth into hard assets that are real and tangible in an effort to preserve their wealth.
The other day, a reader of this column named James sent me some charts that he had put together. I thought they were so good that I asked him if I could include them in an article. These charts show how central banks all over the globe have been recklessly printing money. Over the last 30 years virtually the entire world has developed a great love affair with fiat currency….
Of course anyone with half a brain can see where all of this is ultimately headed. In the end, inflation is going to spiral out of control and we are going to witness financial implosion on a global scale.
So why don’t these nations just adopt sound money?
Well, it turns out that if you are a member of the IMF, you are specifically prohibited from having gold-backed currency.
Yes, you read that correctly.
In fact, U.S. Representative Ron Paul once sent an open letter to the U.S. Treasury and the Federal Reserve asking about this and he received no response. The following is the content of that letter….
I am writing regarding Article 4, Section 2b of the International Monetary Fund (IMF)’s Articles of Agreement. As you may be aware, this language prohibits countries who are members of the IMF from linking their currency to gold. Thus, the IMF is forbidding countries suffering from an erratic monetary policy from adopting the most effective means of stabilizing their currency. This policy could delay a country’s recovery from an economic crisis and retard economic growth, thus furthering economic and political instability.
I would greatly appreciate an explanation from both the Treasury and the Federal Reserve of the reasons the United States has continued to acquiesce in this misguided policy. Please contact Mr. Norman Singleton, my legislative director, if you require any further information regarding this request. Thank you for your cooperation in this matter.
U.S. House of Representatives
Sadly, the truth is that the global elite don’t want nations to start adopting gold-backed currencies. They want countries to use fiat currencies that they can openly manipulate for their own benefit.
At this point, every nation on earth (to the best of my knowledge) uses a fiat currency. All of the major global currencies are being continually devalued. In fact, there are times when counties will purposely devalue their currencies even more rapidly in order to gain a competitive advantage in world trade.
This is why so many investors now have such an aversion to paper currency. It starts losing value the moment you take possession of it.
In some areas of the world, “gold fever” is absolutely exploding. For example, China imported five times as much gold in 2010 as it did in 2009. On the Shanghai Gold Exchange, trading volume soared 43 percent during the first 10 months of 2010.
Gold, silver and other precious metals are now seen as a great hedge against inflation worldwide. Investors all over the globe are demonstrating a strong preference for “real money” over “paper money”.
So what does all of this mean?
It means that some tremendous imbalances are being built up in the global financial system. The central banks of the world must continue to inflate these bubbles with constantly increasing amounts of paper money and debt in order to keep the game going. If at some point the reckless money printing comes to a screeching halt it is going to unleash hell on global financial markets.
But if all of this reckless money printing continues we are eventually going to see horrific inflation all over the planet. In fact, we are already seeing significant inflation happening in many areas of the globe. Almost every single day a new headline about inflation in China seems to pop up in the financial news. Rising food prices are sparking unrest in the Middle East and elsewhere. Even U.S. consumers are starting to see some uncomfortable price increases at the gas pump and in the supermarket.
So it is not just Federal Reserve Chairman Ben Bernanke that is off his rocker. The whole world is going crazy with money printing.
Hopefully this whole thing is not going to end as badly as many of us fear that it will. But right now the central banks of the world are pumping unprecedented amounts of cash into the global financial system, and those in the global financial system are funneling a very large percentage of that cash into hard assets. Unless something changes, that is going to mean that prices for basic necessities such as food and gas are going to continue to rise.