Many pundits and investors alike seemed stunned that Janet Yellen, chair of the Board of Governors’ of Federal Reserve didn’t announce interest rate hikes in September. It doesn’t take much searching to find many of these same pundits and investors were completely shocked by the 2008 crash, as we heard repeated over and over: “Nobody could have seen this coming!”
Yet, with more simple searching you can find there were were investors and pundits that did get it right and predicted the 2008 crash - some in great detail regarding the real estate bubble, the derivative problems, and even what the government’s reaction to the problem would be.
Some of these same pundits that got it right are saying both interesting and shocking things now - besides emphasizing there would be no rate hike this year, but that by all indications, a bigger crash is coming soon, and we’ve never really had a recovery.
Now most would say another crash is just speculation and maybe they were simply lucky predicting the 2008 crash and the lack of a rate hike; so to focus on – the ‘lack of recovery’ - a summary of the most common objections would be: ‘But the GDP growth..’, ‘But the unemployment rates…’, and ‘But the stock market...’ - all figures that indicate there indeed has been a recovery in full swing for some time.
Allow me to dissect the claims and objections, and show you the perspective of those that got it right last time in order to help you understand what they see, and how important this is to today’s political discussion.
The Real Rate of Inflation, GDP, and the Dow Jones
In the last article I wrote on this subject for the Review a couple years back, I got into some detail about how the rate of inflation was being deceptively modified in the 80’s and 90’s, among other things, to essentially remove food and energy from the Consumer Price Index equation. Go figure, two things every family in America needs, right?
The manipulation of the formula hasn’t stopped, with the regular shifting in the ‘weight’ of different commodities in the formula, which pushes the reported rate of inflation, or CPI, even lower.
John Williams, who publishes a newsletter analyzing flaws in current U.S. government economic data and reporting called ’Shadow Government Statistics’ which provides alternate data using the historical calculations for these important figures. The alternate stats include an alternate GDP picture with the historical inflation calculation plugged in, which then paints negative GDP growth for our country since 2005, meaning – if the formulas were never changed, the official numbers would demonstrate that this has been a longer recession and there has in actuality been no recovery!
The Dow Jones is susceptible to the same interpretive flaw, in that, never analyzed with even the reported rate of inflation, much less the historical inflation calculation, gains are not seen in full light. When using the reported rate of inflation, one can clearly see we barely broke the 2008 peak. Using the historical calculation for inflation, the picture looks bleaker.
That’s obviously not what you hear reported to you, the dramatic gains the stock market has made since the 2008 crash… But what are these gains, what do they mean, and who do they belong to?
Low Interest Rates and Malinvestment Bubbles
Rewinding back a little if we look at former Federal Reserve chair Alan Greenspan’s response to the dot com crash, it was to lower the interest rates to 1% for about a year, after which he quickly pumped interest rates back up. This is widely credited for fueling the housing bubble that popped as part of the 2008 financial crisis. Greenspan himself later admitted the housing bubble was “fundamentally engendered by the decline in real long-term interest rates.”
The Federal Reserve, by setting the interest rate unilaterally and without direct market supply and demand forces, must be recognized as being what it is - an artificial rate, as opposed to the natural free market solution where supply and demand would dictate the most competitive and fair rate.
When these rates are low, it means there is new money being added to the system. This money, for the most part is coming to the banks, in very low interest loans (as low as 0%). This free money causes investments that wouldn’t normally be worthwhile to be profitable. Then they get to also turn around and loan it to you for profit, and this helps drive the financial sector into this mirage of a recovery that we seem to be having.
There’s more, besides many experts saying the housing bubble is back re-inflating from the 0% interest rates for 7 years, far outpacing Greenspan’s contribution to the same, there are other bubbles to worry about.
Possibly the most pressing on the doorstep is the Student Loan Bubble. Student loan debt now stands at a record $1.2 trillion, which now represents the second largest category of consumer debt after home mortgages, surpassing even car loans and credit card debt. At the continued growth rate, this debt will balloon to over $3.3T within the next ten years.
One might wonder why is it malinvestment to guarantee student loans?
First, consider that these loans are currently defaulting at a rate of 11.3%, a number sure to be underestimated, as it doesn’t include those in deference or forbearance, which would push that number to at least 23%. These loans are backed by you, the US Tax Payer.
Another thing to consider, when offering anyone who wants to go to college, the financial guarantee to go to college, doesn’t mean that they should go to college. Many recognize this as the bachelor’s-degree-but-working-at-fast-food-restaurant syndrome. Not to demean fast food workers, but not everyone needs to go to college. Plenty of successful people didn’t go to college or dropped out of college. Some should be going to trade schools.
And then there is the unexpected consequence and problem these guaranteed loans have brought to the realm of higher education. A boost in demand with limited supply brings higher prices further feeding this vicious cycle of ballooning debt.
Employment Meets Reality
The unemployment rate is also no longer a good gauge of our labor force and joblessness. Many are pointing to the low 5.1% unemployment rate to attest that we have indeed had a recovery, but this is just another example of government figures gone wild.
Even chief officials in government and finance, like Keith Hall, the former head of the Bureau of Labor Statistics claimed the unemployment figure is “misleadingly low” and calculated at least 3% too low in an interview with NY Post in 2013. Also former chairman of the Federal Reserve, Ben Bernanke, during testimony to congress, said the unemployment rate was "in some ways... too optimistic a measure of the state of the labor market."
Neither of them are wrong. Like inflation, the unemployment formula has also been continually morphed for more cheerful numbers for the establishment. There is a secondary number the BLS releases that more accurately gauges real employment levels called the “Labor Participation Rate” which is sending some shocking warnings. Currently, the labor participation rate is the lowest it has been since the 1970’s, when it was still common to have less women in many workplaces.
This only begins to paint the picture when you realize this doesn’t track underemployed people. Those who found part time work but were seeking full time work, especially considering many part time workers hours were being slashed to stay under the ACA/Obamacare requirements. Underemployed is still employed, in fact even if you worked only 1 hour last month, you are considered employed.
According to the Social Security Administration, 51% of Americans now earn less than $30,000 a year. In fact, when separating the population by income into quintiles and adjusting for reported inflation, the lower 4 of 5 of these quintiles median incomes have all decreased over the past 10 years.
So looking at the figures in these lights, obviously the recovery just isn’t there, not for the average American family, or even the great majority of Americans. But how does this compare, as far as social impact, to the decade of negative GDP we experienced in the Great Depression?
One gauge would be the notorious bread lines of the Great Depression said to have been 2-deep, ¼ mile long. Today, technology is able to conceal the bread lines of yesteryears with food assistance programs, such as the SNAP benefits, which utilize debit cards and regular shopping lines. Demonocracy pulled together a visual to compare the ¼ mile, approximate 916 person bread lines of the Depression, in comparison with what we could compare that today by taking the total number of SNAP participants divided by the total number of Wal Mart Supercenters.
This comes out to almost 8 miles of line, or a total of about 14,588 people per Wal Mart. Considering this is roughly a 14X+ increase, as to compare with a 3X population increase during the same time, these figures are alarming to say the least demonstrating an approximate four fold increase per capita in food assistance in comparison.
The Reserve Currency of the World
There is something worse on the radar than what we’ve covered, and that is the bond bubble, or the dollar itself. It is the opinion of many free market economists that the US Government defaulted on it’s debt in 1973 when it delinked gold from the dollar, and decreed that gold would be ‘fixed’ at $35/ounce. With the current price at the time of writing this hovering around $1,170/ounce, we know that obviously didn’t work.
It is the mere demand for our currency that guarantees its value now, as nothing of physical value is backing it any longer. Lucky for us, as the Reserve Currency of the World, namely, being the ‘PetroDollar’, or the currency needed to purchase oil, has forced every country around the world to stockpile our money in their reserves.
Unfortunately more countries are recognizing our insatiable appetite for deficit spending, and our practice of ‘monetizing our debt’ in which, we add money to the system to make payments on the debts, and cause inflation, eroding the purchasing power of the remaining debt. While this is supposed to be a genius way of double paying without taxation, it of course fails to consider those the rising prices hurt the worst – the poor, not to mention the slap-in-the-face it is to those holding our debt and losing their value.
US Treasuries are now being dumped faster than any time in the last 15 years. Countries like China and Russia are calling for a new world reserve currency. And while both countries are unloading US Treasuries, they are buying gold up at unprecedented rates.
Plenty of other unexpected geopolitical events are threatening the sustainability of the PetroDollar. Secretary of State John Kerry claimed our world reserve status would have been over if the Iran deal were rejected. Does it not speak worlds of the instability of our status that we just came that close to losing it?
The Manipulation of Precious Metals
Russia and China aren’t the only ones buying record amounts of precious metals. Major banks and investment firms like JP Morgan, HSBC, and Goldman Sachs, who have all been recommending their clients not invest in these same metals, have been stockpiling their ‘house accounts’ with gold and silver. JP Morgan has increased their house silver account alone by 500% in the past 2 years.
Currently, the supply and demand of physical gold and silver have little to do with the price as the price is set by the ‘paper’ stock market. And there is a lot wrong with the paper market. While ‘futures’ used to represent future deliveries of a physical product, the COMEX gold delivery is now sitting at a record 293 paper ounces per every physical ounce of gold. Some, like fund manager Dave Krazier claims the ratios are likely worse than they are reporting.
To some, the Plunge Protection Team’s unholy alliance is why paper stocks rise as metals loose. Others, like Paul Craig Roberts, point to the big banks using derivatives to suppress bullion prices. While in Theaodore Butler’s long study of the silver market found a statistical anomaly “I overlooked putting a glaring feature into proper perspective – JPMorgan and the big 4 as a whole achieved the statistically impossible; never taking a loss.”
Those studying the economy from the free market point of view, including those who predicted the 2008 crash, like Peter Schiff, say gold and silver are the safe haven from the coming inflation and crash that will be bigger than 2008.
Alike the gold price fixing in the 70’s, manipulation whether overt or covert, can only work for so long until the market forces overpower it. This is something that appears to be in the process with record silver demand that’s left the US and Royal Canadian Mint suspending and rationing deliveries, as well as other prominent government and private mints proclaiming unprecedented demand in the market right now making for what normally is a retainer of value and wealth, appear to be a potentially lucrative investment.
And for the interest rate hikes? They don’t have a choice, Schiff says, that won’t happen this year.
An interest rate hike will end the easy money party and even the illusion of economic growth we have been watching; it will pop the bubble and expose the phony recovery that never was.
16th November, 2023