Buffett’s Math Trumped by Gold

A part of me agrees with the graph and ascribes the first cycle from 1942 to 1971 as a classic post-war expansion fueled by healthy demographics, sound economic policies, normalized interest rates and the discovery and proliferation of conventional oil as a primary energy source. The second period from 1987 to 2001, in my view reflects the Greenspan era of targeting the gold price with the fed funds rate as he explains in his book “Age of Turbulence”. Though there were many unintended consequences brewing, market observers should agree that interest rates from the early 1980’s to 2001 incentivized savings and productive usage of capital. 

Today, we have neither. We don’t have a market rate that incentivizes savings, nor do we have healthy demographics or sound economic policies. Most millennials prefer to remain single and defer household formation. When they do form households, their fertility rates are far lower than their parents.

Though this graph resembles the prior graph, it’s important to observe carefully. The Gold adjusted Ex Gov Spending GDP per Capita figure shows less pronounced cycles than before. This is crucial as it indicates a longer-term asymptotic decline in peaks achieved by the US economy when excluding government spending. For market participants familiar with technical analysis, this resembles a “lower high” chart pattern. More importantly, the 2015 Gold adjusted Ex-Gov Spending GDP per Capita figure is $35,690 down 17.3% over 86 years vs. $43,157 which was the same figure for 1929.

DYI Comments:  Both charts above clearly showing our central bank secular booms and busts.  Real incomes have been crushed since the year 2000 with a bit of a bounce off the 2009 time period.  Real incomes could very well improve(for those who gainfully employed) despite a stock and bond sell off.  Currently today the largest four banks J.P. Morgan, Wells Fargo, Bank of America, and Citigroup hold 45% of America's deposit.  Take the top 25 banks(including these four) pushes the percentage of deposit to around 85% plus.

Too Big to Fail and Too Big to Bail Out

The possibility of a deflationary smash as these insanely over leveraged banks implode.  The Fed's which is nothing more than a banking cartel from day one with its real mandate of privatizing their profits and off loading their losses onto the American taxpayers a bail out this time will even be too large for the Federal government.  Today the top 20% of Americans pay almost 70% of all income based taxes.

   

This possibility will be unacceptable even for the elites with their vast wealth.

Bail Out... is Out; and Bail In...is In!

The Fed's will impose negative interest rates in order to recapitalize these banks.  This will spread the cost out among almost all depositors in the U.S.  Over the coming months you will hear talk of the war on cash.  In order for this bail in to work is to keep citizen and business' from hoarding(savings) cash.

What should been done during the 2008 -2009 downturn was to protect the depositors, allow the top 50 banks to go bankrupt breaking them into 2,500 new banks.  Of course the real solution is to end money creation and fractional lending.  In other words....End the Fed.  By the way this isn't our first central bank but our 4th.  Historically as a nation we've been to this rodeo before with the same horrible results.  Why do we never learn?

DYI    

Q1 2015 U.S. Banking Review: Total Deposits

One thing that stands out from the table above is the sheer size of the deposit base for these four banks. At the end of Q1 2015, these banks had more than $4.6 trillion in deposits among them – which is almost 45% of the total deposits for all U.S. commercial banks. The fact that the total size of deposits for the fifth largest commercial bank – U.S.Bancorp – is just $278 billion should give a clear idea of how large these financial institutions are.