Bubble

News

GOLD, SILVER or BITCOIN-CRYPTO CURRENCIES: Where Will The Big Money Be Made?

When the Central Banks finally lose control of propping up the markets, will the BIG MONEY be made in owning gold, silver or crypto-currencies?  This is the question many investors who are focused on “alternative assets”, outside the typical mainstream stock, bond and real estate markets, are asking. 

Most investors who have been concerned about the massively inflated Bubble Markets and the Greatest Financial Ponzi Scheme in history, have been investing in gold and silver.  However, a new kid on the block, called Bitcoin and the other crypto-currencies, have gained a lot of attention due to the huge increase in their prices over the past few months. 

However, I also see the value of gold and silver rising considerably as well…. especially silver.  The price of silver will likely increase in a much greater percentage because there isn’t much more physical silver in the world compared to gold, and its price is so low, that when large funds move into the silver market…. the huge pressure will be released by a much higher price.

 Economic

Contagion

The U.S. Economy is about to Face its Biggest Test in Years 

This shock won’t start with auto loans…student loans…or even U.S. corporate debt. 

In short, Canada has a gigantic housing bubble on its hands. And it looks like that bubble is finally about to burst. 

You see, financial crises almost never stay in one place. Instead, they move from country to country like a plague of locusts. 

Investors learned this the hard way in 2007 when a U.S. housing crisis turned into a global financial crisis almost overnight. By the time the dust settled, investors from Tokyo to London were sitting on huge losses. 

More importantly, the U.S. economy sits on a mountain of cheap money, just like Canada. 

We have more auto loan, student loan, credit card, and corporate debt than we’ve ever had. Plus, the federal debt is at $20 trillion and counting. And that “official” figure doesn’t include Social Security, Medicare, or Medicaid. 

In short, the U.S. economy is sitting on a tinderbox of debt. And a Canadian housing crisis could very well be the spark that sets the U.S. economy on fire.

 Financial

Repression

Less Than Zero: How The Fed Killed Saving

It destroyed the incentive to do it

It had been a while since I had checked what kind of return the savings account offered. I knew it was pretty low, but there have been a few Fed rate hikes since the last time I had checked. So I asked the teller to look up the current rate the account was yielding. 

It's 0.06%. 

As in, put $100,000 into your savings account and get back a whopping $60 per year.  

Are you kidding me? $60 to have a hundred grand parked in an account subject to withdrawal restrictions and penalties, along with the usual smattering of administrative fees both overt and hidden? At a bank that stumbled mightily during the Great Financial Crisis? One with the potential to legally confiscate your savings through a "bail in" should another crisis hit? 

Oh, and if you factor in the government's trailing 12-month inflation rate of 2.2%, your "savings" account has a negative (-2.14%) real rate of return. Your compounded savings actually loses purchasing power over time. And as we all know the official inflation rate is farcically understated, your loss of purchasing power is even more dire than it at first appears. 

Savings accounts were created to provide an incentive for people to plan for the future. Put money away today, let it grow through the miracle of compounding interest, and have more tomorrow. 

Prudent savings is essential to a healthy economy. It offers resilience during downturns, and provides seed capital for productive enterprise. 

But we are no longer a nation of savers. Not only does our culture indoctrinate us to spend and consume -- and makes it possible to do so by spending future prosperity today through the use of debt (the very opposite of saving) -- but the Federal Reserve has very intentionally driven down interest rates to historic lows.  

Financial Repression 

As mentioned earlier, this is NOT accidental. As we have written about time and time again, the fundamental economic predicament facing the world is having Too Much Debt. 

This is a situation societies have found themselves in before. In fact, it has happened so often throughout history that there's actually a playbook (for the government) when you get to this stage. It's called Financial Repression. 

To understand financial repression, we have to understand that we've been there before. Many nations have gone through periods in the past where they've had very high levels of government debt. And there are four traditional ways of dealing with that. 

One of them is austerity. Everyone understands that. You raise the tax rates. You lower the government spending. This is a painful choice. It can last for decades. And what do you think the voters think about that? 

There is another option and this we can call this the Argentina option. And that's defaulting on government debts. It’s radical. Everybody understands it. How do the voters feel about it? 

There is a third option is rapidly destroying the value of currency. Creating high rates of inflation that very quickly wipe out the true value of a national debt. But that also wipes out the true value of everyone else’s savings and salaries and so forth. It is such an obvious process you can’t really hide it. So how do the voters feel about that? 

Those first three – they all work. They've all been done before. But they're all very painful and make the voters very angry. 

Now there is a fourth way of doing this. There's nothing controversial about its existence; it's not the slightest bit controversial for professional economists or people who have studied economics extensively. It's financial repression. And it works. It's what the advanced western nations did after World War II. It was a process that took 25 to 30 years, depending on the country. The West went from an average debt as a percentage of national economy from over 90% to under 30%. So we know it works in practice. 

To understand what this fourth alternative is where governments like to go is that there are no political repercussions. It's actually just as painful for the population as a whole. You've got to get the money one way or another. But financial repression is, for most people, just complex enough that the average voter never gets it. And because they don’t get it, they're paying the penalty, but they don’t realize it. And they don't see anyone to blame. That's really good if you want to stay in office. 

The key is a concept called negative real interest rates. If the rate of inflation is higher than the interest payments you are taking in, savers are losing purchasing power every year. 

Remember, this is a zero sum game between the borrower and the saver -- with the saver funding the borrower. 

Every dollar in purchasing power that the savers, which are you and I, are losing every year -- that goes to the benefit of the borrower, which in this case is the Federal government. 

 DYI