There is more mystery and nuance to the economic story than we are being told by the pundits. Here’s the real story about debt, bubbles and a 35-year-long Ponzi Scheme.
Mainstream media tells us every day that we are in the sixth year of recovery and very soon we will hit the “escape velocity” for GDP growth which would mean, I don’t know, perhaps a brand new BMW in every garage. People are constantly reminded of the vibrant housing market and the non-stop bull market on Wall Street.
Well, maybe there is a little more mystery and nuance to the economic story than we are being told by the pundits. Let’s start with a simple chart that has a profound truth in it.
What the chart shows is interest rate falling over the last 35 years – from 18% in the early 1980s to 0% by 2009 and staying there ever since.
You see, interest rates determine the “cost” of money. So, by lowering interest rates constantly, the Federal Reserve Bank made money “cheaper” and thus more easily available. Of course, at the surface, this sounds like a good thing, right? Who doesn’t want more money?
Rather than diving into a boring financial analysis, let’s understand this through a simple story.
Imagine a small town called Murika where a rich man named Mr. Garch owned a big factory that employed most of the people in the town. His cousin owned the bank, his best buddy was the mayor, and his business partner’s wife ran the local newspaper. But the good people of Murika didn’t mind because they were getting paid well, and local businesses were booming. People liked Mr. Garch so much that they called him by his first name, Oli.
Then a few years back, Oli started cutting the bonuses of his employees. The local newspaper gave really convincing reasons why this is necessary. Oli also promised that good times will be back soon if people just worked a little harder.
Although Murikans accepted the pay cuts and worked harder, they didn’t see any pay raises. Soon the local businesses started to suffer as fewer people were buying cars, going out to restaurants and so on. They started complaining a lot, and a few even started questioning Oli’s true intentions.
That’s when Oli’s cousin, head of the local bank, announced that interest rates were being reduced for businesses as well as individuals. This was great because, suddenly, the monthly payments for several things from cars to houses got more affordable. So people borrowed more to buy the things that made them happy, and in a short time, things were back to normal.
But there was one problem. Debt had to be paid back. Bummer. So after a couple of years of binging on debt, people were maxed out. The raise that Oli promised never came. In fact, there were more layoffs and full-time jobs were being replaced with part-time jobs. So people started cutting down on expenses.
But local businesses knew what to do: Go to the banker! And guess what? The kind banker reduced the interest rates again. Murikans were happy. They forgot all about their financial difficulties. “Hey, you work hard, borrow money, and buy what you want. The monthly payments are really low, so who cares? The most important thing is to have stuff.”
When some people still struggled to buy homes and cars, clever innovations were used to help people achieve the Murikan dream. “You can’t put 20% down payment for your home? No problem, just do 15% or 10% or 5% or even 0%! Can’t afford your car payment? It’s all good, pay it over 6 or 7 or even 8 years! Don’t have good credit scores? Don’t even sweat about it!”
The mayor also loved the trend in the interest rates. He borrowed lots and lots of money to build parks and sports stadiums (which were built by his brother-in-law) and he even established a program to give free food to people who got laid-off by Oli. This guaranteed the mayor’s re-election.
Another thing happened during these go-go years: while regular people borrowed money to buy cars and homes, Oli borrowed money to buy local businesses. He borrowed millions of dollars and bought many local businesses — car dealerships, movie theaters, restaurants, bars, apartment complexes and more. This essentially lead to the demise of small businesses in Murika, although nobody would notice this trend for a long time.
The real winner of these transformations was the banker. He controlled the money and determined who got it. He was popular like Santa Claus, but what Murikans didn’t realize was that the banker just created money (and credit) out of thin air. He then loaned that funny money ten times over for an interest. However, since this system had a sophisticated name — “Fractional Reserve” — Murikans never suspected this could be fraudulent. Plus, they trusted the newspaper to tell them the truth. However, the newspaper also relied on the banker for loans, and so it kept singing praises of the banker, calling him the “The Maestro.”
It is worth mentioning that there was one group that did not benefit from the low-low interest rates: the poor. The system was like an interest-rate apartheid system that selectively favored some people. For example, all over Murika, there were payday lenders who targeted the poor and easily charged 300% or more for loans. In fact, by the end our story, there were more payday lenders than McDonald’s.
So this went on for a while, until when one year, the interest rates reached 0%.
Zero percent! What’s next?
That’s when the banks announced they ran out of magic bullets. There was no way to artificially stimulate the economy anymore. People were struggling with their personal debts; as for the mayor, he left the town one day after revealing an incredibly large debt that the town owed. Mr. Garch – nobody called him Oli anymore – bought the local police many militarized vehicles and guns so that Murikans wouldn’t even dream of protesting.
Murikans realized that cheap debt is not the same as higher income or wealth; credit is not the same as cash; and that debt today meant tough sacrifices tomorrow. They understood the wisdom from the Bible that says, “The rich rules over the poor, and the borrower is the slave of the lender.”
Hopefully, the story of Murika resonates in a way you can map it to the history of America over the last 35 years. But what has happened in America is actually far worse than the story above.
Unlike Murika, the bankers and corporations of America have innumerable tools to manipulate the stock market and the economy. How is the US economy, right now, affected by all this financial engineering? Answer: bubbles. Not one, but many. Housing bubble, stock market bubble, student loan bubble, Fracking bubble, car loan bubble, corporate junk bond bubble, and bond market bubble are some of the glaring examples.
You can put them all in one category: “Debt Bubble.”
(For a more in-depth analysis of how these bubbles of deceptive wealth are creating vast inequality in America, check out my article, “Zombie Economy, Living Bubble.”)
A debt bubble is inherently unsustainable because, the more you borrow, the more you are forced to borrow in the future. People buy an expensive stock or a home on the hope that there will be a “greater fool” who will borrow even more money to get this hot potato off their hands. This is the classic Ponzi scheme.
The Achilles heel of a debt bubble is higher interest rates. When the interest rates go up, debt becomes more burdensome, and there will be fewer suckers, and the house of cards will crash.
Take, for example, our federal government that has a whopping $18 trillion of debt — six times the tax revenue of the government. This year alone, it will spend about $500 billion in interest payments (which will not bring down the $18 trillion by one penny). And guess how the government is paying for that? Of course, by borrowing!
Every week, old bonds mature, and rather than paying what the bond is worth, our government just “rolls them over” by issuing new bonds for the same amount!
If the interest rate goes up by just 1 percentage point, the interest payment will go up by an additional $180 billion (1% of $18 trillion).
Any “normalization” of interest rates will be very painful. Stock market will be the first one to burst, followed by housing and others. The burst of this bubble can be even more devastating than the one in 2008 since everything that was big in 2008 is now much bigger.
By the way, the next time banks fail, they won’t ask the public for a bailout …they will just take your money from your bank account. Yes, it’s called “bail-in” and it’s now real, thanks to some “reforms” over the last couple of years.All European countries will have official bail-in policies within the next two months. It has already been tried as a trial run in a small country called Cyprus.
So where do we go from here? Well, there are three options: the good, the ugly, and the insane.
The good option is also, unfortunately, next to impossible in the current political environment. This option is the way of living sustainably, living within our means, and paying off our debt. First, it means getting rid of the Federal Reserve Bank — the front-group for Rothschild banksters and oligarchs. Or, at least, take away their power to set interest rates or print money. Second, it means enormous changes in our laws and tax system, including forcing corporations to significantly raise wages. Good luck trying to make the 0.1% part with their money. Third, Americans need to learn to live within their means and reduce their appetite for mindless consumerism.
The ugly option means just kicking the can down the road. Rinse and Repeat. Keep the 0% interest rates, and when the bubbles burst, just print more money – “QE forever.” (QE is Quantitative Easing, the fancy name for fraudulent money printing by banks). We can become just like Japan which has been stuck at 0% for the last 15 years. Now the Japanese government spends half of its revenue on just the interest payments on its massive debt of over $11 trillion; every Japanese child born in 2015 is greeted with a debt of $100,000. Yes, this rabbit hole into the Wonderland of debt can very well become the role model for America.
There is an insane third option which is very popular among the elites. The thinking behind this is, “Okay, the Ponzi scheme worked well for the elites on the way from 20% to 0%. So why stop here? Let’s go into the the negative territory!”
Yes, negative interest rates have become a reality in many aspects of European banks and bond markets over the last year. What it means is that when you borrow some money, you owe less money! Similarly, when you lend money to the state by buying government bonds, you are guaranteed to lose some of your investment.
Imagine, for example, if you borrow $1000 but have to return only $990. This is great for gamblers and spenders who can borrow money to consume or “invest” in high-risk speculations.
This also means a bonanza for the uber-wealthy. Consider a hedge fund guy borrowing $10 million and having to return only $9 million. He can use the difference of $1 million to buy a yacht!
In this scenario, the banks literally lose money every time they lend.
So how does the bank continue functioning if they lose money every time they give out a loan? Why, of course, they steal from the savers. Negative interest rate means that if you deposit $1000 in your bank today, tomorrow the balance will be a little smaller. Sounds preposterous, right?
So you may ask, “Why don’t I just keep the money under my mattress?”
That’s where the “war on cash” comes into the picture. The simple solution that banking elites have come up with is to have a cashless society. Everything will be digital and you can never remove your money from your bank! Sounds crazy? Well, for starters, Denmark and other Scandinavian countries are trying to become as cashless as possible. France and several other European countries have banned cash transactions over a certain limit,sometimes as low as $1000.
The winners are banksters and governments. Banksters and financial institutions can make a lot of money through transaction fees.
This is also great for the government since they can tax and also monitor every single transaction. Getting paid $40 for babysitting? Aha, nice try, you sneaky teenager! We will make sure you pay taxes on that.
NSA can also open a shiny, new office and spend all day analyzing trillions of transactions, looking for any signs that the average American might be a crook.
The war on cash is also happening right now in other forms. For example, every time you withdraw $10,000 or more of your hard-earned money from your bank account, the bank will notify the government. It’s the law now. And if you try to withdraw, say, $5000 twice within a short time period – whatever that is for the government – you can expect a thorough investigation. That’s how Dennis Hastert got caught. Your rights to spend your own money are limited in this brave New World Order.
It’s not just withdrawal. Even people who deposit a lot of cash in their banks can have their money taken by the government. Thousands of small business owners have lost their entire life savings to the IRS just because they deposited too frequently their own hard-earned money in the banks.
Another form of the war on cash is “civil forfeiture” when the government can simply take your cash without arresting you or charging you with any crime. Billions of dollars have been taken from tens of thousands of Americans over the last few years. You can watch John Oliver describe this legal theft by the government.
You may ask, “Can I move my money to another country?” Good thinking, but with a new law called FATCA, passed in 2010, most banks in the world act as IRS agents. Welcome to “One World, One Government, One Bank.”
To summarize the situation in America: you can lose your cash if you try to withdraw it from your bank, if you have it in your possession, if you try to deposit it in a bank, or if you try to transfer the money to another country.
Just look at what’s happening in Greece. At some point, every heavily indebted country will face the same fate. Banksters and bureaucrats will take over nations and implement their supremely effective tools of “cut, raise, and sell.”
They will cut social security and public services (but not the military, of course); raise taxes either explicitly or implicitly through other means – Obamacare might qualify for this; and sell all productive public assets to big corporations and banks – the holy grail of privatization.
So where does all this gloom and doom leave us? We should not expect simple answers since we got into this mess by falling for clichés and slogans. We have veered so far from the truth, we have allowed ourselves to be conned so long, we have given up so much power to the elites, and we have been drawn into such depths of apathy and ignorance, that it is going to take herculean efforts to turn this around.
George Orwell predicted the future with uncanny insight, but he didn’t know that tyranny would come in the form of banking and corporatocracy. Only a massive social awakening in America can prevent the fruition of Orwell’s prophetic words: “If you want a vision of the future, imagine a boot stamping on a human face — forever.”