The Five Horsemen

Saturday, August 29, 2009, 1:52 PM

Below is another Martenson Report from May of 2009, which I am now making available. 

Nothing has been edited or changed.


Executive Summary

  • What can we expect next, and how will we recognize it?
  • A series of sharp, interrupted shocks is more likely than a major sudden collapse.
  • Five game-changing events, what I call The Five Horsemen, will indicate that the rules have changed and a new reality is about to take over:
    • The First Horseman: New credit growth falls below interest payments
    • The Second Horseman: The Fed monetizes debt
    • The Third Horseman: Government deficit spending exceeds 10% of GDP
    • The Fourth Horseman: The dollar goes down, while interest rates go up
    • The Fifth (and final) Horseman: US debt becomes denominated in foreign currencies

Severe structural damage has already been inflicted on our economy. As I wrote two weeks ago (May 16, 2009) in It Has Hit the Fan:

If you have been waiting for further confirmation about the direction of the economy, or waiting for a sign that it's now time to get serious about preparing for a future filled with less, this report is written for you.

You are living in the midst of the collapse of western economies, which are moving from a more complicated state to a less complicated one. This is it.  Keep a journal, because it's happening right now.

After the Great Depression, many people remarked that it was only obvious in retrospect. While it was unfolding, things steadily eroded. But 75% of the workforce remained employed, while hopeful signs of progress were constantly trotted out by various politicians, private economists, and official-sounding government agencies. It is often quite difficult to appreciate the true magnitude of sweeping change while it is occurring.

The most pressing question now is this:  What can we expect next, and when? 

In this report, I give you the precise combination of macro-events that will cause me to issue an alert and kick my thinking and actions into new orbits.

The Path

I do not expect a major sudden collapse to be the most likely path, although it is a possibility. Instead, I anticipate a series of sharp shocks, followed by periods of relative tranquility. 

Here's how I described the various paths in May of 2008, in a report entitled Charting a Course Through the Recession:

While it is possible, I do not anticipate a one-way slide to the bottom, wherever and whenever that may be. I lean towards the ‘stair-step’ model, where a series of sequential shocks and relatively placid periods mark the path to the future. The three scenarios around which I tend to form my thinking (and actions) are:

  • No change. The future looks just like today, only bigger, and no major upheavals, shocks, or recessions happen. The Fed and Congress are successful in fighting off the deleterious effects of the bursting of the housing bubble, and everybody carries on without any major changes or adjustments. This is not a very likely outcome.  Probability: 1%.
  • A series of short, sharp shocks. Moments of relative calm and seeming recovery are punctuated by rapid and unsettling market plunges and marked changes in social perspective. Think of the food scarcity and riots, and you know what this looks like. One day there was low awareness about food scarcity and the next day shortages and prices spikes were making the news. Soon enough, relative calm returns, prices fall, and order is restored, but prices somehow do not recover to their previous levels, leaving people primed and alert for the next leg of the process. I see this as the most likely path forward.  Probability: 80%.
  • A sudden major collapse. Under this scenario, some sort of a tipping point causes a light-speed reaction in the global economic system that requires shutting down cross-border capital flows. Banks would no longer be able to clear transfers and accounts, which would wreak all sorts of havoc upon our just-in-time society. Food and fuel distribution would be the most immediate concerns. There's enough of a chance of this scenario occurring, and the impacts are potentially so severe, that you should take actions to minimize the impacts to yourselves and your loved ones.  Probability: ~20%.

Based on the odds, the most likely outcome that I see is a series of short, sharp shocks (#2, above) as being the most likely to define the path forward. So far this has been our exact pattern with the first shock occurring in 2007, the second between October 2008 to March 2009 and now a period of stability between March and June of 2009. I invite you to re-read the piece linked above as a means of assessing my information,gathering abilities, and my ability to connect the dots, and shine a light on the future.

In the grand sweep of the trajectory that will deliver the United States, and many other western countries, to a lower standard of living (although not necessarily a lower quality of life, but that's another story), there are several discrete elements that I think of as The Five Horsemen.

The Five Horsemen

I believe that a diminished standard of living is in the future for each of the major economies across the world especially those where the inhabitants have been living beyond their means.

Another belief I hold is that any period of living beyond one's means must certainly be followed by an equivalent trough of living below one's means. For example, if you produce 100 but consume 110, then at some point you will need to produce 100 but only consume 90. 

There are two ways that we might expect this period of adjustment to unfold economically. I laid out the basic elements in Crash Course: Chapter 12 - Debt. When too many claims (debts) are laid upon the future the only question is whether those debts will be defaulted upon or paid back (with "inflated away" being a form of default). If all those claims are destroyed by default, then the reduction in future living standard falls to the holder of the debt(s). If the debts are paid back, then the debtor must accept that they will have less money to spend on consumption.  Either way, somebody has less coming to them in the future than they either expect or currently enjoy.

Stretched across an entire nation, too much debt becomes an unsolvable problem, a predicament, due to the fact that no benefit accrues from shifting the burden of bearing the impact of default from one sector to another.  Shifting a promissory note from one pocket to the other does not change the net worth of the individual and this tactic is equally ineffective for an entire country.

Thus the fact that the US government is assuming massive piles of bad debt from stricken financial corporations does nothing to solve the underlying problem, which sprouts from a nation that has overconsumed for decades. But this is exactly what the government is doing, and the goal seems to be to preserve the status quo at all costs. 

Assuming this view is correct, there are signs we can read along the way to confirm if our fiscal and monetary authorities have selected the right path or the wrong path.  This report details the signposts that will tell us when certain thresholds have been crossed that will mark that the current strategy is failing and that a new leg of the journey has begun.

The problem and the mindset of the economic elites are neatly revealed in this quote:

May 30 (Bloomberg) -- World Bank President Robert Zoellick warned policy makers that fiscal-stimulus plans are insufficient to turn around the “real economy” and rising joblessness threatens to set off political unrest across the globe.

“While the stimulus has given an impulse, it’s like a sugar high unless you eventually get the credit system working,” Zoellick said in an interview yesterday

I like this quote because it distinguishes between the "real economy" and the economy resulting from excessive government borrowing and spending. Stimulus money is almost by definition wasted money because the probability of it resulting in proper investment is so low. The gains from stimulus money run out the very second the juice is turned off. 

But it is the second part of the quote that is revealing - "...unless you eventually get the credit system working..." - apparently those in charge find it unthinkable that an economy could be built on anything other than credit.

An alternative quote expressing a more fundamental view would read, "While the stimulus has given an impulse, it’s like a sugar high, unless it is followed by growth in wage-based income".

The difference between the real quote and the one I provided is like night and day. The Zoellick quote assumes that our past period of living beyond our means is recoverable and extensible, and mine does not. Mine assumes a long-term relationship exists between what people earn and what they can spend. In order for us to service our past debts, we need to grow our incomes, not our access to easy credit.

There is a mathematical limit to this "game," at which point it cannot be carried on any longer. I think we have reached the outer limits of our debt-fueled fantasy, although I recognize that the extreme efforts to carry it on a bit longer may well produce short-term results.

The most obvious and mathematically-defendable end of a credit economy comes when interest payments exceed all income. However, things rarely progress that far, as the trouble becomes painfully obvious far earlier and creditors withdraw their continued support.

How will I know that the participants in this game have finally caught on to the fact that it's over? Here are the five game-changing events that will indicate that the rules have changed and a new reality is about to take over.  As I mentioned, I have been tracking these for years and, unfortunately, been watching them unfold one by one.

The First Horseman: New credit growth falls below interest payments

Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.

~Kenneth Boulding, economist

In our debt-based monetary and economic system, it is imperative that new credit growth at least equal the interest payments on past debt. If this does not happen, then the entire financial edifice, levered up as it is, immediately begins to wobble and crumble. Of course this imposes an exponential growth "requirement" on our entire debt/money system rendering it a long-term impossibility.

Total credit market debt (chart below) stood at over $52 trillion at the end of 2008 and has fit an exponential curve nearly perfectly over the past 5 decades.

The "getting the credit system working again" quote by Mr. Zoellick refers to keeping the curve of this chart sweeping upwards in an uninterrupted fashion, as nothing less will get us back to "how things were."

Where this chart required ~$1 trillion of new yearly credit growth in 1995, the remorseless math of the exponential function turned that into $2 trillion per year by 2000, $3 trillion by 2005, and more than $4 trillion by 2008.

While the government's $1.8 trillion of deficit spending for 2009 is certainly heroic, it needs to be complemented by more than twice that amount from the private sectors in order to keep this chart on a smooth path. That, I am confident to say, will not be happening this year.

Status of the first horseman: Arrived.

The Second Horseman: The Fed monetizes debt

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

~Ludwig Von Mises

My second sign occurs when the Federal Reserve directly "monetizes debt," which is a fancy way of saying "prints money out of thin air and exchanges it for private and/or government debt."  This started in 2007 with the first set of rescues, although at the time the Fed took great pains to stress that it wasn't really monetization because they planned to reverse their actions soon.  Of course, that has not happened yet.  Some of their activity was cleverly concealed with complexity, such as when the Federal Home Loan Board (FHLB) bought up $160 billion in mortgages from failing originators such as Countrywide and then quietly passed them to the Federal Reserve for cash.  Minus the FHLB complexity, this represented nothing less than the Fed printing up some fresh electronic cash and handing it over to Countrywide for some failing mortgage products.

The beginning of the end for nearly every debt-ridden country has always been the attempt to pay for past expenditures with newly-minted money. It always starts innocently enough and seems like the right thing to do, but soon the programs grow and grow, and eventually the currency of the country is destroyed.

Now the Fed is openly and actively buying dodgy debt from the government as well as from the private sector. I covered this in a recent "In Session" posting, where I charted the amount of US Treasury debt that was being purchased by the Federal Reserve on a daily basis. 

Fed POMO activity daily rate v2.jpg

This chart reflects only the Treasury purchases. When we add in agency debt, mortgage-backed securities, and various other corporate debt programs, we find that the Federal Reserve is printing up roughly $15 to $30 billion dollars a day just to keep things limping along.

As for the opening quote by Mises, which I think most accurately reflects how things will turn out, I think it is safe to say this: Any country that is printing up to $30 billion a day just to keep things moving along is not voluntarily abandoning credit expansion.  

This means that we are risking a final catastrophe of the currency system involved. Unfortunately, the currency in question also happens to be the world's reserve currency, so this has enormous, far-reaching implications. 

Status of the second horseman: Arrived.


The Third Horseman: Government deficit spending exceeds 10% of GDP

I did not expect to see this one arrive for the US this early in the game and I am quite stumped by the apparent acquiescence by the rest of the world's financial authorities to the US running a fiscal deficit of over more than 13% of GDP.  I would have expected some resistance on their part, such as a refusal to continue buying US Treasury debt, more than a third of which (this year) has been bought by foreign central banks.

I am convinced that this stimulus money, as historical and enormous as it is, will fail to provide any lasting benefit, in part because so little of it is being spent on investments in the future. Promising to cover the losses for bad debts only protects those who financed past malinvestments.  At most, a few measly percent of the total cost of this bailout and stimulus is going towards investments such as beefing up our energy independence or modernizing our transportation infrastructure.  If, instead, 95% was going towards investments, and Wall Street had to fight over the remaining scraps, I would be singing a different tune. 

The inertia of government spending programs assures that these record deficits will recede slowly only under the best of circumstances and will actually grow larger under normal or worsening conditions.  I also want you to recall here that government deficit spending has the strongest correlation with future inflation handily beating out the impact of bank monetary reserves, a common red herring argument trotted out most recently by Paul Krugman who wrote in the NYT:

Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.

Again, inflation correlates most highly with government deficit spending and I remain at a loss as to why this clean, clear fact eludes so many who should, truth be told, know better. 

Status of the third horseman: Arrived.


The Fourth Horseman: The dollar goes down, while interest rates go up

As long-time readers know, it is this fourth horseman that I watch on a daily basis. The combination of a failing dollar and a rapidly rising interest rate on US Treasury obligations will signal to me that the "limitless borrowing spree" of the US government is over.

Currently, more than $7 trillion in US Treasury debt is "held by the public." (The other $4 trillion is owed by the government to the government, so it is not on the open market.)  Treasury debt is bought and sold in vast quantities on a daily basis. More than half of it is held by foreigners.  If foreigners sold this debt, rates would rise. If they then took the dollar proceeds from these sales and exchanged them in preference for some other currency, the dollar would fall.

The combination of rising interest rates and a falling dollar will signal (to me) that a final loss of confidence in the US dollar as an international store of value has occurred.  When (not if) this happens, all manner of financial ills will stalk the globe.  Everything priced in dollars will go up in price - in dollars.  That includes basically all commodities.  All holders of US dollars and US debts will be desperate to get out of their holdings, and you can expect wild plunges and gyrations in most markets.  Interest-rate derivatives, which are mainly denominated in dollars and linked to US interest rates, will become toxic destroyers. 

So much hinges on the US dollar retaining its role as the reserve currency of the world that thinking through this scenario would require a report all its own. Suffice it to say, that you cannot overestimate the impact of a rapid decline in the value of the dollar coupled to rising US Treasury interest rates.

Because of this, I am quite perplexed that the other central banks continue to play along and buy US debt, while the Fed monetizes like crazy and the US government sports a 13% of GDP fiscal deficit. 

Here's the latest data. We certainly are seeing a bit of a decline in the dollar and a bit of a rise in interest rates especially since mid-March when the Fed announced its intention to buy massive quantities of US Treasury debt. 

USD down.jpg

TNX up.jpg

However, these moves are not not yet strong enough to cause me to issue an alert or take personal actions.  They definitely have a big portion of my attention, but are not yet at the top of my list of immediate concerns.

What would make me sit up and take notice?  Right now that would involve the dollar slipping into the low 70's, while the $TNX (ten year bond yield) vaulted up by some massive amount which, for me, would be 50 basis points in a day (which is one half of a percent).

At that point, I would be putting out an alert that it's time for any fence-sitters to hurry up and grab some dollar-decline protection. 

Status of the fourth horseman: Maybe it's here. Maybe. But not yet in full swing.


The Fifth (and Final) Horseman: US debt becomes denominated in foreign currencies

For whatever reason, some people still trust the debt-rating agencies, and one of the more farcical practices is that these agencies routinely "rate" the US for credit-worthiness. The good news is that Moody's recently reaffirmed that the US still has a "AAA" rating, which is the highest possible rating. Or is this good news?

The reason this is a farce is captured in a post that I wrote in an "In Session" forum thread on this matter:

This is a bit of a non-issue.  For a country that has 100% of its debt denominated in its own currency there can be no other rating besides AAA.

The idea behind the rating is to answer the question, "What is the probability that this entity can pay off this debt?"

Well, that probability is 100%, when the entity has a printing press.

The only thing that would change this would be if/when that entity has debt denominated in something other than its own currency.

So while we can all be relieved that Moody's has such a high opinion of the US, this is useless information for the purpose of deciding if one wants to hold the debt of that country.  An alternative measure would be, "What's the chance that this country will resort to printing to relieve itself of its debt burden, thereby eroding the claims of the current bondholders?"

Let's call this new rating the "M system."  One M means, "Sort of likely," two Ms means, "Probably will do it," and three Ms means, "No doubt, they will print."  By this system, I rate US government debt as quadruple M, or MMMM.

Off the charts, in other words.

However, the absolute game-changer would be if the US had to pay off borrowed money in a currency other than its own.  Yen, for example. In order to pay off that loan, we'd have to get Yen from somewhere, with the usual source being a positive trade balance. 

If the US could not get the Yen through legitimate trade, then it could always print up dollars and buy Yen off the open market.  But this would serve to drive up the value of Yen and drive down the value of the dollar, so this scheme would rapidly unravel in a currency crisis.  If this sounds familiar, it should.  This is how most developing nations get in trouble and experience severe currency and debt crises.

Having your debt denominated in your own currency is an enormous privilege.  Should that luxury go away, it would become immediately apparent how much the US depends on the kindness of strangers to continue living beyond its means.

So far, only Japan has made some low-level noises about denominating their loans to the US in Yen instead of dollars, but you can be sure other countries are quietly considering it as well.

Status of the fifth horseman: Not here yet.


Three out of the five "horsemen," which indicate where we are in the trajectory of our downfall, have already arrived.   A fourth is possibly here; perhaps not quite yet. And the final one will mark an inevitable date with a vastly lower standard of living for US citizens and all countries that are the accidental holders of too many US dollars and debts.

I urge you to begin keeping a close eye on these five horsemen:

  1. New credit growth falls below interest payments
  2. The Fed monetizes debt
  3. Government deficit spending exceeds 10% of GDP
  4. The dollar goes down while interest rates go up
  5. US debt becomes denominated in foreign currencies

The current presence of three, or possibly four, of these signs has me thinking very carefully about my assets, my family's needs, and how we will manage the changes ahead.  When the fifth horseman arrives, it will bring a new reality for all of us, and I intend to be as ready as possible.

Endorsed Financial Adviser Endorsed Financial Adviser

Looking for a financial adviser who sees the world through a similar lens as we do? Free consultation available.

Learn More »
Read Our New Book "Prosper!"Read Our New Book

Prosper! is a "how to" guide for living well no matter what the future brings.

Learn More »


Related content


okubow's picture
Status: Bronze Member (Offline)
Joined: Aug 16 2009
Posts: 67
Re: The Five Horsemen

As usual, great article Chris!

You wrote:

"Because of this, I am quite perplexed that the other central banks continue to play along and buy US debt, while the Fed monetizes like crazy and the US government sports a 13% of GDP fiscal deficit."

I'm not sure about the motives of most central banks, but I have a pretty good idea why the Saudis are buying US government securties . . .

machinehead's picture
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: The Five Horsemen

Farther on in the linked Krugman article,  the pretentious hack has the nerve to say that those projecting inflation are 'political.' When Krugman projects deflation, that's scientific. But when you take the opposite view, you're denigrated as 'political.'  As a shameless regime apologist, Krugman must have been looking in the mirror when he penned that calumny.

Awarding the Nobel Prize to Krugman was a monumental act of intellectual nihilism;  the modern-day equivalent of feting the geocentric pope as a visionary while Galileo writhes at the stake.

And so economics remains mired in pre-Copernican darkness, its expert consensus never yet having successfully forecasted a single recession, despite dozens of business cycles since the industrial revolution began. If these clowns were astronomers, they couldn't tell you when the next eclipse was coming. Their cosmological model only treats with straight lines, echoing their square heads.

Good thing these economic medievalists don't toil for a splenetic feudal monarch. The king would long since have chopped off their useless pointy heads, when they told him to dump his gold for paper.

arbitrage's picture
Status: Member (Offline)
Joined: Jun 18 2009
Posts: 2
Re: The Five Horsemen

it is entirely possible that the US will enter into (or is already in) a short deflationary period due to lack of demand for goods, before the effects of QE set in and creates high inflation.

this is of course a worst of both worlds scenario. in the deflationary period, producers and sellers get screwed. when the situation reverses gear into high inflation, everyone in the US gets screwed.

Davos's picture
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: The Five Horsemen

MachineHead: Your post rocks!

IMHO since all the currencies are sinking in unison with the dollar going to hell in the same hand basket - the collapse is going to come like a thief in the night.

saxplayer00o1's picture
Status: Diamond Member (Online)
Joined: Jul 30 2009
Posts: 4169
Re: The Five Horsemen

Read under:


Headless's picture
Status: Gold Member (Offline)
Joined: Oct 28 2008
Posts: 363
Re: The Five Horsemen

We(the U.S.) will, on any given day,  wake up to $8.00/gal gas within the very near future. There will be NO warning..

locodoc's picture
Status: Member (Offline)
Joined: Jun 17 2009
Posts: 2
Re: The Five Horsemen

The other central banks will have to de-value almost in lockstep. Otherwise their country's exports will fall against ours with a declining USDollar.

 Watch the spot and future prices of gold. If gold goes into backwardation it's a good sign that we are over the edge.

willid3's picture
Status: Member (Offline)
Joined: Jul 31 2009
Posts: 6
Re: The Five Horsemen

i wonder if the reason that the rest of the world isn't as concerned is that the rest of the world is in much worse shape?  and what impact will the likely pyscholigical shock on consumer be? will the it be a repeat of the GD where the vast majority of consumers stopped buying any thing but essentails? and with the contuning collapse incomes for all but the top 1%, driven by globalization and off shoring and the like, just where will demand for goods and the jobs they create come from? Its certianly not going to be the east, and the west is tapped out.  so is the standard of living in the US on the unavoidable flight path down? we are cetainly going to match the worlds living standards.  

willid3's picture
Status: Member (Offline)
Joined: Jul 31 2009
Posts: 6
Re: The Five Horsemen

its doubtful that $8 gas will happn in one day, short of a major supplier (say SA) is unable to deliver any supplies of oil. but will it happen any way, irrespective of any thing else? yes it will! its a finite resource. the cheap and easy sources are playing out. the follow on souces are much more expensive to get to, and use. it will matter little in the long run. the days of cheap oil are over, its a matter of time. so far maniuplators have had their day, as demand collapsed driving oil up. but now they have to store oil in billions of barrels as it has no place to go.   

jonahjay's picture
Status: Member (Offline)
Joined: Aug 30 2009
Posts: 3
Re: The Five Horsemen

So the Fed will soon own most of the housing stock and, perhaps, commercial RE at some point and major corporations (AIG/GE/GM/Banks/etc) and they keep buying U.S. Treasury debt, when can we assume without pretense that they sort of own America the beautiful.  And the current administration wants to give them even more power!  Yikes!  So the government has bailed out most of the major banks with taxpayer (current and future) money, yet they (the banks) are major shareholders in the Fed, and the Fed virtually owns America, does that mean those banks we bailed out with our money now own us?  Hmmm, yea, nice shell game.

flyguy's picture
Status: Member (Offline)
Joined: Aug 28 2009
Posts: 1
Re: The Five Horsemen

$8/gal gasoline?  Why?  Isn't demand down?  And if all that is forecast here continues to unfold, won't demand continue to drop? Yes, the dollar dropping = oil higher.  Is that the mechanism you feel will drive gasoline up to $8/gal?  I believe in peak oil and higher prices as we roll along, but until demand returns to 2007 levels, we don't have the market dynamics that would lead to higher my opinion.

mainecooncat's picture
Status: Gold Member (Offline)
Joined: Sep 7 2008
Posts: 488
Re: The Five Horsemen
flyguy wrote:

$8/gal gasoline?  Why?  Isn't demand down?  And if all that is forecast here continues to unfold, won't demand continue to drop? Yes, the dollar dropping = oil higher.  Is that the mechanism you feel will drive gasoline up to $8/gal?  I believe in peak oil and higher prices as we roll along, but until demand returns to 2007 levels, we don't have the market dynamics that would lead to higher my opinion.

As far as demand returning to 2007 levels, that wouldn't need to happen for a big increase in prices. I think it's really the supply/demand difference that's important. If demand doesn't increase a single barrel it would still in the long run lead to price increases due to shrinking extraction, which could start going at a clip of a few percent per year. Even the conservative IEA now believes this, and the world already consumes more than it produces.

Also I don't believe there's much of a demand difference between then and now. The world is using less, which in itself is a shocker -- especially from the view point of a few years back -- but overall global consumption is only down 2-3% I believe -- from about 86 mb/d in 2007 (scroll donw in the inserted table for world totals) to a projected 83 and change in '09 (fourth paragraph donwn).  


MarkM's picture
Status: Platinum Member (Offline)
Joined: Jul 22 2008
Posts: 849
Re: The Five Horsemen
mainecooncat wrote:

Also I don't believe there's much of a demand difference between then and now. The world is using less, which in itself is a shocker -- especially from the view point of a few years back -- but overall global consumption is only down 2-3% I believe -- from about 86 mb/d in 2007 (scroll donw in the inserted table for world totals) to a projected 83 and change in '09 (fourth paragraph donwn).  



I agree completely.  Consumption is down marginally, yet prices are down 50%.  I firmly believe that, conversely, a small increase in consumption will translate to a marked increase in price.  It's what peak oil is all about.

machinehead's picture
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: The Five Horsemen

Dr. Gary North, whose PhD is in History rather than Econ, describes academia's disgraceful lockstep consensus as apologists for central banking:

As an historian by training, I can think of no cartelization of any industry that has been more successfully concealed by academia. This is by far the largest, richest, and most successful cartel in American history. Yet there is almost no criticism of the system and its enforcement tool, the Federal Reserve System. Whatever mild technical quibbles the academic community has had with the FED, the central issue of central banking is never even mentioned, let alone refuted.

What is the central issue? That all central banking is a government-licensed enforcement arrangement of a well-organized, well-funded cartel. As with all cartels, it operates at the expense of competitors who would otherwise offer better opportunities to the public.

For almost a century, criticisms of this arrangement have been confined to fringe groups. The most articulate of these critics have been members of the Austrian School of economics, most notably Ludwig von Mises and Murray Rothbard. No school of academic opinion opposes central banking, other than the Austrians. The success of academia and the mainstream media in suppressing the story of central banking has been almost total. Anyone with first-hand knowledge of the battle to break through this blackout knows how little success critics have had. They have been almost completely marginalized.

This is true in every nation. Central banking is today universal, excluding Andorra, Monte Carlo, and Panama.

Bingo, Dr. North! 'Professional' economists, whether in academia, government, or business, almost never question the prevailing paradigm of central banking. Even NYU's wild-child super-bear, Dr. Nouriel Roubini, endorsed Bernanke's zero interest rates and doubling of the monetary base.

Why this near-death of academic inquiry? Probably because as federal research funding, not to mention federal tuition funding, has risen, U.S. universities are increasingly appendages of the federal government. University presidents are, above all, skilled politicians. Research which seeks to smash the prevailing consensus isn't  appreciated, is not conducive to obtaining tenure, and often won't be funded in the first place.

The Federal Reserve itself employs hundreds of PhD Econs who churn out mountains of implicitly pro-cartel research, using what are effectively public funds derived from their government-licensed seignorage.  It was at the Kansas City Fed's prestigious Annual Economic Symposium in Jackson Hole that academic economist Dr. Ben Bernanke, presenting a paper co-authored with Dr. Mark Gertler, was identified by 'Sir' Alan Greenspan in 1999 as a rising star, and groomed for the role of Sir Alan's successor.

Much of the trenchant commentary on the unsound system of fiat currency comes from those with academic qualifications outside  the field of economics. They've been taught  to question with scientific rigor, but not to accept the stifling orthodoxies of the stagnant pseudo-science of economics.

Dr. North is an historian; Dr. Paul is an M.D.; Dr. Martenson is a PhD, but not in economics. Serious people tired of seeing our future flushed down the drain are going to demolish the indefensible fiat-currency cartel which has wrecked our prosperity.  Personally, I'd like to see the Economics departments of Harvard, Stanford, and Princeton  (all of which were instrumental in Bernanke's professional formation) closed down and converted to industrial arts classes for promising high schoolers.

No, Ben -- hammer the nail on the blunt end, not the pointy one!

Ray Hewitt's picture
Ray Hewitt
Status: Gold Member (Offline)
Joined: Apr 5 2008
Posts: 458
Re: The Five Horsemen

Some non-academic writers like North and Shedlock, I know for sure have an Austrian theoretical backround. Others like Chris and Nate Martin who have an Austrian perspective haven't said whether there is an influence. It doesn't appear to me to be necessary. All one needs is a finance background and critical reasoning skills to be cognizent of the nature of debt.

So I'm curious. Maybe either Chris or Davos can answer. Has Chris been influenced by the Austrian School or is his forensics based on finance and critical reasoning skills alone?

-joebhed's picture
Status: Member (Offline)
Joined: Mar 19 2009
Posts: 9
Re: The Five Horsemen

1. New Credit Growth Falls Below Interest Payments.

How Debt Money Goes Broke:

What you are calling "credit" growth is, in fact, debt-growth, extended as a credit to somebody's account.

But, you are right in that this new DEBT-credit is the only source for making those unfunded interest payments, and thus, as the paper suggest, the achilles heel of debt-money is nigh upon us.

Good call.


2. The Fed Monetizes Debt -

This is what the Fed does, always. Now, as you say, the Fed has had to step in and create all this new debt because both our household and our businesses have become risk-averse, including the bankers, and, at the same time - the money system would be declared insolvent were it not for the government making up for these natural shortfalls,  in order to make those interest payments referred to above.

3. Gov't DEFICIT at  <10 percent of GDP.

A natural occurence in light of No's 1 and 2.  The private banking system cannot create enough debt-money fast enough, the Fed steps up to help the fellow bankers GET their interest payments by adding unprecedented debts to the system, foisting tremendous economic burdens on the government while the taxpayers are suffering. That's why the Keynesians are right. We'd be dead without it. Can they say "exit strategy"?  Can Bernanke ?

I have to disagree that inflation correlates with deficits - it is exactly as Friedman says, in every case, a monetary matter because that is the definition of inflation. There is more of a correlation between deficits and deflation.


4. I do agree that the relative-dollar will go down someewhat, but not much more in the long run. And interest rates will likely go up for a couple of reasons, the major one being there is no real control over interest rates. And also because bankers naturally want to collect more money on all that debt money out there.

If we did not need to create more debts in order to mantain an adequate means of exchange, or if bankers' profits were not determined primarily by their control of interest rates, they would not go up just because foreign holders want to reduce their risk of repayments. 

Which leads to number 5, and here I can only say that I do fear the "internationalization" of the "financialization" of the US economy.

But it's not the government that is broke.

It is the money system.


dander2194's picture
Status: Member (Offline)
Joined: Apr 20 2009
Posts: 20
Re: The Five Horsemen

Krugman is nothing less than a propagandist for the views of the Federal Reserve. If you have read the book “The Creature from Jekyll Island” you may be aware of who is behind this front organization. Their motives are clear and “Game Theory” is their MO.

Tserendash's picture
Status: Silver Member (Offline)
Joined: Mar 5 2009
Posts: 178
Re: The Five Horsemen

Dr. M has given us a valuable set of bench marks to measure our decline.  I am not sure about the 5th one.  I see it as more probable that we will be unable to borrow from anyone. 

China and other holders of our national debt are engaged in a game of chicken.  The first one out gets out with minimal injury and possible a big gain while the others get creamed by the falling dollar.  It is possible for a raid on all the commodities markets hitting them in a few minutes simultaniously locking in forward delivery of hundreds of billions of dollars of commodities with a locked in dollar price.  I mean OIL, gold, silver, copper, tin, lead, zinc, nickel, chrome, lumber, corn, wheat, rice, sugar, forex, ect.  By the time the market knew what happened they had made committments equal to their U.S. Government bond holdings.  Add to this double sized orders for their normal imports from America. 

Right now there is a glut of cargo ships due to a ship building boom with new bottoms reaching the market at the moment international trade has flipped from double digit growth to double digit decline.  So the capacity is there to haul their bond investments converted to commodities back to China over the next year or two at ultra low shipping rates.  China pays off its commodity purchases by cashing in the bonds.

The dollar collapses and commodities zoom setting off hyper-inflation in the dollar world.  The deed done by a hundred commodity traders in less than a half hour.  $8.00 gas could be a wishful dream!

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments