Any sense of prosperity in today's economy is based on a falsehood, claims Steve St. Angelo, proprietor of the SRSrocco Report website.

Like we here at PeakProsperity.com, Steve is a student of energy. He shares our worldview that net energy per capita has been in steady decline, and a result, future growth will be limited. Also like us, he notes that the "growth" seen over the past several decades hasn't been due to surplus net energy (which makes being able to do more possible). Instead, it has been fueled by debt  — which essentially steals prosperity from the future and consumes it today.

Any third-grader with a crayon can quickly tell you that kind of scam can't last forever. And it can't. Once the can can't be kicked any further and the next economic and/or financial crisis is upon us, Steve sees today's over-inflated asset prices quickly dropping by a gut-wrenching 50-75%.

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Steen Jakobsen back on, Chief Investment Officer of Saxo Bank, returns to the podcast this week to share with us the warning signs of slowing economic growth he's seeing in major markets all over the world.

In his view, the world economy is sputtering badly. So badly, that he's confident predicting a global recession by 2018 — or sooner.

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As much as I try, I simply cannot jump on the bandwagon that says that printing up money out of thin air has any long-term utility for an economy.

It's just too clear to me that doing so presents plenty of dangers, due what we might call 'economic gravity': What goes up, must also come down.

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Executive Summary

• Why the Fed’s rate hikes are not actual “hikes”
• The new debt issuance directly or indirectly enabled by the Fed is staggeringly large
• Why the Fed’s intervention in the financial markets is creating worrisome instability
• As the risks mount, what should the concerned investor do?

If you have not yet read Part 1: The Federal Reserve Is Destroying America available free to all readers, please click here to read it first.

When Is A Rate Hike Not A Rate Hike?

The Fed keeps talking about raising interest rates, but they really aren’t doing any such thing.  In fact they are doing the opposite.

I know that’s a controversial statement, so let me explain.  The point of a ‘rate hike’ is not to make the cost of money (interest rates) go up, but to drain excess money from the system.  That’s why a rate hike cycle is called a ‘tightening’ cycle; because it is making the amount of money available for lending to shrink, or for conditions to become tighter.  The same as if you don’t have quite enough money at the end of the month, things are tight.

This means that the interest rate is the derivative, and the amount of money is the main driver.  You don’t set interest rates, you control the amount of money in the system, and the interest rates follow along.  They are the result, not the cause.

Or at least that’s how it used to be.  But not any longer.

In the past, when the Fed ‘hiked rates’ what it actually did was drain money from the system.   Money out = interest rates up.

Now when the Fed hikes rates it removes zero money in the system, and this is why a rate hike is not actually a rate hike at all, but the opposite because it leaves 100% of the money in the system but raises the amount that banks and other financial institutions can charge you for new loans and outstanding credit.

How did we get to this ‘upside down world’ where a rate hike increases money?

To understand let’s be sure we are clear on…

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Given the extraordinary failure of both Keynesian stimulus and private-sector credit growth to create a self-sustaining cycle of expansion whose benefits flow to the entire workforce rather than to the top few percent, what can we expect going forward? Can we just keep doubling and tripling the economy’s debt load every few years? What if household incomes continue declining? Are these trends sustainable?

In the near-term, is this Great Reflation running out of steam, or is it poised for yet another leg higher? Which is more likely?

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The main lesson from Oroville — or Fukushima, or Katrina —  is that governments do a poor job of relating accurate information to their citizens when big threats are involved. Part of that is likely due to a desire to avoid stoking fear. Part probably due to politics and bureaucracy. And part probably due to plain old incompetence.

Regardless of the cause, it means that the public — even the vigilant ones — suffer information deficits when it matters most. Simply put, the authorities do not share all the facts necessary for making informed decisions.

Which brings us to one of the truly great risks we’re facing today. One with much more destructive potential than a single failed dam but, like Oroville, one the authorities are desperate to keep us in the dark about.

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Those familiar with my writing know I put the word “markets” in quotes because we no longer have a financial system where legitimate price discovery is a regular — or even recognizable — feature.

It's destined to fail. What more can be said about such a flawed system?

Well, a lot as it turns out. 

And failure to pay attention at this stage of economic and ecological history will prove to be exceptionally painful.

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For those who enjoyed his encyclopedic 2015: Year In Review, this week we spend an hour with David Collum to ask: After processing through all of that information, what do you think the future is most likely to bring?

Perhaps it comes as little surprise that he sees the global economy headed back down into recession, one that will be deeper and more damaging than the 2008 crisis.

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