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Prepare For The Great Global Contraction

How hard will we hit the ground?
Friday, May 19, 2017, 8:01 PM

Executive Summary

  • The repercussions of the Fed's Free Money Machine
  • Why debt-funded state control stagnates productivity
  • The importance of the 8-year cycle
  • What should guide investors' focus and decisions

If you have not yet read Part 1: How Long Can The Great Global Reflation Continue? available free to all readers, please click here to read it first.

In Part 1, we asked these questions: 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, we asked: is this Great Reflation running out of steam, or is it poised for yet another leg higher? Which is more likely?

Let’s start by looking at the mechanism that funds the government’s deficit spending, i.e. its ability to borrow and spend enormous sums of money year after year.

The Free Money Machine

The state can afford to continue or increase fiscal stimulus (deficit spending) because the central bank (the Federal Reserve) has created what amounts to a free money machine. Here’s how the machine works.

The federal government issues $1 trillion in new bonds to fund another $1 trillion in deficit spending. The central bank (Federal Reserve) creates $1 trillion with a few keystrokes, and buys the $1 trillion in bonds with newly created money.

The Federal Reserve earns interest on the $1 trillion in bonds it now owns, but it returns this income to the Treasury, minus the Federal Reserve’s relatively modest expenses of operation. Let’s say the bonds carry an interest rate of 2.5%.  The government pays the Federal Reserve $25 billion in annual interest, and the Federal Reserve returns $20 billion annually, so the net cost of borrowing and spending $1 trillion is an insignificant $5 billion.

If this isn’t entirely free money, it’s extremely close to free money.

So in ten years, the Federal Reserve owns $10 trillion more in federal bonds (assuming the bonds are long-term and didn’t mature).

It's no wonder that some economist propose... » Read more

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How Long Can The Great Global Reflation Continue?

And what will happen when it ends?
Friday, May 19, 2017, 8:01 PM

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? » Read more

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If We're Going To Borrow Against The Future, Let's Borrow To Invest

The are much better ways to spend the next $1 Trillion
Thursday, April 2, 2015, 12:21 PM

We are at an important juncture as a global society: either we immediately prioritize a new trajectory focused on creating a positive, functional future or -- by continuing the consumptive, extractive, exploitative status quo -- we will default into a nasty nightmare. » Read more

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Peak Prosperity

How Much Is A Trillion? - Crash Course Chapter 12

So big, humans really can't grasp it
Friday, September 5, 2014, 11:45 AM

One trillion is a big number. In this short video, we try to help you get a sense for just how big; but the reality is simply that the human brain can't really suitably comprehend magnitudes this large.

Which is why we should be concerned that the US' money supply has ballooned to over $12 trillion dollars over the past decade. And that its outstanding debts and liabilities are many multiples that amount. » Read more

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Peak Prosperity

Quantitative Easing - Crash Course Chapter 10

What exactly is this process that the world is betting on?
Friday, August 22, 2014, 9:34 PM

At the exponential pace at which the Fed is increasing the money supply, and knowing the huge challenges the Fed – and most other world central banks  - face in trying to stop or even slow down their money printing, the potential for a disruptive global inflationary period is very real.

So what exactly is quantitative easing» Read more

video

This chapter of the new Crash Course series has not yet been made available to the public.

Each week over the rest of 2014, in sequential order, a new chapter will be made publicly available (we've currently published up to Chapter 12)

If you don't want to wait, you can:

 

 

 

 

video

This chapter of the new Crash Course series has not yet been made available to the public.

Each week over the rest of 2014, in sequential order, a new chapter will be made publicly available (we've currently published up to Chapter 11)

If you don't want to wait, you can:

 

 

 

 

Featured Discussion

US "Missing" Over $12 Trillion

US "Missing" Over $12 Trillion

That's over 70% of our national debt "lost" due to mismanagement and/or fraud

Podcast

David Stockman: We've Been Lied To, Robbed, and Misled

And we're still at risk of it happening all over again
Saturday, March 30, 2013, 12:42 PM

David Stockman, former director of the OMB under President Reagan, former US Representative, and veteran financier is an insider's insider. Few people understand the ways in which both Washington DC and Wall Street work and intersect better than he does.

In his upcoming book, The Great Deformation, Stockman lays out how we have devolved from a free market economy into a managed one that operates for the benefit of a privileged few. And when trouble arises, these few are bailed out at the expense of the public good.

By manipulating the price of money through sustained and historically low interest rates, Greenspan and Bernanke created an era of asset mis-pricing that inevitably would need to correct.  And when market forces attempted to do so in 2008, Paulsen et al hoodwinked the world into believing the repercussions would be so calamitous for all that the institutions responsible for the bad actions that instigated the problem needed to be rescued -- in full -- at all costs.  » Read more

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Say Goodbye to the Purchasing Power of the Dollar

Mr. Bernanke goes to Crazytown
Sunday, March 24, 2013, 11:29 PM

On a long solo car trip this past weekend, I downloaded several podcasts to listen to as the miles passed. One was a classic: The Invention of Money, originally released by NPR's Planet Money team back in January of 2011. I highly recommend listening (or re-listening) to it in full.

The podcast is a great reminder of how any currency in a monetary system is a fabricated construct. A simpler way to explain this is to say it has value simply because we believe it does. » Read more