Updated May 7, 2022
The root cause of the 2008 crash was the excessive inflation of bank credit. An entire nation cannot borrow for 70 years and then expect that all will be fine when the pay back time arrives. FED policies have inflated bank credit for decades. When we borrow, banks create new money. They do NOT lend existing money. Learn how banks create money out of thin air here.
On Thursday 20th November 2014, for the first time in 170 years, UK parliament has debated the creation of money. UK Parliament Debates Money Creation:
Our entire money supply is borrowed money. When we borrowed, we promised to pay back principal + interest. The problem is the interest portion is not even created yet. The ponzi scheme must continue with even more borrowing so that principal + interest exists in the future so that people can earn it and pay it back.
Do you see the problem with this picture? What happens when borrowing stops? The expectation that principal + interest will be available to earn cannot be realized. People start having difficulty paying their debt. When people see this, they start saving. When banks see this, they stop lending. Deflation kicks in with full power.
This is why government allowed sub-prime before 2008. So that borrowing could continue. They removed 20% down requirement so that more money could be borrowed. This is why, during the 2008 crash, the government offered 8K home credit, and then a 10K free gift so that people borrow and inject new money into the economy by buying homes. They used housing bubble to keep the ponzi scheme running.
But we did more of the same that got us into trouble. People think FED has been printing money since 2019, inreased the pace since the pandemic in 2020, and Gold must go up. FED printed money after 2008, inflated their balance sheet to more than 4 trillion and then to 9 trillion, yet US dollar reached all time high and Gold is lower compared to its top. Why? You can read this free report to under stand the Inflation vs Deflation debate and why we need to prepare for deflation before inflation.
Today’s mountain of debt is far higher than in 1929, yet our indicators suggest that the next debt deflation could unfold much more rapidly. It mayhave started with the stock market crash of 2020. The corona virus is the pin that popped the bubble.
The third edition of Conquer the Crash provides 157 forecasts. Here are three:
- Real estate values will begin to fall again, ultimately more than they did in the 1930s.
- Hedge funds, mutual funds, money-market funds, managed accounts and brokerage accounts will go out of favor — many will go out of existence.
- Financial corporations previously bailed out by the Fed and the U.S. government will fail again, as will new ones.
Today’s problems are not about what we are doing now, but what we have already done for the last 70 years. We have expanded credit to unsustainable levels. Now it will deflate. Inflation showed its face and the FED is ready to stop printing and reverse the inflation. This will cause deflation of credit. The world that was built based on free money, aka 0% interest rates, is going away. Asset bubbles that have inflated based on free money will go away.
Banks have been lending to the wrong borrower for decades. Since 1980s loans to the businesses have contracted, and loans to the consumer has expanded. Business loans are used to create value. They contribute more to the real economy. The likely hood that they will be paid back is higher. But consumer loans do not provide value. Consumers consume. They do not produce. Today, banks are 98% invested in consumer loans. The collateral for consumer loans depreciate in time. They do not create value. This is the cause of bank troubles today. 50 years ago banks would be invested in pristine US government bonds. If that were the case now, a housing market crash would not effect the banks much. Alas, it is too late.
Back in September 2019, Repo markets were having problems. FED had to intervene because banks were hesitant to make loans to each other. They did not trust the colleteral of the borrowers. The banks once again started to treat mortgage debt, education loans as junk and unpayable. FED made credit available. Yet on the first day, out of 500 billion FED money, only 78 billion was loaned.
Soon with higher treasury and mortgage rates banks won’t be able to lend money as much as they used to. It is hard for the FED to turn the boat around because banks see this as what it is: A deflationary crash! Deflation is the threat now:
1. FED makes credit available
2. Banks do not want to lend because they don’t think they will get their money back.
3. Borrowers do not want to borrow because they don’t think they can pay it back.
FED or the presidents do not control the market. They cannot force people to borrow or lend. Eventually, free market forces will prevail. Action against the truth will dig our hole deeper.