Do you all realize what is actually going on right now? The global economy is in a conundrum. Seven years ago, the economies around the world fell off a cliff. It caught many people off guard, but I can honestly say that I was not one of them. I pulled my entire net worth out of the stock market in 2007 and was watching from the sidelines when this crash occurred.
We started to see a collapse of our entire economic system in 2008. Even some money market funds “broke the buck” and started to lose money. The global economy was in full meltdown mode. Most of the countries in the civilized world were already deeply in debt when this financial earthquake occurred. Asset prices started to sink into a deflationary spiral. This economic catastrophe looked like it was going to be bigger than the Great Depression. However, the immediate disaster was somehow averted.
The United States took the lead in this so-called “recovery”. After passing an almost trillion-dollar stimulus passage, the United States Federal Reserve began to engage in repeated rounds of quantitative easing. Many people refer to this activity as “money printing” which is actually a misnomer. Extra money is not actually being printed.
The Federal Reserve creates a set amount of theoretical currency that it refers to as the “money supply”. This is best classified by a term that the Federal Reserve calls “M2”. In June of 2008, the United States money supply was just around 862 billion dollars. By June of 2014, this amount had ballooned to just over 4 trillion! Remember, this money was not actually printed onto paper currency… our government gradually proclaimed it into existence through quantitative easing.
Most people think that we now pay our bills by borrowing money from China. For the most part, China stopped loaning the United States money a few years ago along with most other countries. Each time the United States government runs out of money they will proceed to take out loans in the form of treasury bonds. Guess who is now the primary purchaser of these bonds? You guessed it… The Federal Reserve!
Each time the Federal Reserve increases the money supply this gradually decreases the value of the U.S. Dollar. Now here comes the fun part. All the countries around the globe will pick one stable currency to be the global reserve currency. The reserve currency is held in large quantities by governments and large institutions as part of their foreign exchange reserves. This currency is frequently used in international transactions and is often considered to be the world’s safe haven currency. Guess whose currency is currently considered the entire planet’s global reserve currency? The answer is the United States! Isn’t this hilarious?
As the United States gradually decreased the value of the global reserve currency, the value of other currencies around the globe started to rise. This is a good thing for those countries, right? WRONG! Leaders of these other countries became concerned that if their currencies became too strong that this would drastically hurt their ability to export their own goods. Their products would be too expensive on the global stage. This could also negatively affect tourism.
One by one, these countries around the globe began to “peg” their currencies to other weak currencies like the U.S. Dollar and the Euro. Japan and Switzerland joined in on the fun. This started their own versions of quantitative easing in a competitive little game of currency limbo with each nation trying to see how low they could go. Over time, when you compared the U.S. Dollar to other currencies, it didn’t look so bad. The U.S. Dollar was doing an amazing job staying afloat in this global toilet bowl full of currency turds! However, if you compared the U.S. Dollar to hard assets like gold, silver, and oil, its weakness was quite obvious.
But then what the hell happened? The price of gold exploded to over 1700 dollars per ounce but then it started going back down. Some of this downturn in gold was obviously due to the end of a fear trade as global markets stabilized and people felt confident to invest again. A bigger reason for gold’s demise was due to the creation of a brand new asset bubble brought to you by the so-called brilliant economists at the Federal Reserve.
The Federal Reserve did not just start spending its pretend money on government debt. Over the past few years, they have poured over a trillion extra dollars into mortgage-backed securities and “other assets”. The Fed has basically been pouring new money into investment banking. What do investment banks do best? If your answer was “drive the economy into the crapper”… that was an excellent guess but I was looking for “invest”. Money started pouring into the stock market. Individual investors started seeing the stock market rise as gold started to turn downward. People wanted a piece of the action. The Federal Reserve also intentionally drove down interest rates which indirectly “forced” more people into the stock market.
Investors continue to feel safe to keep pouring their own money into the stock market for as long as the Federal Reserve continues to expand the money supply. In this upside-down economic environment, bad news usually makes the stock market go up and good economic news often makes the stock market go down. The United States and the Federal Reserve have created a situation where the value of the U.S. Stock Market is falsely elevated while the value of gold is falsely depressed.
The big fear right now is inflation. The Federal Reserve has fired all of their interventional bullets. If inflation starts to go out of control, then the Fed will have no choice but to increase interest rates and to slow the rate of their quantitative easing. If they stop creating money out of thin air then who will loan money to the United States? We don’t have many good options left. On top of all that, the only way our country can afford the debt we currently have is because interest rates have been held so low. If interest rates rise even slightly, then our treasury debt that we eventually have to refinance will quickly become an overwhelming percentage of our federal budget.
Today we get a shocking announcement from Switzerland. They have grown tired of this global economic shell game. The Swiss have announced today that they are going to take their ball and go home. After putting up with years of financial nonsense, Switzerland just told the world that they are done intentionally devaluing their currency along with everyone else just to fit in. In one single day, the Swiss Franc is absolutely skyrocketing. Switzerland has decided that they will no longer participate in our international “race to the bottom”. Nobody knows for sure what will happen next… but you better get ready for a bumpy ride.
I almost agree with everything you wrote in your article “The Currency Wars And The International Race To The Bottom.” The Fed stopped QE late last year, so it is no longer buying debt. However, that doesn’t mean they won’t start it again.
Dr Guyer move to the head of the class and collect your silver star. (My preference and I imagine yours too.) The Swiss on the other hand I suspect prefer gold and I imagine that’s what they’ll be spending their new found wealth on.
Congrats on calling the 2008 sub prime scam. I called it too just not the magnitude of global devastation it caused. I did not see that coming not knowing at the time those toxic MBS were being flogged around the world. Nice scam they pulled keeping rates lower than they should of been to keep priming home prices higher when clearly unemployment and inflation warranted higher rates.
No it wasn’t difficult to call, being my 3rd bubble. They are getting easier and easier to call. My 1st was early 80’s. We had just moved to Canada from England. My parents bought there 1st home for 44k then proceeded to sell it 6 months later for 80k! This was the land of opportunity. A year later and now onto home #3 rates went from 8-18% in 6 months. My folks lost their home unable to make new higher payments.
Bubble 2 was dot.com. I was a day trader and a good one too or at least I thought until Alan Greenspan uttered those irresponsible words, “the market exhibits irrational exuberance.” The following day my account had lost 50% of it’s value and I was down $150k. Luckily earlier that year we had purchased our 1st home, and remembering what had happened to my parents in the 80’s I had made a 50% down payment on our home. A shrewd call as I’m sure those funds would of been lost in the market that day to.
Trading was not the same (as easy) after that day and I soon made the choice to diversify more trading funds, and bought 2 rental properties. Low and behold a couple year later real estate started to move and we were doing well. We sold all 3 and moved to a different town where home prices were 30% cheaper. I replace our 2 rentals and we bought a massive home. I went back to trading.
If wasn’t long before I realized real estate $ was falling in my lap where as trading was still very difficult. I quit trading and began to buy homes to do reno’s on then rent or flip them. We bought 2-3 homes a year like this but after 2-3 years of real estate going up and up, calling this 3rd bubble of 2008 was pretty easy. Especially since the warnings signs were coming out of the US property market as well as in my town unemployment was around 4% and stores were closing early due to no staff! Being an economic major it was obvious full employment had been reached. Why were rates still not moving? Obviously they would soon stalling real estate. I stopped buying, sold our too massive for us home and bought a nice comfortable home.
After 2008 hit and the news came out of Goldman pumping MBS whilst shorting the market, and knowing of the cozy relationship of them and FED plus all the other gruesome rigging, the removal of uptick rule, Glas Steagal and the gun held to Congresses head in, “sign Tarp of the world ends Monday” and knowing history I have been calling 2008 1929, and what comes next is 1932. The real market crash where the markets lost 90% not to be recovered until 1952. I pray I’m wrong but like you I have street creds and do not see how the US gets out of the next crash alive.
I’m calling the end to the USD. Great depression. All the gold is clearly going to China. Is WWIII coming? Well the banksters pulling all the strings love to finance wars. It pays well and toppling nations help install their central banks. Not many countries left…Russia, Syria, Iran and Cuba with Rothchild central bank.
Get some silver Americans and prepare for the loss of your purchasing power as the USD looses world reserve currency status. Jail your congress for allowing the FED to exist against Article 1 of your Constitution, you’ll default on your debt and create your own currency debt free and begin the long rebuilding process.
Bow out gracefully, don’t try to maintain military might for your military has been used to terrorize the world. Many presidents tried to warn you. Your forefathers said dont loose control of your money supply but you did in 1913 and the world has paid for it and the big day of reckoning is coming for us all. 2016
Hey I could be wrong, maybe low oil is awesome to spur world economy, and were shifting to sustainable model, which we are, but I’m sadly skeptical. The players are the same and the play book looks just like 1929 with 1932 a year away…..
The same goes for me. I predicted the huge market drop in 2008 and the rise in gold prices but I did not predict the entire global financial system almost fall apart when it did. This event motivated me to dive even further into global economics and learn just how everything is interconnected. The more that I learn… the more fragile the global economy actually appears. Thanks for visiting my site and thanks for the comments!
Great story David, thanks for sharing. I’m a newbie day trader and wow, it’s the toughest business
I’ve ever tried. Not giving up yet but man, mentally very difficult.
I ran in to this site,, this is all very interesting…. Even though is a bit hard for me to assimilate the financial vocabulary in most articles, I always end up saying “I hope I don’t starve to death”
You’re welcome Michael and thank you for your efforts. It’s a thank-less task I have found spreading the word. The system has done a good job convincing society that truth is conspiracies and most discount them as chicken little comments not to be believed until it is too late.