All Good Things Must End

Today, I’m going to tell you about the end of the world. Not the end of the world exactly. But the end of the fiat money system President Nixon gave birth to in 1971… when he cut the dollar loose from gold.

And it may feel like the end of the world, because of the social chaos it will provoke. What follows is taken from a speech I gave at Doug Casey’s La Estancia de Cafayate …


rorschach (1)

Meet Rorschach, from Alan Moore’s “Watchmen”


Drowning in Credit

I’ve been predicting the end of the world – at least the end of the post-1971 monetary world – for a long time. I hope I’m wrong about it. But sooner or later, I’ll be right. In the meantime, I’m like a surgeon who has just botched an operation. He sees the patient stiff on the table and wonders if he should go back to the textbooks. Maybe the anklebone is not connected to the shin bone after all.

But the textbooks are hopeless. They’re written by modern economists. And they believe an economy is mechanistic, not humanistic. These folks have fixes for every problem and wrenches in both hands. They also run our central banks. And they think they know what is going on… and what they’re going to do about it.

So they give you “forward guidance.” But it is worthless. Worse than worthless, it suggests knowledge and foresight – neither of which the authorities possess. Do you remember the Fed giving us “forward guidance” before the crisis of 2008? I don’t.

Neither Ben Bernanke nor Janet Yellen had any idea what was happening. They couldn’t give any forward guidance about that crisis and can’t give any about the next one. They just react to events. They neither see them coming nor control them. And they have only one major reaction – even more credit.

But you can’t solve a debt problem with more debt. That’s what the Fed is offering. And that is what the European Central Bank and the Bank of Japan are offering too. They are committed to this policy of providing more and more credit to a world that is already drowning in it.


CentralBankAssetsGlobal central bank assets as a percentage of GDP (i.e., a chart that subtly understates by how much they have grown. Source: Financial Times, IMF, Haver Analytics, Fulcrum Asset Management LLP) – click to enlarge.


Ham-Fisted Grease Monkeys

I should stop here and say a few words about how the economy really works. These clumsy mechanics at the Fed, the European Central Bank and the Bank of Japan think they can turn knobs and adjust levers. But an economy is a complex dynamic system with intricate feedback loops.

It responds to the ham-fisted grease monkeys at central banks, but not necessarily the way the feds want. It is far more complex than they can ever understand, let alone control. Right now, they are getting away with jaw-dropping policies. The markets are not yet punishing them. In fact, investors seem to be rewarding this kind of innovation.

For example, what is 1.1% yield on a Spanish 10-year government note if not an invitation for trouble? Or how about a 10-year German government note with a yield of 0.2%? It’s impossible to know what will happen exactly. But someone is going to lose money. These yields are unnatural. And downright dangerous.

But the risk is not just that the pace of consumer prices will outstrip these puny yields; it is also that bond issuers will default. Europe’s governments are deeply in debt. And the ECB is now making it easier for them to go further into debt. Europe’s bond yields are at their lowest level in 150 years. About one-third of the total new issuance carries a negative nominal yield (that is before you account for inflation).

What sense does it make for the ECB to drive yields lower still … by further pushing up prices? (Bond prices, remember, move in the opposite direction of yields.) None at all – except that many European governments and corporations now get paid to borrow money!


Spain, 10 yr yieldSpain’s 10 year note yield is at a munificent 1.16% – this is actually an all time low (and Spanish government debt has been around for a few centuries) – click to enlarge.


Financial Kamikazes

And the clever Japanese have another trick up their sleeves. Not only is the BoJ directly propping up the market for Japanese government bonds. It’s doing the same with the stock market. Our head spins. But it’s true.

When it comes to overdoing it, nobody overdoes it better than the Japanese. Remember, near the close of World War II, when Japanese pilots strapped themselves to flying bombs? Kamikazes took to the air hoping to die in a fiery explosion on the deck of a US aircraft carrier. Today, it’s Japan’s monetary policies that are kamikaze.


KurodaMr. Kuroda explains his painting of an exponential curve to journalists – no, he’s not a value hunter …

Photo credit: Yuya Shino / Reuters


The Bank of Japan is set to buy $1.4 trillion of government bonds under its current QE program. This allows the  Japanese government to continue going deeper and deeper into debt. But the BoJ has more explosives to strap onto its financial kamikazes. Why stop at buying bonds? Why not buy stocks too?

The BoJ has been a buyer of Japanese equity exchange-traded funds (ETFs) since 2010. And in September 2014, it bought a record amount of stock through its ETF-buying program. This makes it the single largest holder of Japanese stocks in the world – with 1.5% of total capitalization. The BoJ chooses to buy the dips too.

I doubt this is because BoJ governor Haruhiko Kuroda is a value hunter. Instead, it is almost certainly because he wants to manipulate stock prices directly, just as he does with the bond market. The BoJ has waded into the stock market one in every three days since 2010, reports the Wall Street Journal. Where does this lead? To a fiery crash!

Look out for Part II of my speech from Cafayate tomorrow.


Chiran_high_school_girls_wave_kamikaze_pilotJapanese mudjaheddin of yore: Chiran school girls are waving good-bye to a departing Kamikaze pilot with cherry blossoms raised in a taut military salute.

Photo via Wikimedia Commons


Charts by: BigCharts, Fulcrum Asset Management, Haruhiko Kuroda :)


Image captions by PT.


This article appeared originally under the title “I Hope I’m Wrong About This” at Bonner & Partners.




Emigrate While You Can... Learn More




Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • No results available

Support Acting Man

Austrian Theory and Investment


The Review Insider


Dog Blow

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Mish Talk

    Buy Silver Now!
    Buy Gold Now!