On January 20, 2017, Donald Trump will be inaugurated as President of the United States. At that point in time, he will immediately be facing an emergency that will potentially be the greatest crisis of his presidency. And while this emergency may not now be obvious to the casual observer it will, without doubt, become so as the crisis involves the destabilization of both the global financial system and the daily economic exchange in all of the world's major economies.
The onset of the crisis, as we will see, started subtly in 2014 and is accelerating today. At the core is an issue that Trump himself has warned about and that is the global debt (and thus economic and financial) bubble created by global central banks' destabilizing and low interest rates creating what Trump calls an "artificial market". The global debt bubble fuelling this artificial market has increased today to $230 trillion of debt or 340% of global GDP - up from historically stable debt levels of 150% of GDP. We have an unbearable $130 trillion of excess debt that will be cleared from the economic system.
Prior to the formation in 1987 of the globally dominant London Bullion Market Association (LBMA) gold exchange by the Bank of England, the price of gold had historically spiked higher in price when central banks set excessively low interest rates. The new LBMA substituted holding of physical gold bullion with merely holding un-backed paper spot gold contracts that could be created and sold without limit thus suppressing the price of gold. With the formation of the LBMA, the increasingly low central bank interest rates of the past three decades were enabled as the price of gold no longer rose to signal low real interest rates. Rising gold prices had historically limited the prolonging of loose money policy by central bank regulators by drawing investors from paper money and bonds into gold and this was no longer the case. The global debt bubble was spawned.
That Goldman Sachs, JP Morgan Chase and bank regulators the Bank of England and the US Federal Reserve are at the center of this market manipulation is a further complicating factor. The approaching financial market implosion is a predictable consequence of central planning and complete regulatory capture of central bank monetary policy and thus complete capture of our economic and financial system.
Bond yields now indicate that monetary policy is tightening and, in debt bubbles throughout history, tightening of credit availability acts as a constrictor squeezing the debt addicted economy, initiating debt bubble collapse and thus leading to market collapse.
Stage 1 - Global Monetary Tightening Started in 2014 With Increasing LIBOR
After the 2008 Great Financial Crisis, central bank interest rates were lowered to zero in major industrialized economies. The US economy now sees working age adults not in the work force increased to 94 million from 80 million in 2008 before the financial crisis and similarly adults on food stamps has risen to 41 million adults from 28 million adults. Despite record low interest rates after 2008, the US and major economies have not recovered.
A key interest rate measure is the London Inter-Bank Offered Rate(LIBOR). This measure of interest charged by banks to each other in London serves as a reference rate for $28 trillion of global debt. An increase in LIBOR serves as de facto credit tightening globally. It can be seen in the following graph that 6-month LIBOR began to increase at the end of 2014 from 0.33% (essentially the zero interest rate of the central banks) to 1.25% currently thus starting the tightening of global credit:
As LIBOR rose, previously growing world trade rolled-over by mid-2015 and is predicted to decline in Q3 2016:
Stage 2 - Sovereign Credit Tightening
US Treasury rates are an important benchmark for setting commercial lending rates in the US. Slowing world trade has an indirect impact on US rates through the the US dollar's reserve currency status.
Mexican billionaire and sound money advocate Hugo Salinas Price explains that as global trade increases, so do reserve currency reserves received as payment for exports and subsequently held by foreign central banks. As trade declines and their economies slow, central bank reserve currency holdings decline as local central banks sell these reserve currency holdings to meet reserve currency cash demands from local foreign debt holders seeking to repay reserve currency denominated debts as the local currency weakens. The reserve currency holdings are held in the form of Treasury bonds. As these holdings are sold, bond prices decline forcing up interest rates both locally and in the reserve currency (bond issuing) country. Salinas Price notes that the total global paper reserves at central banks rose for 45 years peaking in 2014 and a trend change after such a prolonged period of continued growth is a profound sea change and is unlikely to reverse.
With this scenario in mind, we can also see interest rates increasing in the US despite slowing global trade and a US economy that has not recovered from the 2008 down-turn. This is the secondary effect from the original increase in LIBOR rates that slowed global trade and, as interest rates continue to rise, portends a potentially rapid decline in the bond and equity markets and rapidly increasing costs for real goods including gold and silver (monetary metals) as the central bank debt bubble collapses with paper asset (bonds and equity) deflation and real asset inflation.
President Trump is sworn into office just as the multi-decade central bank bubbles see the onset of collapse sending the world into likely disruptive decline. While the US dollar index currently enjoys a temporary rise in value as the demand for dollars to pay back dollar denominated debt and the bonds may themselves temporarily increase in value during an equity market panic, the onerous overhang of $63 trillion in total current US debt (Federal Reserve Z.1 Flow of Funds report composed of federal, state, municipal, corporate and consumer debt) will clear as the artifice of the Fed's inflated monetary system and artificial economy is exposed as interest rates rise.
President Trump will need to move rapidly to head-off this developing event to avert cascading debt default in the economy and market dislocation and the social catastrophe that would follow. It is essential that (1) Federal Reserve currency debt-notes that are erroneously called dollars (dollars are defined as a unit weight of silver) and the Fed's central planning system be replaced with effective and stable units of sound money (gold and silver) before this time of global crisis and markets be allowed to set interest rates and (2) that the debt overhang be restructured in a orderly fashion.
Debt restructuring militates that the economically destabilizing and societally toxic too-big-to-fail banks that worked with the Fed to create this debt bubble also be wound-down along with the Fed given that the banks' excessively levered balance sheets will be irreparably disrupted by this needed restructuring. The time has come.