Capitalism Crosses The Rubicon – The Second American Revolution
by Darryl Schoon, GoldSeek In capitalist economies, capital, i.e. ‘money’, is created by central banks in the form of credit; and the cost of that credit—central bank interest rates—determines the rate of economic growth. In the end game, however, this is not so. In the end game, credit’s expansive and inflationary incentives are offset by the collapse of massive speculative bubbles resulting in dangerously low levels of economic activity and a commensurate plunge in the velocity of money. When this happens, central banks cut interest rates hoping that cheaper credit will revive growth. But, in the end game, attempting to revive growth by lowering the cost of credit is like pushing on a string; a phrase used in 1935 when Fed Governor Marriner Eccles was asked about Fed attempts to revive the US economy.
[Fed] Governor Eccles: Under present circumstances there is very little, if any, that can be done. Congressman Goldsborough: You mean you cannot push on a string. [Fed] Governor Eccles: That is a very good way to put it, one cannot push on a string. We are in the depths of a depression and… beyond creating an easy money situation through reduction of discount rates, there is very little, if anything, that the reserve organization can do to bring about recovery.
In the 1920s, excessive monetary creation by the Fed fueled an historic stock market bubble. The greed and speculation ended on October 29, 1929 when the bubble burst, stocks plummeted, banks closed, savings were lost and unemployment soared—plunging the US into the Great Depression of the 1930s.
Deflationary depressions are always and everywhere a monetary phenomenon. Excessive monetary growth creates large speculative bubbles, the bubbles burst and economic growth collapses, even when the quantity of money is increased. This is—always and everywhere—the cause of deflationary depressions. DRSchoon, Neo-Friedman Monetarism in an Age of Monetary Debasement
FUEL FOR ANOTHER DEFLATIONARY DEPRESSION US Money Supply, 1980 – 2012 PAST AND FUTURE DEPRESSIONS In 1933 to prevent another Great Depression, the US Congress passed the Glass-Steagall Act. By separating investment banking (leveraged betting) from commercial banking (savings & loans), banks were legally prevented from betting the savings of America as they had in the 1920s. In 1933, the U.S. Congress passed the Glass–Steagall Act mandating a separation between commercial banks, which take deposits and extend loans, and investment banks, which underwrite, issue, and distribute stocks, bonds, and other securities. http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929 In 1999, in a rare bipartisan effort, a Republican Congress and a Democrat President, Bill Clinton, repealed Glass-Steagall; allowing investment bankers to once again place dangerously leveraged bets using America’s savings in Wall Street casinos. Bipartisan usually means that a larger-than-usual deception is being carried out. George Carlin Between 1999 and 2008, Wall Street banks again bet America’s savings and again lost—this time with dodgy bets on suspect subprime mortgages; triggering the greatest financial crisis since the crash of 1929. Once again banks closed, economic activity plummeted and the velocity of money plunged. THE FIVE PERCENT SOLUTION On May 6, 2015, Stephen King, chief economist at HSBC, wrote in a note to HSBC clients:
The world economy is like an ocean liner without lifeboats. If another recession hits, it could be a truly titanic struggle for policy makers… Whereas previous recoveries have enabled monetary and fiscal policymakers to replenish their ammunition, this recovery — both in the US and elsewhere — has been distinguished by a persistent munitions shortage. This is a major problem. In all recessions since the 1970s, the US Fed funds rate has fallen by a minimum of 5 percentage points. That kind of traditional stimulus is now completely ruled out. Stephen King, Chief Economist HSBC, http://www.businessinsider.com/hsbcs-stephen-king-on-the-world-economy-2015-5#ixzz3a34a99ow
In 2006, the Fed funds rate was 5.25%. After the 2008 financial crisis, the Fed lowered the discount rate to 0.00 – 0.25%, the 5 percentage point traditional stimulus at which economies regain inflationary momentum. They didn’t.
We have global bond yields going back to the 16th century and only in the 1570s and 1930s have yields been as low as they have been in recent months. David Rosenberg, May 6, 2015
Today, after six years of zero interest rates, the specter of another deflationary depression is growing in every advanced, i.e. overly-indebted, economy in the world—the US, the UK, the EU, Japan, China, etc. Offered zero rate sovereign bonds as an investment, investors are choosing to invest in negative rate bonds hoping against hope that central bankers can restore the requisite balance between credit and debt necessary for their ponzi-scheme to survive. Arbitraging the cost of capital doesn’t work when capital is free Central banks have now, quite literally, bet the bank. However, once quiescent deflationary forces, awakened by the collapse of the 1990 Japanese Nikkei, the 2000 US dot.com and 2008 US real estate bubbles, are about to be further inflamed by the coming collapse of China’s real estate and stock market bubbles. Continue Reading>>>