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My family and I have been tracking speculative bubbles and busts for 80 years.
We’ve personally witnessed 12 recessions, two depressions, five stock market crashes, three real estate busts, three bank failure epidemics, and two of the most vicious inflationary spirals of all time.
But nothing has prepared us for what we’re seeing now!
Just look how dramatically the world has changed since 2000:
• In prior years, we occasionally saw some individual countries — such as Germany in the 1920s and Brazil in the 1970s — run giant budget deficits and finance them with truckloads of paper money.
But until now, we had never seen a situation like today’s — EVERY MAJOR COUNTRY in the Western world doing it in unison!
• In prior years, sometimes the financial disasters were caused primarily by reckless behavior in government, and sometimes by reckless behavior among banks.
But until now, we had never seen BOTH MAJOR GOVERNMENTS AND MAJOR BANKS take such unprecedented risks at the same time!
I vividly remember how we first began this discussion many years ago …
On a bright summer day in the mid-1990s, my father and I were completing a major comparison of all the major 20th century booms and busts.
He pulled out his long-term charts on interest rates, which he had been updating by hand for decades, and pinned them to his wall. Together, we poured over another stack of charts on stocks, the dollar, and gold.
And we came to the conclusion that the new millennium could bring the most extreme bubble-and-bust cycle of all.
But if you could take a time machine back to that day and if you described to us what I’m about to document for you now, we would have responded with just two short words:
“You’re nuts!”
Never, even in our wildest imagination, could we have foreseen these basic facts, which are such a pivotal aspect of our financial markets today …
Fact #1. The world’s most powerful governments have printed more paper money in the last three years than in the prior half century!
Read that again and think about it carefully for a moment.
If just ONE government ran its money-printing presses 24/7, it would be dangerous enough.
But as I demonstrated here last week, we now have ALL FOUR of the most powerful central banks doing it all at once.
And this money printing is SO big — with the potential for such a dramatic impact on your financial life — I feel I MUST give you the details again:
It’s all summarized in this chart, showing you the size of each central bank’s balance sheet — a measure for the total money-printing operations to date.
And as you can plainly see, every major central bank in the world has joined the party …
The U.S. Federal Reserve (Fed) has nearly TRIPLED the size of its balance sheet — from about 6% of GDP just three years ago to almost 17% of GDP.
The Bank of England (BOE) has followed in lock step with the U.S.
The European Central Bank (ECB) has suddenly expanded its balance sheet from about 20% of GDP to close to 30% GDP. And …
The Bank of Japan (BOJ) has also run up the size of its balance sheet assets to about 30% of its economy!
Total Balance Sheets of the Four
Central Banks: More Than $10 Trillion!
That’s $10 trillion in paper money that’s been pumped into the global economy!
I cannot stress enough how unprecedented this is.
Even in the early 1930s, when the nation’s entire banking system shut down … and even in the early 1980s, when hundreds of U.S. banks were failing each year, the Fed and other central banks never went this far. (The sole exception: The central bank of Germany in the 1920s.)
But here’s the greatest irony of all: It’s not working.
Or, at best, it’s running into the law of diminishing returns — more money, less results.
Shock and Awe
Think how utterly disappointing — and shocking — that must be for the masterminds behind this giant global money operation!
They had hoped that, after dumping all these trillions into their economies, they would have created a respectable boom.
But we see nothing of the kind!
Instead, the U.S. economy is stumbling again, Japan’s economy is dead in the water, and Europe’s is sinking straight into another recession.
They also hoped that, after dishing out so much liquid cash to their biggest banks, those institutions would naturally be in far better shape today.
But, again, we see nothing of the kind!
Sure, some banks have improved and may continue to do so. But many of the world’s largest have used most of the new money to double down on their riskiest bets!
Prime examples: Big European banks. Over the past few months, they have used the bulk of the cheap money they borrowed from the ECB to buy precisely the same junk that got them into so much trouble in the first place — the toxic bonds of weak countries like Spain, Portugal, and Italy!
As a result, European banks now hold 135 billion euros in Greek bonds … 192 billion in Portuguese bonds … 411 billion in Irish bonds … 634 billion in Spanish bonds … and a whopping 801 billion euros in Italian bonds —more than ever before.
And guess which countries are the headquarters of the biggest banks with the most dangerous exposure! Germany and France — the core euro-zone nations with the ultimate responsibility of backstopping the debt crisis!
Finally, they hoped that, with all that funny money pouring into the banks — and with those banks pouring the money back into the bonds of the weakest countries — global investors would finally breathe a sigh of relief and stop worrying about massive sovereign defaults.
Not so!
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Investors are again abandoning sovereign government bonds in droves.
In Spain, for example, they’re driving bond prices into the gutter.
Worse, they’re driven up the cost of insuring against a Spanish government default to the highest level of all time!
And in Italy, we see the same pattern.
But if you think this is just another Greece, consider this: Combined, the economies of Spain and Italy are more than TWELVE times larger than Greece’s economy.
Spain’s economy alone is larger than Australia’s, South Korea’s — even Saudi Arabia’s. And Italy’s economy is larger than Russia’s, India’s, or Canada’s!
So where does all this leave us? Answer:
The Deadliest Vicious Cycle
Consider the sequence of events …
First, some the world’s largest banks in the U.S. and Europe came within a whisker of failure in the wake of the great housing bust and the global debt crisis.
Second, the world’s most powerful governments pumped in trillions of dollars to keep the banks afloat — and they continue to do so to this very day.
Next, many of the banks used a big chunk of that money to double down on their riskiest investments, digging an even deeper hole for themselves and inviting an even bigger outpouring of paper money from their governments.
In short, the deeper the debt crisis gets, the more governments are driven to print money … and the more they print, the deeper the crisis gets.
This, my friend, is the deadliest vicious cycle we’ve ever seen or imagined!
Good luck and God bless!
Martin
Dr. Weiss founded Weiss Research in 1971 and has dedicated his entire career to helping millions of average investors find truly safe havens and investments. He is Chairman of the Weiss Group, which includes Weiss Research and Weiss Ratings, the nation’s leading independent rating agency accepting no fees from rated companies. His last three books have all been New York Times Bestsellers and his most recent title is The Ultimate Money Guide for Bubbles, Busts, Recession and Depression.
{ 21 comments }
Maybe it is different this time. There was always someone to dump on before. There was always a currency to short. What if we are all in this together? What if everyone just keeps rolling their bonds and writing off the defaults. Everyone keeps closer and closer to home and just waits. When you realize that much of our so called economy is just ‘stuff’, it won’t matter if we do less. I don’t suggest that we all turn into Buddhist monks, but we could live much differently. Consider carefully that many people are engaged in totally useless work and yet we all still manage to eat. It will be a tough one to chart.
OK; I understand the world is heading toward a big hurt. So, what does a person who is not of substantial wealth do to best prepare themselves financially? Say, for instance, I have approximately $70K in the bank, possess IRA’s, and am seven years away from owning my home; other than that, pretty much debt free other than living expenses.
We are coming to the end of how our current ideas of an economy works. It simply doesn’t fit in a world where we once needed thousands of workers for jobs that are now done by a dozen or less. We as a society are going to have to come up with radical new ideas of how to feed, clothe and shelter ourselves other than what we currently think of as work.
I agree with Mark. The automation is constantly reducing the requirement for the manpower. Government policies sometimes make people not to work as they get free money or easy money in the name of schemes.
For example In India the central Gov. introduces minimum guaranteed work of 100 days for all eligible people in the rural areas. The intension is too good. But in the implementation people stop working for all possible days and started living with that 100 day wages and various other food subsidies. This is causing a huge vacuum in the rural agriculture sector. There is acute shortage of the labor and all farmers are automating the tasks to the maximum extent. There will be a day very soon where Gov. will withdraw this scheme as it cannot bear the cost.
Then these guys who are enjoying NOW will not find work (Due to automation) and cannot do hard work also. The politicians are spoiling the natural social fabric for votes. Long live democracy!!!
Martin, I think its important to put a few things in perspective here. 1) If you look at the first chart you will see that the Fed, despite the increase in its balance sheet, has in fact, increased its balance sheet by the smallest amount vs GDP. (True its just a tad lower than the Bank of England.) This means that in relative terms the Fed is the most conservative of the 4 central banks when it comes to money printing. 2) When ever the topic of inflation comes up the example of Germany’s hyper inflation is always pointed to as being the end result. In fact, after WW1 all the great nations, Great Britain, France, Germany and America doubled or tripled the size of their balance sheet to cope with the enormous costs and the debts that were incurred by WW1. In fact, Germany’s inflation was a consequence of crippling reparations demanded by the Allies. The German Government didn’t have enough money to keep their economy going AND pay the huge bill presented to them by the Allies. Therefore they chose to print ever increasing amounts of money to pay the bills. The same situation is not present today. 3) The similarities between our current financial crisis and the crisis that lingered between 1918 and the 1930s are uncannily similar to each other. In both instances the problem was a crushing debt burden. It is also interesting that in spite of the lessons that history should have taught us, the current generation of political leaders has still not learned their lessons. For example, Great Britain was determined to deflate its economy in the 1920s-30 so that it could go back on the gold standard. This came at enormous cost in terms of unemployment and a long lingering depressed economy that lasted years. Today, Europe is determined to repeat the same mistakes because of German demands for Austerity measures.
Unfortunately, the only way out of this mess is through two measures: The first is through fiscal stimulus – which is politically impossible. I.E. spending on infrastructure projects to prime the economic pump and get the economic engine firing again. The second is through a low rate of inflation (2-3%)- which it is the policy of all the central banks- to inflate away the burden of the debt over a number of years.
The problem is because of politics the entire burden of managing this economic crisis has fallen entirely on the central banks. The average layman does not understand that the way out of this crisis is through fiscal stimulus. All they see is that the government is spending recklessly and increasing the nominal size of the debt. Nobody actually explains to the public that the way out of this mess is to get the economy firing on all cylinders coupled with a small rate of inflation to evaporate the debt. Needless to say, savers would be furious if they realized that the solution is a hidden tax (of inflation) on their savings that this crisis will eventually be resolved. But who else are Governments going to tax? Poor people? They don’t have any money.
Precipitating an even worse recession/depression through austerity will not solve the problem, only economic activity can get us out of this mess and that by definition means inflation and fiscal stimulus. But as I have pointed out, the chances of a wild uncontrolled German-styled inflation just ain’t going to happen. For one thing if inflation started to get wildly out of control, all the central banks have to do is jam on the breaks and jerk back the money supply and increase interest rates.
Quote ‘..and increase interest rates.’
If the US normalises interest rates to around 4% the interest payment would be about $1trillion dollars. If they cut the money supply the housing crash would continue and company/persanal bankruptcies would rise. The situation is dire and the solutions, such as slashing spending on defence, SS etc politically unpalatable.
Very scary suggestions. Govt spending never works, just ask Stalin, Mao or Castro. People and freedom are the answer, not no-work jobs in govt and billions for office furniture… Ridiculous.
Interesting that you started Weiss Research in 1971.I believe that is approximately the date the U.S. empire peaked.When the size of wealth destroying govt,,had grown large enough, to exceed the wealth creating positives of the private sector.The same year Nixon got us to a, totally dishonest, 100% fiat currency.As govt has continued becoming a larger part of the overall economy,the decline has accelerated.Yet,most Americans look to govt as their savior,more than at any time in the past.Not looking like a good future.
Well, those guys aren t that dumb. There is a deliberate plan behind all this: dawn of Phoenix (PHNX). Backed by GOLD. There must be some 100k tons in covert vaults. Who will be the JOKER end of this year?
All right, youare telling us what is really like, GIVE US THE REAL SOLUTION AND QUIT BEATING THE BUSH.1111
ANYONE WITH HALF A BRAIN KNOWS THAT MONOPLY MONEY DOES SIMPLY NOT WORK11111111111111.
WHAT REALLY BOTHERS ME IS WHEN THEY ACTUALLY TOTALLY DEVALUATE OUR EXISTING DOLLAR, WHAT THE HELL DO WE DO WITH WHAT IS LEFT?????
WHY AREN’T WE HEARING THE NAMES OF THE PEOPLE WHO REALLY CAUSED THE PROBLEM, AND ARE CONTINUINUING TO CAUSE IT. HELICOPTER BEN KNOWS DAMN WELL WHAT HE IS DOING WILL NOT WORK. FORCE THESE BUMBS TO SHOW WHERE THEY ARE PUTTING THEIR MONEY.
NO ONE HAS GONE TO JAIL WHERE THEY BELONG, AND THERE DOESN’T SEEM THAT ANY ONE WILL. THE BOTTOM LINE IS CONGRESS IS CORRUPT AND ARE LOOKING ONLY TOWARD THEIR OWN WELFARE.
TO START WITH, EVERYONE IN CONGRESS SHOULD HAVE THE SAME HEALTH PROGRAM THAT THE CITIZENS HAVE.PERIOD . THEY SHOULD HAVE ONLY THE SAME SOCIAL SECURITY RETIREMENT THAT THE CITIZENS HAVE. THEY SHOULD HAVE A NO MORE THAN THREE TERMS AT BAT AND THE SENATE ONLY 4 YEARS NOT SIX. i COULD ON FOR EVER, BUT IT IS QUITE OBVIOUS, THAT THERE IS NO ACCOUNTABILITY WHAT SO EVER IN OUR GOVT.
THEY DO WHAT EVER THEY WANT AND THE HELL WITH THE PEOPLE. BUT WHAT DO WE AS THE PUBLIC DO ABOUT THE MESS? GIVE US A REAL SOLUTION. BEGIN WITH GETTING RID OF THE GRAFT AND CORRUPTION.
There is nothing new about what is happeningThose in government are doing what keeps us happy.
So what do you suggest ?
Best Regards
Charles
C’mmon folks what good is it to chit chat on about the government and it’s mishandling of the affairs of state. Who cares if the Prez is cluless on what to do about housing, oil, fiat money ect. The important thing is what are you doing to save yourself. In the past one could buy assets such as real estate to fend off inflation. Buying anything akind to an asset will more than likely lead to disaster during these uncertain times. For now, one needs to hunker down by staying out of debt and by staying clear of large mortgages ( pay your house down or off ), loans for personal use as well as business. And save as much as you can each month. Be in a positive cash position This is what I am doing since ’08. I do own stocks and still speculate in futures but this is done with stop loss orders only.
Your right on, Amigo!
Hi Martin
If anyone wishes to study humanity and look at what has changed since 2000 it is a loss of confidence in a productive economy, matched with a loss of trust in political administrations. Our hope has also been badly damaged. Hard to fix that. That’s the problem
Howard, I would say what’s changed since 2000 is that upper-middle class tech jobs have met the fate of factory workers of the ’80s and ’90s. American workers increasingly compete against people who don’t have to pay for sewers, water and air quality, building codes and zoning laws, child and animal welfare, etc. Our “everything is a free market” society dismisses this as just a “free market.” But, there’s nothing free about being forced to pay for a standard of living which includes those amenities which I mentioned, and then compete against those who don’t. A truly free market would allow me to opt out of those things so I could compete with the computer programmer earning $25 per day in New Delhi.
I believe that’s what’s changed. We’ve come to use “free markets” as a catch-all excuse for undermining our own national interests, and to sell out our fellow citizens. It started with blue-collar factory workers. Nobody cared then. We dismissed it as the result of slothful unions, etc. Now it’s high-paying tech jobs requiring good educations.
I know there is a great deal of merit in shifting labor costs to the lowest cost center. It forces destructive renewal, creating efficiencies, etc. But, programmers with 4-year degrees working as cashiers at supermarkets are still the ones bearing the brunt of what, at bottom, is unfair market practices (forcing them to pay for standards of living that their competition doesn’t).
Ultimately, I believe the problem is that we dismiss our collective responsibility. We dismiss it as “just a free market” when we should provide training and redeployment assistance to those affected by this. We can’t impose a high standard of living and at the same time dismiss those negatively affected by it as just the unfortunate recipients of “free market forces.” We’ve lost our compassion and sense of national interests because, to do otherwise, it looks too much like “socialism.” We’ve lost any sight of how forcing people to pay for a high standard of living (at the expense of their livelihoods) is itself a form of socialism (taking from tech workers so we can have lower prices).
It seems like we’ve lost any balanced sense of markets and community interests. We think of things in extremes — until we individually have something to lose, and then we rationalize it with a few buzz words like “free markets,” “less government,” “that’s socialism.”
We’re in a race to the bottom which won’t end well, IMO. We’ll either drop the pretenses of a high standard of living (so workers can compete against the $20-a-day folks. Or, we’ll accept that we have a collective interest in protecting our standard of living, and not everything is a “free market.” That’s the stark contrast I believe we’re headed toward. We either need to accept that it is a “free market” and trim down our standards so we can compete with the cesspools of the world. Or, we’re going to drop the dogmatic rhetoric that frames any disagreeable emphasis on national interests as “socialism.”
Mark
Some good points. There is another step and that is protectionism which helps explain the currency markets at the moment.
Mark,
All well-reasoned thoughts on your part. I would just not frame the conclusion as being a choice between a free-market-imposed lower standard of living or adopting some form of socialism as a strategy for protecting ourselves.
Through all of changes in the American employment landscape from our agrarian beginnings to the current mix, overall standards of living continued to rise and unemployment, with a few short term exceptions, has been extremely low.
Certainly it could be different this time. Maybe domestic jobs aren’t just changing, they are permanently disappearing. Even so, we don’t need to lower our standards to cope with it. There are other tools we can use. Tax policy for example. A significant tariff on goods and services originating outside of the US, combined with a lowering of domestic corporate tax rates would: reduce the cost advantage of “cesspool” competitors to US production, generate revenue for the federal government, spread the tax burden more equitably across all participants in our economy and encourage multinational corporations to bring more of their profits home and put those funds to work here.
So long as we are going to impose higher employment, taxation and environmental standards on companies operating in the US, we cannot at the same time allow others to compete unhindered by those standards. That is not a free market either. One party is burdened and restricted and the other is not.
Precisely because we can’t export our standards to the rest of the world, we must put up reasonable barriers to unfair foreign competition until a more equitable global playing field can be achieved. But that is nationalism not socialism. And with care not to push it so far that it becomes isolationism, the resulting shift to higher prices on some consumer products is an acceptable tradeoff.
If all the money from TARP to the constant printing of money went to pay off the default mortgages and left the owners in the homes we would not have a glut of open housing that can not sell. The govt could have had the owners pay back over time as federal tax debts. Our economy would be in better shape today. Instead we give no interest money to banks and they keep it to meet reserve guidelines and do not loan it to boost the economy. The banks along with Wall Street put us here and are intent with govt collusion to keep us here. Roll out the red carpet for China!
This time, it’s different..
Buy (physical) gold and learn to speak Mandarin.
End the Fed.