Peter Schiff explained “What Happens Next.” This article takes his “likely sequence of events” and expands the discussion.
- Bear Market
- Deficits explode
- Return of ZIRP and QE
- Dollar tanks
- Gold [and silver] soars
- CPI spikes
- Long-term rates rise
- Federal Reserve is forced to hike rates during a recession
- A financial crisis without stimulus or bailouts.
Expanding on his sequence:
BEAR MARKET: Bear markets happen often. Markets, whether stocks, bonds, sugar, crude oil or gold, rise too far and too fast and correct, sometime violently. An arbitrary definition of a bear market is a 20% decline. Larger corrections are common. Examples:
- NASDAQ 100 Index dropped 84% after the 2000 bubble.
- Crude oil dropped 76% during 2008 from its all-time high of $147.
- Silver dropped 93% in the decade following its all-time high in 1980 over $50.
- Deutsche Bank fell 90% since 2007.
RECESSION: Recessions often parallel bear markets in stocks and occur every five to ten years. Sometimes they are brief downturns where loans default, credit is tightened and businesses trim excess costs. The economy prospers after the recession until the next one arrives.
Pump too much credit into the economy (created by central banking and fractional reserve banking) and mal-investments expand. A recession cleanses the excess. But in 2008 the Fed “papered over” the problems and didn’t allow liquidation of bad debts, insolvent big banks and weak businesses. Instead the Fed created dollars from nothing and gave loans to big banks, insiders and the politically connected. Loan examples:
- Citigroup $2.513 trillion (Yes, $Trillions!)
- Bank of America $1.344 trillion
- Goldman Sachs $814 billion
DEFICITS EXPLODE: Recessions weaken the economy, businesses lose profits, pay less in taxes and the government must borrow the shortfall. Individuals lose their jobs, receive unemployment compensation, claim disability and collect Social Security. The government receives less tax revenue and pays out more in benefits. Deficits explode higher.
RETURN OF ZIRP AND QE: The central bank could allow banks to fail, tighten credit, increase interest rates and nurse the economy back to health over years, maybe decades. Will this happen? OF COURSE NOT! The Fed protects the big banks and treats the middle class as “milk cows” who feed banks and the political and financial elite. ZIRP and QE direct dollars to the big banks and create higher prices for everyone. If the Fed does not dissolve, expect QE and higher prices.
DOLLAR TANKS: Feed a huge number of new dollars into the economy and each dollar buys less, so prices rise. The dollar falls in purchasing power for everything we need. “Inflate or Die!”
GOLD [and silver] SOARS: The price of gold reflects distrust for central banking. Gold prices also rise because the banking cartel continually devalues currency units. Central banks want gold prices capped, but will allow prices to skyrocket rather than watch bond markets collapse and banks declare bankruptcy.
CPI SPIKES: All the king’s statisticians and all the king’s politicians can’t minimize the CPI forever. They will torture and twist the statistics, but as prices blast higher, the CPI will rise.
LONG-TERM RATES RISE: Who [in their right mind] will lend dollars to a bankrupt government that promised to return mini-dollars in 30 years? Answer: only those required by laws and regulations, and those who hope to sell the bonds to central banks at a profit (think Europe). If nobody buys bonds at 4%, they will offer a higher rate. Alternately, the government could reduce spending and balance the federal budget. Don’t plan on it! Long rates should rise.
THE FEDERAL RESERVE IS FORCED TO HIKE RATES DURING A RECESSION: They may have little choice if the dollar is collapsing and inflation is threatening the economy. Consequences from the massive global “money printing extravaganza” of 2009—2018 will come. The political and financial elite may not feel most of the damage, but “Main Street” Americans will suffer.
A FINANCIAL CRISIS WITHOUT STIMULUS OR BAILOUTS: The crisis of 2008 could return with broader consequences, since debt and leverage are higher than in 2008.
A multi-year recession or depression is possible. Interest on the US debt must be paid, or the debts defaulted. The government can pay the interest—never mind the underlying debt—ONLY by creating new debt. The question is when, not if, a crisis will occur.
From Charles Hugh Smith: “Here’s Why the Next Recession Will Spiral Into a Depression.”
“Depressions, on the other hand, are generated by self-reinforcing feedback loops; insolvencies beget more insolvencies, reduced prices for assets beget lower prices for assets, and so on.”
From Alasdair Macleod: “The Credit Cycle is on the Turn.”
“We are on the verge of moving into an era of high interest rates, so markets will behave differently from any time since the early 1980s.”
“…the US has low interest rates, but no longer a low interest rate economy.”
“This is why the CPI significantly understates the rate of price inflation…”
“… the commodity price boom which had such a significant effect in the 1970s looks like being repeated in the years ahead.”
“… the best preservation of capital is likely to be just one form of money – physical gold.”
From David Brady:
“The U.S. central bank will have to choose to sacrifice one of their priorities: the stock market, the bond market or the dollar.” … “They will obviously sacrifice the dollar.”
From Daniel Lacalle: “Market Crash? Another ‘Red Card’ For the Economy.”
“… we are not facing a panic created by a black swan, that is, an unexpected event, but by three [four] factors that few could deny were evident.
- Excessive valuations after $20 trillion of monetary expansion inflated most financial assets.
- Bond yields rising as the US 10-year reaches 3.2%.
- The evidence of the Yuan devaluation, which is on its way to surpass 7 Yuan per US dollar.
- Global growth estimates trimmed for the sixth time in as many months.”
And our conclusion comes from the wisdom of Alasdair Macleod:
“Any attempt to rescue the finances of the U.S. government, banks and businesses by printing money [fiat dollars] will simply provide more fuel for the inflationary fire, but it is hard to see that there can be any other material response by the Fed.”
Unless the Fed intends to preside over the worst crash in history, a storm of QE, ZIRP and other monetary nonsense will descend upon the U.S.
Silver and gold are insurance against the destructive and inevitable consequences of fiscal and monetary nonsense.
Trust silver and gold… OR… trust the integrity and benevolent intent of the Federal Reserve and the banking cartel. Silver bullion and coins will not disappoint.
Miles Franklin sells silver and gold. Call them at 1-800-822-8080 and tell them you agree with the Deviant Investor about silver and gold. Your price will not change, but I might receive a benefit if you give my name as your reference.
If you have questions or comments, email me at: garyc99507 “at” gmail.com.