Monetary Madness, Political Madness, Debt Madness

Many people watched the most recent circus – the DNC: A few comments:

  1. Some strong-willed individuals managed to observe the DNC without the use of hard alcohol.
  2. Scandal, corruption, and lies were pervasive.
  3. It was good entertainment but not believable.
  4. The RNC was little better.

The RNC and DNC were not the only circus acts in town. Less entertaining versions emanated from the Eccles building in D.C. and from other central banks.

  • Negative interest rates on sovereign debt are common in Europe and Japan and probably coming to the US.
  • Helicopter money – here we come!
  • Stupid is as stupid does! Garbage in, Garbage out! You can’t win and you must play the game.
  • Yup, Madness, Madness, and more Madness.

Michael Pento explained it eloquently in his article, “Four Stages of Monetary Madness.”


“There are four stages of fiat money printing that have been used by central banks throughout their horrific history of usurping the market-based value of money and borrowing costs. It is a destructive path that began with going off the gold standard and historically ends in hyperinflation and economic chaos.

Stage one is the most benign of the four, but it sets the stage for the baneful effects of the remaining three. The first level of monetary credit creation uses the central banks’ artificial savings to set short-term interest rates through the buying and selling of short-duration government debt. This stage appears innocuous to most at first but is insidiously destructive because it prevents the market from determining the cost of money. This is crucially important because all assets are priced off of the so called “risk-free” rate of return. A gold standard keeps the monetary base from rising more than a few percentage points per annum and thus restrains bank lending. However, having a fiat currency also means a nation has a fiat monetary base. This leads to unfettered bank lending and the creation of asset bubbles.

The second stage of monetary madness has been around for decades but is now commonly known as Quantitative Easing (QE). After several cycles of lower and lower short-term interest rates that are intended to bring the economy out of successive recessions, the central bank (CB) ends up pegging rates at zero percent or below. Once CBs run out of room on the downside of short-term rates they go out along the yield curve and begin to artificially push down borrowing costs for long-term debt. It is important to note that at this stage CBs only purchase assets on private banks’ balance sheets and at least pretend they will someday liquidate these holdings.

The third level of monetary madness is now being threatened to be imposed upon the population by central banks across the globe. This stage is called “Helicopter Money” and is the brainchild of noted economist Milton Friedman. But in reality, versions of it have been used many times prior to Mr. Friedman’s appellation of central bank money drops. Friedman argued the use of Helicopter Money to combat deflation, but it has been traditionally used to help an insolvent government service its debt.

At its core, Helicopter Money is defined to be the issuance of non-maturing government debt or the direct issuance of credit to the public that is financed by the central bank. Both forms of money drops operate most efficiently by circumventing the private banking system. This is because CBs and governments don’t have to worry about private banks deciding to forgo buying more government debt if favor of holding the fiat credit as excess reserves. Helicopter Money allows citizens the direct access to new credit without the threat of having it unwound from the CB. The main difference between non-maturing debt issuance and direct public credit is the former allows the government to direct who gets the new money, and the latter gives the CB that discretion. But in either case, Helicopter Money amounts to a direct increase in the broad money supply and inflation.

As I mentioned in last week’s commentary, The Bank of Japan and perhaps even The European Central Bank are seriously contemplating saying “get to the chopper” very soon. Alas, once you get to level 3 there will be an inexorable march towards the next level. This is because there is no calling in the helicopters without causing a devastating plunge in asset prices and a bond market collapse, which results in massive economic chaos.

This brings us to the final stage of central bank intervention, which is the interminable and direct purchase of sovereign debt by a central bank for the sole purpose of keeping interest rates from spiraling out of control. Hence, the 4th stage of Monetary Madness occurs once inflation becomes fully entrenched in the economy.

It would be pure folly to assume that central banks can achieve their 2% inflation targets with impeccable precision. Years’ worth of deficit spending, surging debt to GDP ratios and a gargantuan increase in central banks’ balance sheets will eventually lead to a significant erosion in the confidence of central bankers to maintain the purchasing power of fiat money. Therefore, inflation won’t just magically stop at 2%; it will eclipse that level and continue to rise.

But that’s only half of the issue. Sovereign bond yields have been slammed so far down by CBs that nearly 30% of the entire supply of government-issued debt now trades below zero percent. The return of inflation must surely cause a mass exodus of longs from the bond market, just as short sellers begin to pile on top. The bond market will also respond in violent fashion — taking yields up 100’s of basis points rather quickly — due to the anticipation of waning bond bids from central bankers.

Of course, surging debt service payments will render debt-saturated governments completely insolvent, which forces central banks into stage 4. Sadly, this is the conclusion that lies ahead for the developed world. Investors should not become complacent with the current innocuous state of global bond yields. In reality, they have become incendiary bombs that will inevitably explode with baneful implications for those that are not fully prepared.”


Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

His article has been posted here, here, here and here.

Review: The Four Stages

  1. Central banks set short term rates.
  2. QE etc.
  3. Helicopter money.
  4. Hyperinflation.

Inevitable Questions:

  • Would central banks and governments engage in such nonsense if they had not already “screwed up” the system so far that they believed they had to use desperate measures? (Hint: no.)
  • We are approaching stage three. Do you see any reason why the madness will not continue to reach stage four? (Hint: no.)
  • Will hyperinflation be good for your personal finances, your savings, or your country’s economy? (Hint: no.)
  • Has a politician ever said “no” to spending more fiat currency and creating more debt? (Hint: no.)
  • Has a central banker ever said “no” to creating more debt and devaluing the currency? (Hint: no.)

Have gold, silver and other hard assets come to mind as antidotes to current and future monetary and fiscal madness?

Gary Christenson

The Deviant Investor

6 thoughts on “Monetary Madness, Political Madness, Debt Madness

  1. I am not so sure about the Phase 3 money printing panic phase. I think these bozo’s will come up with something that no one has proposed online yet, but it will be like spitting in the wind. Totally ineffective. I want a clawback of all Federal Reserve employees going back to 1987. Calling the Donald now about this.

    I think for 90 days these light-weights try some desperate measures while the wings fall off the airplane, a parachute would be too obvious to them. But currencies are going to ZERO versus Gold, Silver and Colored Diamonds. But Bernanke’s Helicopter Money routine will never get off the ground. The rotors were made in China, right. Look for Deutsche Bank or Chinese bank to start the ball rolling down the hill of Mammoth DEFAULTS. Countries defaulting would be next. Prisons being constructed for Central Bankers of the world. I am laying first brick personally to my local chapter.

  2. If people can’t come to grips with the fact that this entire thing [asset inflation and mammoth debt] was designed by the banker elite [International Communism] as a purposeful method to own the earth in “fee simple” through debt creation and then create the devastating crash to “pin the tail on the donkey” [public] as they [banksters] end up with all the real estate that young buyers bought at top prices buying out those older folks who just got taxed out of their homes because of soaring “values.”

    The real estate bust of 07-08 was just a warm up for what’s coming as the economy will really tank within 2-3 years and the mortgages won’t get paid, buyers will be forced out with new burdens of liability [can’t just walk now] and nowhere to go….except the gov’t boarding houses, aka; FEMA camps.

    Don’t know about the rest of you but my property taxes increased over 35%. Yes, i’m fighting the damn fools. Talking to people at the Assessor’s office is like talking to a mailbox… empty one!


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