Looks Like a Ponzi Scheme

Guest Post from Bill Holter

GATA forwarded a fabulous link yesterday

http://www.plata.com.mx/Mplata/articulos/articlesFilt.asp?fiidarticulo=304  to Hugo Salinas Price’s latest writing.  This is a very short read and represents visually what Richard Russell said for years …”Inflate or Die“.  Please read it carefully because if you do not understand it, you will not understand “why” mathematically we are about to go through financial and economic disaster.

Looking at this graph, you will notice the parabolic move began in 1971.  This was possible because “debt” had previously been constrained by the amount of purported U.S. gold holdings.  De-linking from gold allowed literally parabolic growth in new debt issuance. The increase in reserves really started to accelerate around the year 2000 and went vertical beginning around 2008.  These were both years when the economy (and markets) began to seriously falter.  It has been my contention that these years also coincided with “debt saturation” milestones where Kirk called down to the engine room demanding “more power”.

Before moving on, let’s look at how Ponzi schemes work and how they die.  At first, there are few investors so adding even one more sucker to the pile is meaningful as his capital can be parceled out into meaningful “dividends”.  But as the scheme grows, say to 100 unsuspecting souls, one more new investor only equals 1% “payouts” to the group.  Then as the pool gets even larger at 1,000 or more, one new mark is almost meaningless.  As the returns shrink, people begin to look elsewhere and bail out spelling the beginning of the end.  If you look at the above chart again, it pretty much mirrors the birth, growth, maturity and coming death of all Ponzi schemes…doesn’t it?

Looking at the chart from a real world vantage point, the last two plus years has been more than a minor hiccup …the parabolic “trend” has clearly changed and reversed.  Mr. Salinas Price wrote that Mr. Trump has communicated desires to eliminate the trade deficit which will expedite the decline of paper reserves.  I would remind you what Mr. Trump said yesterday, “the dollar is too high”!  This is further evidence of a move away from globalism toward nationalism.  A “lower” dollar will help our exports while curbing imports.  This will truly not be good for an over levered world that relies on product sales to the U.S. to pay their debt service.  Another way to look at it is through the eyes of “Smoot-Hawley” glasses, we already know what happens to trade when tariffs are erected, trade volumes implode.

For the last few years, even with the U.S. trying and struggling to “play the game”, the debt structure had already begun to slow and roll over.  Now with Mr. Trump at the helm, it looks like the U.S. will no longer play the game.  Simply put, “game over” will be rapidly seen and understood as inevitable where no amount of hope will trump “policy” nor [Economic] Mother Nature!  The credit contraction is here and now, if you know this and understand what it means, then you know where it will all end.

As mentioned at the beginning, Richard Russell’s most famous quote was “inflate or die”.  With regard to the above chart, Sir Richard was saying “inflation” (growth of debt) must either continually go up AND at an increasing rate …or it rolls over and dies.  This is exactly why for the last few months I have harped on “credit” and why it is so important.  Credit conditions all over the world have been tightening.  The greatest fear of the Federal Reserve has always been a credit contraction that could not be reversed …their greatest fear has arrived and in spades!

Please understand that “credit” affects EVERYTHING.  Production, consumption and the “ability” to consume, and importantly “distribution”.  Without credit, the economic, nor the financial world will turn …which of course will affect the “social world” as stomachs begin to growl in hunger.

You see, unlike past “reflations”, there is now little to no unencumbered collateral left (even including sovereign balance sheets) anywhere in the world.  The amount of existing debt (Ponzi clients) is so large, new additional debt (new Ponzi clients) has little to no effect on the entire pool.  In other words, we have reached and passed the point of “debt saturation” where the ability to add meaningful debt does not exist.  The availability to obtain new credit is winding down.  Assets are now in the process of being sold to pay existing debt down, very similar to Ponzi clients asking for their money back.  Mr. Trump’s proposed policies of weakening the dollar and balancing the trade deficit will only speed the process …into complete and utter chaos.  The “utter chaos” part is easily forecast because of debt levels compared to current production, and financial derivatives are often 10 times larger (or many more) than the underlying assets themselves.

“Orderly” will not be used to describe the coming liquidation process!

Standing watch,

Bill Holter

Holter-Sinclair collaboration

Thank you Bill Holter


Gary Christenson

The Deviant Investor

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