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JayDubya

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From Doug Casey' International Man Website:
The Lesson Of A Crash That Cured Itself

by Wendy McElroy

"If a government wishes to alleviate, rather than aggravate, a depression, its only valid course is laissez-faire—to leave the economy alone. Only if there is no interference, direct or threatened, with prices, wage rates and business liquidation, will the necessary adjustment proceed with smooth dispatch."

— Murray Rothbard, America's Great Depression

The economic disruption caused by the government’s coronavirus clamp-down may lead to a deep recession or depression; arguably, it already has. President Trump’s $2.2 trillion relief package indicates what his answer to such an economic disaster will be: mega-spending on hand-outs and social projects.

Trump is setting himself up as a modern version of Franklin D. Roosevelt (FDR) whose New Deal programs defined 20th century America by diverting it from a largely free-market path down a largely statist one. Trump wants to be an activist president — the type that history books applaud. Congress’s near-unanimous support of the relief bill means that no real brake will be applied on the speed or depth of federal spending. Few voices even question the need for government to lift up the economy by its bootstraps.

The Great Depression of the 1930s is often viewed as the gold standard for a federal response to an economic crisis. And, yet, FDR’s strong-man policies ushered in a decade of economic misery that did not end until the jolt of a world war in which over 400,000 Americans were killed. Happily, a less bloody "success" story exists.

The financial analyst and historian James Grant offers the do-nothing alternative in his path-breaking book The Forgotten Depression. 1921: The Crash That Cured Itself. The crash of 1920-21 is called "the forgotten depression" because it has almost vanished from history books. The main reason: its lesson is anathema to the political and economic elites who derive power from controlling the marketplace.

Its lesson: when the economy is melting down, do nothing because the free market will self-correct and naturally return to a healthier equilibrium. Recessions—even deep ones called depressions—cause short term pain and damage; in the long term, however, such corrections allow for the healthy adjustment of overvalued assets and provide buying opportunities for the prudent.

Government interruption of this dynamic is useless, and worse. It is useless because government policies cannot prevent a depression. It is "worse" than useless because the policies can prevent a free-market recovery and needlessly draw out the economic pain. The "missed" recovery is never seen, of course. The 19th century French economist Frédéric Bastiat wrote eloquently of the "seen and unseen" costs of government intervention.

In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause—it is seen. The others unfold in succession – they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference—the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee.

In order to perceive the "unseen" cost of government’s intervention into an economic crisis—that is, the missed opportunity for a natural recovery—it is invaluable to draw upon history for comparisons. In America’s Great Depression, Murray Rothbard observed, "The 1920 recession had adjusted itself within a year. There was no reason why the 1929 recession should have taken longer, for the American economy was fundamentally sound."

What happened in 1920 that did not happen in 1929?

When World War I ended on November 11, 1918, A brief recession and a fast recovery followed. Then, a sharp deflation hit and lasted from January 1920 to July 1921. In a Wall Street Journal article entitled "The Depression That Was Fixed by Doing Nothing," Grant explained, "Beginning in January 1920, something much worse than a recession blighted the world. The U.S. suffered the steepest plunge in wholesale prices in its history (not even eclipsed by the Great Depression)."

Indeed, the first year of the 18-month crash was worse than the first year of the Great Depression. Unemployment went from 4 to 12%; production fell by 21%. According to Grant, "the nation’s output in 1920-21 suffered a decline of 23.9 per cent in nominal terms, 8.7 per cent in real terms. From cyclical peak to trough, producer prices fell by 40.8 per cent, industrial production by 31.6 per cent, stock prices by 46.6 per cent and corporate profits by 92 per cent."

And, yet, Grant wrote: "The successive administrations of Woodrow Wilson and Warren G. Harding met the downturn by seeming to ignore it — or by implementing policies that an average 21st-century economist would judge disastrous…." The government did not lower interest rates nor did it ramp up the public debt. Under Harding, the government raised interest rates and paid down the debt. Average money wages were allowed to fall by 19% in one year." Grant continued, "Yet by late 1921, a powerful, job-filled recovery was underway. This is the story of America’s last governmentally unmedicated depression."

The government’s laissez-faire attitude may seem surprising because Wilson, a Democrat, was not a fan of the free market. During World War I, Wilson had been an activist president with his hand clenched around every lever of control. His inaction in 1920 has been grotesquely ascribed to "a stroke of luck." In October 1919, toward the end of Wilson’s second term, he had a debilitating stroke; his wife Edith assumed stewardship of her husband’s office and decided which items were important enough to bring to his bedside. Many matters experienced benign neglect.

In March 1921, when Harding was inaugurated, the economy was already turning around after fifteen months of decline or stagnation. The Republican Harding was an open advocate of laissez-faire, and he did nothing to hamper the ongoing cycle of recovery. Harding and Andrew Mellon, his Treasury Secretary, reduced federal spending, paid down the debt, and lowered tax rates. A Washington Post article entitled "Curing a Depression through Austerity" commented on the effect of Harding’s economic policies.

"The unemployment rate fell from 15.6 percent to 9 percent (on its way to 3.2 percent in 1923), while constant-dollar output leapt by 16 percent. After which the 1920s proverbially roared." By the summer of ‘21, the depression had reversed itself, America proceeded into the Roaring Twenties with a surging economy and happy-go-lucky consumerism.

How specifically did a recovery occur without government "assistance"? A significant part of the answer lies in the incredible power of the price mechanism to motivate human behavior. Which is to say, people want to prosper, and they will respond quickly in the presence of opportunities to advance themselves. "America was on the bargain counter," Grant observed in his book, and Americans love a bargain.

Grant poured over financial pages of the 1920-21 period, especially those of the Wall Street Journal, as a way to take the economic pulse of the time. Among the insights Grant picked up: "Stocks were commandingly cheap, the Journal’s capitalist source concluded. ‘Scores’ of companies were valued in the market at less than their working capital — as if the business itself, apart from the net cash, was worthless. The shares of ‘large numbers’ of industrial companies were selling at "one-third of their respective intrinsic values’." It was time for Americans to buy solid value at basement rates.

The preceding analysis is simplistic, but it sketches one of the most remarkable episodes in America’s economic history: a depression that cured itself. Unlike the Great Depression, it did so rapidly and without the political disruption of massive social programs and huge transfers of wealth.

Trump has chosen the path of FDR and the Great Depression rather than Harding and 1920. Rothbard referred to these past economies as "fundamentally sound." Whether a similar statement is true of today’s economy can be hotly debated, and the prevalent presence of government is a complicating factor; the short-term misery of the correction will be deeper than it needed to be.

What the 1920-21 depression demonstrates, however, is the salutary effect of allowing economic consequences to play out; what the Great Depression demonstrates is the incredible damage of doing the opposite. And, if the current economy is not as solid as in the past, perhaps this is all the more reason to abandon the one factor most responsible for destroying it: government intervention.

Nevertheless, instead of "doing nothing," the Trump administration will "do everything." The money supply will balloon and cause run-away inflation; resources will be misdirected, preventing free-market allocation; the market will be centrally coordinated according to a bureaucratic vision; interest rates will be driven artificially low; spending and debt will explode; unsustainable investments will be bolstered by tax funding…. In short, the depression will grind on to the misery of many and to the profit of a well-connected few.

Trump refers to the campaign against the coronavirus as a "war." Like FDR, he is prepping to be a wartime president with the attendant legacy of glory. Or so the history books will read. In this quest, the narrative of FDR serves Trump well. We can only hope that, unlike the Great Depression, it will not take an actual war to break the cycle of depression being spun.
 

Scorpio

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nice find,

we have long argued, called it 'eat your spinach', that a free market economy must be allowed to purge the excesses,

but, to date, none of them, not just tramp, all of them, have not been willing to go that route,

you have heard it many times before, the long spoken of 'extend and pretend', with all of us fully aware that one day it isn't pretend anymore
 

Uglytruth

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I always liked Walter Williams.

Most of the great problems we face are caused by politicians creating solutions to problems they created in the first place.

What happens when a company goes bankrupt? One thing that does not happen is their productive assets go poof and disappear into thin air. In other words, if GM goes bankrupt, the assembly lines, robots, buildings and other tools don't evaporate. What bankruptcy means is the title to those assets change. People who think they can manage those assets better purchase them.


Walter E. Williams
 

BarnacleBob

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nice find,

we have long argued, called it 'eat your spinach', that a free market economy must be allowed to purge the excesses,

but, to date, none of them, not just tramp, all of them, have not been willing to go that route,

you have heard it many times before, the long spoken of 'extend and pretend', with all of us fully aware that one day it isn't pretend anymore
FB_IMG_1586732524597.jpg
 

Scorpio

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just for reference, spot is jumpy today,
with gold being up 16-17 and yet futures only up about 6

silver is jumping in the futures, up 56 and over 16 again,

g7 announces talk of debt forgiveness for 'disadvantaged' countries
 
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Strawboss

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I thought this was pretty spot on...

A Letter To The Inhabitants Of The Future Dystopia Whose Birth Pangs We're Experiencing

by Tyler Durden
Tue, 04/14/2020 - 16:20
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Authored by James Corbett via minds.com,
“The lamps are going out all over Europe, we shall not see them lit again in our life-time.”
- WWI conspirator Edward Grey
I do not write these words for my contemporaries. We are the damned. It is our lot now to watch as the lamp of liberty is extinguished, our burden to bear witness to the final flickering of the flame of freedom.
No, I don’t write these words for my peers; I write them for those yet to come. The inhabitants of that future dystopia whose birth pangs we are experiencing. The remnant of once-free humanity who might - through some miracle I can’t even imagine—come across this electronic message in a bottle.

I know that it’s almost hopeless. That the chance of these words surviving the coming internet purge are slim at best. That even if—against all odds—this message does wash up on your digital shores, that the chance of these words being understood by you is even slimmer. Not because you don’t understand English, but because you no longer use these words I’m writing: Freedom. Humanity. Individual.
Still, I am here to record the end of an era. So I will press on in the hope against hope that someone, somewhere in that future Digital Dark Age will have eyes to see and ears to hear.
The darkness is descending.

Let there be no mistake: We all know this.


It means that the Corona World Order has arrived.
Some are suggesting that the current crisis is the end of globalization, or that it will wipe out the New World Order altogether... but they are wrong.
In fact, this crisis is the globalists’ dream, and what we are witnessing is the birth of a totalitarian control grid the likes of which could scarcely have been imagined before this pandemic panic kicked off.
Welcome to the Corona World Order.​

Oh, sure, some still deny it. But they are only fooling themselves. They’re afraid to admit that it’s true. Many are still under the old conditioning that told them to bleat “conspiracy theorist” at anyone questioning authority.
We have a name for that kind: “sheep.” Or, sometimes, “sheeple.” The masses in our day are kept in the pen by the jackbooted sheepdogs of the police state and led along by the political puppets who act as their shepherds. Occasionally a wise old-timer in the flock cottons on to the game, but the shepherd has only ever fleeced the flock before, so he resigns himself to his fate. Why struggle? It’s mostly painless.
Never did the sheeple suspect that some day the shepherds would lead them to the slaughter.
It is a term of derision, of course. “Sheeple.” But I like to think that it doesn’t just speak to our stupidity. It speaks to a naivety, an innocence. We are trusting and gentle creatures by nature. Peaceable. Cooperative. That is nothing to be scorned. If it weren’t for the predators in our midst, our failings could even be counted as virtues.
But I am not here to say that. I am here to say this: Resist! Struggle! Fight!
You are not cogs in a machine, despite what the shepherds of your day may be telling you. You are free and beautiful human beings. You are not born under the authority of another. You choose how you live your life, not some bureaucrat, not some police robot, not some “immunity checkpoint” algorithm or QR code.
You do not need permission to buy or to sell or to assemble or to speak your mind or to leave your house. You are not an “asymptomatic carrier” of whatever virus your misleaders are telling you to be afraid of. You do not have to shelter in place because someone in a white lab coat told you to.
I want you to understand that, once upon a time, the government didn’t have the right to know where you were, who you were meeting with, what you were buying and what you were doing 24/7. Hell, the government didn’t even have the ability to do that.
I need you to know that there was a time when you could leave your house when you wanted. Travel where you wanted. Buy and sell as you saw fit. Meet your neighbors. Rally. Protest. Party.
Live. As free human beings are meant to live.
Oh, what am I saying? These words. This language. It makes no sense to you anymore, does it? These concepts don’t exist in your time, do they?
You go where you are told to go. You stay home when you are told to stay home. You shut up when you are told to shut up. You think what you are told to think.
I can’t blame you, after all. You’re trusting and naive and peaceful. Like a sheep.

But oh how I weep for what you have become. I tried to avert it. Please believe me. I really tried.
But the lamp of liberty is being extinguished. And I am bearing witness.
I don’t know if history is something you study anymore, but UK Foreign Secretary “Sir” Edward Grey made his observation about the lamps “going out all over Europe” at the end of the so-called “Twelve Days,” the period during the summer of 1914 in which the mainstream history books tell us that the British government was trying to avoid a World War. We are asked to believe that this prescient remark proved Grey to be a sage diplomat, wracked with grief over the pain and suffering that was about to be unleashed upon the world.

But this is history-by-the-winners of the worst kind. In truth, Grey was himself one of the conspirators that was actively working to bring the First World War about. What’s more, the source of this quotation is in fact Grey himself; it was first recorded in Grey’s own post-war memoir. Any tears shed by Grey over the extinguishing of those lamps were crocodile tears, to be sure.

One can well imagine that we will be told some years hence that Bill Gates made a similarly portentous remark at the onset of this corona crisis. Gazing out the window of his $147.5 million dollar, 66,000 square foot “Xanada 2.0” mansion at the then-epicenter of the US outbreak in Washington State, Gates’ post-coronavirus memoir will no doubt tell us that he remarked to an underling that “The lights are going out all across the globe, we shall not see them lit again in our lifetime.”

But his memoir will no doubt fail to inform us that he was smirking as he said it.
To my children, or my children’s children, or whatever remnant of once-free humanity happens to unearth these words in that God-forsaken future we are goose-stepping into: I’m sorry. I failed you. We all failed you.
But remember this: As long as the blood of your forebears flow through your veins, the lamp of human freedom shall not be extinguished forever.
Let it shine, dear sheep. Let it shine.
 

Scorpio

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In that vein straw,

I was just telling a friend that 'people are so scared of dying, that they fail to live'

I have long spoken of corps and .gov preying on peoples fears
 

Scorpio

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with the news of the sauds playing games discounting oil prices to some,
oil drops below 20 with more effect,

prior, it had tapped below 20 twice, only to quickly rebound, this time might be a short term keeper below
 

madhu

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how many bridges tunnels and airports can you build that are economically viable? This also applies to India. Swanky new airports but the developer is so broke , cannot pay interest. When China cannot inflate anymore, the whole world is making a coordinated effort to goose the currencies. Dollar shortages outside the US causes this debt laden bubble to implode on itself needing more and more excuses to save the whole fiat world. Who is a credit worthy entity that can borrow and at least repay the interest on the debt? Time for a next plaza accord? Or Pretend and extend the loan
 
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Uglytruth

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with the news of the sauds playing games discounting oil prices to some,
That didn't last long..............

3 days ago

Reuters Saudi Arabia, Russia and the U.S. agreed to lead a multinational coalition in major oil-production cuts after a drop in demand due to the coronavirus crisis and a month-long Saudi-Russian feud had devastated oil prices.
 

JayDubya

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Will it be an Inflationary or Deflationary Depression?

by Doug Casey

-

At some point, the economy is no longer controlled by individual citizens in the marketplace but by government "planners," who find they have only one of two alternatives: stop "stimulating" and permit a full-scale credit collapse, or continue stimulating until the dollar loses all value and society breaks down.

Depending on which they choose, we will have a depression characterized by deflation or by hyperinflation.

Deflationary Depression

This is the 1929-style depression, where huge amounts of inflationary credit are wiped out through bank failures, bond defaults, and stock and real-estate crashes.

Before 1913 (the inception of both the Federal Reserve and the income tax), having the dollar pegged to gold (at $20 an ounce) inhibited the scale of monetization.

When depressions of this type occurred, depositors acted quickly to collect their money; they had no illusion that the government would bolster their banks; once the banks ran out of gold, their bank accounts were worthless.

Their quick response and the fact that the federal government could not monetize its deficit spending as freely as it now can forced the market to correct distortions rapidly.

Until the 1930s, depressions were sharp but brief.

They were short because unemployed workers and distressed business owners were forced to lower their prices and change their business methods to avoid starvation.

The 1929 Depression was deeper and more widespread than any before it since the Federal Reserve (by becoming the lender of last resort) allowed banks to maintain far smaller reserves than ever before.

By backing the dollar with Reserve Bank IOUs instead of gold, the money supply could be increased enormously, and large distortions could be built into the economy before a depression liquidated them.

It was far longer than those before it, because government attempted to hold wages and prices at levels few could afford to pay, while its make-work and income-redistribution schemes retarded the rebuilding of capital and the productive employment of labor.

Meanwhile, the government discovered the freedom with which it could have its deficit spending monetized and proceeded to spend at an unprecedented rate to finance the New Deal’s spending programs and World War II.

Since the end of the last depression, there have been numerous small recessions. Since at least the ‘70s, anyone of them could have snowballed into another 1929-style deflation.

Government has been able to forestall a deflation each time, since it has far more power than it did during the ‘30s. But the government’s success so far has linked all the cyclical recessions since the end of World War II into a much larger "supercycle."

Just as each of the past recessions had its moment of truth, so will the current one. And it could well be the turning point for the bigger supercycle as well.

Hyperinflationary Depression

This is the Weimar-style depression, like the one Germany experienced in the early ‘20s. Here, rather than let a collapse of inflationary credit wipe out banks, securities, and real-estate values, the government creates yet more currency and credit to prop things up.

It pumps massive amounts of new purchasing power into the economy to create "demand" (even, or rather, especially among corporate and individual welfare recipients, who produce nothing in return).

The government extends past misallocations of capital, when the economy instead needs to readjust to sustainable patterns of production and consumption.

Hyperinflation could result from overstimulation when the authorities try to boost the economy out of a trough. If they expand the money supply too quickly, it might encourage the trillions of US dollars owned by foreigners to flood back here at once, in a bid for real wealth in competition with domestically held dollars. That would reverse, overnight, the muted inflation figures of the last 40 years, and prices could jump at a 20 percent to 30 percent clip.

It is hard to anticipate all the implications of that happening but, presumably, everyone would panic out of dollars and into real goods.

There would be a wave of bank failures. Possible government reactions would be price controls, withdrawal restrictions, foreign-exchange controls, and many other forms of "people controls."

This country is arguably unique in having a gigantic long-term debt market; bonds and mortgages are worth several times what the stock market is. If the dollars that debt is denominated in were to evaporate, it would be a world-class disaster.

Previous runaway inflations in other countries have been characterized by the printing of literally tons of paper money. But the US economy is based largely on credit.

Would credit cards be accepted if the dollar were to start losing value at a very high rate? Quite possibly not. In other hyperinflations, there was usually some alternate currency to facilitate trade.

Weimar Germans had substantial amounts of gold coins salted away.

In South American inflations, people simply used US dollars.

In the ex-USSR, dollars (and deutsche marks) practically became the new national currency for a few years.

But what would Americans use?

All this would be an academic discussion, or perhaps an interesting topic for a science-fiction treatment, if the US government were a manageable size, and instead of a "legal tender" currency, "dollar" were just a name for a certain quantity of gold.

But that is not the case, and we have to deal with things as they are.

Which Will it Be?

The current administration, Congress, and the Federal Reserve are confronting a far, far more serious problem than ever in past business cycles.

At the bottom of each past cycle, interest rates were high (bond prices were low), inflation was high, and the stock market was very low.

This set up ideal conditions for recovery, as each of these situations went into reverse.

But now, stocks and bonds are already very high, and inflation is already at (what have come to be accepted as normal) very low levels.

At the same time, the government has far less flexibility than in the past, despite being more powerful than ever.

Most of its revenues are already spent before they come in, and it has a gigantic debt load to service.

If some unexpected shock hits, it will be like watching a tightrope walker over the Grand Canyon during a windstorm.

In their efforts to quell inflation, the authorities could make the supply of credit either too small or too costly.

With as much debt as there is today, the wave of bond and mortgage defaults would cascade through the economy. Loan defaults would wipe out banks, and foreclosure sales would depress prices and wipe out the net worth of individuals.

A corporate bankruptcy can take down its suppliers, its workers, its community, and its lenders as well. Perhaps a scramble to pay debt would result in the wholesale liquidation of assets at distress-sale prices, further reducing everyone’s net worth, even while the dollars they owe gain value.

In their efforts to head off a deflation, the authorities would undoubtedly attempt to supply liquidity by creating more currency and credit. But that would just bring back the inflation scenario.

And world credit and currency markets are far larger than they were during the early ‘80s, when things very nearly collapsed.

The financial problems the government has created have taken on a life of their own, and there is a good chance we’ll have a nasty surprise when the next recovery is slated to occur.

Betting on inflation has been the winning strategy since the bottom of the last depression, but a financial accident could change all that overnight.

The inflationists will almost certainly be right in the long run, but they may get wiped out in the short run.

In any event, the moment of truth is approaching, and there likely will be a titanic struggle between the forces of inflation and the forces of deflation. Each will probably win, but in different areas of the economy.

As a result, we’re likely to see all kinds of prices going up and down, like an elevator with a lunatic at the controls. It will not be a mellow experience.

Editor's Note: The enormous and unprecedented effects of governments shutting down the global economy have only just begun.

The coming financial volatility will be unlike anything we've ever seen before.
 

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The sky is falling!
The sky is falling!

That is all you hear about the oil markets, and the talking heads focusing on 20 buck oil

yet, no one is telling you the whole story.

If you look at futures, current and future, you see something very interesting,

sure front month, or current is around 20 bucks, but it jumps fast on the Jun contract, and the July contract, to the tune of $10 or over $30 per barrel in just a couple of months,

then the contracts go to normal status for storage and delivery,

meaning, the market is flat stating this is a temporary situation and will be resolved soon into the future

or don't listen to the talking heads and their misdirection,

oil contracts.jpg
 

BarnacleBob

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The sky is falling!
The sky is falling!

That is all you hear about the oil markets, and the talking heads focusing on 20 buck oil

yet, no one is telling you the whole story.

If you look at futures, current and future, you see something very interesting,

sure front month, or current is around 20 bucks, but it jumps fast on the Jun contract, and the July contract, to the tune of $10 or over $30 per barrel in just a couple of months,

then the contracts go to normal status for storage and delivery,

meaning, the market is flat stating this is a temporary situation and will be resolved soon into the future

or don't listen to the talking heads and their misdirection,

View attachment 162000
Thats exactly what I saw last night while looking around at INO.com. The $20 bbl is a temporary market blip....
 

WillA2

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In that vein straw,

I was just telling a friend that 'people are so scared of dying, that they fail to live'

I have long spoken of corps and .gov preying on peoples fears
I'm untouchable until my Father calls me home. I choose to live. I hope to pass that on to others.
 

JayDubya

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Federal Reserve Funds 165% Of Record Pandemic Deficit Spending Through Monetary Creation

By Daniel R. Amerman, CFA

Two extraordinary and unprecedented actions are being taken in the attempt to contain the economic damage from the national shutdown, and thereby attempt to prevent a depression. Each are on a scale we have never seen before, and each are almost certain to be very long lasting.


Even if the actions are "successful" - a depression is prevented and a severe recession is shortened - these radical actions occurring over a matter of months and years are not only likely to dominate our investments, savings and retirements throughout the rest of the 2020s, but they are likely to still be changing our lives decades from now, long after the COVID-19 pandemic has been forgotten by most.


Between the economic damage to the nation, the lost earnings and careers for individuals, and the costs of the containment of that damage, the shutdowns being used to "flatten the curve" are likely to be the single most expensive event in U.S. history. How the expenses of attempted containment are funded - will change everything, and the effects will stay with us for the rest of our lives.





As can be seen in the graph above of the preceding weeks, an explosive increase in the national debt is being used to fund an array of emergency programs that are throwing hundreds of billions of dollars at corporations, smaller businesses and individuals. At the very same time, all of that money - and quite a bit more - is coming from the Federal Reserve creating the money, almost entirely through a process of reserves based monetary creation.


This analysis is part of a series of related analyses, which support a book that is in the process of being written. Some key chapters from the book and an overview of the series are linked here.

An Unprecedented Increase In The National Debt

We have the fastest increase in the national debt coming up in 2020 that we have ever seen, and this is on top of a national debt that was already rising very rapidly with trillion dollar a year deficits. There is a great deal of weekly variation, but that works out to a round number average of about $20 billion a week or $80 billion every four weeks.


Even in late March, deficits were already running well above that range, as can be seen with the green bars in the graph. There was $67 billion in net new public debt issued in the week ending March 18th, 2020, and another $30 billion the next week, for a two week total of $97 billion, or about 4X the pace of a government running $1 trillion a year deficits.


Then another $299 billion was issued the week ending April 1, 2020, and another $276 billion the following week. That brought the four week total to $672 billion - which vastly exceeded any deficit run up over an entire year by the Federal government before 2009.


The previous annual record had been a $459 billion deficit in the year 2008 (fiscal years), and that total was exceeded in just four weeks by almost 50%. Indeed, if we just look at the latter two weeks, the deficit spending by the government in just those two weeks was equal to almost twice the highest annual deficit ever incurred by the government prior to 2003 (and yes, inflation plays a role, but the current rate of increase is off the charts).


The extraordinary, fantastic, almost incomprehensible increase in the national debt over four weeks is half the picture. The perhaps even more important event - though even less understood by the public - is the orange bars, which represent where the money came from to buy the newly issued debt.


The Federal Reserve effectively created the money to purchase $118 billion in Treasury debt in the week ending March 18th. This rose to a staggering $455 billion the next week, $818 billion the third week, and the Fed had cumulatively purchased over $1.1 trillion in federal debt in the four weeks ending April 8th, 2020.


Almost all of the new money spent by the United States government came from the Federal Reserve using a process of reserves based monetary creation (not money printing). Now, these were not direct payments from the Fed to the Treasury, but that is more or less the whole point. By purchasing the Treasuries through the markets, from participants who had just bought them from the government, the Fed not only funded the U.S. government but ensured that interest rates would remain at extreme lows.


Indeed, as further explored below and in previous chapters, the Fed has been buying far more Treasuries than just those needed to fund deficit spending.





This can be seen in the graph above where we compare the amount of US treasuries that the Federal Reserve was buying each week on a cumulative basis with the increase in the public national debt.


The Fed created the money to buy 175% of the first week of new debt, and then 469% of the second week of new debt (on a cumulative basis). Over three weeks, Treasuries representing a little more than twice the issuance of new debt were purchased, and over four weeks, 165% of the increase in the national debt was funded with newly created money.


And we are still in the early stages.


If we look at every dollar of the amount of money that is going out to businesses from the U.S. government - it is coming from monetary creation by the Federal Reserve.


If we look at checks being sent to each family - every dollar is coming from monetary creation by the Fed.


If we look at the fantastic increase in unemployment compensation payments, and then add on the extra $600 a week to keep the ability to buy groceries and make rental or mortgage payments - every dollar is effectively coming from newly created money, courtesy of the Federal Reserve.


Outside of the Treasury purchases that are the subject of this analysis, if we look at the announced trillions of dollars of Federal Reserve lending programs and asset purchase programs - the Fed didn't have the money to do any of that, without creating the money.


Almost without discussion, or votes, or elections or constitutional processes, emergency powers were seized by the state governors to effectively force the immediate collapse of their state economies, in the name of a health emergency. The calamitous economic damage - even the ability to eat and stay in a residence for the tens of millions of newly unemployed whose jobs were deliberately destroyed by government order - is being dealt with by what could be called an unprecedented and seemingly unquestioned Federalization of the economy, where the Federal government pays for everything for everybody - under the rules and with the political and financial priorities that it establishes (thereby taking total control).


Except the U.S. government doesn't have the money to do any of that, not one bit. The government was already $23 trillion in debt, and unable to pay its preexisting promises without borrowing over $1 trillion a year. An effectively bankrupt government doesn't have the money to pay for any of that: not the rent payments or the grocery bills or the corporate bailouts.


So another branch of the government is creating the money to do so.


This is not literal "money printing" or "modern monetary theory" - or at least, not yet. Instead the money is being created in a very careful, very disciplined - and ultimately quite limited - manner, using reserves based monetary creation. Almost exactly $1 trillion of that $1.1 trillion in newly created and spent money came from an increase in excess reserves of depository institutions over the four weeks ending April 8th. If the current wild rate of spending and asset purchases by the government and the Fed exceed the limits of reserves based monetary creation - that is where "money printing" and high inflation risks come into the picture.





The extraordinary increase in Federal Reserve assets through April 8th - funded by reserves based monetary creation can be clearly seen in the yellow spike above, and we are still in the very early stages.





If the graph generally looks familiar to regular readers - it should, because it looks a lot like the graph above from Chapter 8 that was published about a year ago. That chapter did not (of course) predict the pandemic, and the illustration assumed a recession beginning in October of 2020, which is a bit later than the way things turned out.


However, what was illustrated was always on the way, and should have always formed the foundation of retirement financial planning for most individuals. Oh, not the radical severity of the coronavirus pandemic and the economic shutdowns, but that a recession from any source hitting an effectively bankrupt U.S. government would require massive monetary injections from the Federal Reserve and massive stimulus spending from U.S. government, with each being funded by an unprecedented degree of monetary creation simply because of a lack of other alternatives.





Indeed, every aspect of what is now playing out in real time for the funding of the at least temporary Federalization of the U.S. economy could be seen advance in the graph above, which is from DVD #4 of my "Gold Out Of The Box, 2020s Edition" financial education materials (introductory analysis link here). Our current reality is just starting 8 months earlier than the illustration, and it is occurring faster and on a larger scale.


The Federal Reserve was already unable to unwind its monetary creation that was used to contain the damage from the Financial Crisis of 2008, as explored in Chapter 8 and as can be seen in the blue area. The Federal Reserve has since September of 2019 been effectively funding 100% of the growth in the U.S. national debt through monetary creation, as explored in Chapter 18 and shown in the orange area.


After knowing that slamming interest rates down to zero percent would prove inadequate, for the reasons explored in Chapter 4, the Fed would necessarily resort to massive Treasury purchases in the attempt to contain a new recession, funded by monetary creation for lack of alternatives, as shown in the yellow area above and explored in Chapters 8 and 13.


The funding of unprecedented government stimulus programs by monetary creation on a massive scale was always in the cards, as shown in the red area and covered in DVD #4 of the set. The only source of funding for the cashing out of the Social Security trust funds being that of monetary creation by the Fed was also always in the cards as shown in the purple area and as also explored in DVD #4 of the set. The eventual catastrophic conflict involved in using up the limited resource of reserves based monetary creation for fighting recessions, and thereby quite predictably depleting the money needed to cash out the Social Security trust funds and pay future Social Security payments in full, was also more or less inevitable. The cost of the shutdowns has just increased the size of the conflict while bringing it forward in time.


To be clear, the coronavirus pandemic and the economic shutdowns were each complete wild cards, with no possible way to predict them.


But it's not just the pandemic. The shutdowns and wild increases in the national debt are not hitting an ordinary economy, ordinary markets or ordinary government debt levels. The U.S. economy and financial markets were already based on the fragile and unprecedented foundation of a reliance on monetary creation, that has always been there in the aftermath of the Financial Crisis of 2008.





As explored in chapters including 1, 3, 5, 7, 9, 10, 11, 12, 13, 14 and 15, stock, bond and housing prices over the 2010s were being determined not by historical normality, but the rather we were experiencing soothing, elevated asset prices produced by very low interest rates that were maintained and enforced by a form of monetary creation never used in the U.S. before October of 2008.





These elevated asset prices were already being endangered by the fast growth in the national debt, as explored in Chapter 18 (link here). The federal government could not get the money from banks and private investors to fund trillion dollar a year deficits without paying higher interest rates. Those higher interest rates would likely have collapsed the stock, bond and housing markets - the elevated asset prices were already in peril. In desperation and to keep markets high while keeping government spending going the Federal Reserve was already resorting to funding 100% of deficit spending through monetary creation - even before the pandemic hit - as shown in the graph above.


Decades of short term decisions by politicians to kick problems down the road were already coming together in the 2020s between the growth in the national debt, the dependence of the financial markets on artificially low interest rates maintained via monetary creation by the Fed, and the looming dependence of Social Security on empty "trust funds" where the money paid in had already been spent by politicians many years ago, and trillions in new borrowing would be the only way to get the money to pay retirees.


It was this already weak and heavily stressed situation that the pandemic slammed into like a tsunami. Even before the shutdowns, a cornered federal government could not get the a trillion a year (or at least not at very low interest rates) without getting the Fed to create it. So, when we look at these staggering additional trillions in government spending that the nation and economy are dependent upon because of the shutdown decisions - that money is simply not there, and is not even remotely available by any natural means.


This then means that the U.S. economy, investment markets and the future viability of such programs as Social Security have become utterly dependent on an ever more unnatural and extreme experiment with the nature of money itself. This is not remotely normal - and it won't go away either. The national debt usually only goes one direction - upwards.





If we start with the planned cumulative deficits for the 2020s from before the pandemic, and stack on what is now looking like a quite conservative projection for increased U.S. government spending, we are likely looking at adding $20+ trillion to the national debt in the 2020s, effectively doubling it. What is being spent at such a frantic pace in the space of a few months - is in no way free, but will be there for all of us, for the rest of our lives, in the form of a crushing level of debt to be serviced by the entire nation.


The Federal Reserve knew full well starting in 2008 that when it began its unprecedented experiment of using monetary creation to directly intervene in the markets, that one likely result would be unnaturally elevated asset prices. It didn't have an exit plan. It tried an exit anyway in 2017 and 2018, and nearly brought the markets down in 2018 before backing off.





So when we look at the fantastic rate of growth in what is funded in government deficit spending and in the markets by just creating the money - it too is a one way street, that is likely to be there and stronger every year for the rest of our lives (absent a reset event such as a high rate of inflation).


Part of the premise behind this book, started well before the pandemic, was to provide a framework, as shown below, and help people better understand why stock, bond, home and gold prices were all being profoundly changed by what the Federal Reserve was doing, and what was happening with the national debt.





(More information on the framework can be found in Chapter 1, link here.)


The way stock, bond, housing and gold prices work is changing for the rest of our lives, starting in 2020.


One path is market meltdown and monetary reset. This possibility is shown in Column A, and would include a secular bear market with major losses to retirement accounts, inflation destroying most of the value of money, and likely an economic depression to go along with it. That may sound a bit extreme, but we are living history right now in terms of both a pandemic and a record - government ordered - collapse of the economy and employment.


However, that is not the only possibility and the point behind the fantastic increase in the national debt and the even more fantastic increase in monetary creation is to keep the economic and market collapse from happening. But - the measures deployed won't be temporary events. If they work, they will be there for a very long time, and they are likely to dominate money, interest rates and investment prices for the rest of our lives, as well as the ability of the nation to pay for Social Security and medical care.


If the current crisis is successfully contained, stock prices will be dominated to an unprecedented extent by the distorting effects of how that containment is achieved, possibly for the rest of our lives.


The same will be true of bonds. The same will be true of home prices. The same will be true of gold prices (though in a quite different way).


As many of us sit in our homes and socially distance - the financial and economic world we had in December of 2019 is already long gone. We are in the midst of the fantastic and the unprecedented - and there is no reasonable path back to where we were in the 2010s, let alone the decades before which were not dominated by monetary creation.


There will still be opportunities and there will still be risks. But the specifics of where they are, why they exist and how to identify them are likely to be quite different.
 

ErrosionOfAccord

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I won't put my money where my mouth is but I still think we see $100 bbl oil if the economy gets restarted.
 

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just like we were speaking to earlier,

the May contract went off the board, and Jun is now the active front,
with oil prices jumping up to that level

so oil is now at over $25 front month from the prior $20 yesterday
 

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A while back someone was touting China's push to send up a series of 5G satellites so they could be the premier provider for global internet. They would also use it to spy on whoever uses their system. Right now, the only thing that can come close to their ambition is the U.S. military ring of global communications satellites.
 

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no surprise this evening as oil prices front month continue to slide now, as the Jun contract replaces the expired May that was at under 20

I couldn't take the short trade with the economy possibly being reopened along with a supposed deal in supply contraction

it will probably sink towards 20 and recreate that 10 buck spread 2 months out, as the market awaits more bullish demand numbers
 
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Pyramid

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Who's looking to buy oil now or soon at a predetermined price point?

What vehicle might you use to do so? I'm looking for an ETF and/or stock...I'm too dumb for options.

Thanx!
 

Scorpio

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Pyr

I am going in with futures when I see what I want, and I am looking for sub 20 near term contract
 

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MAY CONTRACT

CLK20 (May '20)
LAST -38.16
CHANGE -56.43

OPEN 17.73 HIGH 17.85 LOW -40.32 PREVIOUS 18.27
VOLUME 151,310
OPEN INTEREST 108,593
TIME 14:33 CT

Note the open interest, still 108,000 contracts to resolve with 151K causing all this damage
 

Strawboss

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So if someone is holding contracts on the long side - they are obligated to take delivery no matter what...and since prices are below zero - they are on the hook for whatever the amount is?

And since no one wants to buy them - the holders of the longs have to give whatever incentive is necessary in order to not be left holding the bag when the settlement period is up.

Is my understanding of the pricing mechanics of this reasonably accurate?
 

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The now active Jun contract is down 3.64 today to 21.39,

but it did have a low of 20.19,
did not hit my target as of yet,

will see if it even does,
bad supply numbers tues/weds could be the impetus to take that one towards cash at 18

so we wait
 

JayDubya

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The next giant industry in need of a bailout

Well this is starting to become a trend.

Over the past few weeks, state governments across the Land of the Free have been feverishly proposing new legislation that will virtually guarantee the entire insurance industry is wiped out.

The root of the issue has to do with something called business interruption insurance.

Business interruption is a pretty common type of insurance that’s designed to protect business owners against a number of risks.

For example, let’s say you own a restaurant and you have a bad kitchen fire that forces you to shut down for a month.

You’d most likely have a fire insurance policy to cover the direct damage of the fire. And a lot of companies would also have a business interruption policy to help them stay afloat during that one-month period while the business is closed for repairs.

But business interruption insurance has certain exclusions. It’s just like any other policy, and the insurers are very clear about what risks they do/do not cover.

A typical homeowner’s insurance policy, for example, covers your home against risks like theft, fire, and vandalism.

But most homeowner’s policies specifically exclude flooding. So any homeowner who wants to protect their homes from the risk of flood damage can purchase a separate flood insurance policy.

Many insurance plans, including business interruption policies, also tend to exclude things like damage caused by war, government action, and “acts of God”.

But again, any business that wants to insure against those risks is free to seek additional coverage.

That’s the whole idea of insurance: customers are able to pick and choose which risks they want to insure against, and which risks they’re willing to take.

It’s fair to say that most business interruption policies don’t cover a worldwide pandemic that shuttered the entire global economy.

But there’s a growing trend now where state governments are proposing new legislation that would RETROACTIVELY force insurance companies to protect their policyholders against Covid.

This is totally nuts. The state governments are the ones that forced businesses to shut down.

Now they expect the insurance companies to pay for the consequences, even though the policies specifically state that they don’t cover this type of risk.

They might as well demand pay for every other uninsured hazard. Did your house flood and you didn’t have flood insurance? Well let’s retroactively force the insurance companies to pay for that too.

Pennsylvania, New York, Illinois, New Jersey, and several other states have proposed similar legislation, or threatened regulatory action.

(This trend is also picking up steam overseas; in the UK, for example, lawsuits are already pending against insurance companies for not paying out Covid-related claims.)

And given that just about EVERY business would qualify for this retroactive Covid coverage, there’s simply no way that the insurance industry would be able to afford such an indemnity.

Think about it-- the federal government made $350 billion worth of loans available to small businesses earlier this month, and that money was 100% used up in about 2 weeks. And they just agreed on another $300 billion this morning.

So most insurance companies would be wiped out if this legislation passes… i.e. CUE THE GOVERNMENT BAILOUT of the insurance industry.

Just like airlines, hotels, hospitals, etc., the insurance company would be standing in line to suckle on that sweet taxpayer bailout teet, probably to the tune of another half-trillion dollars.

Of course, it goes without saying that the government doesn’t have the money for any this.

We’ve explored the government balance sheet many times in the past: Uncle Sam is already in the hole by MINUS $23 trillion according to the Treasury Department’s most recent financial statements.

And, over the last few years, even when the economy was incredibly strong, the federal government still managed to lose more than a trillion dollars a year.

Now that they have a real crisis to contend with, the deficit is going to swell to an unimaginable figure.

Frankly it doesn’t matter whether or not the insurance companies end up footing the bill.

If the insurance companies are forced to pay up, the government will likely bail them out. Otherwise the government will bail out businesses directly.

Either way, it’s pretty obvious the government is going to spend an unbelievable amount of money they don’t have… which means the central bank (Federal Reserve) will keep printing more money.

That’s how the system works: whenever the government wants to bail someone out, the Federal Reserve first conjures the bailout money out of thin air, and then ‘loans’ it to the Treasury Department.

Crazy, right?

The Federal Reserve has already printed trillions of dollars since this crisis started, and that may only be the warm-up round.

The longer this lasts, the more money they’re going to print… and the more they’ll end up debasing the currency.

We are obviously living in extraordinary times, and it’s perfectly reasonable to hope for the best.

But it would be irresponsible to willfully ignore what the government and central bank are doing here.

Conjuring infinite amounts of money out of thin air could have incredibly destructive consequences on the currency.

And that’s why, as I’ve written before, it’s definitely time to consider owning some real assets.

To your freedom,



Simon Black,
 

Scorpio

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But there’s a growing trend now where state governments are proposing new legislation that would RETROACTIVELY force insurance companies to protect their policyholders against Covid.

This is totally nuts. The state governments are the ones that forced businesses to shut down.

Now they expect the insurance companies to pay for the consequences, even though the policies specifically state that they don’t cover this type of risk.
yes, totally nuts

and clearly beyond the scope of any insurance policy,
that clause, 'acts of god' would in fact qualify it, as it is all encompassing 'other events' and could be ruled as such

insur companies all have 'terrorism' exclusions also, for this very reason,

they cannot quantify all possible outcomes, nor can they be expected to,
and this one is certainly out of their scope
 

Scorpio

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madhu,

If he can say this,
-------------
If government had speedily and efficiently exercised such responsible and forthright leadership, in place of launching an irrational panic, we could have controlled the outbreak of the virus, preserved our economic and personal well-being, retained our freedoms and placed ourselves in a good position from which to recover from the relatively mild disruption.


Instead, panic was chosen. The resulting economic crisis is completely man-made.


----------------

then he needs to make the leap in logic that maybe it wasn't taking advantage of a situation, but the situation was actually caused or instigated by them to achieve x result

then he states this:
---------------
The Federal Reserve Bank, as the issuer of the global reserve currency, and its associated global central banks, have unilaterally granted themselves the power to issue any amount of currency.
------------

which is torturing the term 'currency' as it isn't currency issuance at all,
 

Uglytruth

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then he needs to make the leap in logic that maybe it wasn't taking advantage of a situation, but the situation was actually caused or instigated by them to achieve x result
Who took advantage? Libs (print forever to fund our global social problems) or fed (we got this & you are our slaves) Trump (when I owe you $100 I have a problem when I owe you 30T you got a problem) or ds (digital chipped tracking knower of all things) or?
 

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this am we wake up to the Jun contract, now front month getting the hammer,

passed 20 on a drive by shooting without even slowing down and headed to a low in the 11's

currently 16.22 and down 4.21

also acting real squirrely, bid/ask are really moving around as the stability is long gone

and to add, metals also getting the hammer as gold and silver take one square on the chin
 

Scorpio

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sauds and opec calling emergency conference call because of todays drops in the now front Jun and the out months,

now noise is coming that saud oil is going to immediately cut production, rather than as announced a couple of weeks from now
 

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I stated yesterday tramp should be on the phone to the fed telling them to buy up this oil,

supposedly now apparently he has called the treas sec and mnuchin and told them to find the funds to do exactly that