Since 1989 we have witnessed the greatest orgy of monetary aggregate creation and fiscal profligacy in recorded history. The major part of the credit goes to Sir Alan Greenspan, with strong assists to several administrations, Congress, Wall Street, our banking and insurance committees and a host of other elitists. What they have done will provide negative ramifications for years to come.
It is impossible to have perpetual unrestrained expansions of this nature. The thousands of times it has been attempted in the past have resulted in failure. Why the elitists would think that this time it would be different is beyond us? These parties all affect the financial sector in its unrestrained expansion, a basically limitless capacity to create money and credit and derivatives to fund output and the asset markets. This expansion creates the extraordinary capacity to satisfy heightened borrowing demands without the normal corresponding increase of the cost of finance. We see this via unbelievably low interest rates and perpetual growth of credit at some 15% a year. You have the ABS market up 185% in seven years to $2.9 trillion, while MBS doubles to $3.5 trillion. GSE assets (Fannie and Freddie) increased 160% to $2.9 trillion. Broker-dealer assets have risen 135% to $1.8 trillion, as repurchase agreements (the Fed) now exceed $3.3 trillion, as derivative positions reach $270 trillion and hedge funds surpass $1 trillion. A vast casino of ever-growing financial instruments. Total US mortgage debt has doubled in those seven years to $10.5 trillion, which is backed by collateral, which is overvalued by 30 to 60%. This extreme leverage will become a critical factor as the inevitable downside commences. It is not different this time, no matter what Wall Street, the Fed, your government and CNBC tells you. Low-cost variable rate home equity loans, which by the way is what fueled the boom in the 1920s, are packaged in an ABS pool, sold to hedge fund financing the instrument in the low-cost repo market. The hedge funds taking the most profitable and the most dangerous sections in order to maximize levered returns.
In just the past 18 months global central bank reserve assets have inflated by about $1 trillion to over $3.8 trillion. Asian central bank foreign reserves have more than doubled in just the last three years to $2.3 trillion. This is part of what is financing not only the inflationary boom but also the debt of the US government. This has resulted in monetary disorder, international currency instability and unprecedented global imbalances. We now are seeing real market interest rates falling due to a flight to quality. Gold, silver, commodities and bonds, all safe havens, got full attention this past week. The purchase of these vehicles is so pronounced that even the Fed and the Working Group on Financial Markets could not restrain them. They were too busy trying to keep the popular averages from collapsing. In addition, in a totally unexpected event, the inhabitants of France and Holland finally told the elitists to take a hike setting back their plans for world domination by 20 or more years. The message is that we do not want world government; we want sound economic and financial policies. We have known for a long time what the elitists have been doing and we are sick of it and we want it to stop. We will destroy the EU and the euro if that is what it takes to get your attention. The falling dollar is in worse condition than it has ever been. The Europeans are in a recession. Free trade, globalization and open borders are killing us and rising energy prices are intolerable. If the euro dies, and the dollar is not worth having, the only alternative is gold, the only real money. In fact a weaker euro, engineered by the central banks, has forced interest rates lower and gold higher, as professionals search for relative safety. The markets are speaking to us loud and clear, as are the citizens of France and Holland. Something is dramatically wrong. This past week gold, silver, bonds, the market and commodities moved higher, particularly oil. Copper hit a 16-year high. With the exception of the market, which is totally rigged, all those gains went to investments of safety. You are witnessing a major turn of events in the financial world as the world economy begins its slide among increasing inflation. The flight to bonds in particular, which will drive down yields and the cost of money further, will postpone the slide in the US and world economy. It will tend to delay the bursting of the housing bubble and keep construction going, allowing further equity extraction, and continue the fallacy of perceived wealth. As we said last week and forecast last fall that wages would eventually rise is now happening and that is very inflationary. The Fed will raise rates again but that will not have any affect because real rates are lower and they probably will fall even lower as investors seek safety. If you add in higher oil and commodity prices with wages and what inflation you already have presently, you have a major problem. This could easily be exacerbated by dollar sales by any of the large holders and it probably will be. We are now on the brink of monetary disorder. The spring is about to snap and the Fed is deliberately out to lunch. They are going to find control is now beyond their abilities.