Last week I mentioned that the central banks are battling world delevering with what I estimate to be $30 trillion worth (using USD measure) of financial backing to banks and insurance companies and brokerages to battle the delevering happening since the beginning of this great financial crash which started in 2007 with Bear Stearns. Funny because I worked as a security guard in one of those places when I was studying math and history at UCLA...around 1984.
Well...I am making some observations. These are mainly based on my work as a gold and currency analyst for my newsletter PrudentSquirrel 30 years later, and I am looking back in time. This will all relate to the Greenspan Gambit.
I remember seeing these lucite plastic cubes with minature ads proclaiming their latest hundred million dollar deals on their desks. Clearly those were trophies. This stuff is well known and they display them on their desks. Or they used to do that, in the 1980s.
Financialization of the entire economy
Fundamentally what these people did was to financialize everything, or to take all goods and services and companies and capitalize them (this means to take the income each year and compare it to a bond with an interest rate say of 5%) and then sell everything as a security or stock or bond or whatever. The entire US economy at this time was securitized, and the basic form of that was enhanced greatly since 1980 to the present. I have to use a very broad brush here to keep this from being a long piece.
At the same time, money and savings were being accumulated by the baby boomers, and at the same time the stock industry promoted everything, particularly tax deferred investment accounts, and promoted investment in the US stock market.
So as everything in the US was securitized, right after the gold crash from around 1980, when it was $870, an entirely new paradigm was created. To securitize every economic producing activity and to buy it up and aggregate it. Greenspan knew there would be an end to this party. He stated that he wanted to be the US Fed Chief when the next great depression came because he thought he could beat it.
As long as the baby boomers continued working and saving this growth and securitization model worked. Of course we had the usual recessions and so on.
The US even continued in its technical innovation, and we had the Tech Boom concentrating on first the personal computers, then the internet (networking build out) and that also combined with information machines called databases where huge collections of information about whatever you wanted to focus on would be possible...This created new unimaginable wealth.
The information revolution speeded up three things
- It speeded up wealth aggregation
- It speeded up globalization
- It speeded up securitization
Now we get to the Greenspan Gambit
So with technical innovation came also a great increase in the virtual representation of all productive activity... through securitization.
A gigantic world economic boom began lasting from roughly 1983 to 2001 and the tech crash, followed by a speculation and housing boom from 2002 roughly to 2006.
(Sorry if this is really general but I am broad brushing this)
When the tech crash came, the principle of the Greenspan Gambit came into focus. It was to use the US central bank to monetize the losses of the banks and financial sector to prevent a great economic depression as I understand it. The US cut interest rates to very low levels. This was the first step. This caused the home finance boom and home bubble in the US.
This caused this housing bubble which broke in 2005/6 in the US.
They used ultra-cheap central bank money to try and recover from the tech crash and caused a larger bubble the housing and commercial real estate bubble. Interest rates just before this time were about 6%.
Securitization of everything continues, especially with Tech boom capability
In the meantime, all the securitization of all productive (income producing) activity in the US, which started around 1980, continued apace. This was typically called the Financialization boom.
Also the continuation of 'globalism' and exporting US production and jobs overseas.
Housing bubble collapse is the beginning of the great collapse
Once the housing bubble collapsed, the US Fed was faced with unprecedented bank crises around the world. It started to basically buy up or guarantee all bad debts of first US banks, in the Lehman crash in 2008, and also the Bear crash the year before in 2007. Then the US found itself having to back up other world banks in Europe and so on.
The Greenspan Gambit I believe (which is not clearly publicized) was to monetize whatever markets were necessary when they crashed to avert an economic depression. At first we heard it was to be $800 billion dollars in the Tarp plan amidst great debate. This sort of approach has now become for the US alone to be what I estimate to be $20 trillion dollars in purchases of dubious bad securitized debt, securities, etc. bank guarantees, currency swaps, CDS,etc. In a basic sense the risk and losses were transferred to the US currency in principle and the US public in the increased national debt. The perpetrators of all this securitization of the US economy were bailed out.
In a few years since the beginning of this mess with Bear in 2007 and Lehman in 2008, the US has either bought, guaranteed or did currency swaps estimated to be $20 trillion dollars, using the Greenspan Gambit to use the presumably unlimited power of the US Fed and US treasury to basically monetize all bad debts. BUT...
It was only the bad debts of the banking system. The public was not bailed out. Rather they were borrowed against. The US student loans out are crushing our young people. It's a mere $1 trillion compared to the $20 trillion the US put up backing the world bank system. The entire US mortgage debt of around $14 trillion could have been paid off!.
So far, the Greenspan Gambit, which I assume Bernanke is implementing, and I could be wrong, has cost the US $20 trillion in various commitments. And all we got out of this was a horizontal to down US stock market. A collapsed US housing market. And a collapsing US middle class.
Gambit causes US national debt to explode in a few years
The US national debt exploded from very roughly, $7 trillion (various estimates) around 2005 to now $15 trillion. That is direct borrowing. The other amount of the $20 trillion is hypothecated debt and promises which we will end up paying one way or another.
The Greenspan Gambit has failed.
Gold will explode at some point
At some point, gold will explode. But first, the US and the rest of the world is facing debt deflation. And we have not seen the real effect yet. Just wait till corporate earnings start to fail this year. We are at risk of a major world stock crash.
Ironically, things like gold and metal stocks sell off at first in these situations. If that happens. That is so the mega funds can cover margin calls on other things. Gold is like cash to them.
In the meantime, until the Fed fires its last bullets, QE3,4,5 etc, the US will continue supporting the world banking system losses of all types, and the EU as well, until the US treasury is unable to borrow anymore. That will be a fateful time. The other central banks are also doing the same thing. We are all on borrowed time for this present world as we know it.
Gold and Cash
In the US, gold miners like Homestake did well in the Great Depression of the 1930s, while the stock markets were trashed. I would think this will recurre. But first we will probably see a massive world stock crash, once they all realize earnings in the West are falling through the floor, and sovereign debts are going bad. In the meantime, it seems cash and some reasonably measured gold and gold stock positions are the safest bet, aside from also buying up real assets for cash (paid off). But as I have stated before, we are first in a debt deflationary environment, and metals and especially general commodities will suffer in the first crashes. But later they will be probably one of the few havens left.
(Let me explain. Funds and such use gold and metal stocks as sort of cash reserves. So when stocks crash, they sell these to cover margins on other stocks, and at first metals crash in stock crashes.)
Gold USD and Euro
At some point the USD will pay for all this, in the bond markets. Gold at that time will explode. The same would go for the Euro, which is closer to the abyss. We might see both gold and the USD rise together for a while in that scenario. Interesting times...
There is more to say, and we at PrudentSquirrel track gold, and currencies and commodities, with a generally weekly in depth newsletter and you can stop by and have a look at www.PrudentSquirrel.com .
Anyway, we forecast gold to range from $1500 to $2000 for 2012 back in Winter 2011, and have been right. We also caught the last gold price collapse from near $1800 this year by two days warning subscribers. We also predicted the USD rally last year April 25, 2011 by about one or two weeks' notice and no one I know of did that. We also predicted in Summer 2011 the great general commodity crash.
Editor in Chief
Disclaimer: Chris Laird is not an investment advisor/professional. This article, and the PrudentSquirrel newsletter and alerts, are general market commentary only. They are not intended as specific advice. You should talk to your own investment professionals for specific advice. Information here is deemed reliable but should be verified by you if you think it's important.