The System Is Terminally Broken

This is a world where nothing is solved. Someone once told me, ‘Time is a flat circle.’ Everything we’ve ever done or will do, we’re gonna do over and over and over again.  – Nic Pizzalotto, “True Detective”

The Fed has formally “ended” QE, but it hasn’t really.  The Fed will continue reinvesting interest on its portfolio in more bonds and it will rollover maturities.  We saw what happens to the stock market a few weeks ago when Fed official James Bullard asserted that the Fed needs to start raising rates:   the S&P 500 quickly dropped 8%.  Right at the bottom of the drop, the very same Bullard issued a statement suggesting that QE should be extended.  This triggered an insanely abrupt “V” move back up to a new record high for the S&P 500.  Bullard either did this intentionally or is a complete idiot.

The stock market can’t function without Federal Reserve intervention.  The stock market lost 8% quickly on just the thought that the Fed might start raising rates.  Imagine what would happen if the Fed decided to “experiment” by shutting down its market intervention operations – both verbal and physical – for a month…

As for QE, if the Fed has achieved its objective of stimulating the economy, why doesn’t it start removing the $2.6 trillion of liquidity that it has injected into its member banks (LINK)?  This was money that was supposed to be directed at the economy.  How come it’s sitting on bank balance sheets earning .25% interest?  That’s $6.5 billion in free interest the Fed continues to inject into the Too Big To Fail banks.  But why?  What would happen if the Fed decided to “experiment” by removing this massive dead-pool of money from the banks?  The money isn’t really “dead,” it’s keeping the banks from collapsing.

I’m interested to watch the Government Treasury bond auctions now that the Fed is not there to soak up anywhere from 50-100% of each issue.  I wonder if the banks will be moving their $2.6 trillion in Excess Reserves into new Treasury issuance.  Obama is going around broadcasting the lie that the Government’s spending deficit in FY 2014 was something like $600 billion.  Yet, the amount of new Treasury bonds issued increased by $1  trillion over the same period.  Either Obama is lying or the accountants at the Treasury committed a big typo.  Either the Fed has found a way to continue opaquely monetizing new Government debt issuance, or the market is soon going to force U.S. interest rates up much higher.

By continuously intervening in all of the markets, the Fed has destroyed the information transmission system that is built into freely trading markets.  If the Fed left the gold market alone – instead of hammering away with the naked shorting of Comex paper gold – the price of gold would be significantly higher than where it is now.  This would be the market’s signal that our system is indeed terminally broken.

Instead, the Fed keeps interest rates artificially low in hopes of stimulating a recovery in consumption and housing. But if this is working, how come the country’s two largest retailers have begun Black Friday shopping discounts on November 3rd (LINK)?  And the Fed keeps pushing stocks higher to  new record highs in order to “stimulate” confidence and faith in the system.  The fact that the stock market craps its pants when the Fed steps away for a split-second tells us just how broken this transmission mechanism is.  That 8% drop 4 weeks ago is the real signal that our system is terminally broken.

And now it’s emerging that the Q3 GDP report was greatly inflated by a statistical error which erroneously boosted the Government spending component.  It was this component that juiced the GDP report because residential investment (housing) and personal expenditures (consumption) both tanked.    Imagine that – a statistical error artificially boosted the GDP report right before a national election…

A colleague of mine has concluded that the QE infinity policy implemented Friday in Japan is the market’s signal that the entire western fiat system is getting close to imploding.  I’m inclined to agree with him.  Wall Street, the financial media and politicians are pointing at Europe and Japan as the source of the problems.   But the heart and nerve center of the western fiat currency/debt Ponzi scheme is right under our nose in this country.   The U.S. financial system is in worse shape than both Japan and Europe.  The only difference is that the U.S. officials do a much better job hiding these problems.

Time is starting to run out for ability of the U.S. to keep kicking the can of collapse down the road.  I really believe that the full-on intensity of the recent intervention in the precious metals market is the most obvious signal of time expiring.  China has been accumulating physical gold at a stunning rate and now some research indicates that China’s Central Bank may have accumulated significantly more gold than anyone previously thought (LINK).   China has most likely maneuvered itself into owning the world’s largest stock of gold, which is where the U.S. had positioned itself after WW2.   China has done this to a large degree by buying massive quantities of western Central Bank gold.



14 thoughts on “The System Is Terminally Broken


    How long will Europe, China and the US stand idly by as Japan institutes a “beggar thy neighbor” (bugger thy neighbor, is more like it) monetary policy which, aside from inevitably destroying the Japanese economy itself, will export deflation? First Fukushima and now the nuclear option of monetizing absolutely everything. Looks like payback for Hiroshima, to me.

  2. Maybe there are people who realize they can stop WW3 because they’d be the front line soldiers.
    Maybe they have been planning to pay the soldiers with worthless chits.
    Maybe there are some who won’t die cold, broke and hungry that way.
    Maybe China’s massive REAL gold holdings (vs reported) will, like Russia’s underestimated reserves and BRICS+, carry enough weight to deter WW3 as well.
    Maybe the US’s “deep storage gold” new moniker was to appease our creditors, like China, who have looked far into the future for signs of US creditworthiness and resource “viability”.
    On what terms do we fulfill our debts to newly acknowledged regulators who use international accounting standards and rules of law?

  3. Just a few random thoughts, take them all with a grain of salt-
    1. Russia, China and the rest of the world view the US as the bully on the block who owns a shotgun. No one but NO ONE wants to start a fight with him, that is why Russia and China both know that a war with the US means everybody loses. having considered that, both China and Russia play the soft power game, meaning they fight and win their battles without firing a shot, Russia won back Crimea China is winning the islands in the South china Sea. No shooting, just careful brinkmanship. Both Russia and China will let the US hang itself slowly over time while the BRICS nations slowly take over trade leaving the US marginalized. sound impossible? Well, the idea of the Soviet Union falling without a major war seemed impossible in the 1960’s and 1970’s.
    2. How long can this go on? How long did Japan endure deflation? Twenty years plus or so. expect the kick the can to go on because no one wants to open Pandora’s box and let loose the demons and horrors of hyperinflation. Whistle past the graveyard is the past time of the West nowadays.
    #. the Fed has to keep the stock market up to maintain the appearance all is well. When the stock market crashed in 1929 and the Great Depression hit, the Fed was powerless to stop it. Whatever measure they took was too little, too late. When the crash of 1987 hit, the Fed opened up the floodgates to try to prevent great Depression II, and it worked, in theory. The problem was traders expected the Fed or the government or somebody to ride to the rescue the next time it happened (this, of course led to the Plunge Protection Team.)

    So here we are today, the paper markets are inflated while the physical markets for commodities are being depressed, sadly, a crack up boom seems to be in our future. Maybe by studying the fate of other countries that went through this (such as South American countries) we can try to get an idea of what the future holds, though such a future doesn’t look good. The future will look somewhat brighter for those who set aside trade goods, supplies and money for a rainy day (and I mean hard money, use the fiat for tinder.)

  4. Stating that Bullard does not know what he is doing when he one week says interest rates must rise …… and then a week later suggested we need more QE. Au contraire mon ami !!! Actually he knows exactly what he is doing.

    The “V” that he produced in the Dow is exactly what he desires to produce. If you want to understand there intentions all you need to know about is Behavioral Finance. Lawrence Summers has told us that this is Fed doctrine.

    Behavioral Finance practiced by the Fed does not just reward dummies who blindly do what the Fed wants that is supportive of the dollar and punish those who vote against the dollar with gold or other hard assets… it also is used to mold behavior through repetition. For example the recent “V” produced in the stock market has this behavioral effect:

    1). They want as much market participation as possible.
    2). By engaging the peoples money in stocks they are less likely to look for alternatives like gold or other hard assets. They want you in the paper game.
    3). They get a lot of media pundits to say that we are headed for the rocks in the market.
    4). When the downward 8 % drop occurs, a lot of people who are risk adverse sell their stocks at the bottom or close to the bottom.
    5). The stock market rebounds back. This is all done with computers and then excuses for the movements in stocks are leaked into the markets by the owned media to explain what the computers did.
    6). The people that sold feel stupid for having their “fear” reflex get the better of them and then buy back into the market at higher prices.
    7). Their dumb friends that are impervious to the dangers and mispricing of risk throughout the system did not sell and therefore look smart.
    8). Next time the risk adverse will not react to a downward spike and be “smart” like there friends.
    9). Rinse and repeat until you have modified behavior such that the investor will stay put and be complacent no matter what world events transpire.
    10). Enough repetition of this behavior modification and even if a nuclear device goes off in a highly populated U.S. city – the average investor will watch the market go up and accept this as a normal reaction. The public will trust that the markets always recover and never want sell. Now they have really achieved what they want.

  5. Great blog Dave
    Good insight and well thought out articles but WE the true believers in your article have been dealt the largest blow!!

    Gold and silver have dropped back to 2010 levels and don’t even discuss the miners. Abysmal!
    Meanwhile the party rages on for those drinking the cool-aid!
    Keep up the fight but we are pushing shit up hill!

  6. I wonder how long China will wait and only look , because gold is going down and down. Another 1-3 years and West will buy Gold back for $200 with their paper manipulation power. China then will be stuck with US Treasury’s and very expensive Gold. How anybody can only look and do nothing , system is very sick and broken.
    Don’t wait for miracles.

  7. Currency swaps can also be used for liquidity injections to boost asset prices. A friend of mine snuck into the back of an IMF meeting in DC a few months ago and took notes. There’s now a lot of extra liquidity globally sloshing around via currency swaps and not the QE we are more familiar with…

  8. When America refuses to return GOLD, legally belonging to Germany, then we can expect extra new problems for the US financial market. As there is still no signed peace treaty (WWII) the Germans have no chance of ever recovering their GOLD and perhaps, like everything US, nothing will ever come of the GOLD lost in America.

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