Policy Error Or On Purpose?

Posted at 12:24 PM (CST) by & filed under Bill Holter.

Dear CIGAs,

Before getting to the real point of the title “Policy error or on purpose?”, it needs to be pointed out the entire financial system is a “policy error”. We live in a world where even the real economy is increasingly run via central planning. As for the financial side of the coin, central planning has taken on an Alice in Wonderland hue. Whether it be the suspension of mark to market, markets entirely managed and “priced” by force, debt by definition needing to expand or the central banks need for continual asset inflation …they all have ramifications. What I am alluding to is the law of unintended consequences in relation to bad policy.

Now, we hear day after day the Fed will raise rates by a quarter percent and are assured “this is a good thing”. Well yes, in normal times when a central bank raises interest rates it means the underlying economy is strong and inflation (monetary growth) needs to be cooled off. This is obviously not the case today and has not been for most of the last seven years. We have been inundated with “negative surprises” and an economy only limping along.

The latest illustration of a weak economy being this:


The obvious needs to be pointed out here. The last two times we had a recession (and EVERY recession prior), the Fed lowered rates or added liquidity into the system. They did this to aid and jumpstart the economy. Can you imagine the Fed talking about raising rates while ENTERING a recession? This is exactly what is happening! The only other time since 1913 where the Fed actually tightened during a business recession was 1937. The tightening collapsed the markets and the economy turned down further. Please keep in mind no matter what Keynesians or Monetarists tell you, the global and U.S. economies were in recession/depression until the first shots of World War II were fired. No one knows what would have happened had there not been a war but I think it is safe to say the real economy would have languished much longer along with the financial markets.

The above said, I am having a hard time understanding what exactly the Fed and Ole Yeller are thinking? Board governors including the chair are continually talking about “how strong” the economy is. Are they looking at the same reports we are? If they are looking at the same data, they are either mentally impaired or flat out lying when they say they “see strength”. Mrs. Yellen made the comment “we need to raise rates now so we will have something to respond with should the need arise”. Really? A quarter point? A quarter point “response” is .22 caliber when a bazooka is needed and will probably fail! However, a quarter point move up is huge in relation to nearly zero, a discussion of what a rate hike can be read here http://www.zerohedge.com/news/2015-12-03/its-just-025-rate-hike-whats-big-deal-here-stunning-answer Please understand this, a solvency problem was treated with massive doses of liquidity. Now, seven years later the solvency problem is far worse and the Fed wants to pull liquidity?

The Fed has built and presided over the biggest credit bubble in the history of history. Liquidity simply cannot be pulled and rates CANNOT be raised now without affecting the mountain of outstanding credit (and derivatives). We already have an unsustainable economy and financial markets walking a tightrope, raising interest rates will simply push them both off balance. I have to say in my opinion, if the Fed raises rates here they are purposely pulling the plug on the system. Will we be the recipient of some sort of false flag they point at and say their policy would have worked if not for …whatever? They must come up with some sort of “reason” not to raise rates or they will be de facto pushing the big red button on the financial system!

We also heard Mario Draghi speak this morning and disappoint with a mere 10 basis point cut further into the “negative”. Europe is clearly collapsing, their idiocy of allowing refugees to further suck on what little life is left is mindboggling. Higher rates in the U.S. and negative rates in Europe should add to an already overpriced dollar. Whatever trade the U.S. has left will only be further injured with a higher dollar.

That said, it is important to understand the “USDX” index compares fiat currencies with each other. Whether the dollar goes to .56 or 1.56 is a measure of fiats versus each other. It is this area where I have disagreed somewhat with my partner Jim Sinclair in the past but I believe he sees my point now. The inverse relationship of the dollar and gold has held for many years but we are now in the “end game”. This relationship worked when it was about “strength and weakness”. I believe we are about to enter the realm of “existence or non existence”, I will explain this in a moment.

I believe “they know”. They know we are approaching a critical point where the debt load will have completely taken over and the only way to pay is to hyperinflate. They know there is little to no unencumbered collateral left and their efforts at reflation after 2008 have failed. I also believe they know the rig on markets cannot be held much longer and that the gold supply which has supported excess demand of 2,000 tons per year is about to run out. It will be at this point a complete cleansing of the system will take place where some currencies even disappear. Could the dollar go to 1.56 and the Euro collapse or even be disbanded in a financial meltdown? I believe it could. Would a strong dollar versus other fiat currencies mean “stuff” got cheaper for Americans? Not necessarily. This could and in my opinion will coincide with a reset of “stuff” versus ALL currencies and we may be there now. The dollar would simply hyperinflate “less” or might continue to exist versus a currency that failed and went away.

Breaking this down a little further and I guess in essence “denting” the deflationist case, much of the debt itself will be downgraded or even wiped out. When there is too much debt in the first place, history shows much of it will get wiped out. The problem is this, whether you are talking about dollars, euros, pounds or yen …you are speaking of a “debt currency”. ALL of these currencies are in fact themselves DEBT! A big part of the problem is much of this debt is now “sovereign” debt. The stronger dollar is exposing other sovereigns to the fact of over indebtedness, (think Brazil currently). All it will take is one sovereign of any size to go upside down to start a domino effect. When the debt implosion comes, all of these currencies including (and ESPECIALLY) the dollar will be devalued lower. Think of it this way, these fiat currencies were worthless the day they were created except for confidence value. Now, years and trillions of more debt later they are worth even less and the years of public largesse has eroded the original confidence. Can the dollar be a grossly better currency than the euro while at the same time be a basket case in its own right?

The answer of course is “yes”. Please remember this because it is the absolute systemic root, today’s dollar is not the dollar of the 1930’s. That decade started off with the dollar and gold being interchangeable. Contrary to Martin Armstrong’s claim that gold was “devalued”, the fact remains it was the dollar which devalued from $20.67 required to purchase an ounce of gold to $35. The world had too much debt back then and is the closest thing to resembling where we are now, do you expect a different result? Today, the dollar and gold are the absolute opposites of each other rather than being tied like they were at the start of the Great Depression. Do you really believe the currency issued by a bankrupt country with a bankrupt central bank will be revalued higher during the “bankruptcy proceedings”? Credit gets eradicated in depressions and “money” becomes dear. You need to decide for yourself what “money” truly is. JP Morgan clearly knew when he said “Gold is money, everything else is credit”. The system we live in today is almost entirely credit with no “money” supporting it, the policy error and collapse will be breathtaking!

Standing watch,

Bill Holter
HolterSinclair collaboration
Comments welcome bholter@hotmail.com