In Jim Cook's Archive


By James R. Cook

Monumental crosscurrents may be at work in the bond market. The greatest financial maneuvering in history may be taking place at the Federal Reserve. The most explosive economic crisis ever known may be one policy blunder away. Incredible monetary damage may be on our doorstep. A financial earthquake of the severest magnitude may be inescapable.

Here’s the horrible scenario. A rise in interest rates carries two major perils. Highly leveraged bond buyers (with trillions borrowed) could panic for the exits if rates rise. This would collapse the bond market and send interest rates skyward. A rise in rates chokes off mortgage finance (and refi’s) which are a major source of consumer spending. An even bigger jump in interest costs buries homeowners, kills corporate profits, throttles consumers and blows out the federal deficit.

The Fed publicly endorses a rosy economic scenario these days, but what are they really thinking? Quite possibly they are doing everything in their power to hold down interest rates. In other words, they are buying bonds from the banks thereby flooding them with reserves to create new money (money expands through bank credit). They are monetizing government debt, which means they are creating new money to pay the bills. This and other maneuvers hold down rates but it’s no more than raw inflating that depreciates the currency and makes assets and goods appreciate against the dollar.

These powerful opposing forces (deflation and inflation) threaten economic stability and financial order. At any time this house of cards can fall apart, and cascading cross defaults spread wave after wave of bankruptcies that reach even the pinnacles of power.

Others have similar concerns. Analyst Clive Maund warns, “The U.S. economy has now become so distorted and abnormal, as a result of artificially low interest rates and the resultant across the board explosion of credit and pyramiding of derivatives, which have fueled asset bubbles, misallocation of resources and a continuation of massive consumption, that it has become perilously unstable and vulnerable, with the result that any significant rise in rates will lead to an economic implosion.”

Laurence Kotlikoff writes in Fortune Magazine, “When investors around the world wake up to U.S. insolvency, it will be extremely expensive for our government to borrow. The only option then will be printing huge sums of money – generating exactly the hyperinflation the bond market has decided to expect.”

Economist Kurt Richebacher advises, “There is much agonizing whether and when the Greenspan Fed will raise interest rates to fight inflation. Several Fed members were quick to emphasize in public their determination to act, if necessary. For us, all this is empty talk. Today’s Fed will never ‘take the punch bowl away,’ because the risk of shattering the extremely vulnerable bond market is far too big.

“In the absence of true savings, and no new savings, this market is completely built on leveraging. The typically practiced leverage of 20 to 1 requires just 5% equity. But a fall in bond prices by that tiny ratio would wipe out the players’ equity on trillions of dollars of bond holdings in carry trade. In actual fact, this almost happened during the last few weeks, with the benchmark 10-year Treasury yield abruptly jumping 75 basis points to 4.4%.

“Reacting so quickly and sharply to stronger economic data and higher inflation rates for March testifies, of course, to the market’s enormous vulnerability – a $22 trillion market, by the way. We have no doubt that ‘they’ massively intervened in the futures markets to prevent worse. To note, the biggest players are banks and hedge funds.”

Investment advisor Richard Benson writes, “Alan Greenspan has encouraged new credit creation primarily through the borrowing against single family homes to levels that, just a few years ago, could not be contemplated. Currently, our financial system has at least $2 Trillion of mortgages directly financed at 1 percent with Fed Funds and REPO, and the financial system including banks, Wall Street, the GSEs and hedge funds, puts total leveraged finance closer to $10 Trillion. Everything is financed with almost no money down and anyone can get credit. Take a moment to examine the terms you can get today on a new car or home, a mortgage, treasury to junk bonds, commodities and foreign currencies.

“The capital markets have become one massive casino – anyone and everyone can come in and play and everyone’s credit is good! Our financial system supports about $35 Trillion of debt and we have virtually no savings. Very few people believe they are gambling with their own money because borrowing with other people’s money to place the bets has become so easy. The market is really wild!”

Stephen Roach of Morgan-Stanley explains, “By digging in its heels and keeping the federal funds rate negative in real terms, the Federal Reserve has now pushed America firmly into a multiple bubble syndrome. This is shaping up to be a policy blunder of epic proportions.”

Newsletter author Jim Puplava warns, “The amount of (domestic) debt is so large that the only way out will be for policymakers to inflate their way out of history’s largest debt bubble. It is one reason why the Perfect Financial Storm will become a reality. When it unfolds, hyper-inflation Argentina style is the more likely outcome, not deflation.”

Writer Sol Palha states, “Without taking on new debt, this great era of so-called prosperity is nothing but an illusion. We are sitting in a glass house and the first hairline cracks have appeared. The transition from all to nothing will be so fast most won’t even know what hit them with this is all over.”

Newsletter writer, John Myers, tells us, “One thing seems certain – with a total debt load now measuring four times America’s GDP, the nation’s ability to pay back what it has borrowed is next to impossible. It is probably safe to say that no empire has faced such a startling predicament since Rome.

“America’s debt bubble has grown so big that there is only one way out – inflating the dollar and reducing the real cost of its payments. In order to do this, the Fed will not be able to raise interest rates.

“It wouldn’t take much in the way of interest rate hikes to collapse this debt-laden economy. The last time the Fed raised rates (1999 to 2000), it brought about a collapse in the stock market and a subsequent recession. Today the economy is far more dependent on asset inflation in real estate, stocks, bonds and mortgages. Therefore, a sharp rise in rates would bring about severe deflation in paper assets.

“The long and short of it is that credit will continue to be expanded in this country until no more borrowers can be found. Then, when borrowing dries up, the government will become the borrower-of-last-resort, with the Fed monetizing all the government’s excess borrowing or budget deficits. This monetary inflation virtually guarantees a bull market in gold, silver and commodities.

“Keep printing, Mr. Greenspan, keep printing…”

Author of the book Devil Take the Hindmost, Edward Chancellor sums it up nicely, “The Federal Reserve now finds itself caught between a rock and a hard place: if it leaves interest rates untouched at their current level, then consumer price inflation will almost certainly take off. Rising interest rates, however, threaten to stall the U.S. economy and bring about a deflationary collapse.”

I’ve been a gloom and doomer for thirty-two years. That’s because I believed what I read in the books of the great Austrian economist, Ludwig von Mises. He said, “There is no means of avoiding the final collapse of a boom brought on by credit expansion.” That’s what you must understand. There is no good way out of the current predicament. We must pay a terrible price for decades of inflating. The fact that nobody on Wall Street has a clue only means that the danger is great. They completely missed 1929 too. At no time in the past three decades have so many voices been raised in warning. They are still a tiny minority, but they are clever and they are grounded in solid economics. All would agree that 10% in gold and silver is not only mandatory, but has become a financial imperative. I believe we are doing you a great service by convincing you to own these metals.

Start typing and press Enter to search