A Graphic Eye-Opener
How the Monetary System Has Changed
Just the other day, the S&P 500 touched a record intraday high.
Despite the uncertainties around the world, the stock market continues to march on (as I mentioned they would likely do in my Letter, “What to Expect for 2014.“).
Last year, and every year post 2008, I was confident the stock market would continue to set new highs.
This year, I am much more cautious.
It’s been over five years since the great crash of 2008. The markets have climbed, creating new found wealth for the 0.001 per cent. Yet, as I sit here writing this, I can’t help but feel worried for our future.
The world is a much different place than it was just five short years ago. Never in our history has such transformation of the monetary system taken place. A picture is worth a thousand words, so below are charts showing just how much change has occurred.
When a Picture is Worth Trillions
In the last decade, the U.S. federal government has more than doubled its debt, which means it has more than doubled its deficit spending (spending more money than it brings it, year after year.)
In order to support such recklessness, the U.S. has relied on borrowing money from other nations.
America has increased its borrowings from foreign and international investors by more than 270% in the last 10 years, with the majority of this rise occurring in the last five years. But even this wasn’t enough.
As a result, America had to rely on the lender of last resort, the Federal Reserve:
In the same time period, America has increased its debt-load to the Federal Reserve by nearly 250% – again, the majority of this rise occurring post-2008.
This massive debt issuance was supposed to increase economic conditions by encouraging spending; thus, bring stability back to the world.
But has it?
Here’s a chart showing the velocity of MZM money stock:
MZM money stock is a measurement of all liquid money within the economy. MZM represents all money in M2, less the time deposits, plus all money market funds. It has become one of the preferred measures of money supply because it better represents money readily available within the economy for spending and consumption.
As I explained in my letter “A Scary Prediction”:
“The velocity of money measures the rate at which money flows through an economy, in other words, how much money changes hands; it has to do with the amount of economic activity associated with a given money supply. It’s also is a key input in the determination of an economy’s inflation calculation.
A higher velocity means the same quantity of money is being used for a greater number of transactions. As a result, it means people are not just making money, they’re spending it. Economies that exhibit a higher velocity of money relative to others tend to be further along in the business cycle; thus, should have a higher rate of inflation, all things being constant.
But the opposite is true of lower velocity. A low velocity means people aren’t spending; thus, the economy struggles and inflation remains low.”
As you can see in the above chart, MZM velocity continues to drop, setting new record lows starting just prior to the 2008 crash.
But how can this be? Shouldn’t the stock market’s performance over the last five years indicate confidence and thus, encourage spending?
What do you think?
20 Years of Progress Wiped Out
Here’s a chart of the real median household income in the U.S.:
Despite the meteoric rise of the stock market, household incomes have actually dropped back to levels not seen for nearly 20 years!
There is a bright side to this, depending on how you look at it.
The average American either no longer has to work as hard for their living (efficiency), or is simply out of work:
We should note that the average annual hours worked also decreases when the number of part-time workers increase.
No Going Back
All of the above charts lead to my point that the monetary system has completely changed in the last decade.
Here’s a look at the monetary base:
In the last five years, the monetary base has increased by more than a whopping 360%! In other words, money has entered the system – just not to the people who need it the most.
The money supply has increased so much that MZM money velocity will never again return to the days of the Bretton Woods system.
The Fed and the U.S. government
want need you to take risks. They want you to risk it in the stock market to create wealth because it creates the illusion that everything is good.
They certainly don’t want you parking your money in the bank.
Here’s what parking money in the bank looks like for average citizens:
In other words, if you save, you lose money.
Are you saving money, or making big bets in the stock market?
More Leveraged than Ever
Last year, I wrote about the subprime auto market that Obama was allowing.
Within that same letter, I reminded readers of Obama’s speech at the end of 2011 when he said:
“…thanks to some of the same folks who are now running Congress, we had weak regulation, we had little oversight, and what did it get us? Insurance companies that jacked up people’s premiums with impunity and denied care to patients who were sick, mortgage lenders that tricked families into buying homes they couldn’t afford, a financial sector where irresponsibility and lack of basic oversight nearly destroyed our entire economy.”
The Fed, the U.S. government, and the media have done a fine job at making you forget about the events of 2008. But they’ve done an even better job at making you believe that they’ve made the banking system safer.
Here’s a chart showing the growth of mortgage-backed securities (MBS) – the same type of asset that caused the big meltdown in 2008:
So while Obama flaunts his MBS fraud investigations to the media, MBS continues to grow – right alongside U.S. foreclosures.
The World Engulfed
Here’s one last chart that you should see: a chart of all credit market instruments – or in Layman terms, debt:
It’s in billions of dollars, in case you didn’t notice.
What do you think of our monetary system now?
I was reading the opinions of fund managers and analysts earlier this week and many wrote that shots being fired in Ukraine were unlikely because of how the market was reacting.
As I write this, Russian troops are moving and taking over Ukraine military bases, despite American sanctions.
Via CTV news:
“Pro-Russian forces stormed a Ukrainian air force base in Crimea, firing shots and smashing through concrete walls with armoured personnel carriers.
… Russian forces have been seizing Ukrainian military facilities for several days in the Black Sea peninsula, which voted a week ago to secede and join Russia.”
As I mentioned over the past months, the battle between Russia and America will continue to grow. You’re going to read and hear a lot of different opinions about this situation. Some will tell you that Russia isn’t a threat; others will say the opposite.
One of the biggest stories you will hear is about Russia’s gas exports to Europe; how Russia is more dependent on Europe, than Europe is on Russia.
Here’s a video explaining this topic:
But there is much more to this than the author in the video has discussed. Russia has an ace up its sleeve and it could change world trade forever.
I’ll explain more next week.
Meanwhile, as Russian moves to conquer territory, China is quietly seizing the moment to continue its claims over territorial waters.
According to Indonesia’s official news agency, Antara:
“China has included part of Natuna waters in Indonesia’s Riau Islands province in its territorial map, assistant deputy to the chief security minister for defense strategic doctrine Commodore Fahru Zaini stated.
“China has claimed Natuna waters as their territorial waters. This arbitrary claim is related to the dispute over Spratly and Paracel Islands between China and the Philippines. This dispute will have a large impact on the security of Natuna waters,” he noted here on Wednesday.
China has drawn the sea map of Natuna Islands in the South China Sea in its territorial map with nine dash lines, he pointed out.
The new map has even been included in the new passports of Chinese citizens, he explained.
“What China has done is related to the territorial zone of the Unitary Republic of Indonesia. Therefore, we have come to Natuna to see the concrete strategy of the main component of our defense, namely the National Defense Forces (TNI),” he explained.”
Both Russia and China are on a mission to claim territory and rise up as world leaders. The battle between the East and West will have consequences that will reshape this world.
The next five years will be one of dramatic change and I urge readers to take it seriously.