In this weekly article, Mike Savage talks about the 10-year mark of the collapse of Lehman Brothers and Bear Stearns. Did we really learn our lesson? Get financial advice and guidance from a professional retirement planner in Pocono Summit.
Weekly Article 09-12-2018
As we near the 10-year mark of Lehman Brothers and Bear Stearns ceasing to exist and the start of the great monetary experiment of the last 10 years many of the participants are coming out of the woodwork to put their 2 cents in about where we have been and where we are now.
Here is mine.
In a circumstance like we witnessed 10 years ago, if it happened 50 years ago or so, when there was some semblance of sanity and sound money policies, there would have been many valuable lessons learned and our financial system would likely not be nearly as fragile as it is today.
If this monetary emergency took place and “money” was not printed up or keystroked into existence the entire financial system would likely have imploded under its own weight. The derivatives books of the major banks would have likely destroyed the balance sheets of the world’s major banks. Because of this it is likely that bankruptcies in many other industries would likely also happen because of not having access to financing. We are on a debt-based system and if there is not increasing debt- always- the system slows down dramatically and may actually implode because of a lack of that financing.
This is one reason for the over $16 trillion bailout of the banks by the Federal Reserve. I wonder how much other central banks contributed? We only have the GAO report which shows the Fed contributed over $16 trillion. Pretty good for a reported $700 billion bailout that shocked and angered the country at the time.
In this scenario we would have had a rough go for a while but we would likely be, right now, in a sustainable recovery that could stand the test of time. The stock market would be at far lower levels, many bonds would have been defaulted on, real estate prices would likely be a fraction of what they are today and commodities (food, shelter, water, metals, energy) would also be at far lower levels.
While to many that may sound like a negative outcome it really isn’t because the dollars that anyone has had the good fortune of saving would also likely be worth far more than they are worth today so that the income inequality that has taken place because of this “printing” of fiat currency would not exist in the same drastic fashion that it does today.
Many people would have learned the lesson that stocks, bonds and real estate can be risky investments and that having leverage to enhance returns as prices are rising can also be an albatross when prices are falling. This would have likely led to far less leverage, far fewer financial games to manage prices of virtually every asset, and more fair prices for all assets- particularly for those assets that we all need to have to live. In other words, supply and demand would likely be the determining factor in price rather than the manipulation taking place today by traders of major banks, central banks, hedge funds, etc.
Of course, since our leaders took the exact opposite approach and bailed out their banking buddies- don’t forget the Fed is owned by the banks- many companies that should have been destroyed are not only still around but are more of a threat today than they have ever been.
This is a clear example of the law of the jungle being cast aside with money “printing” and those doing the “printing” determining who wins and who loses. Guess what- you and I were not on the winners list!
Our leaders would like us to believe that if the major banks went down our way of life would have ended. I highly doubt it. Not that we wouldn’t have had a few rough years but leaner companies that made better decisions and didn’t get wiped out in the carnage that would likely have taken place would be the new, stronger leaders of today. Of course, the old cronies would be out looking for a job rather than counting their billions at our expense as they are today. The only thing that would have likely ended is the concentration of wealth in just a few stingy hands.
So today, after 10 years of looking back on what I believe to be catastrophic financial decisions which include “printing” so much “money” in the last 10 years we can’t even account for over $21 trillion that is missing from HUD and the Department of Defense. Our national debt has gone from $8 trillion to near $21.6 trillion today and is rising at record levels as we speak.
There are reports of pension funds being $7 trillion underfunded and Social Security sporting a $49 trillion funding deficit. 0% interest rates haven’t helped this situation at all. Of course, stock and bond markets sit near all-time highs so when the next correction (or crash) takes place, look for the pension numbers to get far worse and quickly.
There is manipulation of stocks, bonds, real estate, gold, silver, LIBOR rates, and I am sure much more. This allows those involved- mainly central banks and major banks to walk away with massive profits by manipulating the price by outright purchasing or selling assets. This is illegal for me and you (Buying assets with money we “printed up” from nowhere or selling assets that we have no possession of (naked shorting) or rigging interest rates to maximize profits) but for those who possess the ability to do this- things are just great. Profits are flying high and all of those in on this are making more money than they could ever have dreamt of making.
Of course, as prices are manipulated the actual production of goods can become economically impossible. When a price is driven down and an item costs more to produce than it can be sold for the production has to at least slow down and may cease at some point because without a fair price the producer will go out of business. This is true for dairy cows, food, gold, metals, energy, etc.
I look at this like we are all hearing all of the great economic numbers and many I speak to wonder why they are not seeing it. While the numbers may be ok as they are averaged out, all of the gains are at the top. It is similar to how the stock indexes rise but only a few stocks are responsible for the rise (think FAANGS). If you don’t own those few stocks you are not participating. If you are not in on the share buybacks and “printing up money from nowhere and buying assets with it” party it is likely you are not participating either.
All of the problems that caused our event in 2008 still exist and indeed are far larger than they were back then. The money “printing” has not allowed the masses to learn the valuable lessons that will be learned when we come to the edge of the cliff that we are rapidly approaching.
Many will say- “you have been saying this for years”. My answer is simple- just because the train is late doesn’t mean it’s not coming.
The numbers are truly staggering. The debt of the world is at dizzying heights that have never been seen before and that have no chance of being paid off with fiat currencies having anywhere near their current value. The debts include those of individuals, municipalities, states, governments and even banks and central banks. The debts continue to grow exponentially as our incomes and assets do not. Does it sound like there may be a problem brewing here?
Gregory Mannarino highlights the shenanigans taking place daily to keep bond yields low to prevent rates from rising and causing trillions of debt to become unmanageable. Notice I didn’t say unpayable because in my opinion it is ALREADY unpayable but with low and even negative interest rates it can be manageable for a while longer.
Of course, the answer in 2008 and beyond was to fix the problem of too much debt – with issuing more debt. That is working out great for Greece, Turkey, Argentina, Venezuela, Brazil and many others as they are being crushed by existing and increasing debts daily. It is only a matter of time before reality shows its ugly head and the masses start running for the exits not only on the peripheral debts as is happening now but those of the major developed economies as well.
As usual, it appears to me that having physical assets like food, water, cash, gold, silver, energy, etc. is not a bad idea going forward. I expect that the value of real stuff not based on others ability to pay will have a large premium placed upon it going forward when many realize the promises made are unlikely to be kept. The clock is ticking.
Mike Savage, ChFC, Financial Advisor
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