Debt & The Biggest Wealth Transfer in History

Stanley Druckenmiller appeared on CNBC this week. The meat of his comments start at the 12:35 mark. Although, his entire segment, which begins at the 8:03 mark, is good – especially when he rhetorically asks, “who owns assets”, and at the 15:00 mark when he explains what the Feds policies are all about: “the biggest redistribution of wealth from the middle class and the poor to the rich ever”.

Jimmy Dunne’s comments at the very end are also priceless: Referring to what the Fed is doing, “it’s  bad for my children, his children, and the guys that caddy for Stan and me“….”I can’t imagine why they wouldn’t do it [start tapering], just start it. The hangover’s going to be worse from this…but, it’s good for us (the wealthy)”.  All one needs to understand is record amounts of debt continue to be created, and who benefits from the issuance? A few simple charts will paint a clear picture…

Real incomes and purchasing power have been declining for decades, the result of conscious policies enacted by government, and their masters that fund campaigns. Now, due to further policy blunders and political favors, the percentage of people who have a job has not recovered from the latest Fed-blown bubble that popped.

employment rate

Fewer jobs means less tax revenue and larger deficits. Instead of cutting the fat like any business or household to make ends meet, the government simply collects more from its citizens, which reduces disposable income and further slows the economy. This death spiral continues because those in power refuse to look in the mirror and admit they are the source of the problem. Until the voters make them pay in the voting booth, nothing will change – thus Step-1 in the 5-Step plan.

When one runs out of family members to put to work and purchasing power is continuously eroded, then you inevitably hit the proverbial wall. Debt has been used as a substitute for growth over 30 years. This Ponzi scheme requires ever more dollar printing to perpetuate, which has resulted in a 95% decline in the value of the dollar since the Fed was fraudulently established in 1913. Other countries that can’t print and borrow to pay their bills have already hit the wall (i.e. Arab Spring, Brazil riots, etc.). Now it is happening in the West (starting with the PIIGS), as the economic hit men have turned on their own to strip mine assets.

GDP

With the debt ceiling debate in full swing, this may be a good time to review a new chart from Denninger (below) that shows the relationship between our national debt, GDP, and stocks. Since credit spends just like cash, it is immediately additive to GDP, and should be included in the real monetary base. Notice how the S&P 500 line followed the debt curve (orange) until 1995, when the internet bubble started its expansion. After the dot.com bust, stocks once again tried to follow the expansion of debt, until the fraudulent real estate bubble popped. After a huge violation of the debt trend line, stocks have rallied back on the expansion of more money printing (which is used to buy more debt), and the subprime lending of student and car loans (to fill the void of credit card deleveraging).

As the graph of 10-year Treasury below illustrates, rates have been declining for over 30 years, making the refinancing of old debt a winning strategy. What happens when rates start their cyclical rise? The exponential expansion of debt over the last 33 years now becomes the interest chicken that comes home to roost. The bond market is the biggest on the planet because it’s been the largest bubble to be blown in history. As rates rise, the sovereign debt bubble (filled with hydrogen derivatives) will produce devastation far greater than the CO2-filled internet and (un)natural gas-filled real estate bubbles. As the hydrogen comes out of the debt bubble, the stock line will follow it back down toward the GDP line (green).

10-year

What has disguised the coming collapse has been the rise in stocks. During most people’s lifetime, we’ve been in a public cycle where government debt was the safe haven asset. Now we are transitioning from the public to private cycle, meaning government debt is not trusted and rates have bottomed. The tangible assets of companies are replacing the safe haven status of government debt. Consequently, money will continue to be parked in corporate debt and stocks, even by central banks that don’t trust their own debt. The elephant in the room that nobody wants to discuss is that the real monetary base, which includes credit, is going to see a devastating decline when the debt bubble pops. It won’t matter how wealthy you are now, if you don’t understand the intrinsic value of your assets, versus the debt-inflated portion (just go ask all those “smart” rich customers of Bernie Madoff).  If you want to know when to head for the bomb shelter, I would start stacking the shelves when the 10-year goes back over 4-5%.

jobless

When the folks fully awaken from their slumber and realize that their decline in living standards is not the result of their laziness or misfortune, but a debt-filled growth mirage and premeditated rape of their wealth, there will be hell to pay. Because revolutions only come after the people have lost it all, it’s doubtful any proactive steps will be taken before we crash and burn. However, what the mouthpieces in the media forget is it’s almost always the messenger that suffers the consequences of their boss’s conspiring actions.

Many people do not yet fully understand all the details, but they know something is not right (i.e. NSA spying & collaboration with major tech companies, IRS bullying, trillion-dollar deficits, record debts, major cities declaring bankruptcy, bank account confiscation, pension nationalization, infinite money printing, executive orders by the President to use drones to kill Americans without a trial, 50+ million people on Food Stamps, no executives in jail for the biggest fraud in history, ongoing undeclared wars based on fabricated intel., etc., etc.).

truckers

Some, like these truckers, are starting to organize to make their frustrations known to those in power. Others will not realize what’s happened until their retirement accounts are confiscated and their bank accounts bailed-in….and for those that think our collision with fate can be averted, David Stockman serves up a mouthful of truth, when he states, “Calamity Janet” Yellen, who will likely replace “Bubbles-Ben” (after “Slimy Summers” crawled back under his rock) has “no clue how to wean Wall Street from its pathetic addiction to easy money.”

Confidence can ride the wave of propaganda and ignorance longer than would be expected in the face of so much fraud and corruption. However, like a turnover in football, interest rates can turn fast and unexpectedly. The next two years is like two minutes in economic history, and it would be wise for folks to practice their two-minute drill.

George_Orwell

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