Economy forecasters fear that 2017 will not be an improvement on 2016 for a myriad of reasons.
In its latest “World Economic Outlook,” the IMF’s chief economist Maurice Obstfeld gave a dire warning. With a broad range of risks ahead like our soaring national debt.
Here are three main challenges facing the economy in 2017 and the truth about how conservatives are avoiding these common pitfalls.
1. The US Monetary Policy Reaches Its Limits.
A significant phenomenon already unfolding are central banks reaching the limits of their expansionary monetary policy and 2017 may be the year they have to face the music.
According to global economic advisor and expert Daniel Lacalle, Central Banks have cut interest rates 700 times since the collapse of Lehman Brothers.
Ask yourself the following question: “What exactly did we all get from this unprecedented amount of stimulus?”
Astoundingly,$24 Trillion in monetary stimulus and we received 1.6% economic growth according to Lacalle.
While Quantitative Easing (QE)has succeeded in maintaining short-term liquidity in markets, its diminishing returns mean the end is nigh…
A recent survey of money managers by the Bank of America Merrill Lynch found that 48 percent believe global fiscal policy remains too tight, a sentiment echoed by many other economic commentators worried over the increasing ineffectiveness of monetary policy.
Yet, while nearly half argue that monetary policy is too tight, take a look at this chart from the Federal Reserve showing interest rates for the last decade.
Please decide for yourself if you think it looks troubling.
Global economic advisor and best selling author Jim Rickards says on Bloomberg, “Seriously we’re in a depression… You can’t solve a depression by printing money. You can only solve it with structural changes.”
2. The US Shadow Debt.
Most Americans are already aware according to the U.S. Treasury Department, the U.S. is nearly $20 trillion in debt.
On Jan. 20, 2009, when President Obama was inaugurated, the total debt of the federal government was a mere $10 Trillion. That means in Mr. Obama’s presidency, the federal debt has increased by far more than $9 Trillion ($76k per household.)
Most economists believe our new President Donald J. Trump will require the government to borrow much more.
In fact, Mr. Trump’s own economic advisor Tom Barrack said that his policies would “increase the national debt by roughly $10 trillion” — and, he said, “that would be a good thing. ”
“You have fiscal stimulus, and you’re going to increase from 20 trillion to 30 trillion in debt,” said Barrack on CNBC.
He then implied the government could always print more money in order to cover its debts, since the bonds are not backed by any collateral.
“It’s unsecured debt in any event, right?”
As shocking as $30 trillion in debt is for Americans, the real news is what’s referred to as shadow debt.
Shadow debt is unseen, unregulated and little understood.
As debt and derivatives markets have grown beyond all recognition, they have moved increasingly into the shadows.
Regulators worry that some of the complex financial instruments conjured up around the lending and borrowing of money—worth trillions of dollars—may sow the seeds of the next financial crisis.
At the forefront of concerned regulators is the president of the Federal Reserve Bank of New York (one of the financial world’s most powerful voices.)
In a speech in Hong Kong on September 14th he gave warning: “The same factors that may have reduced the probability of future systemic events, however, may amplify the damage caused by, and complicate the management of, very severe financial shocks. The changes that have reduced the vulnerability of the system to smaller shocks may have increased the severity of the larger ones.”
How large of a shock was he referring to?
Look no further than the $250+ Trillion in shadow derivatives held by a mere five banks in the US.
New analysis from the Bank for International Settlements shows that $2.7 trillion in shadow derivatives is traded every single day!
Since most of us do not have a reference point for a trillion of anything, here is an absolutely shocking infographic of what that looks like.
According to Standard & Poor’s Leveraged Commentary and Data, a part of the rating agency that tracks the loan market, these shadow bets backed by pension funds, mutual funds and insurance companies have mushroomed.
More febrile still, the institutions that issue this shadow money give it newfangled difficult names so we don’t understand it.
In our humble attempt to simplify we will refer to complex derivatives as shadow money.
A derivative is basically a legal bet (or unsecured contract) that gets its value from something else, such as the future (or current value) of real estate, government bonds or really anything they can imagine.
This shadow money can also be used as insurance, betting that a loan will or won’t default before a given date.
So its a big betting system, like a Casino in Las Vegas, but instead of betting on cards and roulette, you bet on other stuff or the performance of practically anything that can store value.
The system is not regulated by any of your elected representatives and institutions can buy a derivative on an existing derivative.(This is where it gets really unnerving for everyone who remembers 2008.)
Legendary investor Warren Buffett said in The Economist that derivatives were “financial weapons of mass destruction.”
Well, Mr Buffett; there are over 250 Trillion of these “financial weapons of mass destruction” right here in our U.S.A. held in only five institutions.
3. The Age of Bail-ins.
A bail-in is when regulators or governments have statutory powers to restructure the liabilities of failing financial institutions, and impose losses on both bondholders and depositors.
Simply put, a bail-in is an attempt to resolve and restructure a financial institution by creating additional bank capital via forced conversion of the bank’s creditors’ claims (potentially bonds and deposits) into newly created common shares of the institution.
Bail-ins are already happening and yet there is a lack of appreciation of this risk as there was a lack of appreciation of the risks posed by the 2008 recession and the global debt crisis.
In a speech entitled, “The Great Recession: Moving Ahead,” the Federal Reserve Vice Chairman Stanley Fischer said that the U.S. was preparing proposals for bank bail-ins for “systemically important banks.”
According to one of the world’s foremost experts on the credit crisis Shah Gilani, he says in Money Morning:
“If your too-big-to-fail (TBTF) bank is failing because they can’t pay off derivative bets they made, and the government refuses to bail them out, under a mandate titled “Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution,” approved on Nov. 16, 2014, by the G20’s Financial Stability Board, they can take your deposited money and turn it into shares of equity capital to try and keep your TBTF bank from failing.”
Once your money is deposited in a financial institution, it legally becomes the property of the institution. Mr. Gilani explains that a deposit is an unsecured debt obligation:
“If you bank with one of the country’s biggest banks, who collectively have trillions of dollars of derivatives they hold “off balance sheet” (meaning those debts aren’t recorded on banks’ GAAP balance sheets), those debt bets have a superior legal standing to your deposits and get paid back before you get any of your cash.”
At over 2,300 pages and still growing, the Dodd Frank Act is currently the longest and most complicated bill ever passed by the US legislature.
Do you wonder why?
In perhaps the best widely available review of how derivatives are a higher priority than your money comes from Pennsylvania law professor and expert David Skeel’s book “The New Financial Deal.”
When a financial institution appears to be on shaky ground, the derivatives players all rush to put in their claims, in a run on the collateral (actual money) before it ran out.
Professor Skeel says depositors are the last in line.
That means that derivative claimants have first grab at the assets of failed institutions. (That probably is not you.)
Harvard Law School professor Mark Roe says: “With derivatives players knowing that they enjoyed superpriority, they could pay less attention to one major cost of trading—the risk that their counterparty could fail and default on its obligations. ”
Professor Roe further warns,
“In this view, solvent counterparties become unable to extract their frozen collateral… “
(If you’d like, you can read the full Harvard Law professors paper at this free link.)
According to these professors and found within the Dodd Frank Act, this means that financial institutions are pre-authorised by their respective government to simply transfer the savings of depositors, should they (the financial institution) decide that an “emergency” exists.
Now, let me ask you our dear reader.
Do you think it’s safe to say, that, even if an emergency does not exist, one can be trumped up?
For the purpose of clarification, this does not mean financial institutions have “confiscated” your deposit…
The Harvard Law Professor states that the financial institution has simply converted it, (assumably without your permission,) for a piece of paper that says you now own something other than your money—
For example, it could be shares in the failing institution itself,
Which, again, may or may not be saleable.
So, what are conservative minded individuals doing to avoid these common pitfalls?
The most essential precaution according to many advisors is to minimize your exposure to counterparty risk with deliverable precious metals.
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