In this mirage, Jim Rickards believes he has found key signals that warn of an impending financial catastrophe which will forever change the seemingly invincible character of our economic status. Here are the facts, which are listed below…
Collapse of the PetroDOLLAR
Very few people are aware of how the American dollar became the reserve currency of the world, giving our nation unprecedented favor in not only economic realms but currency protection as well. Originally, the dollar became king of all currencies when 44 allied nations met in Bretton Woods, New Hampshire in 1945 and agreed to replace the old and debt ridden British pound [sound like our present American dollar] with the up and coming economically powerful American dollar. To add credibility to this decision, the group also created an international gold backed monetary standard that relied heavily upon the U.S. dollar, backed up by a supposed equal amount of gold held primarily at Ft Knox.
However, on August 15, 1971 President Richard Nixon shocked the global financial market by taking the U.S. off this internationally gold backed system, thereby theoretically dissolving the Bretton Woods agreement and thus taking our currency off a gold standard. The dollar was still a powerful currency because of the health of our economy and the world’s perception of America. But then the Arab Oil embargo changed all that. It was during this time that Jim was involved in high level discussions on how to convince the Saudis to bring the price of $2 per barrel oil down from the $12 it had reached. There was discussion of invading Saudi Arabia and taking over their oil fields which America had predominately put into place. However, Henry Kissinger finally worked out an agreement with the Saudis that gave them military protection from our country in exchange for their oil to be priced in dollars, hence the birth and rise of the ‘Petrodollar’ (hereby we can also understand the supportive arrangement that our country has had with Saudi Arabia, even to the detriment of Israel. I also contend that this is part of the New World Order agenda as well in my book, "Beyond the Shemitah"). By 1975, all the oil-producing nations of OPEC had agreed to price the sale of their oil in dollars and at the same time invest any surplus oil proceeds into U.S. Treasury bills. Besides maintaining a powerful global reserve currency, it also provided ready buyers for American treasuries. We now have a better understanding why our country has always been a friend to Saudi Arabia and a purchaser of Middle Eastern oil as opposed to becoming energy independent which it has been capable of for decades. However, this is now being challenged for the first time with our national shale oil production, soon to surpass the production of Saudi Arabian oil itself. This is also causing instability in the oil markets, as we have recently seen with the bottom dropping out of oil from a high near $110/barrel of oil in the summer of 2014 to a low of under $60/barrel at the end of the year (and even to as low as $30/barrel in the winter of 2015 - 2016).
But more important, the ‘Petrodollar’ advantage is disappearing. No longer is oil only being sold in dollars. China with a number of other countries, such a Russia , Brazil, Iran and others are establishing swap lines with each other. For example, China has recently worked out swap lines with Switzerland that allow China’s currency (called the Yuan) to be swapped for Swiss francs, today one of the world’s most sound currencies. And China has recently launched its first crude oil futures contracts denominated in Yuan. This will give the Chinese much greater clout in setting oil prices and trade with other countries and itself. No doubt, China with other countries are in the process of dismantling the highly coveted ‘Petrodollar’. And in so doing, it will eventually replace the dollar from its position of the world’s reserve currency. When this occurs, the dollar will most likely go into a free fall best described as a "free fall" collapse.
Since 2008, over $4 trillion dollars have flooded into this country’s economy - whether propping up or bailing out bankrupt companies such as General Motors, Bank of America, Fannie Mae, etc. or just flooding the market with dollars. In addition to this, our country is now over $20 trillion in actual debt (such as over $2 trillion we owe the Chinese in Treasury bonds they have purchased) besides the $4 trillion of “fiat” dollars flooding the marketplace. However, most significantly is a total of approximately $127 trillion in unfunded liabilities that are on the books yet to be covered. These liabilities would include future Social Security payments, Medicare A,B and D, Veterans benefits, FHA mortgages, student loans, Fannie Mae/Freddie Mac and a host of other debts that are on the books for future payment but presently are totally unfunded.
The question that begs an answer is, how has our country been able to accumulate such massive amounts of debt, in reality making the “true” value of the dollar practically worthless, yet still have the world continue to believe the dollar is still worth a real dollar? The key lies in our country’s past GDP or Gross Domestic Production. During our countries greatest economic boom years, from the 1950’s thru the 60’s, America’s economic engine was able to produce $2.41 for every $1.00 of debt created. For a business, which our country is the largest in the world, America accumulated $1.42 of profit versus every dollar of debt incurred. That’s equivalent to a 142% profit margin and would be considered very high for most business operations today.
However by the late 70’s, that relationship changed dramatically. Instead of $1.42 profit for every dollar of debt incurred, we only achieved $0.41 profit for every dollar of debt, bringing our country to a negative profit ratio. In other words, we were creating $0.59 of debt for every dollar of revenue created. This is a sure prescription to bankruptcy. Today, this number is down to $0.03 profit for every dollar of debt generated. This business arrangement is unsustainable. Soon, and very soon, even this profit number, miniscule as it is, will go negative giving us a sure sign the system is on the verge of collapse.
The “Misery Index” calculates the real inflation rate plus the real unemployment rate. Although government figures state our unemployment rate has decreased to between 6 – 7%, the real unemployment rate is still 23% due to people who have fallen off the employment rolls either because they are no longer looking for work, workers who had full time work now accepting part - time employment, independent contractors who never paid into the system and have no work, etc. Although the government states we have extremely moderate inflation in the realm of 2% yearly, most Americans know it’s higher. This is especially true for those whose salaries have not increased one iota for years, and in some instances have even decreased! The bottom line is that the “Misery Index” is now even higher than it was immediately before the Great Depression in 1929! During the Great Depression it was 27. Today it registers 32.89.
Velocity of Money
There is another factor that plays a key role in determining the danger of a sudden and catastrophic collapse. It’s identified as the “Velocity of Money” and has a serious and significant multiplication effect. For example, you work and get paid for your labor. Then you go out and spend your earnings on various needs, whether for life’s necessities and/or pleasure. Each dollar spent causes other dollars to be brought into economic activity with associated productivity. Basically the velocity of money determines economic activity and is based on how the dollar produces and multiplies business activity. In 1975, the value given for “Velocity of Money” was 1.7. In 1998 it went as high as 2.2. However, today it is hovering around 1.3, nearly the same value it was prior the onslaught of the Great Depression! This is a definitive indicator that economic activity is extremely low and not increasing as the government would have us believe.
Negative Capital Base to Debt Rate
Another component that adds to the potential of a catastrophic collapse is the dismal capital base of the Federal Reserve to registered liabilities on its books. The Federal Reserve claims to have $56 billion of capital, the highest ever. Sounds good when expressed in this manner. However, what you don’t hear is the level of debt that needs to be covered by this capital base, which is in excess of $4.3 trillion (this is actual debt that needs to be covered). To put this into perspective, prior 2008 the Feds leverage was 1 to 22 which means they had $1 to cover every $22 of debt. Today, it is 1 to 77! Figures such as this is what had Sen. Rand Paul cite the work of “Project Prophecy” and predict that our economy is teetering on the edge of a Roman Empire – like collapse.
Bank Debt & The Astronomical Derivative Value
Another key player that is building the specter for a sudden catastrophic collapse of our economy and currency is the stratospheric leveraged debt of our banking system. Today, we have $60 trillion of debt on the balance sheets of our banking system. As of late, bank debt is now growing 30x faster than our economy. Moreover, this does not take into consideration the astronomical notational value of the derivatives market, which is now believed to be well north of $700 trillion. In just six years, we have already increased the derivatives market by another whooping $108 trillion. This added leverage and astronomical liability is like adding megatons of nuclear fuel to a super hydrogen bomb that’s ready to go off! Just the dangers inherent in these banking/financial instabilities makes for the setting up of an “economic explosion” which will change this world forever.
And this does not even take into account the instability of the world that we see today. For example, events taking place in the Middle East (i.e. Russia’s recent penchant for conquest such as Crimea and possibly the Ukraine), Chinese dominance and want of the Salk and Spratley Islands, continued North Korean craziness, ISIS, Islamic terrorism and a host of other problems which could come about and catalyze the collapse of an already imbalanced world economy.
Stock Market Capitalization to GDP
There is yet another indicator which paints an important picture of our economy and overall financial health. It involves the stock market. Obviously, any significant “jolt” that would effect the stock market could set the stage for a rampant sell - off, which in turn would impact our economy. The key metric here is the stock market capitalization to GDP (Gross Domestic Product). Basically, it is a measure of our nations productive output to the capitalization (value) of the stock market. Prior to the Great Depression of 1929 - 1936, this value was 87%. The value prior the 2008 credit/real estate collapse was 187%. Now, this value has reached 203%. As can be seen, this value is significantly higher than all the previous highs. Therefore, stock market capitalization, as a percentage of GDP, is twice as high as it was just prior to the Great Depression. The bottom line is the ‘“Project Prophecy” system identifies such a value as a pre-crash signal.
False Buyer of U.S. Treasuries
Jim has found out through high level associations a critical component that could well be the harbinger which will bring down this entire economic house. It has been noted that both China and Russia have recently been selling off U.S. Treasuries they hold. But to whom? Besides paying one of the lowest levels of interest on any bond, most countries know that our currency backing for the borrowed treasuries is nearly worthless. So what country in their right mind would purchase such bogus bonds? It’s been found that Belgium is the primary buyer through international settlement records. But Belgium does not have the financial wherewithal to have bought the record amounts of Treasuries. And this doesn’t even include the dumping of excess Treasuries by the Chinese and Russians. What’s going on here? Jim has found out that Belgium is just a front and that the Federal Reserve is actually buying back these Treasuries. And because we know the capital base of the Federal Reserve is 1:77 to its liabilities (which means it’s broke), it is believed this buy-back is taking place with fiat money. It’s only a matter of time (very short, we believe) before interest rates by economic necessity have to go up. Once this occurs, the stock market and housing markets will implode. Jim believes that an attack on our treasury market is another very serious flashpoint that could ignite the sudden collapse of our markets. So serious is this concern, that the Treasury Dept. has established an intelligence unit within the department called a “war room”. As Jim comments, “that tells us financial warfare is here and it’s real.”
Dumping of U.S. Treasuries
What type of attack could occur against our country via the $17 trillion Treasury notes that have been purchased by other countries? It’s known that both China and Russia are two of the largest holders of our Treasurys. It was recently observed that Russia began to sell-off large chunks of U.S. Treasury holdings prior the recent Crimean incursion. From this there is fear that countries such as Russia will financially “blackmail” our country by dumping large amounts of bonds on the market, reducing their value and thereby indirectly influencing the value of the dollar as well as causing interest rates to go up. Truly, this would constitute a form of financial warfare against our country. If this were to happen on a large scale, the dollar would most likely go into a free fall.
Precious Metal Manipulation
Gold may become the defacto reserve currency in the world, although its current down - trend in price would seem to negate this prediction. What many are not aware of is that precious metal prices (which include gold, silver, platinum and palladium among others) since the beginning of 2013 have been and continue being significantly manipulated by COMEX, the London Exchange, paper backed gold notes (ETF, ETN and other “paper” holdings in precious metals) as never before. Paradoxically, what we are currently noticing is that central banks of many nations are clandestinely dumping dollars to purchase physical gold. One of the most prolific nations on a gold purchasing spree is China. China has acquired more than 3,000 tons of gold in the last four years. Yet, China insists it officially only holds 1,054 tons. Recently, Jim spoke with a senior official of one of the largest physical gold transporters in the world. He stated that he was met by the People’s Liberation Army (Chinese army) by armored vehicles, which took the gold he was transporting directly into China. For this reason, the intelligence community believes China is using their own military and intelligence assets to acquire gold in stealth. Why? There are those who believe China is loading up on gold to launch their own currency, the Yuan, as a gold-backed reserve currency. However Jim believes that they are establishing a sizeable gold position as a hedge against the coming collapse of the dollar. Nonetheless, in either case, we believe the current manipulation in gold and related precious metals is a planned mechanism for China to purchase these metals on the cheap. It is our contention that this is being done as a preventative for China dumping it’s nearly $2 trillion of Treasuries due to a decimation of the dollar. But it is only a stop-gap measure at best. No doubt, any currency or a basket of currencies that will form the new global reserve currency which is now being put together will most likely be backed by gold. If not, why is China purchasing so much gold and being transported by military convoys?
Record High Margin Debt
Margin debt is defined as the borrowing of funds to invest in the stock market. The problem is when you borrow to buy stocks, and those stocks go down, eventually you will be forced to sell shares to pay back the money you borrowed. This is identified as a margin call. The danger is when stocks drop so sharply that not only do you lose the value of the stocks, but now you must sell to pay back the borrowed money. This possibly could mean selling at a double, triple or even greater loss than if you did not use margin. Therefore, record high margin debt causes enhanced market instability and makes the potential of a market collapse so much more probable. Proof of this is evident as one analyzes the dot – com bust of the year 2000 and the financial crisis of 2007 – 2008. In both instances, margin debt where at record levels. Today, margin debt is greater than either of the two examples given.
Bail - Ins vs Bail - Outs
Another danger that lurks as a potential threat to the razors edge this world’s economy is teetering on is the shadow banking system of China. What this means is that the Chinese banking system is highly leveraged, in many ways like it’s American counterparts. However instead of the astronomical levels that American banks are leveraged in the derivative market, the Chinese are highly leveraged in the real estate market. They are now up to $7.5 trillion, a whopping 4,067% increase since 2005. In the last three years, construction has been 50% of China’s GDP growth. The result, the building of “ghost” cities, which consist of skyscrapers, luxury hotels, upscale shopping cents, airports, expressways. And not just one such city, but multiples which are totally vacant!!! John Dale Davidson reports in the 2016 February issue of Strategic Investment that more than 64 million apartment homes stand empty in China, which represent one fifth of all the homes in China. In effect, China has built empty cities that could house New York City 25 times over. This deserves to be reiterated. China has built the equivalent of 25 empty New York Cities! Even Xiao Gang, Chairman of the Bank of China decries…..”This is fundamentally a Ponzi scheme.” What is so dangerous about this are the consequences that occur in all Ponzi schemes. Once you run out of suckers to buy into the scheme, it collapses. Such a collapse will cause a run on China’s banks, causing the banks to collapse and create a domino effect worldwide. This is truly a set-up for the collapse of the global economy.
Beyond the Chinese banking debacle lies the new scheme to bail out depleted banks. Due to the fractional reserve system in the way banks operate, allowing banks to leverage debt out on 10% of their cash reserves (it is well known that the largest banks in America such as Goldman Sachs, Citigroup, Bank of America, Chase along with Morgan, etc. have even leveraged their holdings as much as 100x with each dollar held by derivatives), it is now understood that if a severe financial implosion would take place, the Federal Reserve or any other governmental agency, including the Treasury Dept., would not have enough capitalization to bail out these bell weather banks. An agreement signed in early 2015 involving the G-7 nations now has given international allowance for the banks to hold their customer’s funds to help keep them afloat during a financial crisis. Precedent for this was set when Cyprus in their financial fiasco raided the accounts of their customers who had over 100,000 in Euros. Those customers lost anything and everything over 100,000 Euros. Not only can this happen in Cyprus, but most countries have adopted this concept, known as “bail – ins”, as law. This truth also deserves reiteration. An agreement has been signed by the G-7 nations amongst numerous others which allow banks to use your funds (without repayment clauses) to bail out their losses. This is akin to highway robbery. Again, another reason not to hold all your financial eggs in one basket.
Plans to Replace the Dollar
Probably the most telling of all facts that indicate the near term demise of the dollar and our financial/economic position is the “secret” plan to replace the dollar with a new world currency titled the “Special Drawing Right” or SDR for short. A plan has already been put in place by the International Monetary Fund (IMF) as a de facto solution following the collapse of the global financial system. To replace most of the worlds failed currencies, the IMF will introduce the SDR as the new reserve currency. which Jim identifies as a "spooky new currency". The IMF can do this as it is the only organization that has a relatively clean balance sheet. But most important, the IMF is a collection of the world’s most powerful men and women whom otherwise are best titled the “world-financial elite”. They will be the group most likely to establish the world’s first single currency. Although this currency may be in the “rough”, so to speak, it will be a historic first to see a non-existent currency arise that will have global domination.
Astronomical Bond Bubble
Today, there are 100 trillion dollar in bonds currently in existence throughout the worlds (please note: this is in TRILLIONS of dollars. Just think, there are 1,000 million dollars contained in one billion dollars, and 1,000 billion dollars contained in just one trillion dollars. Therefore, 100,000 billion dollars are contained in 100 trillion dollars. Does this help to give you a sense of the magnitude of what we are dealing with?). A third of these are in the U.S., another half are from developing nations and the remaining 14% come from emerging markets. However, a majority of these bonds have been used as an underlying asset for credit derivatives. Furthermore, these derivatives are leveraged over five times the value of the existing bond market. Therefore, the total exposure of the worldwide bond bubble is in excess of $555 trillion, not just the $100 trillion in bond valuation that presently exists in the market.
To put this number in perspective, consider that the total Gross World Product (GWP) is $74 trillion yearly. So the current bond bubble represents 7.5 years of all the labor and production of the entire world. Again, we are dealing with astronomical numbers.
Also consider that the Credit Default Swap (CDS) market, which nearly destroyed the financial system in 2008, was only $50 to $60 trillion at that time – one tenth of the size of the current bond bubble today.
What makes this system so fragile is the massive amount of leverage built into the system. All it would take is one default to cause a ripple effect that could lead to a catastrophic domino effect. For example , if there is a default on just one $10 million bond holding (for example, GM could easily issue a total of well over $10 million in bond debt), then such a default could easily wipe out $55 million worth of “assets” due to the leverage of this credit derivative. Herein lies the danger. Just one of these defaults could cause a domino effect, not only affecting the bond market but the stock market as well. How? To compensate for a significant bond loss, other avenues of monetary availability must be acquired such as usually available in the stock market. Therefore to compensate for a bond default, companies would most likely cash in their stock holdings to cover their defaulting bonds. This easily could cause a serious stock market downdraft which will the next domino to fall. With a rapidly descending market, margin calls would be issued to force stocks to be cashed out to cover the margin (remember, margin is borrowed money used to buy stocks which today stands at an all time high). And this consequence alone will lead to an even more accelerated stock market downdraft. Herein is how we could see a domino effect take place that would topple the whole system as it nearly did in 2008. And what could this lead to?