Friday, November 6, 2009

The crash is right around the corner....

What people don't understand is that the United States is resting on a house of cards. This house of cards is money (debt) coming from China and other buyers of U.S. debt. As China continues to buy our debt it keeps interest rates low in the U.S. (0.25%). It is also coming from the Federal Reserves proxies: the primary dealers (namely JPMorgan and Goldman Sachs). These banks can then borrow from the Fed at extremely low interest rates and invest that money in equities, oil, gold, etc....this is what we call blowing a bubble.

The house of cards is mainly being support by esoteric instruments called "central bank liquidity swaps". Check the video below, Rep. Alan Grayson from Florida ask Ben Bernake about these swaps, he can't give Grayson a straight answer. These loans are given to foreign central banks and those banks then lend the money to banks is their respective countries.

Those loans are used to prop up asset prices in the United States by driving the dollar lower. Effectively these swaps are short sells on the U.S. dollar.

What this means is that if interest rates rise, even slightly, there will be a gigantic short squeeze on the dollar. Zerohedge has this to say:
"The next risk flaring episode is lurking so close, just off in the shadows... We need just one failed auction (Treasury auction), and when interest rates explode, the entire $1 quadrillion IR (interest rate) derivatives house of cards will collapse and take everything away with it. America has bet its future on the goodwill of China and the Fed's proxies: the Primary Dealers. If it does get to the point where Audit The Fed bill actually does get implemented in its non-abridged form, look for some fireworks in the IR (interest rate) world, courtesy of none other than Ben Bernanke. Would Uncle Ben be willing to wipe out the financial system as we know it as a final self-defense measure? Why, of course he would."

Basically, when interest rates rise there will be no more free money flowing from the Fed. The central bank liquidity swaps with foreign central banks will reverse (those central banks will have to find dollars for us to buy back). Also, if interest rates start to rise, Goldman and JPMorgan will quit borrowing at low rates and start paying off the loans that they have already taken. This creates an even greater demand to find U.S. dollars to pay off those loans from the Fed. Combined with the large demand for dollars from U.S. citizens to pay off their debt, which is unlikely to stop anytime soon (see chart below), we are on the precipice of the next leg down in the economy. This one is likely to make 2007-2009 look like a cake walk.

Notice how last time debt to GDP went parabolic was at the very beginning of the Great Depression. This time it is worse. What also happened during the Great Depression? A gigantic U.S. dollar rally, caused by an enormous demand for U.S. dollars to pay off debt.

Key Point:
An explosion in the U.S. dollar, one that could destroy the financial system as we know it, and force the U.S. to dramatically change policy (let the depression take its course) is upon us. Maybe not today, but sometime in the very near future this will happen.

What can you do? Keep cash! Or, if you must hold your money in a bank (interest rate volatility will destroy most banks and the FDIC is already bankrupt) I would suggest keeping it in a checking account. You want your money in demand deposits, not being lent out on a loan that will never be repaid.

What if I am wrong? Worst case scenario, you don't lose any money! Inflation is not a concern yet, as banks are not lending to the public or companies, even if the Fed prints 15 quadrillion dollars we will not have inflation unless banks start lending. I will write more about this later.

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