These Pictures. What is Wrong

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by Gary Christenson, Deviant Investor:

Sometimes details obscure the bigger picture. The following graphs do not show most of the details and “noise.” These log-scale graphs show one bar every four years (plus April 2018) based on official debt on July 1st, or the average of monthly closes every fourth year for M3, stock indices, houses and commodities.

#1: The official national debt of the United States.

#2: M3 – currency in circulation – data from the St. Louis Federal Reserve: Deficit spending, fractional reserve banking and central bank “quantitative easing” (monetization) add currency into circulation. The rapidly increasing quantity of dollars along with a slowly increasing economy devalues all dollars and creates higher prices.

#3: As commercial and central banks devalue the dollar “currency risk” affects the debt markets and interest rates rise. Higher rates applied to $230 trillion of global debt require larger debt service payments and “squeeze” debtors including all sovereign governments.

#4: The DOW and NASDAQ rose exponentially as the dollar devalued. But markets often move too far and too fast. The corrections, such as 1987, 2000 and 2008, can be painful for everyone.

#5: Dollar devaluations push commodity prices higher. Bubbles occur in commodities and in stocks. Examples: 1980 gold, 1974 & 1980 sugar and 2008 crude oil. Commodities can fall hard after a rapid rise. Examples: The 1980 goldpeak remained the all-time high until 2007. Crude oil fell about 75% from mid to late 2008. Silver fell over 70% from 2011 to December 2015.

SO WHAT IS THE PROBLEM?

  1. Debt is too large. Either sovereign debt will default (unthinkable) or will be paid with devalued currencies. Argentina “over-printed” and dropped 13 zeros from their inflated currency during the past 70 years. Many other currencies inflated and fell to near zero value. No fiat currency is immune!
  2. Rising interest rates. The ten year rate bottomed in July 2016. The five year rate bottomed under 0.60% four years earlier. Higher rates benefit banks (read this article) but they hurt debtors because of higher debt service payments. That includes the U.S. government.

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