Tuesday, December 17, 2013

Perfect Economic Storm

Several major economic factors are now beginning to converge into what could become a perfect economic storm.  Let me try an list them.

1. Woodrow Wilson in 1913 signs the Federal Reserve Act giving a private central bank control over US currency and credit that the US Constitution says is the job of Congress.

2. Private Federal Reserve Bank (FED) raised interest rates and constructed money supply causing the Great Depression but blamed the depression on the Hawley-Smoot Tariff Act.

3. Both American political parties abandons tariffs and protectionist economic policies, sign NAFTA and GAD, and begin exporting jobs and industry to China.

4. Bank of International Settlement Basil 1 Accords raised reserve requirements on Japan causing the "Lost Decade" in the 1990's

5. Bank of International Settlement Basil 2 Accords raised reserve requirements in 2007 triggering the housing collapse.

6. Bank of International Settlement Basil 3 Accords will raise reserve requirements again and will imcrease liquidity requirements that may effect and eliminate the inter-bank REPO lending market. Basil 3 was supposed to be implemented Jan 1, 2013 but has not yet been implimented.

7. ObamaCare greatly ncreases the cost of healthcare which will both decease the money supply and money velocity (circulation) in the economy.

8. FED may begin to decrease Quantitative Easing and begin to increase interest rates.  This will affect the intra-bank REPO interest rate and may cause banks to become insolvent.

9. Banks keep a fractional reserve to handle day-to-day business.  They don't like to hold cash in reserves because of inflation.  So, they usually hold bonds but increasingly credit-default swaps. Banks borror from each other when they need cash using the LIBOR or REPO market.  

10. Banks also borrow cash from each other on the REPO market using US bonds as collateral so they can invest in other more speculative and risky investments that earn more than US bonds.

11. US Banks are also highly invested in credit-default swap derivatives which are Bond insurance policies. Bond Insurance derivatives are paying a better return than US Bonds.  Monthly insurance premiums are divided up and paid out to credit-default swap holders.

12.  If the US ever stops QE printing and cannot sell its bonds to float its deficit spending and cannot pay the interest on its national debt, then the bond insurance holders (US Banks) have to pay.  Instead of a bailout, banks may conduct a Cypress-style bail-in and could confiscate money out of private segregated accounts.

13. Chinese Middle class is forbidden from investing outside their country and are invested in Chinese real estate.  China has been building 12-24 ghost cities each year.  Some see this as a huge housing bubble ready to collapse.  Others say it takes several years to sell the housing but they are selling. 

14. If there were to be a Chinese housing collapse, it would be 10x worse than the US and affect global markets x10.  However, unlike the US, China does have the demographics to keep pace with the building.

15. Or the US could just continue to QE print and China could just continue to build ghost cities until WW3 and we could all just wipe the slate clean and start over.

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