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Monday, May 18, 2015

The Truth of The Great Financial Crisis...And the Truth Why the Worst is Yet to Come

In the search of "truth", start with the big numbers and work your way down.  The biggest number of all...people.  How many are there and the change over time.  Economists and Fed chiefs enjoy explaining the growth of the US population as a part and parcel of the US "exceptionalism" meme.  But the truth of our economic troubles (and OECD nations alike) lies in slowing population growth and the components of that slowdown.  The core populations are shrinking...the old are swelling...the young are barely growing.

In short, the world celebrated the end of WWII by getting laid with reckless abandon.  The greatest bubble was born...a population bubble greater than any before or since among most WWII participant nations which would be the foundation of so many coming economic bubbles.   This population bubble would see decades of hubris, leverage, debt, and eventually outright fraud and lies layered upon one another.

This is a simple explanation why housing and equities crashed in '08.  Why mortgage debt and total oil consumption peaked and has fallen since.  Look no further than annual growth of the young versus old.  An economic system premised on perpetual growth ran out of new customers.

First, the 25-54 year old segment of the US population vs. the 55+ segment.  The annual growth of the 55+ segment eclipsed the 25-54 segment as of '00.  And since '08 the 25-54 year old segment is outright shrinking while the 55+ is surging (below). 

Two caveats on the following numbers, one, they include all US residents whether legal residents or "otherwise", and two, nearly all US population growth through 2050 is anticipated to be Hispanic immigrants and their offspring but if low skill jobs creation doesn't turnaround...there won't likely be the economic draw to entice nearly as many as anticipated and some portion may even repatriate to their home nations.
This situation will continue for at least another decade before the situation begins to normalize (below).

Below, the 25-64 year old segment vs. the 65+ and you see the same demographic dynamics coming through with a decade delay.  The growth of the young...forming families, buying homes, seeing wage gains, saving for retirement has nearly come to a halt.  The surging 65+ segment is looking to curtail spending in retirement, downsize their living arrangements, and cut make due while living on fixed incomes.  Slowly but surely they are in forced liquidation.  The majority with social security as their primary, if not sole, income...not the consumer base America is looking for. 

The situation going forward is about to get much worse...after 2016 the 25-64 year old segment will begin outright shrinking while the 65+ year olds continues its surge (below).  This will go on for another decade before time catches up with the baby boom and a balance of young and old is re-established.

The below charts dramatically highlight the implications of what was always an inevitable population growth slowdown and the governmental response...debt.  Some charts for your consideration...

Below, the Fed's balance sheet growth (aka, St. Louis Monetary base) impact was intended to push bond yields down...but equally impacted were stocks and real estate (below).

But like all bubbles...a pop is inevitable.  But this pop is not likely to be a "market" event like 2000 or 2008-09.  Why?  In Dec '08, when President Bush explained he'd "abandoned free-market principles to save the free market system" lights and sirens should have been going off.  In March '09, when President Obama said "...buying stocks is a potentially good deal..." the governments involvement in markets to "save the system" via TALF, TARP, QE, and so many other acknowledged acronyms and unacknowledged means was set.  The Rubicon had been crossed and free-markets would not be allowed to return so long as the illusion of normalcy was to be maintained.  National and global economic mismanagement was one the costs of this illusion alongside inequality of asset bubbles minus the wage hikes to buy those assets

The implications of a flattening population across all advanced economies of the OECD should be very clear for national real estate but less clear for global commodities....and on and on.  But it isn't clear at all because central banks are attempting to devalue the currencies and simultaneously boost certain asset valuations while almost surely hindering other assets like precious metals.

Obama's March '09 assertion "that profit and earnings ratios are starting to get to the point where buying stocks is a potentially good deal" was not correct.  With declining core consumers resulting in a mismatch of excess capacity...a depression where excess capacity was cured should have been the markets answer to the decades of economic mismanagement.  But it wasn't allowed then and with demographics only getting more difficult...don't expect a re-emergence of markets anytime soon. 

A political resolution will be necessary to initiate the ultimate rebalancing of asset valuations with "market forces"...but unfortunately I doubt this political change will come via the ballot boxes or simply selecting new candidates.  Something a bit more radical seems the ultimate endgame.


  1. Excellent analysis. I doubt a president will initiate the re-balancing. Or even the federal reserve. We must wait for the boomers themselves to panic into selling. Now, what could possibly shake the confidence of these boomers? Not your charts or your reasoned analysis. They already ready 'know' they are wealthy. The boomers 'know' how much there assets are worth. Currently, they are not selling for less than they are 'worth'.

    I don't expect boomers to panic even when the defaults start to escalate. The president will order the fed to bail out a huge insurance company and it will refuse. The boomers will be confused but they won't panic. Their 'wealth' will evaporate and they will feel cheated. Only a few percent have a chance at realising their 'wealth'. The boomers don't have my sympathies, they have had an exceptionally easy ride - especially the American boomers.

    The financial system will collapse, either under its own weight or if a few percent of boomers panic and attempt to 'cash' out. As the financial system is only a means of control, I expect government control to increase as the financial system collapses. Which won't be fun. It really is a great shame that so few people bother to think independently.

    1. David - wise words as always...I did update my ending to make clear I don't expect a "political" change to come via the ballot boxes but more likely something a bit more disruptive than new elections.

    2. Your clarification and reply resonate with both truth and wisdom.

      With a single word, 'disruption', you concisely portray our collective future. The financial system collapse and reset will disrupt our way of life. Our governments will believe that they have 'learned their lessons the hard way' and they will 'promise' whatever their campaign consultants advise. We then get to vote red or blue but we still play the same game regardless.

      We, the people, need to assume control and responsibility for our own lives and that is a very scary thing to do. Believing in the government to act in our own best interests is unbelievable. God himself gave us free will and we are forever trying to give it away. Will a financial system collapse and the evaporation of our pensions shake our faith in the centralised control systems of finance, law and government? Or simply 're-reinforce it?

      Thanks for teasing some value from my rants.

  2. Nice piece. For Chris and also for David, how does one go about weathering this storm? It is inevitable. It seems that the supposed solution that is pending but hidden away from "media" is the spurring on of a multilateral global system involving the use of SDR denominated bonds instead of the dollar to change financial system as we know it. SDRs was used to loan money to Ukraine last year with the Crimea crisis. How does one prepare for this crisis other than their ongoing job skills, social skills, minimal debt or say gold ?

    1. Hey Slam,

      thanks for reading but unfortunately, my answer is gonna suck (just setting expectations). I think what's coming is more akin to an ice age than a storm. The models we've grown to know are culminating and the new system or model is simply unknown (at least to me).

      So, best I can offer is plan for the worst and hope for the best. Folks like Chris Martenson of Peak Prosperity make good sense in their approach. Do your best to build your resilience and the like. Do the things that always made sense...have friends and be a good friend, minimal debt, have a big pantry, buy some precious metals, have a small armory, and hope you never need any of them. Sorry if I have nothing to tell you don't already know.

    2. I should add that you if you are fortunate enough to have the basics above almost have to buy some amount of RE, stocks, bonds (leverage levels is based on how you want to sleep), and hold some amount of cash...regardless if you believe in them or not or if the fundamentals make any sense. They are almost surely politically appointed valuations...and the system is so compromised that maintaining false valuations are almost surely considered of national security.

      It's just the allocation that is up to you...but what I have found is that peoples belief systems tend to match their gold bugs generally want nothing but collapse as only that outcome suits them...stock holders want to hear nothing but bullish holders, RE holders, etc., etc. So think of the outcome you want, the outcome you believe in, and the outcome you find hard to believe. Invest some towards all and you'll hopefully have a return and hopefully remain positive but guarded (as best you can) to all outcomes.

  3. The systems that society has built up are optimised for cost. Generally, robustness is not a prime consideration. Overtime, the systems become increasingly brittle and fragile as they become ever more cost effective.

    Gambling your life on the uninterrupted continuance of these systems is very brave. A financial system collapse doesn't just destroy savings. Water, food and fuel distribution systems will all suffer shocks.

    Hopefully, our governments will have plans to ensure the supply of the basics of life. Having your own supplies increases your individual survival chances if the financial collapse leads to the collapse of other systems.

    Being mentally prepared for a range of disaster scenarios should increase your odds of weathering storms and adapting quickly to new circumstances.

    For example, if you wake up tomorrow without power and it stays off for ten days, how big a problem would that be for you? Personally, I would survive but not thrive.

    Perhaps my next purchase ought to be a gas barbeque rather than a new smart phone. A water butt and filter rather than a new coffee machine. Should I attend a town meeting and instead of complaining about price increases ask how robust our towns power and water supplies are. Robust systems are more expensive than ones not designed to withstand shocks.

    Think, think and then think some more. That includes me. I am hoping for a financial crisis and not a food, fuel and water crisis. An international trade crisis, rather than a local one. Surely, an international trade crisis will impact local markets?

    Prepare for the worst and hope for the best. Enjoy life, accept that change is inevitable and adapt quickly. Don't worry about the future but do give it some thought.

  4. The economy doesn't need a prosperous middle class. It only needs a prosperous enough upper middle class and upper class with sufficient compassion. That is the way it has always been with a short American exception. Historically in the world compassion has been low but I am guessing well enough to-do Americans will stave off mass homelessness if the system fails to maintain enough jobs with enough pay for the masses.

    They used to say let them eat cake. Now they say let them get a second job at Instacart. Just wait until the effect of Obamatrade take effect.

    1. Hi Joseph, interesting point about classes and their numbers. The class system is basically a system of control by the 'upper class' of everyone else. The economy is essentially a very effective mechanism of both distraction and control. An easy way to waste the very best of humanity ensuring the disorganised masses don't start thinking big thoughts. As are really big wars.

      We really should pay close attention to what we are led to believe. Starting with everything you know is wrong and moving on from there. Knowledge is a massive barrier to understanding. Especially knowledge that we all know. Things continually change but most knowledge does not. That tells you what you need to know about knowledge and its accuracy.

      For example, Chris points out that things changed dramatically in certain years. Knowledge hasn't tracked these changes, YET. Reality has changed and continuously changes. Our knowledge of reality hasn't changed in decades. When it does change, it will appear to be both abrupt and dramatic to the masses. The masses will ask for confirmation that this new reality is real and won't change. The masses demand to be lied to and so are lied too. The disorganised masses find uncertainty frightening. Perhaps one day the human race will stop running and have a think instead.

  5. "...more likely something a bit more disruptive than new elections." Look what Ray Dalio said:

  6. Hi Joseph, good clip. Governments believe that they provide social cohesion. Governments are wrong. Social cohesion creates governments. Governments then unwittingly destroy social cohesion, whilst trying ever harder to maintain social cohesion.

    I use the word government to describe any ruling elite.

    We are currently a few years in to a twenty year period of crisis. The ruling elite wish the crisis to end with them having more power and more control. The UN would like more power, to be a global government. The IMF would like to control the world's reserve currency, SDR'S. Free of any political interference.

    People with power want to keep it, to keep it they need more of it. Power is simply the ability of a few to influence the many. Therefore, the base of the elites power is us.

    For example, as crisis levels grow, we the people will reach a point where we demand a solution. The IMF will say 'our SDR'S will re-capitalise the financial system.' At that point, we the people, have a choice. We can believe them or laugh at them. The IMF will attempt to influence us into giving them more control over us. Leading to a more powerful financial sector. Governments will call for more powers to contain the financial sector, will will believe them or laugh at them?

    Do you see that, every crisis leads the few to demand more from us? Power is concentrated into fewer and fewer hands as we continually and voluntarily give them more control over us? In the UK, our newly elected prime minister states that not breaking the law doesn't necessarily prevent the government from taking action against you. Obviously, he then mumbles about terrorists and the British way of life. Unreal, he is simply taking power from us, that isn't the way it works. He is merely creating an opposing force. Opposing this opposing force will be his justification for more centralised control. More power to the few, taken from the many. The USA is further down this path.

    Let me be clear, a small government initiated by the many is a result of social cohesion.
    A large government is a parasite which destroys social cohesion.

    Again, government is just a word to describe any organisation which the public initially create to achieve an agreed goal. Once birthed, these organisations must be regularly culled otherwise they grow beyond our ability to control them. They grow until they collapse under their own weight. What an utter waste of resources and potential.

    So, will these organisations collapse or simply grow bigger? Are banks really to big to fail? Is the human race infinitely stupid as Einstein suggested?

    The organisations collapse the instant we stop believing in them. You need proof? Imagine a class full of eight year olds and the teacher is explaining that bits of paper we borrow from a bank are money. The children, just laugh. The teacher calls in the headmaster. The children laugh at him. A local banker is called in. The children cry with tears of laughter. Janet Yellen and President Clinton surrounded by armed security show them a suitcase full of green paper. This is money Hilary shrieks. A child stands up, gently shakes her head. 'No, it isn't money. You just need me to pretend it is.'

    So, render unto Caesar that which is Caesars. Money is an idea. Conch shells, salt, silver, gold or green rectangles of paper, even bit coin can act as money only if a socially cohesive group of people decide it is money.

    I fear I may be rambling. My point is that social cohesion arises naturally from the people as a form of protection and comfort. The few are meddling with forces beyond their ability to comprehend. Hence the crisis. More centralised control will be offered as the solution. Will we laugh as the eight year olds did in my story? I hope so.

  7. Good article. Found your blog on a reported article written by Jim Willie on Silver Doctors. As an active duty Army officer I can tell you there are just as many zombies in the military as there are anywhere else in America. I woke up in 2008 and started buying precious metals. Since then I've been trying to wade through the sea of information and, unfortunately, disinformation. Big things are afoot. Some people I share this info with will just relegate it to another economic downturn. I pity their ignorance. 2014 was my own personal apocalypse, or, "unveiling," where I came to see so many seemingly disconnected dots come together, so many conspiracy "theories" turn out to have merit. Whatever we think we know about what is going on I guarantee you there is another layer beyond that we don't see. Being a Christina actually helps a great deal in this arena, knowing that Satan is the deceiver of deceivers, conspiring with human agents to carry out a very evil and real plan to destroy humanity, which he hates with reckless abandon. This coming global financial crash is just one more piece to the puzzle. While we are all consumed with preparing for this event, we must be careful to not fall for the hidden conditioning of the masses that the emerging system is being engineered for. Hollywood is probably the most useful tool this end, especially for Americans.

    Jesus is who the Bible says he is. While you all are preparing tangibly for this crash, it is more important to prepare spiritually. "For what shall it profit a man if he gains the whole world but loses his soul?" The ultimate endgame is for Satan to help mankind "liberate" itself from the confines God placed it in when He made us. It is a lie to think we can attain ultimate freedom and liberty outside of God, yet this is exactly where Satan wants to take us right before springing the final trap to destroy us. He engineers crisis after crisis, spreading chaos and lawlessness until the whole world is ready to accept the answer it thinks will bring it into this so-called "golden age" or "age of Aquarius." I pray anyone reading this does not fall for these lies.

    The problem with living in a matrix (and knowing it) is not knowing how much of the matrix we still have yet to be freed from...

    1. LM,

      not a "religious" man myself but much of what you say rings true with me. I find many who are aware of the troubles we face but their only goal is to enrich themselves from it...not unlike the greed of those presently driving the system.

      There is a moral crisis as part and parcel of the financial and demographic crisis we face. No matter our troubles, we are the ones who get to choose how we react to it...and actions alone dictate a person. Thanks for your thoughts.

    2. One thing I can't get a straight answer on is what will happen to fixed mortgages or any debt with a fixed interest rate for that matter after any monetary reset occurs. My wife used to work in mortgages and she says there's no fine print that would lead to any sort of revaluation of mortgages in concert with a devalued dollar. One writer has referenced the Weimar Republic as precedent for why the banks today will not be on the losing end of things. If Jim Willie is correct and the gov't makes a 30% or so initial devaluation, will that mean my $300k mortgage increases by the same %? Others have encouraged people to reduce debt as much as possible, but unless your mortgage is an adjustable rate how can the banks legally, arbitrarily simply jack up people's debts like that and not get sued? Doesn't the gov't still have some sense of self-preservation that would drive it to keep this from happening in order to keep the entire country from getting completely pissed off and storming Washington?

    3. Little Mac - no mortgage expert here...but pretty sure any devaluation wouldn't change mortgage payments (based on todays law). Fixed mortgages would be unchanged in their structures and payments but what may change is that banks are allowed to offload all remaining mortgage debt to Fan/Fred/Ginnie, etc. to allow the government to monetize all the losses? Banks may move entirely to the origination model and immediately move them off their balance sheet? Of course, with a declining population of buyers, rates already based on ZIRP, the only lever left to push housing is dollar devaluation. More questions than answers here and well worth to think through the possibilities...but that's for another day.

  8. The flattening age pyramid is more about a falling death rate than any problem with the birth rate. Due to medical advances, improvements in diet, safer working conditions, and improved safety in everything from cars to toasters, people live much longer. And that's the rub. Social Security has had precious few adjustments to reflect this longevity and as a result it is no longer actuarially sound. The problem is compounded by the fact that people who should still be working and contributing to the economy are instead retired.

    You can find a chart of the US death rate here:


    Kim G
    Boston, MA

    1. Gringo - I'm saying half right on this one...totally agree we have a death dearth going on due to longer lifespans. However, we also have seen the birth rates and replacement rate fall significantly in the US, now well below replacement rates. US is now down to 1.86 from 2.1 as recently as 2007 (2.1 is considered flat...anything below inadequate to maintain current population).

  9. By the way, if you haven't, you owe it to yourself to read some of Dr. Laurence Kotlikoff's (Professor of Economics at Boston University) work on intergenerational inequality. He also wrote a paper in 1996 explaining why the federal government was bankrupt. And as you know, things are far worse now.


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