"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered."

-Thomas Jefferson

September 21, 2016  En route to New York City  Yesterday I told you how the US federal debt level is expanding at its fastest rate since the financial crisis.  This isn’t supposed to be happening.  The financial crisis is years behind us. The economy is supposedly on solid footing. The government keeps gushing about how much tax revenue they’re collecting.  Usually when government debt expands so rapidly it’s because they’re waging war, fighting a major recession, or financing some serious infrastructure projects.  But none of these things are happening.  Think about it-- yesterday I told you that the debt is now $19.5 trillion. The debt hit $18.5 trillion in November of last year… meaning that they added $1 trillion to the national debt in just 10 months.  What did you get for that $1 trillion? Did they defeat ISIS? Give everyone a massive tax rebate? Recapitalize all of their insolvent trust funds?  Nope. Nada. They made a trillion dollars vanish into thin air and have absolutely nothing to show for it.  That’s because an absolutely astonishing level of spending (and waste) is built into the system now.  Just keeping the lights on, i.e. simply paying interest on the national debt, plus all the mandatory entitlement programs, burns through almost 100% of their tax revenue.  This means that they have to go into debt to finance nearly everything we think of as government, from fake airport security to the national parks to the Internal Revenue Service.  To be fair, this approach has worked well for years. The US government has had an ample supply of lenders willing to fund its largess.  But that pipeline of suckers will soon be running dry.  In fact, according to the Treasury Department’s most recent data, two of America’s biggest foreign lenders (China and Japan) are already cutting back on their $2.37 trillion of US debt.  Then there’s the Federal Reserve, another one of the government’s major lenders, which now owns $2.46 trillion of US debt.  This is up from just $479 billion right before the financial crisis blew up in 2008. So the Fed has expanded its Treasury holdings by 5-fold (not to mention its ownership of mortgage backed securities has exploded from $0 to $1.7 trillion over the same period…)  But one of the Fed’s major challenges is that they’re nearly insolvent, with a razor-thin capital ratio of just 0.8%.  Simply put, if the Fed continues to conjure trillions of dollars out of thin air to feed the government’s insatiable appetite for debt, they’re risking a major currency crisis at a minimum.  That leaves Social Security, far and away the single largest owner of US Treasuries.  It’s been a neat little scam for decades. Workers in the United States pay a portion of their paychecks to Medicare and Social Security, some of which ends up in the pockets of retirees each month.  The rest of that tax revenue (the “Social Security surplus”) is loaned to the federal government.  Over the years, Social Security has loaned the government trillions of dollars, stockpiling entire warehouses full of IOUs from the Treasury Department.  But here’s the thing-- Social Security and Medicare are rapidly running out of money.  Each year in their annual reports, in fact, their respective boards of trustees describe the programs’ financial woes in excruciating detail. They don’t pull any punches.  The Trustees themselves explain that Social Security’s two biggest trust funds will start running terminal deficits in 2020 until they are fully depleted 14 years later.  This means that in just four more years, Social Security will no longer be able to loan any more money to the federal government. Uncle Sam is about to lose his biggest lender.  What’s more, the US government is going to have to come up with trillions of dollars more to pay back Social Security in the subsequent years.  But that’s just the tip of the iceberg: the US government is also staring down the barrel of several trillion dollars worth of other enormous expenses that they’ll need to pay.  Major components of US infrastructure are in dire need of a facelift that is estimated to cost $1.4 trillion.  Then there are entire federal trust funds that are either insolvent or living on borrowed time--like the Highway Trust Fund that was nearly depleted last year…  … or the FDIC’s deposit insurance fund, which guarantees trillions of dollars worth of deposits in the US banking system, yet is undercapitalized and fails to meet its own insurance threshold.  Even more critical is the pension fund crisis across the United States, where private, state, and local pensions face a funding shortfall exceeding $7 trillion according to credit agency Moody’s.  Yet the federal government’s Pension Benefit Guaranty Corporation, which is supposed to guarantee the pensions of 30 million American workers, is itself insolvent and in need of a government bailout.  There is no end to these liabilities that the US government has been pushing off for years.  So in addition to losing its biggest lenders, they’ll need to come up with trillions of dollars more to pay for these looming obligations.  Like it or not, this party starts in just four more years.  Until tomorrow,  Simon Black Founder, SovereignMan.com

Demand For Gold Bullion Is High And Rising

In a recent interview on February 27, 2016, Dr. Paul Craig Roberts, former US Treasury Assistant Secretary, co-founder of Reaganomics, economist and author, said that the Federal Reserve’s ability to manipulate markets has continued for far longer than he ever thought possible. Even so, he doesn’t think we will make it through the year without a major collapse.

With the American economy hollowed out, Roberts said, “Monetary stimulation today puts the Chinese to work, and the Indians to work.” Today, he said, the Federal Reserve’s policy is “focused on saving a handful of very large” American, British and European banks. Financial deregulation allowed huge banking conglomerates to form with an “extraordinary concentration” of wealth and power. Given their size, he said, “It is believed that if one of them were to fail, the consequences would be the entire financial system would fail.”

“I don’t think the house of cards will make it through the year,” Roberts said, “but I have been surprised so far.” The Federal Reserve, he said, doesn’t seem to be limited by what had been seen as proper, ethical or prudent fiscal policy. Furthermore, he said, “The Fed can create whatever money they need to create” to prop up any market.

Roberts said the economy now runs on impressions. “As long as they have the impression of a good stock market and a good bond market,” he said, the Fed “can keep the impression going that we have a good economy, even when we have 23% unemployment.” There is a “sort of psychological impression that the economy must be going good.” People who are unemployed have the impression that it’s somehow their own fault, not the economy, since government unemployment figures are so low. Inflation, which the public sees as rising every time they go to the supermarket, also must be low, since the government says inflation is zero.

Roberts explained that “The only real limit in my opinion on the Fed to support financial markets through money creation is the value of the dollar.” The key question is when will people lose all confidence in the dollar?

The US Fed has the European Central Bank and the Bank of Japan also doing quantitative easing. If the three major currencies are all printing currency, the dollar won’t lose value against the other currencies. That policy then forces all the little countries to do the same thing, Roberts argued. If they don’t, their currency becomes worth so much, they can’t sell anything. Roberts gave the example of the Swiss Franc, which was rising so much, the Swiss had to state that all efforts of currencies to seek refuge in the Swiss Franc would result in printing more Francs, so it would not rise anymore.

Speaking about the gold and silver markets, Roberts said that the US allows the bullion authorities “to use uncovered shorts in the bullion futures market to drive down the price of gold and silver, and to prevent its rise. If they can prevent gold from rising in price against the dollar, they are protecting the dollar against their policy.”

Roberts wondered what could cause the Fed to lose control of the ability to manage the value of the dollar. “If nothing can cause that,” he said, “then the house of cards can keep going forever.” You could have “50% unemployment and the stock market at 20,000.” The Fed, Roberts said, “manipulates policy for the benefit of the markets, not of the general population.” The current hollowed-out economy “can be presented as a success because stock and bond prices are high, and inflation is low.”

Roberts sees the TransPacific Partnership and other trade agreements as Washington’s attempt to organize the world against the dissident BRIC countries, which are withdrawing from the Western payment system. Washington is trying to make sure that BRIC policies don’t have any adverse effect on the US dollar. The great fear is that if there is a run on the dollar and no one wants dollar-denominated assets, US power would collapse. Roberts predicted that “If there is a dollar collapse, the Fed will let the banks go and raise interest rates to try to convince people to hold the dollar.”

“People are buying gold continuously,” Roberts said, “but the price of gold isn’t determined in the market where they’re buying it; it’s being determined in the paper market,” where the price is manipulated by the selling of options. Demand for bullion is very high and has been growing, he said. The Canadian and US mints have had to either suspend or ration the sale of one-ounce coins because they can’t get enough bullion to produce enough coins. Roberts asked, with such demand, “How can the price be falling? Because they manipulate the price.” And, if the market is rigged, “no one knows what the outcome of this is going to be.”

The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any stock, futures or options contracts.