Category Archives: Monetary Policy

The Biggest Ponzi Scheme In The History Of The World

 By: Michael T. Snyder

The Economic Collapse Blog

Did you know that you are involved in the most massive Ponzi scheme that has ever existed?  To illustrate my point, allow me to tell you a little story.  Once upon a time, there was a man named Sam.  When he was younger, he had been a very principled young man that had worked incredibly hard and that had built a large number of tremendously successful businesses.  He became fabulously wealthy and he accumulated far more gold than anyone else on the planet.  But when he started to get a little older he forgot the values of his youth.  He started making really bad decisions and some of his relatives started to take advantage of him.  One particularly devious relative was a nephew named Fred.  One day Fred approached his uncle Sam with a scheme that his friends the bankers had come up with.  What happened next would change the course of Sam’s life forever.

Even though Sam was the wealthiest man in the world by far, Fred convinced Sam that he could have an even higher standard of living by going into a little bit of debt.  In exchange for IOUs issued by his uncle Sam, Fred would give him paper notes that he printed off on his printing press.  Since the paper notes would be backed by the gold that Sam was holding, everyone would consider them to be valuable.  Sam could take those paper notes and spend them on whatever his heart desired.  Uncle Sam started to do this, and he started to become addicted to all of the nice things that those paper notes would buy him.

Fred took the IOUs that he received from his uncle and he auctioned them off to the bankers.  But there was a problem.  The IOUs issued by Uncle Sam had to be paid back with interest.  When the time came to pay back the IOUs, Uncle Sam could not afford to pay back the debts, pay the interest on those debts, and buy all of the nice things that he wanted.  So Uncle Sam issued even more IOUs than before so that he could get enough notes to pay off his debts.  As time rolled on, this pattern just kept on repeating.  Uncle Sam repeatedly paid off his old debts by taking out even larger new debts.

Meanwhile, since the notes that Uncle Sam was using were backed by gold, everyone else in the world decided to start using them to trade with one another.  This was greatly beneficial to Uncle Sam, because the rest of the world was glad to send him oil, home electronics, plastic trinkets and anything else that Uncle Sam wanted in exchange for his gold-backed notes.

Eventually, however, the rest of the world started to suspect that the number of gold-backed notes that Uncle Sam was issuing far exceeded the amount of gold that Uncle Sam actually had.  So the rest of the world started to trade in their notes for gold.

And by that time Uncle Sam definitely did not have enough gold to back up his notes.  Realizing that the scheme was starting to collapse, one day Uncle Sam announced that his notes would no longer be backed by gold.  But he insisted that the rest of the world should continue using his notes because he was the wealthiest man on the planet and everyone should just trust him.

And the rest of the world did continue to trust him, although it wasn’t the same as before.

As Uncle Sam got greedier and greedier, he started to issue IOUs and spend notes at a rate that nobody ever dreamed possible.  The great businesses that Uncle Sam had built when he was younger were starting to decline, and Uncle Sam started buying far more stuff from the rest of the world than they bought from him.  The rest of the world was still glad to take Uncle Sam’s notes because they used them to trade with one another, but they started accumulating far more notes than they actually needed.

Not sure exactly what to do with mountains of these notes, the rest of the world started to loan them back to Uncle Sam.  It eventually got to the point where Uncle Sam owed the rest of the world trillions of these notes.  Even though the notes were losing value at a rate of close to 10 percent a year, Uncle Sam somehow convinced the rest of the world to loan him notes at an average rate of interest of less than 3 percent a year.

One day Uncle Sam woke up and realized that the amount of debt that he owed was now more than 5000 times larger than it was when Fred had first approached him with this ill-fated scheme.  Uncle Sam now owed more than 16 trillion notes to his creditors, and Uncle Sam had already made future financial commitments of 202 trillion notes that he would never be able to pay.  Meanwhile, the notes that Fred had been printing up for Uncle Sam were now worth less than 5 percent of their original value.  Uncle Sam was becoming concerned because some of his other relatives were warning that this whole scheme was about to collapse.

Sadly, Uncle Sam did not listen to them.  Uncle Sam knew that if he admitted how fraudulent the financial scheme was, the rest of the world would quit sending him all of the things that he needed in exchange for his notes and they would quit lending his notes back to him at super low interest rates.

And if the rest of the world lost confidence in his notes and quit using them, Uncle Sam knew that his standard of living would go way, way down.  That was something that Uncle Sam could not bear to have happen.

When a financial crisis almost caused the scheme to crash in 2008, a desperate Uncle Sam went to Fred and asked for help.  In response, Fred started printing up far more notes than ever before and started directly buying up large amounts of IOUs from Uncle Sam with the notes that he was creating out of thin air.  Fred hoped that the rest of the world would not notice what he was doing.

It seemed to work for a little while, but then an even worse financial crisis came along.  Once again, Uncle Sam started issuing massive amounts of new IOUs and Fred started printing up giant mountains of new notes to try to fix things, but their desperate attempts to keep the system going were to no avail.  The rest of the world started to realize that they had been sucked into a massive Ponzi scheme, and they lost confidence in the notes that Uncle Sam was using.  Suddenly nobody wanted to lend notes to Uncle Sam at super low interest rates anymore, and people started asking for far more notes in exchange for the things that Uncle Sam wanted.

Uncle Sam’s standard of living dropped dramatically.  Since he could no longer flood the world with his notes, Uncle Sam could not continue to consume far, far more wealth than he produced.  Uncle Sam sunk into a deep depression as he watched the scheme fall apart all around him.

Uncle Sam had once been the wealthiest man on the entire planet, but now he was a broke, tired old man that was absolutely drowning in debt.  Unfortunately, once he was down on his luck the rest of the world did not have any compassion for him.  In fact, much of the rest of the world celebrated the downfall of Uncle Sam.

All of this could have been avoided if Uncle Sam had never agreed to Fred’s crazy scheme.  And once Uncle Sam made the decision to stop backing his notes with gold, it was only a matter of time before the scheme was going to collapse.

Does this little story sound crazy to you?  It shouldn’t.  The truth is that you are involved in such a scheme right now.  In case you haven’t figured it out, “Uncle Sam” is the United States, the “notes” are U.S. dollars, and “Fred” is the Federal Reserve.

Please share this story with as many people as you can.  Our country is headed for complete and total financial disaster, and we need to get people educated about this while there is still time.

The Dark Side Of QE: The Next Chapter In Our Story

From: The Future Tense

Bernanke printing money to infinity
QE3: Full steam ahead.


The Dark Side Of QE: The Next Chapter In Our Story

I am about to tell a story with a very happy beginning and a very sad end. Unfortunately, it happens to be the story we are living in today, but because we are still in the happy part of the story most people cannot see what is coming ahead. I will provide that for you here.

The immediate knee jerk reaction to the Fed’s announcement today is that the Fed printing $40 billion per month and pumping it into the banking system is fundamentally strong for every type of asset in the world. Those that graduated from college in 2009 and have only been watching the market for a few years would believe this is a fact.

In essence: buy everything and just keep on buying.

Now that we know we are on the path of QE to infinity it is very important to understand how an endless running stream of new money fundamentally impacts assets differently. You’ll notice a repetition of the word fundamentally because for long periods of time assets can move in the opposite direction of their fundamentals. Think of the 100% par value of subprime mortgage tranches in early 2006 or the multi-billion dollar valuation of in 1999. Over time assets have a tendency, like gravity, to revert back to their fundamental value. This is what causes booms, busts, opportunity, and disaster.

Before we go any further, let’s quickly review how QE actually works. The Fed shows up at the doorstep of primary dealer (the largest) banks with a printed bag full of money and asks them if they can come in and buy some mortgage bonds. The banks agree, hand them the bonds, and take the bag full of cash. The banks now have a new lump sum of money to spend or do with what they like. This is also new money that did not exist in the economy before which is how the money supply is increased. In reality, there are no knocking on doors with bags of money, this process takes place electronically with a few key strokes from either side. The outcome, however, is the same.


Part 1: The Positive Benefits Of QE (March 2009 – September 2012)

We’ll start with mortgage bonds as a completely separate conversation because the Fed has targeted this one asset as their choice of purchase. Mortgage bonds and mortgage rates will have an obvious fundamental advantage to the Fed purchasing them every single month. If the Fed decided they were only going to purchase blue Honda Accord cars every month, it would have a positive fundamental impact on the price of those cars.

The QE process of mortgage bond purchases has the immediate impact of lowering mortgage rates (a new larger buyer of mortgages in the market – higher demand equals lower rates). It also has an alternative impact due to the bag of money left at the doorstep of the banks. The banks can now take this money and spend it. They can purchase treasury bonds, corporate bonds, and municipal bonds (plus a few other assets we’ll get to in a moment).

This bond purchasing lowers the cost of borrowing for everyone as lower interest rates allow corporations, local governments, and the federal government to borrow more. This is the Fed’s second goal: to lower the cost of borrowing to stimulate the economy.

Stocks rise with the Fed easing in part for the very reason just discussed. If it costs corporations less to borrow money it increases their profits and allows them more opportunity to grow. QE also has the ability to push up stock prices because banks now have more fresh cash that they can put to work in the stock market.

The positive benefit of QE, the happy part of the story, is essentially what we have experienced since the first QE program began in March of 2009. Interest rates on every type of bond in America: treasury, corporate, municipal, mortgage, auto, credit card, and junk bonds have fallen significantly.

Stocks have soared, rising over 100% in the S&P 500 since the first QE began that March. This creates an immediate wealth effect for those holding stocks (their portfolio says $400,000 instead of $200,000 making them more likely to spend and boost the economy).

Corporate profits have surged with the lower cost of borrowing, the massive reduction in expenses (mostly through employee layoffs), and an increase in productivity.

Over the past 3.5 years when rolling out QE 1 & 2 the dollar index has moved sideways and even appreciated (due mainly to the over weighting of the index to the euro).

So far we have only experienced the good part of inflation. We have only experienced the high of the drug, and the buzz of the alcohol. If the story ended here today it would appear that QE was the correct decision all along and that the unlimited QE program announced today has no reason to be anything but positive.

But the story will not end here today. We will look now look at what comes next.


Part 2: The Dark Side Of QE (2013 – 2016)

This is where we move away from the fairy tale and back into reality.

When the Fed shows up at the bank with the bag of cash there is another asset class the bank can purchase with the money: commodities.

Commodities include agriculture (food), energy (oil and natural gas), metals (copper, steel, aluminum), lumber, water, precious metals, and every other tangible good in the world. Many of these items are either directly purchased by consumers (food and energy) or they are purchased as a byproduct of other items they use such as a car, shirt, or washer and dryer. This directly raises the cost of living for consumers. A higher cost of living means less disposable income and less money available to buy goods such as iPads, furniture, vacations, or cars. A slow down in spending in these areas not only impacts the stock prices of these companies, it spurs lay offs at them as well.

This is looking directly at the consumer side, but what about the corporate side? At the end of the day a company is judged (with its stock price) based on its ability to generate profits. If the cost of goods to produce rises (with rising commodity prices) and companies are not able to raise prices enough to offset those costs (which would occur if wages were not rising at an equal or greater pace) then profit margins fall.

Do you see, based on the fundamentals of economics, how inflation does not help the price of stocks. This is, in part, why stocks were crushed during the stagflationary period of the 1970’s.


What about bonds?

Bonds face a similar dilemma, only magnified. Why? Because bonds do not have the ability to raise prices the way a company can to offset inflation (even though we just saw how companies can only raise prices so far without choking off all demand). Bonds are set at a fixed interest rate. If the underlying value of the currency the bond is held in depreciates in value then the investor is trapped.

Many bonds today actually have a negative yield. This means that the cost of living is rising more rapidly every year than what is paid out in interest. Investors buying these bonds know going in that they are losing purchasing power. Why would anyone ever do this? I have no idea. Why would they purchase Internet stocks in the year 2000 at sky high valuations when the companies had no profits? Bonds today, like stocks then, are in a bubble. The madness of crowds has set in.

At some point, as new QE money enters the money supply and continues to depreciate the value of the currency there will be an awakening moment for bond holders. What will trigger this “moment?” I have no idea. But I know that it is coming. Those trapped inside the long term bonds that have been front running the Fed’s QE programs will suddenly realize that they are running in quicksand.

How about the currency itself? Paper bills. They have no interest rate risk right? They have no corporate margins to worry about right? Holding cash at the bank seems like the best available option.

In reality it will be ultimately be the worst. The only thing worse than a low interest rate during a period of high inflation is no interest rate. We live in a borderless world today where investors do not have to hold their money in a domestic bank (just watch what is taking place right now in Spain). Money can be moved to a bank in Switzerland, Hong Kong, Brazil, or Canada. It can also be held in those currencies at those banks.

This is what will take place at first slowly in America and then in a rush at the end. Most will likely not be allowed to escape as the borders are shut when the politicians realize what is taking place. Their money will be trapped inside the closed room being filled with water by Bernanke. Their purchasing power will drown.


How about real estate?

This is one of the favorites for those arguing for an inflation investment. The problem is that real estate is purchased with debt. If the cost of the debt rises significantly (interest rates rise) then the price of the asset is going to fall, even if the cost of building a new home is rising as well. This will only occur over the short term because we still have an enormous amount of untapped supply to mop up. It is only in a hyperinflationary environment, not a very high inflationary environment, that real estate will be a strong investment.

So after understanding why stocks, bonds, cash, and real estate fundamentally should go down in a high inflationary environment, what is the best investment option?



I have explained numerous times using historical examples and charts how we are in a long term secular bull market for commodities which began in the year 2000. Energy, agriculture, water, rare earths, and precious metals have been and still are my personal favorites.

If the Fed prints more money tomorrow there is no fundamental downside for the price of gold. There are no corporate margins squeezed. There are no interest rate risks. There is no dilution of the money. It is just a larger amount of paper money chasing a stable amount of physical gold. Throughout history that has only led to one thing: a price adjustment in the price of gold to account for the paper money that has been created.

Usually this happens very slowly over a long period of time and then very suddenly and violently at the end. Almost all of the entire bull market run in gold during the 1970’s happened in the last 90 days leading into January 1980. I think it will be the same this time as well.

For an in depth look into the inflation/deflation discussion see Would The Fed Printing $50 Trillion Tomorrow Cause Hyperinflation?