Dear Money & Crisis Reader,
Memory is a funny thing.
I can remember all the way back to my first year of schooling.
Not the whole thing or in perfect clarity or anything. But certainly key events.
Like the exchange student who drank too much strawberry milk and puked all over one of the girls. His vomit had turned luminous pink from the milk and he was pumping it out like a fire hose.
Spectacular. And a visual I’m going to remember until the day I die.
Some folks claim they can remember back even further than that. Seniors in their 60s and 70s who can recall specific moments from before they can even speak or walk.
And yet, when it comes to certain life lessons, we humans seem to forget all too quickly.
Like for example, the 2008 financial crisis.
It caught many of us off guard. We lost a lot of money. And we swore we would never be unprepared for a crisis again.
For a while, folks seemed to take that idea to heart. They took ownership over their finances and started to build robust emergency funds.
Year after year, average financial security built and built, peaking in 2012 with some of the highest savings numbers we’ve ever seen in the U.S.
And then, everyone just…
The following year, as the memory of 2008 started to fade from the collective unconscious, the savings rate plummeted to as low as they’ve ever been.
And now, as we close out 2018, more than half of Americans couldn’t come up with the money to cover a small emergency expense of $400 — let alone deal with a real financial crisis.
Which is especially reckless considering a full-blown recession is on the cards next year.
Financial expert Jim Rickards knows it. I know it. Heck, even the overly optimistic Labradors writing for the mainstream media are starting to catch on.
And it’s going to be a hell of a lot messier and harder to clean up than some pink vomit.
In today’s issue of Money & Crisis, Jim Rickards — one of the few experts who actually predicted the 2008 crash — delves into the root cause of the 2019 crisis.
All the best,
Editor, Money & Crisis
P.S. After 15 years of secrecy, Jim is finally able to reveal this sensitive information. You don’t know this, but Jim developed a special tool many years ago while working with the U.S. government. “Project Prophesy,” as it’s now known, can predict surprising political and economic events before they happen. Click here for Jim’s shocking confession.
The Fed Is “Triple Tightening” Into Crisis
It’s my job to point out the risks to the financial system and to help people prepare for the next crisis.
Of course, central banks are a big part of the problem. If you have defective and obsolete models, you will produce incorrect analysis and bad policy every time.
And there’s no better example of this than the Federal Reserve.
- The Fed uses equilibrium models to understand an economy that is not an equilibrium system — it’s a complex dynamic system.
- It uses the Phillips curve to understand the relationship between unemployment and inflation — when 50 years of data say there is no fixed relationship.
- And it uses “value at risk” modeling based on normally distributed events — when the evidence is clear that the degree distribution of risk events is a power curve, not a normal or bell curve.
As a result of these defective models, the Fed printed $3.5 trillion of new money beginning in 2008 to “stimulate” the economy, only to produce the weakest recovery in history.
That’s over now. The Fed’s cycle of monetary tightening has been ongoing in various forms for over five years.
First came Bernanke’s taper warning in May 2013.
Next came the actual taper in December 2013 that ran until November 2014.
Then came the removal of forward guidance in March 2015, the liftoff in rates in December 2015, seven more rate hikes to date and the start of quantitative tightening in October 2017.
Another rate hike is already in the queue for December, which would be the ninth rate hike since liftoff.
During much of this tightening, the dollar was actually lower because markets believed the Fed would not raise in the first place or was overdoing it and would have to reverse course.
Now that the Fed has shown it’s serious and will continue its tightening path (at least until they cause a recession), markets have no choice but to believe them.
And since last October, the Fed has also been reducing its balance sheet with quantitative tightening (QT).
Autopiloting Into a Crash Landing
When the Fed started QT last year, they urged market participants to ignore it.
They said the QT plan was on autopilot, the Fed was not going to use it as an instrument of policy and the money burning would “run on background” just like a computer program that’s open but not in use at the moment.
It’s fine for the Fed to say that, but markets have another view. Analysts estimate that QT is the equivalent of two to four rate hikes per year over and above the explicit rate hikes. Markets have already suffered two significant sell-offs this year, the most recent being October’s.
Tighter monetary conditions in the U.S. have led to a stronger dollar, capital outflows from emerging markets (EMs) and disinflation.
The dollar is up about 4.5% this year against major competing currencies such as the euro, pound, and yen.
A stronger dollar is itself a form of monetary tightening. A stronger dollar cheapens imports for U.S. buyers because they need fewer dollars to purchase goods. That’s a deflationary vector that will make the Fed’s goal of achieving a persistent 2% inflation rate even harder to reach.
So, the U.S. is now getting a triple shot of tightening in the form of higher rates, reduced money supply, and a stronger dollar.
At this rate, we may be in a recession sometime next year unless the Fed reverses course. We’ll see if the Fed wakes up to the danger before it’s too late.
I’m not holding my breath. The Fed is always the last to know.
P.S. This could be my most important message going into 2019.
To date, the CIA has given clearance to fewer than 100 people in the entire world involved with this project. I happen to be one of them!
But as a tax-paying American citizen, you deserve to know the truth.
Click here for all the details.