How An Artificial Economy Collapses Organically

April 10, 2015

One of the biggest news stories, almost too perfect not to be timed, was released on a day when markets closed early: Good Friday.

Conveniently not factored into major world markets was last week’s horrible jobs report.

From the timing of the news, to the revisions and the real story, these numbers tell about the underlying economy. It says everything one needs to know about the broken monetary system.

Does anyone on their most optimistic day believe that unemployment is really 5.5 percent? What is shocking is that many people clearly do.

But what stands out much more than the abstract and always managed “jobs added” component to the past week’s numbers is the quite dismal reality of there now being 93.2 million people NOT in the labor force. This is the worst number since the late 1970s and confirms the shrinkage of any semblance of an organic growth or a healthy economy. And they don’t even need to hide it!

Of course, this is directly contrary to the message “the markets” have been led to believe in the widely held expectation that the Fed will be raising rates soon based on robust economic activity.

There is a much heavier reality that we should all be focused on as the ultimate gauge of where we are on this road to monetary or currency ruin. We sit on the edge. The reality is that an economy that can barely generate enough money to service official debt (no less manage to prop up the giant financial too big to fail Ponzi that caused it all) is one that is careening faster and faster toward desperation.

And therefore, we would all do well to watch the bond market very carefully. All amounts of QE, as enormous as it might have been, come up as peanuts compared to the bond market. This could be the other black swan (since everyone is only focused on equities and believes in the so-called ‘central bank put’ on the equity markets) is that the problem will come (as always!) from a direction the mainstream investor is unaware of.

Once bond prices start to fall and rates rise, the evaporation of liquid paper churn becomes too much to bear – for even the most enthusiastic mainstream financial analyst cheerleader. It could easily turn into a dollar crisis (get out of dollar denominated debt AND out of the dollar tsunami).

Keep in mind that the equity markets are just a small fraction of the bond markets, which will make interest rates go higher and the dollar lower – while liquidity in the bond market will not come back. But what happens if the illiquidity in the bond market (= a small door) is met with the wish of many to exit it?

Classic run on the biggest banks.

The volatility we saw last year in the US 10-Year Treasury note could also appear to the downside. Now if that would happen, the volatility itself could create dramatic volumes of even more sellers – an uncommon and disruptive volatility.

What happens to all those dollars if people over there sell them and they come home?

If people/businesses/governments are treading water, at best, in this sea of debt, how can anything hold up if rates rise and entire nations, including businesses and individuals, have to default?

The Fed would no longer be able to do anything, because printing dollars to buy the debt would increase the dollar flood while raising rates faster than the crisis would demand; it would kill the economy.

A move OUT of dollar-denominated debt would be the opposite – and could only be answered by tightening. But tightening in a weakening economy would kill the stock market.

Currently, the prevailing wisdom is that a liquidity problem in the U.S. markets will always result in more demand for US Dollars. But if central banks close all the doors at a time when the world believes money printing and artificially low interest rates come at no cost, a rude awakening is in store.

Perhaps we should put away all sharp objects, because the deeper reality may be even worse. The money (currency or credit) needed to meet the ever-expanding (due now and going forward) unfunded unofficial liabilities is gargantuan. It practically guarantees the demise of the currency underlying it all. Therefore, they must print. And the only thing they could slow down the inevitable fall in dollar value would be tighten, which would out us right back where we started.

The monetary policy argument (the Greenspan to Bernanke to Yellen put) is already baked into the cake. They simply “didn’t do enough” – so they will do more.

The sad reality is that those who pay the most will be the unsuspecting masses, among which many have been following sound economic principles all along – punished despite saving.

Not a week goes by without another story about potentially bailing and/or control over the movement of the $27-$30 trillion sitting in retirement accounts like low hanging fruit; from the ‘Cyprus bail-in’ template to the recent announcement from the FBI that banks will soon be required to report minimal sized deposits and withdrawals.

It seems inevitable that we are on a crash course toward the point where propaganda convinces the great masses that it is their civil obligation to contribute financially – with their hard-earned retirements.

We will see an extension of the trend in which people have been more than willing to give up civil liberties and basic human rights via some great distorted rationalization that it’s ‘all for the good of something bigger’. Or worse, for the illusion of personal safety. The same will be said for the willingness of people to give up their wealth.

But that will not be enough.

Once upon a forgotten time there was a spontaneous a sustainable (organic) engine of growth. All that is left of it now lies on the fringe as an ever diminishing remnant of the spirit that encompassed free markets at one time.

Seems the tree of liberty is due for a shaking sometime soon.


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