By F. William Engdahl
July 25, 2022:
Information Clearing House
--Since
the creation of the US Federal Reserve over
a century ago, every major financial market
collapse has been deliberately triggered for
political motives by the central bank. The
situation is no different today, as clearly
the US Fed is acting with its interest rate
weapon to crash what is the greatest
speculative financial bubble in human
history, a bubble it created. Global crash
events always begin on the periphery, such
as with the 1931 Austrian Creditanstalt or
the Lehman Bros. failure in September 2008.
The June 15 decision by the Fed to impose
the largest single rate hike in almost 30
years as financial markets are already in a
meltdown, now guarantees a global depression
and worse.
The extent of the “cheap credit” bubble
that the Fed, the ECB and Bank of Japan have
engineered with buying up of bonds and
maintaining unprecedented near-zero or even
negative interest rates for now 14 years, is
beyond imagination. Financial media cover it
over with daily nonsense reporting , while
the world economy is being readied, not for
so-called “stagflation” or recession. What
is coming now in the coming months, barring
a dramatic policy reversal, is the worst
economic depression in history to date.
Thank you, globalization and Davos.
Globalization
The political pressures behind
globalization and the creation of the World
Trade Organization out of the Bretton Woods
GATT trade rules with the 1994 Marrakesh
Agreement, ensured that the advanced
industrial manufacturing of the West, most
especially the USA, could flee offshore,
“outsource” to create production in extreme
low wage countries. No country offered more
benefit in the late 1990s than China. China
joined WHO in 2001 and from then on the
capital flows into China manufacture from
the West have been staggering. So too has
been the buildup of China dollar debt. Now
that global world financial structure based
on record debt is all beginning to come
apart.
When Washington deliberately allowed the
September 2008 Lehman Bros financial
collapse, the Chinese leadership responded
with panic and commissioned unprecedented
credit to local governments to build
infrastructure. Some of it was partly
useful, such as a network of high-speed
railways. Some of it was plainly wasteful,
such as construction of empty “ghost
cities.” For the rest of the world, the
unprecedented China demand for construction
steel, coal, oil, copper and such was
welcome, as fears of a global depression
receded. But the actions by the US Fed and
ECB after 2008, and of their respective
governments, did nothing to address the
systemic financial abuse of the world’s
major private banks on Wall Street and
Europe , as well as Hong Kong.
The August 1971 Nixon decision to
decouple the US dollar, the world reserve
currency, from gold, opened the floodgates
to global money flows. Ever more permissive
laws favoring uncontrolled financial
speculation in the US and abroad were
imposed at every turn, from Clinton’s repeal
of Glass-Steagall at the behest of Wall
Street in November 1999. That allowed
creation of mega-banks so large that the
government declared them “too big to fail.”
That was a hoax, but the population believed
it and bailed them out with hundreds of
billions in taxpayer money.
Since the crisis of 2008 the Fed and
other major global central banks have
created unprecedented credit, so-called
“helicopter money,” to bailout the major
financial institutions. The health of the
real economy was not a goal. In the case of
the Fed, Bank of Japan, ECB and Bank of
England, a combined $25 trillion was
injected into the banking system via
“quantitative easing” purchase of bonds, as
well as dodgy assets like mortgage-backed
securities over the
past 14 years.
Quantitative madness
Here is where it began to go really bad.
The largest Wall Street banks such as JP
MorganChase, Wells Fargo, Citigroup or in
London HSBC or Barclays, lent billions to
their major corporate clients. The borrowers
in turn used the liquidity, not to invest in
new manufacturing or mining technology, but
rather to inflate the value of their company
stocks, so-called stock buy-backs, termed
“maximizing shareholder value.”
BlackRock, Fidelity, banks and other
investors loved the free ride. From the
onset of Fed easing in 2008 to July 2020,
some $5 trillions had been invested in such
stock buybacks, creating the greatest stock
market rally in history. Everything became
financialized in the process. Corporations
paid out $3.8 trillion in
dividends in the period from 2010 to
2019. Companies like Tesla which had never
earned a profit, became more valuable than
Ford and GM combined. Cryptocurrencies such
as Bitcoin reached market cap valuation over
$1 trillion by late 2021. With Fed money
flowing freely, banks and investment funds
invested in high-risk, high profit areas
like junk bonds or emerging market debt in
places like Turkey, Indonesia or, yes,
China.
The post-2008 era of Quantitative Easing
and zero Fed interest rates led to absurd US
Government debt expansion. Since January
2020 the Fed, Bank of England, European
Central Bank and Bank of Japan have injected
a combined $9 trillion in near zero rate
credit into the world banking system. Since
a Fed policy change in September 2019, it
enabled Washington to increase public debt
by a staggering $10 trillion in less than 3
years. Then the Fed again covertly bailed
out Wall Street by buying $120 billion per
month of US Treasury bonds and
Mortgage-Backed Securities creating a huge
bond bubble.
A reckless Biden Administration began
doling out trillions in so-called stimulus
money to combat needless lockdowns of the
economy. US Federal debt went from a
manageable 35% of GDP in 1980 to more than
129% of GDP today. Only the Fed Quantitative
Easing, buying of trillions of US government
and mortgage debt and the near zero rates
made that possible. Now the Fed has begun to
unwind that and withdraw liquidity from the
economy with QT or tightening, plus rate
hikes. This is deliberate. It is not about a
stumbling Fed mis-judging inflation.
Energy
drives the collapse
Sadly, the Fed and other central bankers
lie. Raising interest rates is not to cure
inflation. It is to force a global reset in
control over the world’s assets, it’s
wealth, whether real estate, farmland,
commodity production, industry, even water.
The Fed knows very well that Inflation is
only beginning to rip across the global
economy. What is unique is that now Green
Energy mandates across the industrial world
are driving this inflation crisis for the
first time, something deliberately ignored
by Washington or Brussels or Berlin.
The global shortages of fertilizers,
soaring prices of natural gas, and grain
supply losses from global draught or
exploding costs of fertilizers and fuel or
the war in Ukraine, guarantee that, at
latest this September-October harvest time,
we will undergo a global additional food and
energy price explosion. Those shortages all
are a result of deliberate policies.
Moreover, far worse inflation is certain,
due to the pathological insistence of the
world’s leading industrial economies led by
the Biden Administration’s anti-hydrocarbon
agenda. That agenda is typified by the
astonishing nonsense of the US Energy
Secretary stating, “buy E-autos instead” as
the answer to exploding gasoline prices.
Similarly, the European Union has decided
to phase out Russian oil and gas with no
viable substitute as its leading economy,
Germany, moves to shut its last nuclear
reactor and close more coal plants. Germany
and other EU economies as a result will see
power blackouts this winter and natural gas
prices will continue to soar. In the second
week of June in Germany gas prices rose
another 60% alone. Both the Green-controlled
German government and the Green Agenda “Fit
for 55” by the EU Commission continue to
push unreliable and costly wind and solar at
the expense of far cheaper and reliable
hydrocarbons, insuring an unprecedented
energy-led inflation.
Fed
has pulled the plug
With the 0.75% Fed rate hike, largest in
almost 30 years, and promise of more to
come, the US central bank has now guaranteed
a collapse of not merely the US debt bubble,
but also much of the post-2008 global debt
of $303 trillion. Rising interest rates
after almost 15 years mean collapsing bond
values. Bonds, not stocks, are the heart of
the global financial system.
US mortgage rates have now doubled in
just 5 months to above 6%, and home sales
were already plunging before the latest rate
hike. US corporations took on record debt
owing to the years of ultra-low rates. Some
70% of that debt is rated just above “junk”
status. That corporate non-financial debt
totaled $9 trillion in 2006. Today it
exceeds $18 trillion. Now a large number of
those marginal companies will not be able to
rollover the old debt with new, and
bankruptcies will follow in coming months.
The cosmetics giant Revlon just declared
bankruptcy.
The highly-speculative, unregulated
Crypto market, led by Bitcoin, is collapsing
as investors realize there is no bailout
there. Last November the Crypto world had a
$3 trillion valuation. Today it is less than
half, and with more collapse underway. Even
before the latest Fed rate hike the stock
value of the US megabanks had lost some $300
billion. Now with stock market further panic
selling guaranteed as a global economic
collapse grows, those banks are
pre-programmed for a new severe bank crisis
over the coming months.
As US economist Doug Noland recently
noted, “Today, there’s a massive “periphery”
loaded with “subprime” junk bonds, leveraged
loans, buy-now-pay-later, auto, credit card,
housing, and solar securitizations,
franchise loans, private Credit, crypto
Credit, DeFi, and on and on. A massive
infrastructure has evolved over this long
cycle to spur consumption for tens of
millions, while financing thousands of
uneconomic enterprises. The “periphery” has
become systemic like never before. And
things have
started to Break.”
The Federal Government will now find its
interest cost of carrying a record $30
trillion in Federal debt far more costly.
Unlike the 1930s Great Depression when
Federal debt was near nothing, today the
Government, especially since the Biden
budget measures, is at the limits. The US is
becoming a Third World economy. If the Fed
no longer buys trillions of US debt, who
will? China? Japan? Not likely.
Deleveraging the bubble
With the Fed now imposing a Quantitative
Tightening, withdrawing tens of billions in
bonds and other assets monthly, as well as
raising key interest rates, financial
markets have begun a deleveraging. It will
likely be jerky, as key players like
BlackRock and Fidelity seek to control the
meltdown for their purposes. But the
direction is clear.
By late last year investors had borrowed
almost $1 trillion in margin debt to buy
stocks. That was in a rising market. Now the
opposite holds, and margin borrowers are
forced to give more collateral or sell their
stocks to avoid default. That feeds the
coming meltdown. With collapse of both
stocks and bonds in coming months, go the
private retirement savings of tens of
millions of Americans in programs like
401-k. Credit card auto loans and other
consumer debt in the USA has ballooned in
the past decade to a record $4.3 trillion at
end of 2021. Now interest rates on that
debt, especially credit card, will jump from
an already high 16%. Defaults on those
credit loans will skyrocket.
Outside the US what we will see now, as
the Swiss National Bank, Bank of England and
even ECB are forced to follow the Fed
raising rates, is the global snowballing of
defaults, bankruptcies, amid a soaring
inflation which the central bank interest
rates have no power to control. About 27% of
global nonfinancial corporate debt is held
by Chinese companies, estimated at $23
trillion. Another $32 trillion corporate
debt is held by US and EU companies. Now
China is in the midst of its worst economic
crisis since 30 years and little sign of
recovery. With the USA, China’s largest
customer, going into an economic depression,
China’s crisis can only worsen. That will
not be good for the world economy.
Italy, with a national debt of $3.2
trillion, has a debt-to-GDP of 150%. Only
ECB negative interest rates have kept that
from exploding in a new banking crisis. Now
that explosion is pre-programmed despite
soothing words from Lagarde of the ECB.
Japan, with a 260% debt level is the worst
of all industrial nations, and is in a trap
of zero rates with more than $7.5 trillion
public debt. The yen is now falling
seriously, and destabilizing all of Asia.
The heart of the world financial system,
contrary to popular belief, is not stock
markets. It is bond markets—government,
corporate and agency bonds. This bond market
has been losing value as inflation has
soared and interest rates have risen since
2021 in the USA and EU. Globally this
comprises some $250 trillion in asset value
a sum that, with every fed interest rise ,
loses more value. The last time we had such
a major reverse in bond values was forty
years ago in the Paul Volcker era with 20%
interest rates to “squeeze out inflation.”
As bond prices fall, the value of bank
capital falls. The most exposed to such a
loss of value are major French banks along
with Deutsche Bank in the EU, along with the
largest Japanese banks. US banks like JP
MorganChase are believed to be only slightly
less exposed to a major bond crash. Much of
their risk is hidden in off-balance sheet
derivatives and such. However, unlike in
2008, today central banks can’t rerun
another decade of zero interest rates and
QE. This time, as insiders like ex-Bank of
England head Mark Carney noted three years
ago, the crisis will be used to force the
world to accept a new Central Bank Digital
Currency, a world where all money will be
centrally issued and controlled. This is
also what Davos WEF people mean by their
Great Reset. It will not be good. A Global
Planned Financial Tsunami Has Just Begun.
F. William Engdahl is strategic risk
consultant and lecturer, he holds a degree
in politics from Princeton University and is
a best-selling author on oil and
geopolitics,
http://www.williamengdahl.com