When I was growing up, journalism was very different than it is today. Walter Cronkite, an American broadcast journalist from my youth said, “In seeking truth you have to get both sides of a story.” I agree. As a truth seeker, I never presume one side is all wrong. I never attempt to silence anyone. Instead, I look for truth on both sides of an argument, even if it’s hidden. No person is ever completely wrong about everything as no person is ever completely right; people just accentuate and see things differently. Good communication (listening, speaking, and writing) goes a long way in helping us grow.
In light of this philosophy, I have made an observation—being in the inflationist or deflationist camp is like being a democrat or republican in today’s America. What I mean is polarizing yourself in one camp is missing the big picture in the grand scheme of things. This big picture is not about gaming better in today’s rigged markets; it’s about the credit market drying up. It’s about the current financial system coming to end. It’s about the poor people who are hurt by the process. It’s about protecting yourself, your people, and your possessions; so after decades of hard work, they don’t go poof and disappear.
Allow me to frame this with an analogical story that brings my perspective into view. Once upon a time there was a world economic ship. The world hired a captain from the US with a compass called the US dollar. Gold was the money of the day, and currency was its proxy. Since the US had the most gold at the end of World Word II, world leaders made a deal with us; their currencies would be pegged to the US dollar which would, in turn, be measured in and backed by gold. The US said yes to the world, and accepted this agreement, otherwise known as responsibility.
To make a long story short, the US broke this agreement it had with the world because it wanted to borrow and print US dollars without restraint, probably for elections and political promises. When caught red-handed by Charles de Gaulle, the nations tried to get as much gold from the US as they could before Nixon officially closed the agreement (“temporarily” for 50 years now) that allowed this exchange of dollars for gold. Being the nations accepted this broken agreement without resisting, one might presume that another classified agreement came under the table, which was not disclosed to the public.
Fact is the US captain of the ship was hired to keep the gold-dollar ratio intact, to print dollars according to its mining and purchases of gold. The more gold that officials pulled out of the ground or bought with existing dollars, the more dollars they were allowed to print. It wasn’t a difficult or challenging job to monitor the printing press in relation to its gold reserves; it just took discipline. If the captain had had this discipline, the natural winds of supply and demand would have guided the lending markets to steer the world’s economic ship steadily along the path of production and prosperity.
As most stories go, someone always rebels out of fear and/or greed. For one or both of these reasons, the captain decided that he didn’t want to do his easy boring job anymore, that he wanted to print dollars freely without worrying about gold. Thus he set the ship in a new direction without anyone realizing it. The winds of supply and demand were replaced by the Fed who controlled the money supply. Over time, and not surprisingly, the supply and demand of goods and services became less relevant to the US, while the supply of dollars became more relevant and extremely important.
When the captain detached the dollar from gold, he removed the sail from the vessel. Without people noticing, the world economic ship stopped moving linearly. US production moved overseas and prosperity happened to a small group of corporate and political elites, as well as others who knew how to game the new process. The captain convinced people that it didn’t matter if we were moving linearly or spinning around in circles, so as long as we stayed in motion. He designed a mechanical strategy to spin the ship in circles and used top engineers to implement it. They put holes in calculated areas of the ship and set machines in place which evaporated the water that leaked in. This process kept the ship afloat and spinning continuously in clock-like motion.
The captain used its power as the world reserve currency to monetize the dollar through the global lending market. By swapping dollars outside of the US, he kept the lending market moving without having to make lending productive. In other words, banks could lend to anyone or any business without worry about whether that business would be profitable or not. These banks grew too big to fail and were always bailed out, even if they made reckless errors. Companies could just borrow more money and buy their own stock and that made their businesses appear prosperous. For a long time now, this process of “spinning” has been sustaining the global economy. The lending industry has become the biggest most important in the world, which almost every other industry depends on.
The ship is old now, but that’s not the problem. The problem is the captain’s machines have drained the ocean and most of the water is gone. This means there is no H2O liquid or liquidity from the mechanical evaporation process to keep the ship spinning. It seems impossible to drain an ocean, but the lower the water level dropped, the more water it took to get the same spin through the machines. The captain is trying to reengineer the machines into some kind or boring system, but the ship is slowing down considerably and people are starting to notice that they aren’t going anywhere. Looking over the top of the ship, you can see the water in the ocean is almost gone and the ship is sitting in a massive crater.
The politicians assure the people; “We don’t need water to spin; we can use the dirt in the crater. Don’t worry, we have the best engineers in the world working on this. Just keep doing what we tell you to do and everything will be back to normal again soon.” Most people go along with this idea, but there are a few rebels like me who don’t think our leaders are being forthright and don’t understand why spinning is necessary when we aren’t going anywhere. We speak up, but we get censored and shamed because it’s not in the best interest of the elites for the general population to understand these things. They are implementing some kind of plan for when it stops to transfer their wealth to the new system.
In a healthy world economy, entrepreneurial spirt, as well as supply and demand of goods and services, would have steered the ship of the lending industry to support the process of production, but the captain took over this natural process with a mechanical one, using a lot of hydro-evaporation-power to go nowhere. To keep the process going, he allowed production to move abroad, he lowered interest rates, he printed a ton of dollars, he allowed zombie companies to be funded again and again, he allowed markets to disconnect from fundamentals and profits, he allowed real businesses to be destroyed, and so on. He drained all the water from the ocean to provide a tiny current that keeps the ship spinning, and enriched himself in the process.
We see this story over and over again in the Bible and throughout history. The dog stopped wagging its tail and the tail started wagging the dog. Lucifer wanted to be God. The ouroboros consumed its own body. People chased after the wind. What happened while we were spinning? The rich got richer, and the poor got poorer. We accumulated a massive pile of unpayable debt and promises that will not be kept. We made people unproductive and took away their purpose and meaning in life. We made people sick with engineered food, engineered health care, engineered money, drugs, dirty water, air pollution, artificial everything, manmade viruses, etc. We thought that dollars, which were nothing but paper, could become gold, otherwise known as financial alchemy. Do you know how that story ends?
All of this became clear to me after I learned about swap lines as a remedy for the 2008 crisis, and expanded swap-line measures as a remedy for March 2020. A little over a year ago, the overseas dollar funding markets were crippled as we saw from the foreign exchange swap basis spread. If you are as unfamiliar with this financial lingo as I was, a basis spread is the premium that international institutions pay to obtain US dollars in the foreign exchange swap market over a specific period of time. Via one-week and three-month periods, this lending generates a profit for the US, like interest. It is the water that creates the spin for the global economic ship. It the fruitless process that keeps everything going. It is the ouroboros and the dog chasing its own tail. None of it is about production or growth of anything that’s real. It’s about keeping the dollar illusion going.
Similar to the repo market interest rate that spiked overnight in September of 2019, the short-tenor basis spread increased dramatically in March 2020. To remedy the situation, the FOMC grew swap lines massively. They did this by reducing the cost of funds on their already existing swap lines with five central banks (SSCBs)—the Bank of Canada, Bank of England, European Central Bank, Bank of Japan, and Swiss National Bank. They added longer term swaps to already existing short-term ones. They increased auctions from weekly to daily. They added nine other swap lines with central banks (TSCBs) on a temporary basis, and “a new temporary repo facility for foreign and international monetary authorities (FIMA repo)” where FIMA account holders are able to exchange U.S. Treasury securities for U.S. dollars. See Liberty Street Economics (on the New York Fed’s website) for more information.
The question is did it work? And if so, how long will it last? Did it enable the lending industry to keep going? Did it stir the remaining water in the crater to create a current that moves the world economic ship? According to the post above, “After controlling for the effects of concurrent equity market volatility, we find that only the settlements of daily one-week auctions on one-week FX swap basis spreads improved market conditions. In contrast, settlements of one-week and eighty-four-day operations were not associated with significant improvements in market functioning as initially term liquidity obtained by banks was only partially channeled beyond the banking system.” Do you wonder why the whole financial system is built on gaming and not on good old natural economic principles?
I wonder about a lot of things. I wonder how long these games are going to last. I wonder what our leaders really think. I wonder what they’re actually trying to do. Do they seriously want to create inflation? Or are they just keeping the ship spinning? Or is inflation meant to keep the ship spinning? It now makes perfect sense to me why the Fed did all those PPP loans, why they keep extending the mortgage moratorium, and why we have all this stimulus. Since the repo market collapsed in September 2019, the Fed has been frantically trying to regenerate a current in the remaining water that remains under the vessel. There is not enough liquid (H2O) for the ship, no more liquidity in the system to keep the lending process going, to keep the tail wagging the dog, without the value of the money disintegrating. Does the captain of the ship know what this means?
“Don’t let the people wake up!” the captain shouts. “Keep the ship spinning! Keep the tail wagging the dog, no matter what!” Whether we have a Democrat or Republican in office, it doesn’t matter. Whether we are heading into inflation or deflation, I’d argue that we are in the middle of both. The big picture is telling us that the world economic ship is coming to a standstill. We are going to have to get off this cruise, walk a long way across the crater in knee-deep water, and get to work being productive again on our land. I’m primarily speaking about America, since China and other countries are already producing for us. People don’t know what’s coming, but when the thirsty doggy dog of the bond market wakes up from its long slumber and realizes that it has been drugged, duped, lied to, disguised, used, and beaten by its own tail, it’s not going to be very happy.