My family and I have been tracking speculative bubbles and busts for 80 years.
We’ve personally witnessed 12 recessions, two depressions, five stock market crashes, three real estate busts, three bank failure epidemics, and two of the most vicious inflationary spirals of all time.
But nothing has prepared us for what we’re seeing now!
Just look how dramatically the world has changed since 2000:
• In prior years, we occasionally saw some individual countries — such as Germany in the 1920s and Brazil in the 1970s — run giant budget deficits and finance them with truckloads of paper money.
But until now, we had never seen a situation like today’s — EVERY MAJOR COUNTRY in the Western world doing it in unison!
• In prior years, sometimes the financial disasters were caused primarily by reckless behavior in government, and sometimes by reckless behavior among banks.
But until now, we had never seen BOTH MAJOR GOVERNMENTS AND MAJOR BANKS take such unprecedented risks at the same time!
I vividly remember how we first began this discussion many years ago …
On a bright summer day in the mid-1990s, my father and I were completing a major comparison of all the major 20th century booms and busts.
He pulled out his long-term charts on interest rates, which he had been updating by hand for decades, and pinned them to his wall. Together, we poured over another stack of charts on stocks, the dollar, and gold.
And we came to the conclusion that the new millennium could bring the most extreme bubble-and-bust cycle of all.
But if you could take a time machine back to that day and if you described to us what I’m about to document for you now, we would have responded with just two short words:
Never, even in our wildest imagination, could we have foreseen these basic facts, which are such a pivotal aspect of our financial markets today …
Fact #1. The world’s most powerful governments have printed more paper money in the last three years than in the prior half century!
Read that again and think about it carefully for a moment.
If just ONE government ran its money-printing presses 24/7, it would be dangerous enough.
But as I demonstrated here last week, we now have ALL FOUR of the most powerful central banks doing it all at once.
And this money printing is SO big — with the potential for such a dramatic impact on your financial life — I feel I MUST give you the details again:
It’s all summarized in this chart, showing you the size of each central bank’s balance sheet — a measure for the total money-printing operations to date.
And as you can plainly see, every major central bank in the world has joined the party …
The U.S. Federal Reserve (Fed) has nearly TRIPLED the size of its balance sheet — from about 6% of GDP just three years ago to almost 17% of GDP.
The Bank of England (BOE) has followed in lock step with the U.S.
The European Central Bank (ECB) has suddenly expanded its balance sheet from about 20% of GDP to close to 30% GDP. And …
The Bank of Japan (BOJ) has also run up the size of its balance sheet assets to about 30% of its economy!
Total Balance Sheets of the Four
Central Banks: More Than $10 Trillion!
That’s $10 trillion in paper money that’s been pumped into the global economy!
I cannot stress enough how unprecedented this is.
Even in the early 1930s, when the nation’s entire banking system shut down … and even in the early 1980s, when hundreds of U.S. banks were failing each year, the Fed and other central banks never went this far. (The sole exception: The central bank of Germany in the 1920s.)
But here’s the greatest irony of all: It’s not working.
Or, at best, it’s running into the law of diminishing returns — more money, less results.
Shock and Awe
Think how utterly disappointing — and shocking — that must be for the masterminds behind this giant global money operation!
They had hoped that, after dumping all these trillions into their economies, they would have created a respectable boom.
But we see nothing of the kind!
Instead, the U.S. economy is stumbling again, Japan’s economy is dead in the water, and Europe’s is sinking straight into another recession.
They also hoped that, after dishing out so much liquid cash to their biggest banks, those institutions would naturally be in far better shape today.
But, again, we see nothing of the kind!
Sure, some banks have improved and may continue to do so. But many of the world’s largest have used most of the new money to double down on their riskiest bets!
Prime examples: Big European banks. Over the past few months, they have used the bulk of the cheap money they borrowed from the ECB to buy precisely the same junk that got them into so much trouble in the first place — the toxic bonds of weak countries like Spain, Portugal, and Italy!
As a result, European banks now hold 135 billion euros in Greek bonds … 192 billion in Portuguese bonds … 411 billion in Irish bonds … 634 billion in Spanish bonds … and a whopping 801 billion euros in Italian bonds —more than ever before.
And guess which countries are the headquarters of the biggest banks with the most dangerous exposure! Germany and France — the core euro-zone nations with the ultimate responsibility of backstopping the debt crisis!
Finally, they hoped that, with all that funny money pouring into the banks — and with those banks pouring the money back into the bonds of the weakest countries — global investors would finally breathe a sigh of relief and stop worrying about massive sovereign defaults.
Investors are again abandoning sovereign government bonds in droves.
In Spain, for example, they’re driving bond prices into the gutter.
Worse, they’re driven up the cost of insuring against a Spanish government default to the highest level of all time!
And in Italy, we see the same pattern.
But if you think this is just another Greece, consider this: Combined, the economies of Spain and Italy are more than TWELVE times larger than Greece’s economy.
Spain’s economy alone is larger than Australia’s, South Korea’s — even Saudi Arabia’s. And Italy’s economy is larger than Russia’s, India’s, or Canada’s!
So where does all this leave us? Answer:
The Deadliest Vicious Cycle
Consider the sequence of events …
First, some the world’s largest banks in the U.S. and Europe came within a whisker of failure in the wake of the great housing bust and the global debt crisis.
Second, the world’s most powerful governments pumped in trillions of dollars to keep the banks afloat — and they continue to do so to this very day.
Next, many of the banks used a big chunk of that money to double down on their riskiest investments, digging an even deeper hole for themselves and inviting an even bigger outpouring of paper money from their governments.
In short, the deeper the debt crisis gets, the more governments are driven to print money … and the more they print, the deeper the crisis gets.
This, my friend, is the deadliest vicious cycle we’ve ever seen or imagined!
Good luck and God bless!