Economic Crisis: A Look Ahead

0:00Beginning last September, weekend of September 8th, the federal government, while it would not use the term nationalize, it did in fact nationalize both Fannie Mae and Freddie Mac. The two semi-vins, semi-federal agencies, which at that point were supplying 90% of all of the mortgages in the United States. And in one weekend, without congressional discussion, with no announcement whatsoever, the housing market of the United States was nationalized.

0:45There was no hue and cry. There were no discussions of the clear unconstitutionality of the decision. It simply was made by the Secretary of the Treasury, and the next day, the following weekend, whatever business went on, in terms of the supposedly largest and most important single market of the American economy, was in fact an extension of the United States government. Over the next four weeks, we saw the destruction, self-destruction, of the investment banking model. It had existed in the United States since the 1860s and within a matter of two weeks disappeared as a functional model.

1:43And the reason was, the extreme leverage of the model was facing complete bankruptcy because of the breakdown of the financial markets. But more to the point, if the model was not changed to commercial banking, the companies would not be eligible in any way for federal money. And as soon as the lawyers, over one weekend, change the entire structure of the investment banking industry, in one weekend, both of the largest companies involved got a $10 billion bailout from the government. The fact that lawyers could put together a complete transformation of a company in one weekend, This weekend gives you some indication of the pressure that the industry was under and then it ended, effectively ended.

2:42There are no more investment banking houses that any of us have ever heard of. Mayor Stearns has gone, Goldman Sachs has gone, they're now officially commercial banks. Now this is the magnitude of what took place within a four week period. This is not some business as usual situation. This is a fundamental restructuring of the capital markets of the United States. If you look at the chart issued by the St. Louis Fed, which I do monitor, of the adjusted monetary base, You will see probably the most terrifying chart in Federal Reserve history.

3:29When the money supply, the base money supply, the high-powered money supply of the United States began increasing at a rate of well over 150% per annum, and until quite recently accelerated. There was some drop back in the last few weeks, but nothing to begin to restore what it was in September of last year. It indicates to me that the Federal Reserve was in panic mode and had to begin buying enormous quantities of debt certificates, increasing its balance sheet, but of course increasing it by means of fiat money on a scale we have never seen before, not even in wartime, never have we seen the expansion of the monetary base comparable to what took place within a period of just a few weeks last year.

4:30This is not business as usual. What they have to do is to conceal a breakdown. They have to conceal the massive losses of the capital markets as a result of fiat money and excessive leverage, in some cases, 30 and 40 to 1. And the losses are just horrendous. They're in the trillions. They're in the tens of trillions of dollars worldwide in just a few months. And the Federal Reserve's response and the response of the Bank of England, the response of central banks around the world is the same, and that is to create enormous quantities of money in order to purchase bad assets at face value, or if not purchase, then create lending arrangements of bad assets at face value. It is a gigantic bailout of the fractional reserve banking system.

5:29And for those of us who have spent our years as adults studying banking and monetary history on the assumption that there is only one law of American banking and that is major New York banks will not be allowed to fail and that that law has been dominant since 1914. We have seen the result of the operation of that law. I believe we're coming into a period of serious, obviously monetary inflation, that's already a done deal. I think we're coming into a period of price inflation. It's going to take some time because the banks, the fractional reserve banks are panicked and they're not lending all of the money out that they are legally allowed to lend.

6:17They're keeping it at the Federal Reserve at 0% interest as excess reserves. And that tells me they are panic stricken. They will not lend to anything even for a positive rate of interest. They prefer to keep it at the Fed. When that changes, we're going to see that money flow into the economy and that is going to result in excessive price inflation for American peacetime. I believe we're now, if you want a phrase, a simple phrase, I'm going to modify a phrase that is in fact apocryphal, which is attributed to Marie Antoinette who was told that the The Parisians could not buy bread and she supposedly responded, let them eat cake.

7:10I think what is happening in America today that the Federal Reserve system has decided that the solution is let them eat digits. And I think we are seeing the massive expansion of the money supply to conceal the implicit Bankruptcy of the Capital Markets today, and that this is a digital illusion for the sake of keeping large entities out of bankruptcy court and bringing a kind of panic around the world. And of course, it's not just our banks, European banks, UBS, they seem to announce A billion dollar loss every weekend. It's just extraordinary how much money UBS has lost.

8:04And the losses that are being sustained with the loans that had been made to Eastern Europe in currencies that are collapsing, that cannot be paid back in the euro, is creating questions Questions of Solvency for Banks All Across Europe. There is supposedly at least a report that was published in The Telegraph about a month ago which said that the estimate is that there are something in the range of 20 to 25 trillion dollars of expected losses in the Euro zone. Let them eat digits. There will be concealment and the means of the concealment of, in fact, enormous losses of capital will be the improvement of the ledgers by means of digits.

9:03But capital is not digits. Capital is thrift. Capital is the willingness to save, to defer gratification in the present for the sake of of the hope of increased profitability in the future. There must be a restriction of consumption in order to provide capital for future growth. That is the basis of certainly Austrian capital theory. And we are not seeing massive restraint on the part of consumers in order to make capital available to businesses. We are seeing massive lack of restraint by the central banks in order to create digits which will be used to conceal the magnitude of the breakdown of the capital markets.

9:56It is deception on a massive scale. Now it always has been. It always has been. And in fact, the Austrian theory of the trade cycle, which Mises first promoted in 1912, on the nature of deception. He asked that fundamental question, why is it that entrepreneurs make the same mistake at the same time, both in the boom phase and in the bust phase? That was the question that triggered his theory. And his answer to it was, there has to be some central source of the error. And that is the central banking system and Fractional Reserve Banking, and he said that's where you have to look for the malinvestment both in the boom phase and the far side of the boom phase, the bust, recession, depression, in which real capital pricing is reestablished by the market. It was deception in the boom phase and it is the market's attempt to establish accurate free market pricing for the capital He said it was deception, deceptively low interest rates which were a result of monetary inflation by the central bank.

11:21That is what we saw, that is the irrational exuberance, Schiller's phrase that was appropriated by Greenspan. It was irrational exuberance based on massive deception and that is fiat money. Money. And now, in this phase that we're going through, we had from 2007 August to essentially September 2008, you had the attempt of the market process to reestablish the real value of capital assets. And now we are going to have deception on a massive scale because Because the central banks do not dare allow the cartel to break down because of the accurate pricing of capital assets. So, I think we come into an age of deception, which is massive, unprecedented in American peacetime history. You may have had it in World War II, but I don't think we have seen it since that time. And the main area of deception is going to Maybe the value of money, the reliability of the dollar, that's what I expect.

12:37I don't know how long it's going to take because we are in a carry trade situation. There's a massive run to get dollars because the other currencies are as bad or worse. It is a roaring race to the edge of the precipice of the central bankers to see who can deceive best and most successfully fastest. And the result is going to be what we always knew it would be, and that is the destruction of fiat currencies And ultimately, the destruction of people who have trusted the deceivers. And they are deceiving on a scale today, the likes of which I would not have predicted.

13:27I don't think anybody would have predicted the magnitude of the expansion of high-powered money by the central banks worldwide. And I think it's going to lead to the destruction of people's dreams and hopes Capital Assets and everything that they have bet on, assuming that the dollar would be reliable, I think those dreams are now at risk.