According to John Williams’ Shadow Government Statistics (shadowstats.com), by comparing the overall ratio of “borrowed” to “non-borrowed” bank reserves, we can learn a lot about the health of the U.S. banking industry. The “nonborrowed bank reserves” are the available reserve funds that are owned by the banks, themselves. On the other hand, the “borrowed bank reserves” are primarily those reserves that have been loaned to U.S. banks—primarily by the Federal Reserve’s “special lending operations”.
When most of the U.S. banks’ reserves are “nonborrowed” (owned by the banks themselves), the banks are comparatively healthy and operating “in the black” primarily with their own funds. In other words, most of the reserve funds being loaned by the bank to customers, are funds owned by the banks, themselves. This is as it should be. The banks—being creditors to whom customers apply for loans—should be lending currency from the banks depositors and from the banks own “unborrowed” reserves. Insofar as the banks are lending their depositors’ currency and also the banks’ own currency, the banks should be making a profit.
But if most of the banks reserve funds are “borrowed” from the Federal Reserve, the banks themselves are shown to be borrowers rather than lenders. This information has to be disconcerting since banks are, by definition, lenders rather than borrowers. When banks have to borrow to stay in business, the banks are clearly in trouble.
For example, throughout A.D. 2007, of the U.S. banking industry’s total reserves, there was about an average monthly surplus of $40 billion in “nonborrowed” bank reserves. In other words, the banks reserve funds consisted of $40 billion in bank profits and the banks were independently “in the black” to the tune of $40 billion per month.
However, since January of this year, U.S. banks total reserves are now primarily borrowed from the Federal Reserve. As of June, the banks’ reserves are now $130 billion borrowed. That’s a $170 billion swing (from $40 billion in non-borrowed reserves to $130 billion in borrowed reserves) in just six months. Instead of being $40 billion in black last year, the U.S. banks are currently $130 billion in the red. This suggests that if the Federal Reserve hadn’t been bailing out our banks, we could’ve seen widespread bank failures, runs on U.S. banks and an economic panic as early as January or February of this year.
The growth of “borrowed reserves” (from the Federal Reserve) probably also explains why gov-co is allowing and even desperately encouraging bigger, semi-solvent banks to buy up and merge with smaller, nearly bankrupt banks. By means of bail-outs and bank mergers, the federales can to avoid exposing the truth: The U.S. banking industry is already virtually bankrupt.
This insight is particular interesting to me since I’d “sensed” and predicted throughout the third and fourth quarters of A.D. 2007, that there was a high probability that the economy would collapse in the first quarter of this year. That first-quarter collapse obviously didn’t take place. I assumed my prediction was mistaken because my “crystal ball” needed a tune-up. I now realize that the reason the collapse didn’t take place was that the Federal Reserve 1) initiated its “special lending programs” to pump enormous sums of currency into the ailing big banks; and 2) encouraged small, bankrupt banks to “merge” with larger banks.
The Fed’s tactics worked. A first-quarter collapse was avoided.
But, in the end, all that can be achieved by bail-outs and bank mergers is an accounting sleight-of-hand that hides the bankruptcies of some banks on the quarterly reports of other, larger, “less bankrupt” banks. This accounting-by-illusion may thereby cause some larger banks and/or the taxpayers to assume liability for some bankrupt bank’s unpayable debts. But, no matter who—taxpayers or big banks—wind up holding the debt “bag,” those debts not only remain, but as I’ve explained repeatedly for the past two months, those debts remain primarily unpayable.
It’s like playing Old Maid. We can move the Queen of Spades from one player’s hand to another’s. We might not know who’s really holding the Queen (debt) at any given time, but she’s always in the game until the last player is openly stuck with her and therefore loses.
Similarly, our government can move our unpayable debt from the small bankrupt banks to the big bankrupt banks and on to the bankrupt taxpayers. “Wee duh Pee-pul” might not be able to tell exactly where the unpayable debt is at any given moment—but that enormous, unpayable debt is always there. Sooner or later, somebody in our economic system is going to get stuck holding the “Queen”—a debt that can’t possibly be paid or transferred to some other “sucker”. At that point, the game is over. But unlike Old Maid, when our unpayable debt is finally exposed, the whole economy will collapse and everyone will lose—not just the one player left holding the “Queen”.
For me, the fundamental, inescapable and lethal reality of the current financial system is the fact that the vast majority of the existing debts can’t be paid. Not by banks, not by government, not by taxpayers. My “crystal ball” tells me that at least half and probably 80 to 90% of existing debts cannot, and therefore will not, be paid. If I’m right, all government can do is “play for time,” try to conceal the debt, and postpone the inevitable.
But that “inevitable” is coming, and when it arrives, we’re going to have to admit that most of our modern, fiat-monetary system’s wealth (kept in the form of paper debt instruments) is virtually worthless. When that inevitable moment arrives, up to 90% of the country’s debt—and purported wealth—will be vaporized. The resulting economic and social chaos could be horrific.
Some might suppose that my predictions of an 80 to 90% depreciation in the value of debts—and therefore wealth—is absurd. Maybe so. I actually hope they’re right. I do not want what I see coming.
But I simply look at the total American debt (national debt of gov-co, plus the debts of state & local governments, plus private debts on mortgages, cars payments, credit cards, etc.) of roughly $75 trillion and divide that sum by the population of 300 million. Result? The “fair share” of the American debt is $250,000 for every American man, woman and child. I doubt that the average man, woman and child can produce $50,000 in assets. That tells me that, as a nation, we are technically bankrupt and incapable of paying at least 80% of the existing American debt. I conclude that what can’t be paid, won’t be paid and that the existing debt must therefore be repudiated by as much as 80, maybe 90 per cent.
This conclusion may not be as farfetched as it seems. News reports already indicate that Merrill Lynch, America’s largest brokerage firm, has lost more than two-thirds of its stock value. Citigroup, once America’s largest bank by market capitalizaton, has lost even more. Washington Mutual has reportedly given up nine tenths of its value. On average, even including the strongest of the banks, half of the wealth of bank shareholders has reportedly been wiped out—so far. Losses of this magnitude from institutions of such significance are right in line with my predictions of an average 80 to 90% depreciation in the value of existing paper debt instruments.
In the Bible’s Old Covenant, God calls for a “Jubilee” every 50 years. In the year of the Jubilee, all debts are forgiven and all properties are returned to their original owners. We see faint evidence of the Jubilee principle in the LORD’s Prayer: “. . . and forgive us our debts as we forgive our debtors.”
Could our current dire circumstances force our gov-co to declare an American “Jubilee” where all debts are forgiven, cancelled and extinguished? Why not? Truth is, at least 80% of the debt can’t ever be repaid, so why waste time with the charade that it can? Why not simply admit that all of our debts are unpayable, declare a Jubilee and “officially” wipe out all the debt? The people would love it. The politician who proposed the Jubilee might be elected “king” rather than mere president.
But, unfortunately, we can’t cancel all our paper debt without also cancelling virtually all of our paper wealth. And that may be the fatal flaw in our modern debt-based monetary system.
The people of the Old Covenant did business in an asset-based economy with an asset-based monetary system of fixed weights and measures where wealth was measured in tangible quantities of gold, silver, land and cattle. (Americans also had an asset-based currency gold-backing was removed in A.D. 1933 and silver-backing disappeared in A.D. 1968.) Yes, the O.T. Hebrews probably denominated some of their wealth in the form of “papyrus” promises to pay, but most of their wealth was stored in tangible form. If they cancelled all of their debts (papyrus promises to pay), they’d still have all of their tangible assets as wealth. A Jubilee would be inconvenient for the relatively few creditors, but beneficial for the nation.
We, on the other hand, since A.D.1968 have lived in an ever so “modern,” debt-based monetary system where we have virtually no tangible assets. Instead, our debt instruments (paper and digital promises to pay that are merely evidence of wealth) are mistakenly presumed to be wealth (tangible payment), itself. As a result, most people’s purported “wealth” is now stored in pieces of paper like stocks, bonds, mortgages, bank account receipts and pension funds. But those pieces of paper are debt instruments—promises to pay that, for the most part, can’t be kept.
As a result, for most people, we can’t cancel our debts without also extinguishing virtually all of our correlative paper “evidence” of wealth.
Therefore, government dares not openly repudiate the debt (declare a “Jubilee” or national bankruptcy), since doing so will also repudiate virtually all of our purported “wealth” (paper promises to pay). Instead, I believe that government will seek to covertly repudiate the majority of our debt by means of inflation.
For example, suppose the inflation rate during the last year had been 15%. Then, because of inflation, $100,000 today would only buy as much as could be purchased with $85,000 last year. So, if I’d borrowed $100,000 last year and repaid the $100,000 today, thanks to inflation I’d be “robbing” the creditor of $15,000 in purchasing power. Sure, as promised, I’d repay exactly the $100,000 that I borrowed, but the value of today’s $100,000 would be reduced by 15% inflation to a purchasing power of only $85,000 in last year’s dollars. Thus, by means of 15% inflation, 15% of all existing debt denominated in dollars would be “vaporized”. If gov-co can sustain 15% inflation for four years, they repudiate roughly half of today’s unpayable debt. If they can sustain 20% inflation, the debt can be reduced by half in three years.
In an asset-based financial system, using inflation to repudiate unpayable debts might not be so bad. There could be instances where, to save the “system,” existing debt has to be repudiated. But in today’s debt-based monetary system where evidences of wealth (debt instruments) are mistakenly deemed to be real wealth—as inflation erases our former debt, it also erases our former “wealth”. And that’s the Catch-22 that our government can’t escape.
Do you follow my argument? I’m simply saying that when I borrow $100,000 in a debt-based, fiat currency like the dollar, I sign two copies of the same document—one copy for me, that proves my debt, and another copy for the lender that proves his correlative wealth. Because we have no asset-based currency, my debt and my creditor’s “wealth” are correlative; they are two sides of the same financial “coin”. So, if inflation repudiates say, 15%, of my debt, inflation must also repudiate 15% of my creditor’s wealth. As the debt is repudiated, so is the wealth.
As the creditor’s wealth disappears, what is left to loan? If there’s nothing left to loan, how can a credit-based economy like ours continue to function?
(As you may know, the Great Depression of the 1930’s was reportedly caused or at least aggravated by the banks withdrawing money from circulation. Today, we don’t have “money”; we have credit. And today, banks are reluctant to even make loans to other banks. Thus, today’s banks are withdrawing “credit” from circulation, just as they withdrew money at the beginning of the Great Depression. Will coincidences ever cease, hmm?)
If this analysis is roughly correct, the only people who might survive the massive debt repudiation that I believe is inevitable will be those who’ve stored their wealth in some tangible form like land, food, silver or gold. If so, those holding their wealth in the form of paper promises to pay are heading for abject poverty.
Implication: IF my analysis is correct—I repeat, IF my analysis is correct—prudent people will get out of paper debt instruments (stocks, bonds, bank accounts, pension funds) as quickly as possible and move their wealth into something tangible like silver or gold.
But is my analysis correct?
Who can say? My prediction of an economic collapse in the first quarter was wrong (thank God). It’s entirely possible that my conviction that our economic catastrophe has been only postponed but remains inevitable, could also be wrong. (In fact, I hope I’m wrong.) Maybe gov-co has some more financial tricks up its sleeve to temporarily or even permanently stave off economic Armageddon.
May be. But I apparently lack sufficient intelligence, education or imagination to see how. For me, there’s only one remaining question: When?
So, suppose you agreed with my analysis and argument, and decided to withdraw much of your paper wealth from your bank, stocks, bonds, pension funds and convert that purported “wealth” (promises to pay) into physical silver or gold (actual payments). As with any investment, there’s always attendant risk. But what are the chances that the price of gold and silver will rise over the next 12 to 36 months? Answer: probably close to 100%. What are the chances that gold and silver will lose value over the next 12 to 36 months? Answer: almost zero.
Ask the same questions about your paper debt instruments, and you’ll see that, on average, your paper has already lost value—maybe lots of value—and will probably continue to lose more over the next one to three years. Can anyone guarantee that will happen? No. But can anyone deny that that result is highly probable? No.
The implication is apparent: Get out of paper and get into gold. Now.