POITOU, FRANCE – Coming into focus is a fuller picture of the worldwide financial crisis.
This week, we began looking at Turkey, but only because Donald Trump sent an extraordinary tweet last Friday.
In it, the president broke with tradition and common sense in a remarkable way. He used a crash in the Turkish lira to justify a new attack in the trade war.
Instead of soothing words that might have calmed the crisis situation, his tweet made it worse. And instead of coming to the aid of an ally in difficulty, he piled on.
We had never previously spent even two minutes thinking about Turkey or its finances. But then, after the president roused our curiosity, we saw what we think was a glimpse of the future.
In it, we see huge defaults… stock crashes… chest-pounding… threats and counterthreats… populism… betrayal… trade wars… and currency wars… as the world reckons with $115 trillion in excess debt.
Back to that in a minute…
Yesterday was the Feast of the Assumption. France is overwhelmingly Catholic, so the occasion was marked by remembrances all over the country.
We were invited to join a procession at a nearby château. The place was magnificent, high on a cliff, overlooking the valley of the Benaize river.
View of the Benaize valley from the castle ramparts
When we arrived, a small group was already offering prayers to a small statue of the Virgin. Singing followed, then more prayers, and then the faithful began a procession, carrying the statue in front of them.
We were a little shocked by one of the verses, in which Mary gave Christ to the world “from her ‘entrailles’ [bowels].”
The French tend to be earthy and direct in their language. We had a maiden aunt for whom “freshen up” was the polite way to say “go to the bathroom.”
But in France, if you’re in a restaurant and ask for the “bathroom,” the waiters will be surprised. Why would you want to take a bath in the restaurant? It is the toilet you want.
Likewise, the children of a second marriage are referred to as coming from “the second bed,” which is a little too vivid for Anglo-Saxon imaginations.
But back to the procession… We made our way down a narrow path to a grotto in the valley below. There, the Virgin was placed among candles with a small fire in front, while the prayers, incantations, and hymns continued.
The path was steep, and it was easier going downhill than up again. Some of the old people found it hard to get back up out of the valley to the château on the high ground.
There, a priest, dressed in a beige, hooded outfit, said a benediction. The ceremony over, we quickly forgot all about the grieving Mary, and sat down to enjoy a gay picnic with our neighbors.
But let’s depart from the Benaize valley and refocus our attention on the subject of today: Turkey… and the collapse to come.
Turkey has only 1% of the world’s GDP, and less than 5% of America’s. Small potatoes, in other words. But a great wall always develops a small crack before it falls down.
The great wall we are looking at is one built by $250 trillion of debt, laid up, a billion here, a billion there, over the last 30 years.
The foundation stones were put in place in 1971, when the final tether between gold and the U.S. dollar was severed… and the greenback was cut off from the real world of time and resources.
Previously, borrowings were more or less limited by savings; savings were more or less limited by earnings; and earnings were more or less limited by the number of hours in the day.
There was plenty of room for excesses and extraordinary popular delusions in the pre-1971 world. But there was also a feedback loop that tended – however imperfectly – to prevent things from getting too far out of whack.
At the end of the day, so to speak, mistakes were corrected.
That feedback loop was made of gold. Number 79 on the periodic table, the quantity of gold couldn’t be readily increased.
Credit may be created by the financial industry. But it is Main Street output that services debt. And as long as money was linked to gold, neither cash nor credit could get too far ahead of the real goods and services the economy could produce.
But then, in 1971, Nixon cut the final thread between gold and the dollar. And the cornerstone of today’s great wall of debt was laid.
After the foundation was in place, it took a few years for people to realize what they had to work with – an almost unlimited supply of credit.
“Money” could be created by the central banks, and magnified by the financial industry at will, earning fees for the bankers and boosting the assets of the wealthy.
Once people realized that “money” could be gotten readily, their inhibitions about spending it gradually fell away.
“Deficits don’t matter,” said Dick Cheney. “It would be a good thing if we didn’t have [a federal debt ceiling],” chimed Ben “Courage to Act” Bernanke.
“And don’t worry about the stock market,” added Alan Greenspan (or words to that effect). In 1987, he made it clear that the world’s most important equity market would not be allowed to correct excess debt or speculation.
That was the meaning of the “Greenspan Put.” If stocks went down, the central bank would push them back up again.
How? By making more ersatz credit available on even friendlier terms.
And so it was… off to the races!
Communists… crackpots… people who lived in caves and had yet to stand fully upright… were suddenly able to cadge millions from lenders who never earned the money, never saved it, and never really worried much about losing it; after all, there was plenty more where that came from!
Why else would any sane person lend money to a Turk… an Argentine… or Elon Musk?
Why else would anyone lend at negative rates? If you lend at 20%, it takes only five years to break even. If you lend at 10%, it takes 10 years. And at 2%, it takes 50 years. The lower the rate, the more future you need.
But at negative rates, the future becomes meaningless. You’ll never break even.
This is not the real world; this is the phony world concocted by the U.S. dollar and its quack managers.
That is also why lenders – apparently compos mentis, wearing no ankle bracelets, and with no court orders putting their affairs in others’ hands – bought Argentine bonds with 100-year maturities.
One year? One hundred years? It didn’t matter… The future had gone missing.
That’s what happens when a money system gets perverted by fake money. Normally, you do things in anticipation of the consequences.
You save for a rainy day. You turn down a second dessert because you know you will have to get on the scale tomorrow. You leave the pretty woman next door alone because you know her husband has a license for concealed carry.
Actions have consequences! Tomorrow comes. And the neighbor comes looking for you.
The fake dollar distorted the connection between actions and consequences. People could reap what they had not sown. They could invest savings no one had ever earned. They could borrow – big time! – knowing the future (when they would have to pay it back) would never come.
But in the real world, the future does show up… eventually.
And it rolled into the ancient capital of the Eastern Empire last week.
The Turkish lira fell as foreign investors fled and the sun rose over the Bosporus. And Donald Trump added insult to injury with further trade barriers.
Turkey has a GDP of only $900 billion. It has external debt of only $500 billion. These numbers are so small – compared to a $90 trillion world economy… and $250 trillion of debt – that investors shirk it off.
The problem is “contained,” they say, echoing those famous words of Ben Bernanke in September 2007.
Then, it was Lehman Brothers that was in trouble. That crack was tiny, too; Lehman had only $619 billion in debt.
Then, too, there seemed little reason to worry. Ben Bernanke had taken over from Alan Greenspan. The Greenspan Put had become the Bernanke Put. The future could jolly well wait.
And Bernanke did come through. With nearly $4 trillion in extra central bank credit, he succeeded in reviving the wildest fantasies of the bubble era… But not before the wall had come down and the stock market had been crushed under the rubble.
More to come on how Turkey… China… and the USA will reckon with unpayable debt.
A MESSAGE FROM DAN DENNING
Editor’s Note: Instead of our usual Market Insight, we’re sharing a special message from Dan Denning, Bill’s right-hand man and coauthor on The Bill Bonner Letter. Later this month, Dan will be embarking on a special project. And he could use your help, Dear Reader. Read on…
I’d like to cordially invite you to sit down and have a cup of coffee with me (or even a beer).
From August 19 to August 26, I’m embarking on my second roadtrip to find the best retirement towns in America.
And as you can see from the map below, I may be coming to a city or perfect bolthole town near you.
So if you’re in or near one of the stops on my tour, I’d like to meet up with you and get some “local knowledge” about the places I’m visiting.
If you haven’t heard of the Bolthole Project, let me quickly introduce you to it.
Great American Bolthole
The goal is the same as the first trip I took late last year in the Rocky Mountains. Namely, to enjoy a higher quality of life and lower cost of living, and to find a place that you (and your family) can enjoy or retreat to if need be… right here in America. Readers of The Bill Bonner Letter can catch up here.
Why would you need a place like this?
Well, on the one hand, it’s just good retirement planning. In The Bill Bonner Letter, Bill and I have suggested that you can “definancialize” your life by investing in more real assets and real wealth. For most investors, this means owning fewer bonds (which are in a huge bubble) and fewer stocks.
The Bolthole Project is a key part of our asset allocation and diversification strategy for the coming crash.
Incidentally, did you know that August is the second-worst-performing month for stocks since 1950, according to the Stock Trader’s Almanac? The worst is September! Why? No one knows. But the most sensible theory is that investors and traders come back from the beach in August, look at the news, and find plenty of reasons to sell.
Dan’s Bolthole Roadtrip, August 2018
The second reason I began the Bolthole Project last year: to find a safe place to escape to in America if the wheels come off civil society (or we just have a garden-variety stock market crash and Great Depression).
I know it’s not popular or particularly pleasant to talk about these things. But it’s my job to plan for them anyway.
A currency crash that sparks a financial crisis (Turkey). A geopolitical hotspot that sparks a shooting war (the South China Sea). A massive stock market fraud that sparks a huge sell-off in a nine-year-old bull market (ahem, electric cars perhaps). Or a trade war that escalates out of control.
All of these things could happen this year. Or none of them. The Bolthole Project is not about selling everything and heading to the hills. It’s about sensibly preparing for a crisis that could come – and I’m not even going to get into the possibility of political violence and/or civil war in America as we head into the midterm elections. That’s a subject I’ll cover in detail in the September issue of The Bill Bonner Letter.
But as a long-term lifestyle solution, the Bolthole Project is also about finding the kind of place you wouldn’t mind spending some time in each summer or fall, even if the world isn’t falling apart. What’s the best solution? A mountain town? A college town? A quiet coastal town? Or somewhere more remote and off the grid?
You can see from the map that there are three or four distinct types of places I’m visiting.
The first is your classic beachside retirement town like Wilmington, North Carolina and Virginia Beach. I have family in Wilmington, and another goal of this project is to reinvest in those relationships now that I’m back in America – in the belief that good, solid connections with family are, or will be, just as valuable as a good stock portfolio in the coming years.
Williamsburg and Charlottesville in Virginia are small college towns (with libraries, cultural activities, and a bit more vibrancy) near (perhaps too near) D.C. and an international airport. Our own Joe Withrow already has his “bolthole” in northern Virginia. And Bill’s brother, Jim, lives not far away. I plan to visit both of them.
But I’m hoping you’re somewhere on the roadtrip, too. If you are, and you’re happy to talk about local real estate, the economy, industry, taxes, or just your general impressions of where you live, let me know! You can reply to this email with your contact details, or write to [email protected], and I’ll get in contact with you directly to set something up.
The odds are that you’re not anywhere close to where I’ll be.
But you can still follow along. I’ll be sending pictures to head office with observations from the field. And even though I deleted my Facebook account late last year, I’m still on Twitter.
You can follow me there (@danielkdenning) for pictures, attractions, and my observations.
I hope to hear from you or see you soon. And of course, you’ll be hearing from me and seeing what I find during my latest excursion.
– Dan Denning
P.S. I’ve been surprised by how many people are as excited about this project as I am. It’s true that a major part of it is what I’d call “financial prepping” – the kind of thing you’d do to de-risk yourself from a major “event” that could disrupt the economy or financial markets. It’s the financial equivalent of preparing for a natural disaster (knowing that a financial disaster is only ever one major credit event, default, or bankruptcy away).
But it’s not all negative “end-of-the-worldism,” either. With technology, it may finally be possible that living and working in small-town America is a much more attractive proposition than living and working in big cities like New York, Chicago, Miami, Seattle, San Francisco, or Los Angeles. These cities are all expensive now for young people. And many (if not most) of them are poorly governed, with high taxes and crime, and intrusive micromanaging regulations.
One of the ideas I’ve written about in The Bill Bonner Letter is that America might be on the verge of a “sixth migration” – a massive demographic realignment of where people choose to live and work. That migration will take millennials – the largest demographic cohort in America – back to the same small towns and cities their grandparents came from.
You can see there may be a lot of opportunity to find real estate or even small businesses ahead of that migration. That’s another reason why I want to investigate these small towns first-hand. I began last year in Colorado, Nebraska, South Dakota, North Dakota, Wyoming, and New Mexico. Now, I’m headed to North Carolina, Virginia, and Tennessee. If you’re nearby, let me know!
Ten Commandments for a Secure Retirement
With stagnant wage growth and record-low savings rates, retiring in America is harder than ever. To ensure security in your golden years, consider these “Ten Retirement Commandments”…
Why the Government Will Come for Facebook
Is Big Tech too big? Technology firms like Google and Facebook have provided the world with fast, free services like online search and social media. But their success has brought them power… and made them targets for ambitious politicians.
How Musk Goes Private
Tesla CEO Elon Musk shocked the financial world when he announced his plan to take the Silicon Valley electric car maker private. In order to pull that off, Musk has partnered with the bank he’s most cozy with…
In the mailbag, the conversation turns to Bill, himself…
Bill, who did you pay off to get the good press and followers in the mailbag? While reading the mailbag from a few days ago, I expected to see a picture of you on the cross alongside Jesus.
– James B.
The dots might get connected if Congress, the Senate, and people like you would belly up to the bar with Trump on making America great again, instead of looking for every opportunity to rub his face in the dirt and hoping he falls. If he does, all of you will have a hand in it.
Everyone complains, but not one political lifer has ever tried to follow through on their promises, except Trump. I swear, all of you are rooting for him to fail. Why else would you say what you do?
– Rland D.
As an Aussie, I am not directly drawn into the morass of U.S. politics (thank goodness), but I really see the point Bill is making. His newsletter is very interesting and entertaining, too. So keep it up, Bill, even if you have to use colored pencils to join the dots.
– Alan L.
Bill, every commentator has a bias; I’d guess that yours is neither left nor right, but a bias against stupidity and knavery, the hallmarks of the political class. Even though the efforts are small in the beginning, I’d suggest everyone root for the dismantling of the administrative and regulatory state, and buy as much physical gold as they can!
– Russ H.
The misinformed acolytes of the two-party system continue to amuse with their rants and tantrums. Bill takes a shot at a Democrat, and the lefties yell at him for being a Republican. He points out the follies of Trump, and the righties scream about him being a Democrat.
It’s almost as if this deep-thinking clan is not aware that one might not necessarily be a member of either wing of the big-government party. These same folks also take turns yapping about how government data is proof positive that their guy or gal is an economic savior. Until, that is, the guy or gal from the other side uses government data, at which point, it becomes nothing but lies.
Despite decades (centuries?) of evidence to the contrary, this unthinking band of faux patriots somehow still believes that politicians are destroyers, not creators. It is rather amazing to watch. Bill, a big thank you for continuing to prod these folks to out themselves as uninformed parodies of themselves.
– Al D.
IN CASE YOU MISSED IT…
It’s official. America is now on the hunt for “Brandt oil.”
Recent data suggests that the U.S. is now one of the world’s top energy exporters. And thanks to an executive order from President Trump, the U.S. could soon be a leading exporter of a new energy source which some are calling “Brandt oil.”
What is “Brandt oil”? And how will it power the future? Details here.