Aug. 25, 2015 - Freedomain Radio - Stefan Molyneux
24:40
3058 Stock Market Meltdown. There Will Be No Economic Recovery.
Last week, the Dow Jones Industrial Average fell more than 1,000 points, its worst weekly performance in approximately four years. On Monday, the index plunged by over 1,000 points early - and closed the day down 588 points. In terms of the number of points lost, Monday August 24th, 2015 was the eighth-worst single-day loss in the index’s history. Some analysis are blaming the China currency devaluation and the drop in the Shanghai Stock Exchange Composite Index – but what is really going on?
Hi everybody, it's Stefan Molyneux from Freedom Main Radio.
I hope you're doing well.
Hoo-wee!
What a day in the market.
What a couple of days has it been for you.
Last week, the Dow Jones Industrial Average fell more than 1,000 points, its worst weekly performance in approximately four years.
On Monday, the index plunged by over 1,000 points early and closed the day down 588 points.
Chinese stocks since Friday down 14 percent.
Japan falling into a hole.
Gold is back, baby.
What the hell is going on?
Well, we're going to try and help you out with that, give you a little bit of perspective.
In terms of the number of points lost, Monday, August 24th, 2015, was the eighth worst single day loss in the index's history.
A third of Standard & Poor 500 companies have declined over 20 percent from their peaks and many retain high valuations despite disappointing earnings numbers.
The United States dollar index dropped the most it has in over five months today to seven-month lows, losing against the euro and the yen.
And losing against the euro is like losing a short contest to Andy Rooney.
Oil prices have plunged across the U.S. oil benchmark, settling down 5.5% at $38.24 a barrel.
Its first close between $40 a barrel since February 2009.
The CBOE Volatility Index, the so-called FEAR Index, jumped to its highest level in more than six and a half years.
On Monday last week, the index saw its largest weekly surge ever as it soared more than 46% on Friday.
So what is going on?
Just before we begin, remember, people will say, it's capitalism, it's a free market, it's barely even state crony capitalism anymore.
Money is controlled by the government and interest rates are controlled by the government, two of the most fundamental aspects of what was formerly a free market.
When money and interest rates, money creation and distribution and interest rates are outside the control of the free market, you barely even have a vestigial Free market.
It's like one of those fingers that gets hacked off and still keeps giving you the finger, even though the owner may be deceased.
That's what we're looking at in terms of the free market.
So don't let anyone tell you markets are in trouble.
No, no, no.
Central planning, fascism, the Federal Reserve is in trouble.
Some analysts are even going so far to blame the currency devaluation in China, but that's all nonsense.
Crash has started before then.
What the hell is going on?
Ah, nothing like a rollercoaster graph of doom to begin things with.
So this is an effective federal funds rate from 1954 to 2015.
So the federal funds rate is the interest rate at which banks trade federal funds.
Federal funds are just a variety of government debt instruments.
The balances are held at Federal Reserve Banks.
When people talk about the interest rate set by the Federal Reserve, this is what they're ultimately talking about.
So if you look down the bottom right-hand side, this is what is called a flatline.
If this is you in like a medical situation, you are in the arms of ancient relatives already.
This is the point in the medical drama at which the guy's been trying to resuscitate you for minutes and the nurse has to pull you off and say, he's gone, Jim, he's gone.
Well, that would be the economy as a whole.
Of course, you can see we've got various things going on here throughout the 60s and 70s.
Of course, in the 70s, when they decoupled the US dollar from its remnants of the gold standard, they changed the interest rates.
In the oil crisis and stagflation in the 70s, they jacked it up.
Money supplies going crazy.
This is not a free market situation.
This is mad Dr.
Evil people pulling giant levers, destroying lives, creating fortunes.
It's one big giant machine of statism and bureaucracy and political self-interest and the general rape of the middle class that characterizes a late empire decaying society.
But this crashing down of interest rates after the financial crisis creates the illusion of economic growth.
You can borrow money at effectively 0%, and you have for many, many, many years.
This creates an artificial bubble, which we'll see why it hasn't translated either into hyperinflation or real economic growth.
But this is effectively negative interest, because when you can borrow at 0% interest, There's inflation, which means people are paying you to take their money, and still there's been no sustainable economic recovery.
So let's look at these informations, right?
So this is artificially cheap money.
When you crush down the interest rate to zero or near zero, you're creating a massive bubble.
You're building your economic house on the foundations of quicksand, as I've been saying, for many, many, many years.
So here you can see that the Dow Jones Industrial Average was beginning to, like, the effective federal funds rate went crashing down to the bottom.
And as a result of keeping this money really, really low, well, you've seen some improvement in the Dow Jones Industrial Average.
And this is all contingent upon the Fed keeping interest rates at or about zero.
So Fed Funds Futures used to place bets on central bank policy showed this Monday, August 24th, that investors and traders see a 24% likelihood of a rate increase in the September 2015 meeting.
The probability was nearly halved from two weeks ago.
So when you have an economy that is fundamentally adapted to 0% interest rates, if you raise those interest rates, which you would only do when there's a genuine economic recovery or the perception thereof, you raise those interest rates, all the fragility, all the businesses that have adapted, Two, this hothouse environment of artificially free money, particularly the financial instruments, financial institutions, they're all going to fall apart.
So when you see how much this growth is driven by these fund rates and the government pumping money into the hands of the banksters at 0% interest, This is not sustainable.
You cannot keep paying people to take your money and think you have a sustainable economic growth.
It's like having a business model in a restaurant called, I'll pay you to eat here.
So QE, you've probably heard of this, stands for quantitative easing.
There's been QE1, QE2, QE3. Basically, it used to be Queen Elizabeth used to be these giant cruise ships that would go from across the Atlantic.
Well, think of that, except filled with money and your children's future kidneys.
So, this is when the Federal Reserve creates money out of nothing and then buys a bunch of stuff with this newly created money.
And it buys a bunch of stuff from financial institutions, from banks, from other financial institutions.
Now, it's generally prevented.
It's supposed to be prevented from buying equities directly.
Because if the government is buying equities directly, there's no point having a stock market whatsoever.
The whole point of the stock market is to attempt to get the precious capital, the precious lifeblood of our economic future, that which sustains our civilization, our civility, our very life itself, to make sure that our precious resources go to the right places, not get wasted in chia pet nonsense, but actually go to things that are going to raise worker productivity, which is the very benchmark of economic growth.
So there's no point having a stock market when the government is in there buying equities.
Traditionally, the Federal Reserve is not supposed to buy equities, but during the financial crisis there have been some loopholes created.
So they give money to agencies or institutions which then go out and buy equities, thus distorting the entire stock market.
Capital is literally the lifeblood.
The capital that is stored up and saved is the lifeblood of generations.
It's the self-sacrifice of generations.
It's the entire reason for civilization.
When it gets misallocated, it's not just money that's lost.
It's civilization itself.
This is some very, very important stuff.
So, when you drop...
So, the government tried to resuscitate.
The U.S. government tried to resuscitate during the financial crisis by dropping interest rates to zero.
That didn't work, didn't create massive amounts of economic growth.
So then they create money and then they buy assets from the private sector, like all the toxic mortgages and a lot of government bonds.
And then that lowers the yields because bonds are in a big demand, so it lowers their yields.
And then financial instruments instead turn to buying more risky investments, i.e.
equities or in the stock market.
And so basically private companies are making a lot of money because the government is just pumping money into these financial institutions.
And so they're making a lot of money without building anything or hiring anyone, which is why you're having this miraculous resurrection of the economy without actually a lot of people having any work.
And it's why companies are doing these massive share buybacks to gain control of their own company again because of all this free money.
And that does not help because they're not investing in upgrading their equipment or making things more efficient or automating anything, hiring new people and so on.
And so the reality is this quantitative easing is a huge bailout of the bankers, a massive, giant, horrifying bailout of the bankers.
It is welfare or hellfare for the super rich.
The US Federal Reserve held between seven to eight hundred billion dollars of Treasury notes on its balance sheet before the recession.
In late November 2008, QE1 began and the Federal Reserve started buying $600 billion in mortgage-backed securities.
So again, just messing completely with the price mechanism.
By March 2009, it held $1.5 trillion of bank debt, mortgage-backed securities, and treasury notes.
This amount reached $2.1 trillion in June 2010.
Purchases were temporarily halted, but resumed in August 2010 as the economy did not show signs of recovery.
After that halt in June, holdings started falling as the debt matured.
The Fed's revised goal became to keep holdings at $2.054 trillion.
Because, you know, 2.055, that would be interference.
To maintain that level, the Fed bought $30 billion in 2-10 year Treasury notes every single month.
Now, U.S. Treasury securities are debt obligations of the U.S. government that come in various forms like bonds or notes.
So when you buy U.S. Treasuries, you lend money to the government for a specified period of time.
Mortgage-backed securities, of course, are bonds that are backed by mortgage loans, and they've been just great lately.
And so when the Federal Reserve is pumping money into the economy, it's lending money to the government, and it's pumping money through its financial proxies into the government.
It's creating artificial demand.
You might wonder why anybody's lending money to the American government that has hundreds of trillions of dollars of unfunded liabilities and $18 trillion in debt.
Why would anyone lend to them?
No one's choosing to, in a way.
It's just all this money coming out of the Fed that's going in to prop up this house of cards.
So this is like lending money to a cocaine addict.
It's going to stimulate the economy at the strip club and maybe penicillin stocks, but it's not going to build anything sustainable in the long run.
In November 2010, the Fed announced a second round of quantitative easing, QE2, with plans to buy $600 billion worth of Treasury securities by the end of the second quarter of 2011.
This is like paying someone to date your cousin.
You pay someone $100 to date your cousin, what you're basically saying is your cousin is minus $100 worth of datability.
And when you have to have the Federal Reserve buy $600 billion worth of Treasury securities, you're saying the market doesn't want them and certainly not at the price that they're being offered at.
A third round of quantitative easing, QE3, was announced on September 13, 2012.
The Federal Reserve decided to launch a new $40 billion per month open-ended bond purchasing program of agency mortgage-backed securities.
And again, this is just money being created out of nothing, being injected into financial institutions, and being injected into the government.
And this, of course, means that the government doesn't have to slow down its spending.
You see, normally when you get heavily in debt, people don't want to lend to you, which is why Greece had to get 20-25% returns on its bonds in order to get anyone to buy them, assuming that the Germans were going to pay them off, which is probably what's going to end up happening.
So when you get more into debt, the price of your debt issuance is supposed to go up.
Interest you have to pay back on your bonds is supposed to go up.
That slows down your borrowing.
But that's not what's happening because the government is buying its own debt.
It's like you paying your visa bill with your visa bill.
Hey, I guess I can go out and spend more.
But it's a massive misallocation of resources.
It distorts the market completely, what's left of it.
And, of course, it creates a bubble.
A bubble doesn't mean everything's overinflated.
It just means everything is...
It's misallocated.
It's allocated to the wrong places.
And, of course, it creates future obligations.
When the government issues a bond, it gets money now, and then it has to pay it back in 10 years, when the existing political masters are usually out of power.
So it's just creating a bubble of misallocation, followed by the inevitable crash, which we may be on the verge of as we speak.
So it's a stimulus program that allows the Federal Reserve to relief $40 billion per month of commercial housing market debt risk.
And this is all evident from outside the empire.
From inside the empire, no one's going to tell you the truth.
The Wall Street's not going to tell you the truth.
The media is not going to tell you the truth.
Well, I guess places like this is going to tell you the truth.
Outside, though, it's completely clear that if you are paying relatives to come to your restaurant, it's because people don't want to come to your restaurant.
So that's really evident to everyone from the outside.
It was also announced that the federal funds rate would be held near zero at least through 2015.
When they say that we're keeping the federal fund rates near zero, what they're saying is the economic recovery isn't happening or isn't real.
So that's pretty important as well.
December 12, 2012, an increase in the amount of open-ended purchases from $40 billion to $85 billion per month was announced.
On June 19, 2013, Ben Bernanke announced a tapering of some of the Federal Reserve's QE policy, specifically noting that the Fed may reduce its bond purchases from $85 billion to $65 billion a month.
Bernanke did not announce an interest rate hike, but suggested a rate increase would likely occur if inflation followed a 2% target rate and unemployment decreased to 6.5%.
Okay, very, very brief history.
So, of course, the central banking was supposed to be the lender of last resort.
Like, if a whole bunch of banks went bankrupt, then they would lend that money.
Then this, of course, became nonsense because there was federal deposit insurance, which meant that the government would backstop all of this stuff.
And so they started mucking about with, like, oh, we're going to create full employment.
We're going to keep interest stable.
We're going to do this.
It has no mandate that makes any sense anymore, which is natural for government programs and so on, right?
Money and interest are government programs and they work about as well as war, as invasion, as welfare, as the military industrial complex.
They work about as well as your local roads and the post office.
It's just another government program.
So Bernanke says, oh yeah, well, we might have a rate hike and so on if these conditions get met.
Following these comments, imagine having this kind of power.
Following these comments, the stock market's dropped by 4.3% over the next three trading days, with the Dow Jones dropping 659 points between June 19th to 24th, 2013.
That's just on the vague possibility of maybe having a rate increase in the federal funds.
And the stock market is like, ah!
Somebody's rating treats and drops like a stone.
September 18, 2013, the Fed decided to hold off on scaling back its bond-buying program.
Really?
Okay, I think the guy can do without cocaine.
Oh dear, he's clawing his eyeballs out.
Let's inject some cocaine back into his eye sockets.
Began tapering purchases in February of 2014.
Purchases were halted on October 19, 2014 as the Federal Reserve amassed over $4.5 trillion in what Dr.
Evil would call assheads.
The Dow Jones Industrial Average fell by 5% at this point as the market contemplated existence without quantitative easing.
Hey man, if I can't get that cocaine snort off the hooker's ass, I'm not getting out of bed.
In the midst of a panic, St.
Louis Fed President James Bullard eased tensions by reassuring the market that QE4 would occur if the economy did indeed need a fresh dose of stimulus.
Don't worry, cocaine addicts, there's a new drug wheel scaling the border fence as we speak.
By the end of the year, the Dow Jones Industrial Average had rallied by 10%.
The drug addicts were assured they would receive their fix.
Don't worry!
We're not going to have any kind of real-world interest rates anytime soon.
Continue in your predatory, unicorn, middle-class, goring delusion of financial predation.
So look here.
This chart doesn't show bank debt and other, quote, assets held by the Federal Reserve.
This is just U.S. Treasury and mortgage-backed securities held by the Federal Reserve in billions.
And the mortgage-backed securities, as you can see, until the financial crash, weren't really held by the Federal Reserve.
Then they mass and mass and mass and mass and spike and mass and spike.
And the U.S. Treasury securities, as you can see, you know, they had, you know, seven or eight hundred Billion dollars and now just massive amounts of this stuff.
So this is the amount of crap money, of wallpaper money, of monopoly money, of type whatever you want into your own bank account, illusory, predatory, rape the poor money, because the poor get hurt the most with this kind of stuff.
This is the amount of money that's flowing into the economy and there still is not any kind of economic recovery.
This is late stage, catastrophic, wake up in a ditch, addiction stage.
Federal Reserve total assets in trillions of dollars.
Eh, cooking along a little under a trillion dollars until the financial crash.
Boom!
Up to two relatively quickly.
And then QE2, and then QE3, and they're just grabbing more and more and more assets.
So this has basically been, since 2008, a $3.5 trillion worth of bailout to the banks and other financial institutions.
A $3.5 trillion bailout.
Man, you could go invading countries for that kind of money.
And the Fed, this is how insane this situation is, the Fed creates its own money, gets a whole bunch of illusory assets, which is government assets, which are actually liabilities, which is bonds.
And the Fed in 2014 alone made $100 billion profit from the assets that they bought with their own made-up money.
I can't believe anybody except you and me work for a living.
Federal Reserve, total assets in Dow Jones Industrial Average Index, assets in billions of dollars, right?
So as you can see here, 07, 08, the Dow Jones crashing, it's dam busting its way down to the bottom of the ditch.
And so they start cranking up the money, start cranking up the money.
And as you can see, when they start cranking up the money, just think of the yellow line as the mood of the cocaine addicts.
Oh no, I'm crashing because I'm out of cocaine.
Here's some cocaine!
Let's keep you going!
And up and up it goes.
But all you're doing is deferring the problems and making it worse.
Extend and pretend.
Extend the debt and pretend you can pay it back.
And the Dow Jones is being fed by debt and bailouts, and this sloshes way too much money into the stock market.
I'll tell you this from personal experience.
I was involved in an IPO. You get too much money into the stock market, the CEOs start paying attention to the stock market rather than to their employees, their customers, or keeping their plants maintained, or growing new businesses, or anything like that.
Way too much money in the stock market.
It's all being forced and herded in there.
Think of the amount of money you may have that's in the stock market that you don't even want to be there.
But you've got to put it there because otherwise the government will tax it or inflation will eat it away.
Supercharged stock market.
I've done a whole presentation on this years ago.
NASDAQ and Fed assets.
Federal Reserve total assets and NASDAQ composite index assets in billions of dollars.
Again, you can see here 07, 08.
It's beginning to crash and it crashes really sharply.
Whoa!
Let's step in with the cocaine.
This is a 0.84 correlation between the Federal Reserve assets and NASDAQ. So they're buying and they're buying and they're buying.
This is propping up all of these prices.
It's all made up money to prop things up.
Standard& Poor 500 in Fed assets.
Ooh, I am beginning to see a pattern.
Might as well have the same damn graph over and over again.
Stock market's beginning to crash.
Cocaine's beginning to crash.
Here's more cocaine!
We're going to put it in every orifice we can find.
QE1, they start to buy, they start to buy, they start to buy.
Up goes, see, it's a bubble.
It's a bubble driven by debt, by counterfeiting, by illusory money.
Look.
Mainstream media stock market analysts are blaming China's currency devaluation for the recent fall of the U.S. stock market.
But the foundation of the problem began with the Federal Reserve a long time ago.
The interest rate is at a historic low, effectively 0% or counting inflation.
They're paying you to take their money.
You can't cut it any further to stimulate the illusion of economic growth.
You can't go below zero.
Federal Reserve ceased QE3 on October 19, 2014, and has made indications it would raise the interest rate by the end of the year.
But it's only going to do that if they feel there's real economic recovery going on, which there isn't.
The economy has not recovered.
And all of the, quote, growth has been manufactured by the Federal Reserve.
If the Federal Reserve raises interest rates, many businesses could become completely unsustainable.
The financial sector, in particular, could easily collapse.
Oh, let's hope so.
Because companies are sitting on a huge amount of money.
Because they can make money just by their stock price going on.
They can make money by buying back their own stock.
They can make money because they're getting 0% interest and they can go and pocket in bonds at a couple of points and consider themselves financial geniuses.
If the interest rates go up, the companies will find it easier to spend their own money and cheaper to spend their own money than to go and borrow it.
Let's say the rates go to 3%, well, you're already sitting on a bunch of money, so instead of borrowing money, you'll just spend your own.
So the money starts flooding into the economy, which may cause some significant, if not hyperinflation.
Now, the Federal Reserve keeps saying, oh yeah, I know, we're going to raise the rates, man.
You know what, man?
Tomorrow, I'm totally cutting down on my cocaine.
Like, I don't need it or anything.
Like, I could quit any time.
I don't need it.
It's a choice.
It's a choice.
It's fun.
You don't have a problem with fun.
I'll quit tomorrow.
Tomorrow, tomorrow, I'm totally cutting down on my cocaine.
Just holding this forward, you know, it's like that little artificial hair that keeps all the greyhounds going around the track.
Yeah, we're going to have to raise the rates, totally, because the economic recovery, feel it, right beneath it.
It's totally solid, man.
It's not thin ice of any kind.
And so they're maintaining this illusion just to keep people thinking that things are going to change and it's not a bubble.
But the expected recovery hasn't arrived.
The interest rates aren't going to go up.
If the Federal Reserve doesn't raise the interest rate or announces any plans for QE4, it's essentially an official confirmation that there will be no economic recovery, my friends.
