--EXCERPTED FROM: 02-03-18 Chris Martenson via - "It's Looking A Lot Like 2008 Now..." --

The warning signs in 2007 were abundant and, for most, completely obvious in hindsight.  I was writing about them extensively at the time and, today,  I see too many parallel features for comfort.  It's not that conditions are exactly the same, but they're so similar that we’d have to quibble to separate them.

Whereas in

2007:  People were borrowing heavily against their rising home prices,

2018:  We have record household debt, record auto loan balances (in terms of both payment schedule length and amount), record corporate debt, and record sovereign debts.


2007: The Fed was carefully raising rates to see if they could build up an interest rate buffer.

2018: We also have rising rates and declining market liquidity due to reduced central bank QE activity:


Note that "raising rates” today isn't exactly the same as it was in 2007, save that that borrowing money costs you a little more. So, yes, auto loans and mortgages all cost a little more than they did a few months ago.


But unlike the mechanism the Fed used in 2007, today it's not driving interest rates higher by withdrawing liquidity.  Instead, it's doing so by simply offering a higher rate of interest to banks on their excess reserves (IOER), and that drags the overall rate of interest up.

Why? Because if you're a bank and you have the choice between either lending overnight to another bank or lending money to the Fed (which is completely risk-free), then you're going to take the best deal. Right now, the Fed is offering pretty sweet terms.

This chart explains why and how the Fed has been able to raise rates without draining liquidity:

Without this little feature, unwisely authorized by congress in 2008, the Fed would have to drain many hundreds of billions of dollars from the system to hike interest rates. Instead, now they can just set the IOER higher, as if it were a magic dial that sets the price of money.

It’s a cool trick. But it's newness prevents us from looking to past interest hiking cycles for clues as to how this current one will play out.  The dynamics are totally different.


Now, the Fed is starting to drain liquidity from the system, too. It's using a process it refers to as ‘reducing its balance sheet.’

On that front, we see that the Fed has allowed some $30 billion of Treasurys to ‘roll off’ its balance sheet. This simply means that when these instruments matured, the Treasury Department returned the principal to the Fed (thus 'retiring' the bonds), instead of seeing the Fed replace the bonds by printing up more money to buy more of the same securities at the next Treasury auction:


While the above chart may look dramatic, it’s not really. It won't really impact things much as long as the ECB and the BoJ continue to print and dump more new digital currency into world markets. (Although, they've publicly committed to tapering these purchases in the future -- so far that’s not really in the data unless we squint hopefully at the last little wiggle in the chart below):

But what really matters is this next chart, which shows the combined stimulus across all the major central banks. Since the financial system is truly global now, it matters less what any one central bank is doing and instead we have to look across them all.

When we do, this is what we see:


Anything above the zero line means that central banks are still dumping money into the system.  So they are not collectively ‘tightening’ yet, which would technically mean they would be removing money from the system -- as they are slated to do somewhere around the beginning of 2019.

However, the world’s debt levels and stock and bond prices are all so massively stretched and elevated, that simply even doing less money printing may have the same effect as tightening. Believe it or not, we’re coming off of the largest year of money printing in all of history in 2017.

Think about that for a second…nine years into the ‘recovery’ and the central banks printed the largest amount of emergency money ever. 

Which is it?  Are we still experiencing an emergency of historically unprecedented magnitude? Or are we years into enjoying a robust "recovery", as our media and elected officials have been telling us?

Obviously  our global economic and financial systems are dramatically more tenuous than we're being told

In my calculation, the markets cannot withstand any reduction in stimulus. If the projected tightening actually occurs, asset prices will begin to fall violently in response. When that occurs, all the central banks' promised plans will be tossed in the trash can. The ensuing rescue efforts will unleash a tidal wave of liquidity that will dwarf the efforts of the past decade, and very likely destroy the remaining purchasing power of the world's major fiat currencies.

But first, the markets will need to fall hard, in order to give the central bankers enough political air cover for such drastic action. Expect to see days where the Dow closes down between 500 - 1,000 points in a single day.

Just like today.