Gold News

Extreme Warning

But no crash just yet...

BITCOIN is making itself useful, writes Bill Bonner in his Diary of a Rogue Economist.

Bloomberg is on the case:

"Bolívar to Bitcoin Market Hits Record $1 Million Per Day
"The Venezuelan bolívar to Bitcoin market reached a record [last] Tuesday, as the Dollar-starved nation increasingly seeks the digital token in exchange for its nearly worthless currency."

Venezuela is a disaster. Inflation is expected to hit 13,000% this year.

But disaster isn't sedentary. It's nomadic. And our guess is that it is headed our way.

First, let's turn to the research department to find out how close it might be...

What's up with the Doom Index?

As you recall, our researchers – led by the indefatigable Joe Withrow – came up with a way to tell when a crash was likely to happen. We call it the Doom Index.

No guarantees, because these things are unpredictable. But a measure based on a broad group of indicators should be more reliable than your correspondent's hunches, right?

Well, who knows.

But Joe gave us an update:

"The Doom Index spiked up to 7 – our extreme warning level – back in January...and it will remain at 7 for at least another three months based on first-quarter numbers.

"But it is not signaling the crash alert flag...yet.

"What has kept the crash alert flag in storage – and perhaps what will keep the markets chugging along for another quarter – is an uptick in credit growth. After falling to 1.6% last quarter, credit growth increased to 2.4% during Q1 2018.

"Remember, we are leaning on economist Richard Duncan's analysis here. Duncan says that the modern economy requires at least 2% credit growth to avoid recession. So 2.4% is just enough to avoid a Doom Point.

"On the flip side, there was a sharp drop in non-farm payrolls. Non-farm payrolls steadily increased for 29 consecutive quarters – that takes us back to 2010. But they plunged 1.2% during Q1 2018. 1.2% sounds like a small move, but that's the biggest drop in non-farm payrolls since the start of 2009.

"So we saw an uptick in credit growth, but a fall in wages this past quarter. Perhaps those two moves are related...I don't know...But we find ourselves right back where we were in January."

Okay. "Extreme warning." But no crash yet.

Got that?

And while the data is giving us an "extreme warning," so are the fundamentals – which is why a catastrophe may be headed towards us...and why there may be no way to avoid it.

Markets go up and down all the time – sometimes sharply.

People never know what things are worth. They discover prices by bidding against one another. And human beings tend to overdo it.

They get overly optimistic or overly pessimistic...driving prices too high or too low...causing mini-booms and panics.

Between the end of the War Between the States and the Great Depression, there was the Panic of 1873, the Panic of 1884, the Panic of 1893, the Panic of 1901, the Panic of 1907, and the Depression of 1920-21.

The pain and damage done by these setbacks varied. But generally, they came and went. Markets quickly adjusted. Prices fell. Companies went broke. Entrepreneurs and speculators picked up the pieces...and got back to work.

Anyone can make a mistake. But if you want a real catastrophe, you need the government. The feds began to "do something" about these periodic overshoots following the crash of '29. The result was the Great Depression.

Then, the Federal Reserve got in on the action.

The Fed was set up in 1913. At first, its job was modest: to protect the currency and make sure the big banks made money.

This it did cautiously, at first, by "taking away the punchbowl," as former Fed chief William McChesney Martin described it, when the party started to get out of hand.

It wasn't until the 1980s that the Fed became the life of the party itself. By then, the US had a new currency (the ever-stretchy, post-gold-backed Dollar)...and the politicians had realized that "deficits don't matter."

They didn't seem to matter because beginning in the late-'80s, the Fed was no longer restraining excess spending...

It was enabling it.

Deficits used to draw down the nation's savings. That's because the feds had to borrow to fill in the hole. And when you borrowed, you borrowed what someone else had saved.

No more. The new Dollar and the Fed's low interest rates made real savings irrelevant. The Fed dropped interest rates to make saving unattractive...and covered the deficits with fake savings – credit it invented "out of thin air"; it bought US Treasury bonds itself.

Back when the feds had to borrow real savings to close the gap between outlays and tax receipts, there was a natural limit on what they could spend.

If they borrowed too much, they "crowded out" private borrowers. Interest rates rose. Savings increased. The economy cooled down. And tax receipts fell.

Every lawmaker knew that the federal government had to manage its finances responsibly. Neither party wanted to get a reputation for incompetence with money.

But now, all that has changed. The illusion of abundance – provided by the Fed's EZ-money policies – has bamboozled them all.

Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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