Mass Infusions of New Credit


“The bank is something more than men, I tell you.  It’s the monster.  Men made it, but they can’t control it.” – John Steinbeck, The Grapes of Wrath


Something strange and somewhat senseless happened this week. On Tuesday, the price of gold jumped over $13 per ounce.  This, in itself, is nothing too remarkable.  However, at precisely the same time gold was jumping, the yield on the 10-Year Treasury note was slip sliding down to 2.15 percent.


It looks hungry… once it is finished with this little Godzilla snack, it will probably come for the rest of us.

Illustration by Larry T Quach


In short, investors were simultaneously anticipating inflation and deflation.  Naturally, this is a gross oversimplification.  But it does make the point that something peculiar is going on with these markets.

Clear thinking and simple logic won’t make heads or tails of things.  For example, late Wednesday and then into Thursday the reverse happened.  Gold gave back practically all $13 per ounce it had gained on Tuesday, while the yield on the 10-Year Treasury note climbed back up to 2.19 percent.  What to make of it?


Gold and treasury yields have been inversely correlated for some time. This is probably due to inflation expectations driving expectations about interest rate policy – click to enlarge.


With a little imagination one can conceive of where the money’s coming from to buy Treasury bonds.  More than likely, it has something to do with central bank intervention into credit markets.  Though, the Federal Reserve is not the only culprit.

If you recall, the Federal Reserve’s quantitative easing program concluded in late 2014.  The Fed even says it plans to start shrinking its balance sheet later this year.  So if the Fed’s not the source of liquidity for Treasury purchases, who is?

Certainly, the People’s Bank of China and the Bank of Japan are popular Treasury buyers.  In fact, after selling part of its massive hoard of Treasuries in 2016, the People’s Banks of China is once again buying.

And in addition to the Bank of Japan’s Treasury holdings, regional Japanese banks have been stocking up on Treasuries; over the last five years they’ve increased their holdings of U.S. Treasuries and other foreign bonds buy 80 percent.

At the moment, mass infusions of new credit are also being injected from Europe.  Specifically, Treasury purchases are being prompted by the European Central Bank’s never ending quantitative easing program.

Just this week, for instance, ECB President Mario Draghi announced that the ECB would be holding interest rates at 0.0 percent and will extend its quantitative easing program, if required. In Draghi’s mind, Europe just can’t get the inflation it needs so that he can shut down the printing press.


Europe’s finger-wagging printer-in-chief, Mario Draghi. He and the ECB Council erroneously assume that the economy “needs” constant devaluation of the monetary unit in order to grow. This monetary quackery has become the standard  program of central banks around the world and is the main reason why money supply expansion has gone “parabolic” everywhere, because consumer prices as measured by official statistics are not rising “fast enough”. That is bound to have severe repercussions down the road.

Photo credit: AFP


Unsustainable Debt Burdens

While the U.S. government can seemingly borrow and spend without limits, the U.S. consumer appears to be nearing the end of its rope.  Somehow this always seems to happen at the worst possible time.

The problem, of course, is that U.S. consumer debt has gone parabolic since early 2009.  Student loans, auto loans, and credit card debt has all recklessly piled up to dizzying heights.  In reality, U.S. consumers have borrowed much more – nearly $13 trillion – than they can ever pay back.  Stagnating wages also exacerbate the problem.

Matt Scully, at Bloomberg, clarifies the dilemma:


“Americans faced with lackluster income growth have been financing more of their spending with debt instead.  There are early signs that loan burdens are growing unsustainably large for borrowers with lower incomes.  Household borrowings have surged to a record $12.73 trillion, and the percentage of debt that is overdue has risen for two consecutive quarters.

“Some companies are growing worried about their customers.  Public Storage said in April that more of its self-storage customers now seem to be under stress.  Credit card lenders including Synchrony Financial and Capital One Financial Corp. are setting aside more money to cover bad loans.”


Indeed, they’ll need plenty of money set aside to cover unpaid debt.  You just wait and see…


Total US household debt (incl. mortgages) – at a new all time high as of the end of Q1 2017 – click to enlarge.


The Three Headed Debt Monster That’s Going to Ravage the Economy

Obviously, bad debt doesn’t just go away.  Over time, it metastasizes through the financial system like a wicked three headed monster.  At first it is subtle and no one really notices the hideous growth taking place.  But then, in the blink of an eye, the monster rampages through the economy leaving destruction in its wake.

The three heads of the consumer debt monster consist of student loans, auto loans, and credit card debt.  What makes these debts particularly nasty is that there’s no collateral backing them. Where’s the collateral?

The collateral for student loans is non-recoverable.  For it has been dispersed into oversized professor salaries, oversized lecture auditoriums, and oversized sports complexes.  Similarly, credit card debt has been run-up purchasing 72-inch flat screen televisions, avocado toast, and combination dinner platters at Applebee’s.

How does a creditor recover the cost of a meal that was consumed 2 years ago? Technically, auto loans have some form of collateral.  The cars can always be repossessed.  But new cars lose value nearly as fast as fresh tomatoes turn to rot.  Presently, record levels of auto loans are backed by cars with negative equity – the debt owed is more than the cars are worth.


The post-crisis car lending lunacy in all its awe-inspiring splendor – click to enlarge.


What’s more, easy lending over the last 8 years has compelled more and more car buyers to roll their negative equity from prior loan balances into new loans.  On top of that, some amiable lenders only verified income on 8 percent of their auto loans.  Why bother with such inconveniences when the bad loans are being securitized in packaged debt offerings and sold to pension funds?

The point is, this three-headed debt monster’s been constructed in earnest over the last 8 years.  Cheap credit, zealous creditors, and money-pinched consumers desperate to maintain their standard of living have built it up with reckless abandon.

Of course, the chief architects, the policy makers – particularly Bernanke and Yellen – provided the blueprint.  Remember, the almighty American consumer was to borrow all the cheap credit being sprinkled about and spend the economy back to optimal growth.  Well, the consumers did their part.  Yet the lame economic theories fell flat.

Who would you like to feed to the three headed monster for breakfast?


Charts by: StockCharts, St. Louis Fed


Chart and image captions by PT


MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.




Emigrate While You Can... Learn More




Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • US Stock Market: Conspicuous Similarities with 1929, 1987 and Japan in 1990
      Stretched to the Limit There are good reasons to suspect that the bull market in US equities has been stretched to the limit. These include inter alia: high fundamental valuation levels, as e.g. illustrated by the Shiller P/E ratio (a.k.a. “CAPE”/ cyclically adjusted P/E); rising interest rates; and the maturity of the advance.   The end of an era - a little review of the mother of modern crash patterns, the 1929 debacle. In hindsight it is both a bit scary and sad, in...
  • How to Blow $12.2 Billion in No Time Flat
      Fake Responses  One month ago we asked: What kind of stock market purge is this?  Over the last 30 days the stock market’s offered plenty of fake responses.  Yet we’re still waiting for a clear answer.   As the party continues, the dance moves of the revelers are becoming ever more ominous. Are they still right in the head? Perhaps a little trepanation is called for to relieve those brain tensions a bit?  [PT]   The stock market, like the President,...
  • Despondency in Silver-Land
      Speculators Throw the Towel Over the past several years we have seen a few amazing moves in futures positioning in a number of commodities, such as e.g. in crude oil, where the by far largest speculative long positions in history have been amassed. Over the past year it was silver's turn. In April 2017, large speculators had built up a record net long position of more than 103,000 contracts in silver futures with the metal trading at $18.30. At the end of February of this year, they held...
  • US Stock Market – The Flight to Fantasy
      Divergences Continue to Send Warning Signals The chart formation built in the course of the early February sell-off and subsequent rebound continues to look ominous, so we are closely watching the proceedings. There are now numerous new divergences in place that clearly represent a major warning signal for the stock market. For example, here is a chart comparing the SPX to the NDX (Nasdaq 100 Index) and the broad-based NYA (NYSE Composite Index).   The tech sector is always the...
  • Stock and Bond Markets - The Augustine of Hippo Plea
      Lord, Grant us Chastity and Temperance... Just Not Yet! Most fund managers are in an unenviable situation nowadays (particularly if they have a long only mandate). On the one hand, they would love to get an opportunity to buy assets at reasonable prices. On the other hand, should asset prices actually return to levels that could be remotely termed “reasonable”, they would be saddled with staggering losses from their existing exposure. Or more precisely: their investors would be saddled...
  • US Equities – Mixed Signals Battling it Out
      A Warning Signal from Market Internals Readers may recall that we looked at various market internals after the sudden sell-offs in August 2015 and January 2016 in order to find out if any of them had provided clear  advance warning. One that did so was the SPX new highs/new lows percent index (HLP). Below is the latest update of this indicator.   HLP (uppermost panel) provided advance warning prior to the sell-offs of August 2015 and January 2016 by dipping noticeably below the...
  • Return of the Market Criers - Precious Metals Supply and Demand
      Ballistically Yours One nearly-famous gold salesman blasted subscribers this week with, “Gold Is Going to Go Ballistic!” A numerologist shouted out the number $10,000. At the county fair this weekend, we ran out of pocket change, so we did not have a chance to see the Tarot Card reader to get a confirmation. The market criers are back in gold town [PT]   Even if you think that the price of gold is going to go a lot higher (which we do, by the way—but to lean on...
  • Good Riddance Lloyd Blankfein!
      One and the Same   “God gave me my money.” – John D. Rockefeller   Today we step away from the economy and markets and endeavor down the path less traveled.  For fun and for free, we wade out into a smelly peat bog.  There we scratch away the surface muck in search of what lies below.   One should actually be careful about quotes like the one attributed to Rockefeller above, even if it of course sounds good and is very suitable for the topic at...
  • Incrementum's New Cryptocurrency Research Report
      Another Highly Useful Report As we noted on occasion of the release of the first Incrementum Crypto Research Report, the report would become a regular feature. Our friends at Incrementum have just recently released the second edition, which you can download further below (if you missed the first report, see Cryptonite 2; scroll to the end of the article for the download link).   BTC hourly (at the Bitstamp exchange). Although BTC has been in a bear market since peaking in...
  • US Stock Market – How Bad Can It Get?
      SPX, Quo Vadis? Considering the Crash Potential In view of the fact that the stock market action has gotten a bit out of hand again this week, we are providing a brief update of charts we have discussed in these pages over the past few weeks (see e.g. “The Flight to Fantasy”). We are doing this mainly because the probability that a low probability event will actually happen has increased somewhat in recent days.   Robert Taylor and Deborah Kerr cast wary glances at their...
  • Yosemite Sam is Back!
      Dubious Picks Unless this is part of another cunning negotiation tactic, the Donald's recent cabinet nominations have to be considered highly dubious, to say the least. First he promoted Mike Pompeo from his CIA post to the position of Secretary of State – removing the eminently reasonable, and as we believe widely underappreciated Rex Tillerson. Pompeo is mainly known for sharing Trump's irrational dislike of the  nuclear deal with Iran, which was pretty much the only laudable policy...

Support Acting Man

Item Guides


Austrian Theory and Investment



THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Buy Silver Now!
Buy Gold Now!

Diary of a Rogue Economist