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Previous crises

In 1971, President Nixon effectively defaulted on the Bretton Woods agreement of 1944, thus severing the last ties to a gold standard. The decision allowed the US and other Western nations to ramp up spending to pay for welfare and warfare. It produced short-term benefits but increased long-term national financial risk. Leaving the gold standard allowed imprudent politicians to engage in unrestrained spending not supported by national economic output.

Since then, the world has suffered several economic crises. Stagflation in the seventies, the savings and loan banking crisis in the eighties, the collapse of the Japanese real estate bubble late 1980s, nose-bleeding interest rates during the eighties, a Scandinavian banking crisis in the early nineties, the Asia debt crisis in 1998, the dot-com crash in 2000, the Global Financial collapse beginning in 2007, the Eurozone crisis in 2010, and finally the COVID crisis in 2020. Most of these crises were caused by unsustainable risks created by debt. Reckless and feckless politicians threw good money at every small or big problem. In so doing, they solved nothing but exacerbated the situation by increasing private and public debt.

Today

Today, the world is kneeling under the weight of a mountain of debt. COVID-19 led to accelerated and unprecedented borrowing, and the Ukraine war pushed Western debt even higher—with no long-term positive outcome. By the end of 2022, the global debt was roughly 400% of GDP, and many advanced nations will never be able to pay it off.

We are coming out of 40 years of descending interest rates, a trend that likely ended when the inflation monster finally entered the financial stage in 2022 after the unprecedented expansion of the fiat currency supply. Now, our living standards are threatened by war, political corruption, incompetence, social unrest, and inflation. Have we passed the threshold of no return to what we perceive as "normality"?

The current 6–11% inflation levels in the Western world suffocate households, corporations, and nations with unsustainable financial expenses. As always, there is no lack of self-proclaimed experts telling populations not to worry, not least the Fed. Your government, the sole creator of the debt problems in the first place, promises to save us all from the perils to come. Of course, such an idea is not only a distortion of reality but also delusional.

Denial

There are ample signs that politicians, ordinary men, and women are in collective denial of the looming threats against Western nations. We have chosen to live on credit for at least two decades rather than work more to increase the production of goods and services. In no place is this more evident than in nations still expanding welfare programs despite shrinking labor pools and unrestricted immigration from incompatible cultures.

Our refusal to tighten our belts and adjust our spending to match income and savings, has led to individual and institutional "irrational exuberance," as Greenspan warned against before the dot-com crash in March 2000. Today, the debt levels are double or more, compared to previous crises. A potential recovery is not likely be quick and painless, like ripping off a bandaid. The era of everyone having access to ultra-cheap money is over. Whether we like it or not, a reckoning will impose severe pain on populations. This can occur tomorrow, next week, next year, or in the next decade. No one knows, but the inevitable bust seems closer than we'd like to think.

The September 2008 bankruptcy of Lehman Brothers represented a panic that started in the summer of 2007 with mortgage losses and a run on a French bank. That panic proceeded with the failure of Bear Stearns in March 2008, and shortly after the failures of Fannie Mae and Freddie Mac. In other words, panics can run for a year or longer before the situation comes to some sort of conclusion - normally by massive regulatory intervention.

Financial failures

Last week we learned that three US banks failed. Among them, the super-woke[1] SVB, collapsed due to a good old-fashioned bank run. SVB is all about "equity, diversity, and inclusion" and big bonuses to the top brass for subscribing to the doctrines of Klaus Schwab and the WEF. The bank did not have enough liquid assets to meet deposit withdrawal demands. So, the FDIC stepped in and took it over on March 10, 2023.

Also, in the same week, the Swiss central bank had to bail out the trainwreck Credit Suisse, which has been on life support for years. Months prior, the Bank of England bailed out the pension funds to prevent a systemic collapse of the UK financial system. All three are consequences of higher Fed interest rates and poor risk management.

If central banks continue to raise interest rates, the higher rates will exacerbate the losses on bond portfolios and push more banks into insolvency. It stands to reason to claim that the Western financial system is in a dangerous state and that there is no easy way out of the problems created by useless political leaders and manipulating central banks.

Another looming crisis is the trillions of dollars in derivatives held by international banks. No one can quantify the level of systemic risk in derivatives, but the dollar amount is much higher than in the 2008 crisis due to massive QE and negative real interest rates. So, there is significant potential for a crisis of epic proportions. Banks are operating in closed rooms filled with explosive gas. All it takes is one large trade to go sour, and the gas is ignited with devastating effects.

Central Banks and Inflation

Central banks and rule makers pretend to control events, but nothing is farther from the truth. The geniuses running central banks are way behind the curve, and together with politicians and media "experts," they have little to no credibility left. For instance, Fed chairman Jerome Powell complained in 2019 that inflation slightly lower than the target 2% represented a problem. Later, when reckless money printing finally created almost two-figure inflation levels, he reassured markets by proclaiming inflation transitory. Now, when the inflation is proven stubbornly persistent despite rate hikes, he claims the Fed has "the necessary tools" to engineer a soft landing. It is a load of BS. They are between a rock and a hard place, unable to maintain stable prices and avoid collateral damage in form of a recession. It is due time that investors understand that central banks can kick the can down the road only for so long, and we are fast running out of road. Reality will eventually dawn on the most complacent investor – wealth and prosperity cannot be printed or created by governments.

Political leaders show increasing signs of desperation. The FDIC's decision to bail out all SVB depositors means the government is going against its rules. The bail-out is the end of QT and a clear sign that the predicted Fed pivot is here. Hence, most equity markets have gained over the last few days expecting reinitiation of QE. What markets seem not to understand is that QE is inflationary. The fiat currency system guarantees a perpetual loss of purchasing power - a significant threat to the well-being of the lower and middle classes.

A survey suggests that over 60% of Americans live hand to mouth with savings of less than USD 1000. That is a telltale sign that ordinary people are not only struggling but teetering on the brink of financial ruin due to debt. No democracy can survive, let alone flourish, without an economically independent and self-reliant middle class. Western economic decline has many facets. Still, a growing number of welfare recipients is a sure path to cultural and social decline in any community. We need only look to the USA, which has completely lost its bearings due to social, political, and cultural decay. President Biden refuses to defend US borders but is willing to risk WW III to protect Europe's most corrupt country Ukraine - and destroy the economic foundation for Europe's industry in the making. It makes no sense at all.

One thing is for sure. Governments and their bureaucracies and cronies are growing. They have no other options than coming after the little man and woman to pay for failing policies. Do not become a victim. Your hard-earned savings, no matter amount, must be protected from government "confiscation" to the greatest extent possible. Opening your eyes to the threats we are facing is a good start. Knowledge and common sense are the best tools against whatever peril you encounter. Regardless of what they tell you, governments will not save you or your family.

I tell my children there is a real possibility they will probably become the first generation in centuries to face lower living standards than their parents. This is a prediction I hope to be wrong, but it seems the ruling elites are doing everything they can to prove me right.

Save your savings

It is imperative for personal financial survival that we, the dwindling numbers of taxpayers, prepare for the implosion of the world's largest financial bubble. We need to protect our personal wealth. Investors should reduce exposure to stocks and increase cash allocations. Your portfolio should also have assets without counterparty risk, such as precious metals. Diversification is a no-brainer and means holding a combination of non-correlated asset classes of stocks, bonds, commodities, cash, and real estate. Additional diversity can be obtained by slicing up your portfolio into sectors. Some examples are healthcare, consumer discretionary and staples, technology, financials, energy, and industrials. The time will come when you can return to the stock market with confidence. That time is not yet.

Consider contacting your financial advisor to create a portfolio designed to accommodate your objectives.

[1] If you can take the cringe - read SVB’s ESG report from 2022.