The next economic recession will be like no other in history. It will be much worse than the Great Recession of 2007, and it may be worse than the Great Depression of the 1930's. How was this conclusion reached? The amount of monetary inflation in the economy is beyond belief; it has become a super-sized bubble waiting to burst. When the inflation bubble finally bursts, the Federal Reserve will scramble to find enough cash to keep the banking system "liquid". During the 2007 Recession, Congress stepped in and put hundreds of billions of dollars in to the system in order to keep it moving. Basically, taxpayer money was used to prop up privately owned businesses. The taxpayers will never see that money again; it has disappeared into the TARP program. Over the past ten years, the Federal Reserve has pushed Trillions of dollars into the economy hoping it would stimulate a bit of economic growth. Their plan failed.
In his book "The Road to Ruin", author James Rickards discusses several facets of the financial markets, the Treasury Department, and the Federal Reserve. The author spent many years working on Wall Street, specifically in hedge funds, and thus acquired inside knowledge of the derivative market. Derivatives are a best described literally as a form of financial gambling. The system can be explained using football terminology which is familiar to everyone. Company A bets Company B that the Redskins will beat the Cowboys next week. They agree to make a bet worth billions, using margin accounts and being financed by large banks. However, in order to hedge their bet, Company A makes another bet with Company C that the Cowboys will score at least one touchdown, thus protecting themselves in case the Redskins lose. But, Company B also wants to hedge their bet, so they make a bet with Company D that the Redskins will score at least one touchdown. And Company C hedges against their bet with Company A, with Company E, and it goes on and on with all the above named companies. All of these bets are worth billions, all are on margin, and all are financed by the same big banks. If just one of these companies defaults on their bets, and has their margin called, the entire system will collapse. The hedge fund companies will scramble to borrow money in order to satisfy their margin requirements, and the banks will scramble to find enough capital to keep operating while billions of dollars’ worth of unpaid hedge funds debt starts piling up. The derivative market is currently valued at over $100Trillion dollars, if that would suddenly collapse the results would be catastrophic. During the recession of 2007, the system almost collapsed. Wall Street had invested billions of dollars into mortgage derivatives, and as soon as the mortgage industry started taking losses from homeowners that defaulted on their mortgages, the Federal Government was forced to take action to keep the system from collapsing. This time however, the derivative market has grown even larger, and the Government does not have enough money to mount a rescue attempt.
Moving beyond the financial markets, the banks will be in terrible jeopardy. The Federal Reserve will not be able to lend the banks the Trillions of dollars needed to keep them afloat. Therefore, the banks will take whatever cash they can find. Money in bank deposits accounts, 401k and IRA accounts, investment accounts, or any other type of account will be confiscated by the banking system with the full support of the US government. In the January-February issue of "Foreign Affairs" magazine, Timothy Geithner the former Secretary of the US Treasury and former governor of the Federal Reserve Bank of New York uses language that reconciles to the exact terminology used by author James Rickards. Secretary Geithner describes how the Federal Government and the banking system led by the Federal Reserve have been given the authority to take drastic action during the next financial crises. That drastic action will be to take the public's hard earned money, and use it to save the sharks on Wall Street from their own stupidity.