How an Unsound Global Monetary System Creates Boom/Bust Cycles

Many times when I run into old friends after a while, in reference to past conversations we may have had regarding global capital markets, they tell me something to the effect of: “Everything you said that was going to happen happened exactly like you told me. How did you know?” The key to my predictions is my understanding of the global monetary system. Often people ask me about questions beyond the realm of my expertise such as real estate. They inform me of countries where the real estate market still seems to be holding up well despite the global monetary crisis and ask me, “Do you think buying a house is a good investment right now in Country X (the name of a country with a healthy real estate market)?” My answer is always the same. I answer their question with a question of my own. “What’s the key interest rate in Country X (the interest rate at which banks lend to each other)?” I ask. If their answer is any figure between 0.00% and 1.50% to 1.75%, as it often is, I tell them to wait for much lower prices that will be coming very soon. Even though I would never claim expertise in real estate markets, I can still provide my colleagues with solid forecasts based upon my understanding of the global monetary system.

If the key lending rate in Country X is extremely low, I know that the real estate market, despite appearances, is a grossly distorted bubble waiting to burst. In such a situation, the upside may be another 5% to 10% while the downside is likely 25% to 40%. And that is just not a good risk-reward setup to enter any type of market. With the assistance of a fraudulent monetary system, Central Banks create massive real estate and stock market bubbles by slashing interest rates so low that they induce their countrymen to massively borrow from banks. When Central Banks, in essence, sucker their countrymen to borrow huge amounts of money with low interest rates, then much of this money is either re-invested back into (1) stock markets; or (2) real estate markets. Some may say that “sucker” is too harsh a word choice, but when a monetary policy can have no possible end but the bursting of a bubble, then “sucker” seems quite an apropos choice of words. Everyone always likes low interest rates, but this affinity for “free” money is very short-sighted as such monetary policies always have hugely negative consequences several years later.

Thus, when strong bull markets in stock markets or real estate markets are primarily driven by the implementation of easy money policies instituted by Central Banks, these bull markets never have sustainable legs. This is why they bubbles inevitably form and bubbles inevitably burst. Instead, the only thing easy money policies create are massively distorted prices in stock markets and real estate that would have never been attainable with the implementation of (1) sound money; or (2) the implementation of intelligent monetary policy.

Thus, in some hot spots in Asia where real estate markets have held up reasonably well during this crisis, I can guarantee that you will see real estate prices 25% to 30% lower than present values within approximately 18-months if the key interest rate established by the Central Banks in these markets are close to 1.00% or lower at the present time. In fact, come back here in 18-months and I’ll reveal what specific country I’m referring to, to prove my point. Furthermore, if you take the time to understand which markets most of that nearly “free” money has been directed into, then it is even easier to understand how significant this drop will be. For example, if real estate markets are still relatively healthy in a country where key interest rates are near 1.00% or lower, and there has been virtually no capital inflow into stock markets for the past couple of years due to the underwhelming performance of global indexes, then you can be assured that the correction that will occur in such a real estate market in the near future will be quite painful.

When I inform people of my very simple way to assess the future direction of real estate markets based upon monetary policies being implemented in their country, they sometimes counter with the question, “What about the trillions upon trillions of currencies being injected into the EU countries, the US, and Japan to stimulate the economy? Won’t that cause real estate markets to keep rising?” Again I answer their question with a question of my own. I ask, “So what if these actions succeed in inflating and distorting markets even more. Do inflated asset prices truly create real wealth and is a bigger bubble really beneficial to you as an investor?” Even if higher, inflated real estate prices and a greater bubble transpires as a result of irresponsible monetary policy, an inflated price of a real estate asset does not necessarily translate into an increase in real wealth. What matters to real wealth is simply the purchasing power of your money, not how much of it you have or how much an asset is worth. During periods of high inflation, an asset can grow quite significantly in monetary terms while simultaneously destroying one’s wealth in real terms.

So even if a bigger bubble does form as a result of loose monetary policy instituted by foolish Central Banks, it is still better to wait until the bubble bursts before you buy. In the end, understanding how money is created, and understanding that we have a broken monetary system today that has not worked for the last century is the key to understanding the future direction of stock markets and real estate markets. Because this is such an easy concept to understand once properly explained, it also makes the failures of people like former Federal Reserve Chairman Alan Greenspan easier to understand. If one views Greenspan’s actions when he served as the Chairman of the Federal Reserve through the lens of special interest groups and the interests of the financial oligarchs, his actions are quite easy to understand. If you believe that Greenspan made his decisions with the interests of the American people at heart, then they become incredibly difficult to understand.

As long as the mechanisms of this fraudulent monetary system remain in place and as long as the masses remain uninformed, we will always experience huge boom/bust cycles in every capital market in the world. In addition, predicting long-term trends and reversals does not require much more skill other than understanding how money works. Predicting the short-term interim movements of capital markets, however, is much more difficult and requires a historical understanding of Central Bank and government interventions into free-markets. I recently watched a fascinating documentary called “Secrecy” in which Melissa Boyle Mahle, a former US intelligence officer and expert on the Middle East and Counterterrorism, stated in regard to terrorism, “You need to keep your enemy confused. You want them to be insecure, you want them to fear. If they know your game and they know your strategy and they know your tactics, you have so handicapped yourself that you will not win.”

This is quite a scary statement when you realize that Ms. Mahle’s statement could just as easily apply not to counterterrorism measures but to tactics the financial oligarchs employ against the people. The severe boom/bust cycles that all world economies experience from time to time are NOT natural economic cycles as the economists paid by the financial oligarchs mislead the masses to believe. Severe boom-bust cycles are entirely a man-made event created and precisely controlled by Central Bankers. Understand this, and you will ultimately remove a lot of the guesswork regarding long-term movements of capital markets and understand how to create wealth, even in the midst of crisis.

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