January 21, 2016
Chances are you’ve never heard of William White.
You might have heard of the organization that he used to manage—the Bank of International Settlements (BIS).
The BIS is often called the central bank of central banks; their role is essentially to facilitate international financial transactions among the world’s central banks.
So they are a major component in the international financial system, just like the IMF and World Bank.
William White is a central banker who used to be on the BIS management committee. And this makes him a key member of the global financial establishment.
It’s not too often that central bankers are particularly transparent with the public.
Ben Bernanke famously told the world in July 2005 that there wouldn’t be a nationwide decline in home prices in the United States.
Then just a few months later when home prices did fall, he told Congress that the adverse effects of the housing market were ‘contained’ and wouldn’t affect the broader economy.
He was dead wrong on both accounts. And one of the biggest financial crises in history broke out shortly thereafter.
Central bankers seem to always miss the crisis just around the corner.
That’s pretty scary given that they have the power to dominate and control just about everything in the entire economy.
And despite a serial track record of failure, we’re just supposed to trust them to be smart guys. It’s madness.
A few days ago, however, William White gave an interview stating some things that you never hear coming out of the mouth of a central banker. Ever.
According to White, the global financial system is dangerously unstable.
“The situation is worse than in 2007,” he said, and went on to explain that central banks no longer have the ammunition to fight off a major crisis.
He railed against the mountain of government debt that has accumulated worldwide, saying that “it will be obvious in the next recession that many of these debts will never be serviced or repaid.”
White also suggested that banks, particularly in Europe, will have to be recapitalized on an unimaginable scale.
And due to all the new regulations, it will be depositors who have portions of their accounts confiscated by the state in order to fund the bank bailouts.
William White is not alone.
Michael Bury, the man who made $100 million betting against the last housing crisis, sees the same thing.
In an interview last month, Bury spoke about the “absurdity” of the massive level of debt in the system, and the Federal Reserve’s pitiful balance sheet.
When he gave the interview, the Fed’s balance sheet was leveraged 77:1. Today, barely a month later, it’s over 100:1. Incredible.
Financial markets have been in panic mode since the beginning of the year.
Just in the first few weeks of January, US stocks are down more than 10%. In China, the epicenter of the chaos, stocks are down 20%.
Commodity prices continue to fall. Pessimism abounds.
Look, maybe this is it. Maybe the global financial system has truly reached its limit.
Maybe the world has realized that the path to prosperity is not in conjuring money out of thin air, raising taxes, or going deeper into debt.
Maybe people have finally figured out that an insolvent government and insolvent central bank cannot possibly continue to underpin the entire financial system.
Or maybe not.
Maybe this will all be forgotten in a few weeks. And this coming Christmas no one will remember the great crisis of January that almost was.
But to me the incredible thing is how much panic there has been, particularly in banking and financial markets, just at the mere HINT of problems in the system.
It’s a clear indication of how quickly people can lose confidence and an entire system can become unglued.
Maybe things drag on like this for years, with government continuing to pile up debt and central banks continuing their slide into insolvency.
Maybe interest rates can become even more negative, and banks can become even less liquid.
But one day that confidence will turn. And as this month shows, it can all happen in an instant.
Look, I’m an optimistic guy.
Crisis always brings opportunity for those who can see the obvious realities. And I think what’s starting to unfold is tremendously exciting.
Economics isn’t complicated. The Universal Law of Prosperity is very simple: produce more than you consume.
Governments, corporations, and individuals all have to abide by it. Those who do will thrive. Those who don’t will fail, sooner or later.
When the entire financial system ignores this fundamental rule, it puts us all at risk.
And if you can understand that, you can take simple, sensible steps to prevent the consequences.
We’ll discuss some of these steps in upcoming letters.