Why the Central Bank Con Game Is Nearing Its End

The always brilliant David Stockman wrote an article that I think best explains why the jig is up for the central bank con game. If like me you have been wrong in thinking the fraudulent policy of printing money cannot continue, only to find that your portfolio has been trashed by 50% to 70% one more time simply because the Pinocchio noses of Ben Bernanke or Janet Yellen have not yet been visible to the masses, I strongly suggest you have a read of Stockman’s article here: http://jaytaylormedia.com/700-days-in-no-mans-land-why-they-cant-keep-it-up/, titled “700 Days in No Man’s Land—Why They Can’t Keep It Up.”

For those of you who may not have the time or attention span to dig into the meaty substance of David’s methodical thought process, let me try to summarize in bullet form what he is saying. After reviewing my summary of Stockman’s article, you may then wish to verify my summary by reviewing the article. But I spent some time reading through it and taking notes. Here is what I came up with:

The Risk On/Risk Off trade, or what Stockman refers to as the “risk parity trade” (RPT)—which means that when stocks fall U.S. Treasuries rise and when U.S. Treasuries fall stocks rise, is an unnatural phenomenon that can occur only when the natural laws of economics are interfered with by constant and massive printing of debt based or fiat money. This trade, which has enabled a redistribution of wealth from those who produce it (miners, farmers, manufacturers, and inventors), to the central bankers and those who own the central bankers as well as government, has been magnified to a very great extent when the Plunge Protection Team (PPT) was created with the 1987 stock market crash. From that time on, Wall Street as well as Washington, was given a huge boost in their ability to rob the public when the Fed handed them trillions of dollars’ worth of gambling chips handed to the gambling houses on Wall Street. Following the 1987 stock market crash and an effort to avoid a repeat of 1929, the Greenspan put became an illegal reality that has resulted in increasing amounts of mal investment, “peak debt,” and increasing levels of insolvency in the U.S.

• Coordinated central bank policies are a must to hide the big lie and keep RPT in play. By pushing interest rates down in an effort to stimulate prosperity and obscure the reality of declining prosperity in the U.S. and to avoid a 1929-style depression, Alan Greenspan’s Wall Street “put” pushed interest rates below equilibrium, thus causing Americans to shun buying U.S. Treasuries. Who then would buy U.S. Treasuries? ANSWER: The Japanese, who had built up huge excess dollar reserves from their massive trade surpluses of the 1980s and 1990s. Also as a result of the creation of the petrodollar in the early 1970s, a bid for the dollar and U.S. Treasuries was a reality since oil had to be paid for in dollars. Oil exporting countries with dollars were natural buyers of U.S. Treasuries and then along came China with its massive trade surpluses during the first decade of the new century. In addition to these natural buyers of Treasuries, one other prerequisite for maintaining RPT was coordinated central bank action of all the major players like the central bank of Japan, the European Central Bank, and finally Bank of China. To keep this increasingly global system from imploding or exploding, central bankers outside of a troubled zone had to step in to stimulate the troubled zone. For example, last year we saw the Bank of Japan step in to stimulate when the Fed began talking about tapering QE. The really big example was in 2008-09 when China began massive QE that has led to massive mal investment (empty cities) and hoarding of commodities, the results of which are now leading to plummeting commodity prices and rising levels of insolvency, especially among companies and countries producing commodities. The problems now being faced in China (and elsewhere) resulting from this massive coordinated QE are now leading to a lack of cooperation between central banks as countries seek to first take care of their own economic survival.

• National interest breaks down central bank coordination. A major boost to the Chinese export machine in the first decade of this century was the attachment of the yuan to the U.S. dollar, which fell by nearly 40%, versus the U.S. dollar index, which is comprised of euro, yen, and pound but most heavily weighted against the euro. But from 2011 through the present, the dollar has risen by 25%, which has negatively impacted Chinese exports at the very time mal investment from massive domestic stimulus has made it obvious the Chinese economy was becoming ever more insolvent with problems of empty cities and massive bankruptcy ever more obvious. By pegging and not allowing the yuan’s value to be market driven, it has a significantly overvalued currency. To try to stimulate exports, it has started to allow the yuan to fall vis-à-vis the dollar. However, a declining yuan combined with increasing problems of financial insolvency in China has led to a massive exodus of capital from China and a need on the part of the Bank of China to sell U.S. Treasuries.

• The Chinese economy is tanking and that is sending the price of all manner of commodities (with the possible exception of the tiny lithium market) down, down, down! And that has been leading the Bank of China to sell massive amounts of U.S. Treasuries to meet their own financial needs and domestic demand for the “strong” dollar. By the way, not mentioned in the Stockman article but coming out today is a revelation that one of the other major holders of U.S. Treasuries, namely Saudi Arabia, is starting to sell U.S. Treasuries. Indeed as the price of oil collapses and the BRICS look to trade amongst themselves at the exclusion of the West, that combined with global economic decline is leading to a decline of Saudi oil exports and a demand for dollars to purchase oil as set up by Kissinger in 1972. In other words, for reasons unique to each country, the requisite for the continuation of RPT is breaking down, which means the existing global dollar based monetary system itself is on the verge of breaking down and with it, Pinocchio’s nose will no longer be hidden.

The Bottom Line: The first issue of this letter, which began as a monthly publication, was written on October 15, 1981, the very day Anwar Sadat was assassinated and gold rose $15.30 on that news. At that time, I was convinced we were likely heading for a hyperinflation simply because the U.S. Government was already, even then, living beyond its means and there would not be enough savings in the U.S. to fund the deficit, so the printing press would be employed to meet the shortfall.

My simplistic view proved not to be true in the short run, but 35 years later, it is looking like we may now be on the verge of that happening. The delay in facing economic reality has been made possible by central bankers, large banks, and governments around the world coordinating efforts to create trillions of dollars out of thin air so that whenever one area of the world plunged the other areas of the world would come to the rescue. That could work for a while until the global economy reached peak debt. That’s where we are now. China, the last country on Earth that could still print trillions of dollars’ worth of funny debt-based money did so, thus further damaging the long-term prospects of the global economy with its mal invested empty cities.

But alas, when push comes to shove and countries are asked to commit hara-kiri economics for the survival of the Anglo-American Empire, the Japanese, who were the only people thus far subjected to nuclear war and as such have been the captive state of the U.S. and NATO, may be willing to cooperate. Other nations like China and Russia are proving less willing to obey the dictates of Washington and NATO. For its own survival, China is allowing the yuan to float to lower levels even as the U.S. threatens harm if they continue with that policy.


The first signs that RPT is breaking down came last August when a massive decline in the stock market didn’t result in a flow of funds into the Treasury markets. This was the first major sign that

the RPT system, made possible under the petrodollar following the breakdown of Bretton Woods in 1971, is nearing its end. This may in fact be the reason why the Fed has actually dared to raise interest rates and it is the only reason I think they may continue to do so even as the U.S. economy heads south to such an extent that no one will believe the statistical lies floating out from the BLS. It may well be that the only way the U.S. can fund its huge government and private sector deficit is to return to a market-driven interest rate. More likely in my view—perhaps after significantly more deflationary pain, will be the start of a hyperinflation process. We can hope and pray that doesn’t happen because of the hell on Earth that is likely to follow.

Meanwhile, central bank con artists want us to believe their omniscience and omnipotence can save us from economic destruction. So the refrain that “we will do whatever it takes to avoid a catastrophic deflation” continues. The problem they have is that QE isn’t any longer working at all because we have now reached global peak debt. Printing more money can neither stimulate the economy nor even raise prices to fund massive debt. There is no place on the face of the earth anymore that can delay the inevitable date with economic reality. China was the last and made the global economy a whole lot worse by massive money printing that led to empty cities, oversupply of commodities, and massive excess capacity. For China to do more now by keeping its exchange rate elevated simply to satisfy the Anglo-American Empire is out of the question, because for it to continue to play the American game would be suicidal. As in the 1930s, central bank effectiveness can only be compared to “pushing on a string.” RPT is at or very near its end. The likely outcome will be what has only been delayed, namely, a massive global depression that will likely make that of the 1930s look like child’s play.
Of course this is my view. I have been wrong before with my gloomy outlook. We can hope and pray to the Creator that I am wrong or that He in His infinite wisdom and mercy intervenes on our behalf. But then a clear reading of “the Good Book” has shown that there are frequently times through history when He chooses not to, especially when His people have arrogantly dismissed His existence, as the gods of central banking seem to have these days.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.