Since Michael Lewitt, aka “The Credit Strategist” is one of our preferred bond market analysts, we enjoyed his latest interview by Financial Sense‘s Jim Puplava, where he discusses the only thing that matters: “are we on the verge of a massive market crash.” It will hardly come as a surprise that Lewitt, author of The Committee to Destroy the World: Inside the Plot to Unleash a Super Crash on the Global Economy, argues that the problems we faced in the last recession haven’t been dealt with and, as a result, another crisis is likely, particularly when it comes to the opaque derivatives market. In sum, Lewitt believes we are “in the late stages of Ponzi finance.”
The following is a summary of Puplava’s interview with Lewitt, which can be heard in full here.
We see abundant evidence that government policies have failed and are failing, Lewitt said.
“They’ve tried to solve the debt crisis by printing trillions of dollars of more debt,” he noted. “They’ve added on top of that hundreds of billions of regulations or new regulatory costs, and somehow they expect the economy to grow under the weight of those burdens.”
These and other missteps by regulators have hampered growth and have created our current low-yield, low-interest rate muddled economy. Many regulators come from the same class of academic economists, Lewitt argued, and they don’t understand how the world actually works.
As such, he said, our current course is going to lead to another crisis.
Debt and Regulations Are Crippling Growth
The worst thing about the debt buildup is borrowed money isn’t being used for productive ends, Lewitt said. And what’s more, political will doesn’t exist to fix what is an acknowledged problem, he added.
“You couldn’t design this worse if you tried,” he said. “Low-interest rates cover up a lot of things, but eventually you have to pay the money back.”
As the debt inevitably matures, companies will be looking back on years of low growth, and they’ll have to default, Lewitt stated. And governments will keep taxing and spending until there’s pushback.
In terms of regulations, Lewitt said he feels they were well intentioned. The financial system was grossly overleveraged, but the problem is regulations went too far, he added.
“Markets are over-regulated right now. It’s one thing to want to make sure banks aren’t levered 30-to-1, but it’s another thing to come up with a set of regulations that dries up liquidity in markets,” he said.
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Fed Is a Shadowy, Poorly Understood Force
Nobody wants to connect the dots, and most people don’t understand what the Fed does, or even what the fractional reserve banking system is, Lewitt noted.
“As a result, we have a system where the most powerful government agency in the world, the Federal Reserve, really operates without very many checks and balances,” he said.
We’ve seen regulators that are just hurting markets and making missteps. For example, the Fed should have raised rates at the latest in 2014, but instead persisted with crisis-era policies, Lewitt said.
What we’ve ended up with is a massive regulatory state because the government doesn’t trust people to manage themselves, he added.
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Derivatives Market Is a Mess
Right now, American banks are much better capitalized and everything will be fine, Lewitt stated, unless derivatives become a problem.
For example, if Deutsche Bank is unable to meet its obligations on its $60 trillion in derivatives, counterparties around the world, including Goldman Sachs, J.P. Morgan, and others, are going to have a problem.
“It’s a huge daisy chain,” he noted. “The problem with derivatives has not been solved—it’s been glossed over. There is $200 trillion debt globally, and there’s no way the global economy can generate the productivity to service that debt.”
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Later Stages of Ponzi Finance
“We’re … just borrowing new money to pay back old money,” Lewitt said. “I would say that we’re in the late stages of Ponzi finance.”
This doesn’t end well, Lewitt noted. At some point, people will have to come up with real money to pay debts. Or in our case, we’re going to devalue money to pay our debts through inflation and currency debauchment, Lewitt said. Those are our only options.
But we can make a positive impact to prevent some of this from happening, Lewitt argued.
“We should discourage debt,” he said. “We should encourage equity. We should discourage speculation. We should encourage productive investment. And in order to do that, you need to change the tax code, which right now does the opposite.”
We also need to lower the growth of debt, he said. And we need to figure out how to improve productivity and improve economic growth. The ways to do that are to fix the tax code, reduce regulation, and allow the economy rather than the government to run things, Lewitt added.
For individuals, this means getting out of bonds, having some gold, not being afraid to hold cash, and being very cautious of equities, Lewitt said.
“Now is not the time to be a hero,” he said. “Now’s the time to worry about protecting your capital.”
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The interview can be accessed here.
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