Editor’s Note: While our initial observations regarding the global stock market crash may suggest that the world’s central banks are out of bullets, Chris Martenson of Peak Prosperity argues that they have one very powerful weapon left in their arsenals. With the real threat of devestating deflation looming, The Fed knows what they have to do. They are absolutely terrified of what could happen if asset prices collapse like they did during the Great Depression. In coming weeks, months and years, argue Martenson, they will do what they do best, and they’ll do it on a scale never before seen. This time, however, they won’t just be printing money to bail out the banks. They’ll take their monetary easing directly to the end user, the consumer who drives the economy. So expect to be getting “free” money at some point in the near future.

The Deflation Monster Has Arrived (And it sure looks angry)
By Chris Martenson

As we’ve been warning for quite a while (too long for my taste): the world’s grand experiment with debt has come to an end. And it’s now unraveling.

Just in the two weeks since the start of 2016, the US equity markets are down almost 10%. Their worst start to the year in history. Many other markets across the world are suffering worse.

If you watched stock prices today, you likely had flashbacks to the financial crisis of 2008. At one point the Dow was down over 500 points, the S&P cracked below key support at 1,900, and the price of oil dropped below $30/barrel. Scared investors are wondering: What the heck is happening? Many are also fearfully asking: Are we re-entering another crisis?

Sadly, we think so. While there may be a market rescue that provide some relief in the near term, looking at the next few years, we will experience this as a time of unprecedented financial market turmoil, political upheaval and social unrest. The losses will be staggering. Markets are going to crash, wealth will be transferred from the unwary to the well-connected, and life for most people will get harder as measured against the recent past.

It’s nothing personal; it’s just math. This is simply the way things go when a prolonged series of very bad decisions have been made. Not by you or me, mind you. Most of the bad decisions that will haunt our future were made by the Federal Reserve in its ridiculous attempts to sustain the unsustainable.

The Cost Of Bad Decisions

In spiritual terms, it is said that everything happens for a reason. When it comes to the Fed, however, I’m afraid that a less inspiring saying applies:

Yes, it’s easy to pick on the Fed now that it’s obvious that they’ve failed to bring prosperity to anyone but their inside coterie of rich friends and big client banks. But I’ve been pointing out the Fed’s grotesque failures for a very long time. Again, too long for my tastes.

I rather pointlessly wish that the central banks of the world had been reined in by the public before the crash of 2008. However the seeds of their folly were sown long before then:

(Source)

Note the pattern in the above monthly chart of the S&P 500. A relatively minor market slump in 1994 was treated by the then Greenspan Fed with an astonishing burst of new money creation — via its ‘sweeps” program response, which effectively eliminated reserve requirements for banks .That misguided policy created the first so-called Tech Bubble, which burst in 2000.

The next move by the Fed was to drop rates to 1%, which gave us the Housing Bubble. That was a much worse and more destructive event than the bubble that preceded it. And it burst in 2008.

Then the Fed (under Bernanke this time) dropped rates to 0%. The rest of the world’s central banks followed in lockstep (some going even further, into negative territory, as in Europe’s case). This has led to a gigantic, interconnected set of bubbles across equities, bonds and real estate — virtually everywhere across the globe.

So the Fed’s pattern here was: fixing a small problem with a bad decision, which lead to an even larger problem addressed by an even worse decision, resulting in an even larger set of problems that are now in the process of deflating/bursting. Three sets of increasingly bad decisions in a row.

The amplitude and frequency of the bubbles and crashes are both increasing. As is the size and scope of the destruction.

The Even Larger Backdrop

The even larger backdrop to all of this is that the developed world, and recently China, have been stoking growth with debt, and have been doing so for a very long time.

Using the US as a proxy for other countries, this is what the lunacy looks like:

As practically everybody can quickly work out, increasing your debts at 2x the rate of your income eventually puts you in the poor house. As I said, it’s nothing personal; it’s just math.

But somehow, this math escaped the Fed’s researchers and policy makers as a problem. Well, turns out it is. And it’s now knocking loudly on the world’s door. The deflation monster has arrived.

The only possible way to rationalize such an increase in debt is to convince oneself that economic growth will come roaring back, and make it all okay. But the world is now ten years into an era of structurally weak GDP and there are no signs that high growth is coming back any time soon, if ever.

So the entire edifice of debt-funded growth is now being called into question — at least by those who are paying attention or who aren’t hopelessly blinkered by a belief system rooted in the high net energy growth paradigms of the past.

At any rate, I started the chart in 1970 because it was in 1971 that the US broke the dollar’s linkage to gold. The rest of the world complained for a bit at the time, but politicians everywhere quickly realized that the loss of the golden tether also allowed them to spend with wild abandon and rack up huge deficits. So it was wildly popular.

As long as everybody played along, this game of borrowing and then borrowing some more was fun. In one of the greatest circular backrubs of all time, the central banks and banking systems of the developed world all bought each other’s debt, pretending as if it all made sense somehow:

(Source)

The above charts show how hopelessly entangled the worldwide web of debt has become. Yes, it’s all made possible by the delusion that somehow being owed money by an insolvent entity will endlessly prevent your own insolvency from being revealed. How much longer can that delusion last?

All of this is really just the terminal sign of a major credit bubble — a credit era, if you will — drawing to a close.

I will once again rely upon this quote by Ludwig Von Mises because apparently its message has not yet sunk in everywhere it should have:

“ There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

~ Ludwig Von Mises

Well, the central banks of the world could not bring themselves to voluntarily end the credit expansion – that would have taken real courage.

So now we are facing something far worse.

Why The Next Crisis Will Be Worse Than 2008

I’m not just calling for another run of the mill bear market for equities, but for the unwinding of the largest and most ill-conceived credit bubble in all of history. Equities are a side story to a larger one.

It’s global and it’s huge. This deflationary monster has no equal in all of history, so there’s not a lot of history to guide us here.

At Peak Prosperity we favor the model that predicts ‘first the deflation, then the inflation’ or the “Ka-Poom! Theory” as Erik Janszen at iTulip described it. While it may seem that we are many years away from runaway inflation (and some are doubting it will or ever could arrive again), here’s how that will probably unfold.

Faced with the prospect of watching the entire financial world burn to the figurative ground (if not literal in some locations), or doing something, the central banks will opt for doing something.

Given that their efforts have not yielded the desired or necessary results, what can they realistically do that they haven’t already?

The next thing is to give money to Main Street.

That is, give money to the people instead of the banks. Obviously puffing up bank balance sheets and income statements has only made the banks richer. Nobody else besides a very tiny and already wealthy minority has really benefited. Believe it or not, the central banks are already considering shifting the money spigot towards the public.

You might receive a credit to your bank account courtesy of the Fed. Or you might receive a tax rebate for last year. Maybe even a tax holiday for this year, with the central bank monetizing the resulting federal deficits.

Either way, money will be printed out of thin air and given to you. That’s what’s coming next. Possibly after a failed attempt at demanding negative interest rates from the banks. But coming it is.

This “helicopter money” spree will juice the system one last time, stoking the flames of inflation. And while the central banks assume they can control what happens next, I think they cannot.

Once people lose faith in their currency all bets are off. The smart people will be those who take their fresh central bank money and spend it before the next guy.

In Part 2: Why This Next Crisis Will Be Worse Than 2008 we look at what is most likely to happen next, how bad things could potentially get, and what steps each of us can and should be taking now — in advance of the approaching rout — to position ourselves for safety (and for prosperity, too)

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

Italy's banking index was down over 4 percent with shares in several lenders, including the country's biggest retail bank Intesa Sanpaolo and the third biggest lender Banca Monte dei Paschi di Siena, suspended from trading after heavy losses.

Bloodbath for Italian financials in 2016...

But don't worry:

• *MONTE PASCHI CEO CONFIRMS FINANCIAL STABILITY OF BANK
• *MONTE PASCHI CEO: STOCK DECLINE NOT JUSTIFIED BY FUNDAMENTALS

As Reuters reports,

And now, Italian regulators have re-enforced a short-selling ban (because that has always worked so well in the past)...

The exclusive, which was published by the UK’s Telegraph newspaper, revealed that James Clapper, the US Director of National Intelligence has been instructed by Congress to begin the major review into Russia’s “clandestine” funding of EU parties over the last decade.

Hypocritical? Oh, let us count the ways…

“Moscow-backed destabilization” of Europe

First, to get a sense of the motives behind this investigation, look no further than the wording used to justify it. The Russians have been “fostering agitation against NATO missile defense” and attempting to “exploit European disunity” on the subject.

That’s right everyone, the way to deal with European “disunity” over NATO, is not to address the root causes — it’s to start investigating how the Russians might be exploiting it. In a roundabout way, that makes sense as a temporary distraction. But realistically, Washington may be giving the Russians a bit too much credit. This so-called “Moscow-backed destabilization”should be the least of their worries. In actual fact, there are plenty of reasons for Europeans to have grown naturally disillusioned with the military bloc all on their own: a massive refugee crisis, the threat of the Schengen agreement crumbling before their eyes, terrorism paying more frequent visits to Europe’s foremost cities — not to mention growing concerns over potential repeats of the mass sexual assaults seen in Cologne on New Year’s Eve.

In other words, years of NATO interventionism have stirred up a toxic political cocktail and dropped it off on Europe’s doorstep — and that, frankly, has very little to do with Russia.

Look who cares — and who doesn’t

Young as it is, the investigation into the Kremlin’s “meddling” has already scored some big fans.

“Finally waking up to the problem,” tweeted Bill Browder along with a link to the Telegraph story. Banker-turned-activist Browder was convicted of a massive tax fraud scheme in Russia (and has subsequently turned into somewhat of a hero in the Western media, despite the emergence of holes in his story and his interesting preference for speaking to an adoring press rather than under oath).

Anders Aslund, senior fellow at the Atlantic Council also tweeted the story. Aslund’s tweets are interesting, to say the least. In November, he suggested on the platform that the “broader implication” of a Reuter’s investigation into the identity of Putin’s daughters meant that one of those alleged daughters, Ekaterina Tikhonova, would be a “successor” to her father, thus renewing a Russian “monarchy”.

And such good news deserves to be tweeted thrice, seems to have been the thinking for Jacek Saryusz-Wolski, Polish MEP and Vice President of the European People’s Party.

On the other hand, a lot of the reader reaction on the story was quite different. One Twitter user posted the link and asked:“When do we investigate US meddling, globally?” while one noted “several levels of irony” in the news, and another warned that merely talking about ending NATO in Europe could soon earn you the honor of being labeled part of a “Moscow-backed destabilization program”. On Facebook, the comment on the story which received the most ‘likes’ simply said: “Please investigate US meddling in Europe first.”

Follow Tilo Jung ✔@TiloJung If you talk about ending NATO, you could soon be called being part of a "Moscow-backed destabilisation" program http://www.telegraph.co.uk/news/worldnews/europe/russia/12103602/America-to-investigate-Russian-meddling-in-EU.html … 12:26 PM - 17 Jan 2016 The Telegraph Russia accused of clandestine funding of European parties as US conducts major review of Vladimir... By Peter Foster @pmdfoster Exclusive: UK warns of "new Cold War" as Kremlin seeks to divide and rule in Europe View on web 2121 Retweets 99 likes

It’s only democracy if you agree with us

How, pray tell, would Washington and Brussels react if tomorrow Moscow announced a ‘massive investigation’ into alleged US-funding of opposition figures and parties in Russia — an investigation designed purely to stigmatize the opposition and paint them as foreign agents. Oh wait; we already know how they would react. They would scream blue murder about Putin’s ‘punitive’ and ‘authoritarian’ regime that seeks to silence dissidents and opposition figures. The headlines practically write themselves.

The message is clear and the double standard could not be more obvious: Decades of US influence in the EU is inherently good and acceptable, while any modicum of Russian influence is awful and must be stamped out. In Europe, democracy is only democracy when pro-EU, pro-NATO parties win elections — but it’s “destabilization” and undermining “political cohesion” when anti-establishment parties and politicians gain traction.

Neo-McCarthyism kicked up a notch

Why the EU can’t conduct this investigation itself is not made clear in the Telegraph piece, but one could venture a guess that it’s because what’s happening here has little to do with EU interests. It’s US intelligence — with permission from Brussels — nosing around in the European democratic process in an effort to identify and weed out parties and political figures that hurt Washington’s interests. Sounds a bit like what they’re accusing the Russians of doing, only worse.

But why should we be surprised? Something similar has already happened within the media and academia. Journalists, analysts and historians who have attempted to rationalize or explain Russia’s actions from Ukraine to Syria have been labeled agents of the Kremlin and have been pushed to the fringes for having the audacity to go against the accepted consensus. This investigation in large part will simply be an extension of that blossoming neo-McCarthyism. We’re just moving on from individual journalists and politicians to stigmatizing entire political parties.

Already in the UK, Labour leader Jeremy Corbyn, for the sin of suggesting he would not use nuclear weapons and his reluctance to dive head-first into conflict with Russia, has already been labeled ‘Comrade Corbyn’ by the Daily Mail, while his director of communications, acclaimed journalist Seumas Milne, has been branded a ‘Stalinist’ by Politico.

RT gets name-checked again

What would a story about an investigation into Russian meddling in Europe be without a mention of Russia Today? Analysts have noted that RT, the “Kremlin-controlled television channel, which operates in Britain” (gasp) gave “very positive and extensive” coverage to Corbyn during his leadership campaign. This naturally is cited as part of the Kremlin’s nefarious campaign of influence in the UK elections. No mention is made, however, of the brutal anti-Corbyn campaign waged by the majority of the UK establishment media for months in the run up to his election. In this context, the fact that RT gave Corbyn some positive attention is hardly earth-shattering stuff.

But again, we’ve come smack-bang into another case of hypocritical nonsense. Western media treats the Russian opposition like it’s the Second Coming of Jesus — and yet we’re all supposed to get our pants in a twist over Russian media taking an interest in anti-NATO candidates in Europe? In Western capitals, the red carpet is rolled out for anyone with a Russian passport and something remotely anti-Putin to say. Criminal background? No matter. History of racist comments? Don’t worry about it. Fan of museum orgies? It’s all good. Like to set historic buildings on fire? Go ahead; you’re an ‘artist’.

Europe’s crisis of leadership

The Telegraph story hasn’t been covered widely since it broke at the weekend, but rest assured of the coming onslaught — and remember that the analysts overjoyed by the prospect of another excuse to divert all blame east, are the same ones that never bothered to worry about the decades-long US-backed destabilization of the Middle East, which, it’s fair to say, is proving to be a far bigger problem for Europe than Putin and RT.

Europe is going through a crisis of leadership — and the current crew steering the ship are still blind to the fact that their passengers are beginning to look longingly out at the waves wondering whether it might not be better to just jump overboard and see what happens. In Britain, the threat of a ‘Brexit’ looms as a very real possibility. Poland’s newly-elected nationalist government doesn’t appear ready to play ball with Brussels. Spain has elected a ‘hung’ parliament. Far right and far left movements are gaining ground in Germany and France. Greece is barely holding on and a question mark remains hanging over the future of the euro.

But the real problem is obviously Putin’s meddling. Yeah, let’s just go with that.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.

(RT)