America's Great Reorganization
Sunday, December 29th, 2024
Laramie, Wyoming
By Dan Denning
Good news everyone!
The next debt ceiling crisis has been rescheduled for sometime between January 14th and January 23rd of the new year. Originally it was supposed to be January 2nd. But in a note I read on the US Treasury website when I returned to Laramie last night, Janet Yellen says it won’t be necessary to take ‘extraordinary measures’ to prevent the US government from defaulting on its debt obligations for a couple of weeks.
Whether it’s next week or the week after, the days of cheap money in America are over. That’s what our old friend Joe Withrow says below in Part One of an essay he’s kindly allowed us to republish while we’re recharging our batteries for 2025. Joe digs into Janet Yellen’s role in trying to control the US yield curve, and shows what ‘normal’ (higher) interest rates are likely to do to stock and real estate prices in America, starting next year.
The result—along with other proposed policies by US President Donald Trump, is what Joe is calling ‘America’s Great Reorganization’. If Joe is right, it will have far-reaching implications for the Middle Class, for America, and for your retirement portfolio. Please enjoy and look for Part Two tomorrow.
Regards,
Dan
PS Long-time readers will recognize Joe as the architect of Bill’s original Doom Index. When we decided to relaunch ‘Doom’ here at BPR, we went back to Joe with the idea. He applied his formidable research skills and got to work constructing it. Joe is one of the best analysts and researchers we know. And his ‘big picture’ view paints a picture of a changing America, which may require investment changes too.
America’s Great Reorganization
When it comes to macroeconomic analysis, there are always countless moving pieces. We can think of these moving pieces as dots on a game board.
As Bill Bonner is fond of saying – understanding what’s going on in the world requires us to see those dots for what they are as best we’re able. Then we must connect them to one another in a manner that makes sense. If we do this successfully, we’ll find that a story reveals itself to us.
Like any other, that story can be true or false. To determine which, we must continue to assess the moving pieces and gage whether new data and developments support or invalidate our story.
With that in mind, I’d like to share a story with you today.
After two years of following this story and assessing the moving parts… I believe this story to be accurate. The new developments seem to support it.
That story is the nature of the current power struggle we see unfolding before us. It’s not a physical struggle, but a financial one.
It has become clear that old-world European powers have had an influence over American politics and economic policy for many years now. The reality is far more nuanced, but I use the term ‘globalist faction’ to describe these old-world European powers.
We’re talking about the powers underlying globalist institutions such as the European Union (EU), the European Central Bank (ECB), the United Nations (UN), the World Bank (WB), the International Monetary Fund (IMF), the Bank for International Settlements (BIS), the Organisation for Economic Co-operation and Development (OECD), the World Economic Forum (WEF), and similar entities.
These institutions seem to be aligned in world view, and they seem to push or support a similar agenda. They favor centralized global governance over national sovereignty—and especially over localized governance.
The World Economic Forum developed a policy framework to quantify this agenda. The friendly name for it is “stakeholder capitalism”. Klaus Schwab packaged this framework as “The Great Reset” and marketed it to the world in June 2020 – amidst the chaos associated with the Covid hysteria.
It’s clear that key American institutions have largely aligned with this globalist agenda for years now… and some still do. Bank of America talks about the implementation of stakeholder capitalism each year in its annual letter to shareholders.
However, it’s also evident that other prominent American institutions have broken ranks from the globalist agenda. There’s been a fracture at the upper echelon of the power structure.
The American Counter-Revolution
Those at the heart of America’s financial system are now in self-preservation mode. In fact, they are executing a plan to save the dollar-based financial system… which is central to their own wealth, power, and influence.
This dynamic started to come into view in October 2022. The Federal Reserve (the Fed) had already raised the federal funds rate by 300 basis points (3%) earlier that year… and the globalist faction was not happy about it.
The Fed’s aggressive rate-hiking campaign prompted the UN to put out an announcement that October. They backed up their announcement with an academic report titled Trade and Development Report 2022.
The UN’s report called for all central banks to stop hiking rates immediately. The authors said that it would be irresponsible to raise rates any further, and they implied that to do so would be akin to an attack on developing countries.
This report was clearly targeted at the Fed. It was a message from globalist headquarters that the Fed was out of line.
I expected Fed Chairman Jerome Powell to back down at that point. After all, the Fed openly coordinated monetary policy with the ECB and other central banks for years after the financial crisis of 2008. It certainly looked like they were all on the same team.
The very next week Powell came out and raised the federal (fed) funds rate another 75 basis points (0.75%). And he went on to hike rates another 150 basis points (1.5%) in the months that followed.
That caught my attention. Powell not only defied the globalist marching orders… he moved against them aggressively and unapologetically.
Powell also began to talk about the need for fiscal reform within the US government. In one Federal Open Market Committee (FOMC) meeting Powell even said explicitly that he didn’t think it was the Fed’s job to monetize government debt.
Meanwhile, US Treasury Secretary Janet Yellen announced what she called a “Treasury Buyback Plan” in September 2023. Per the announcement, the Treasury would regularly purchase US Treasuries throughout 2024.
This was obviously an operation to begin what we call “yield curve control” (YCC). That’s where an entity – typically a central bank – aggressively buys sovereign bonds of certain durations specifically to keep interest rates from rising above a target level.
Yellen’s plan looked like “Operation Twist” all over again.
Operation Twist was what the Fed called its YCC program back in 2011. That’s when Ben Bernanke ran the show.
Per the program, Bernanke bought long-term Treasury bonds while simultaneously selling short-term Treasuries in great quantities. This served to push long-term interest rates lower than they otherwise would be.
Yellen set out to run the same playbook from her post at the Treasury last year… but there’s a nuance here.
The Treasury cannot create money from thin air like the Fed can. The only thing it can do is issue new Treasury securities to finance its own spending. However, it needs willing investors to buy those securities.
This is why yield curve control programs are always run by a central bank. YCC doesn’t work terribly well if you can’t print massive amounts of money to buy the bonds you want to buy.
Of course this begged the question – why was Yellen trying to do yield curve control at the Treasury? Shouldn’t Powell run this operation from the Fed?
The answer became clear over time – Yellen and Powell are on different teams.
Yellen is a loyal foot solider for the globalist faction. She catered to the globalist agenda when she chaired the Fed from 2014 to 2018… and she did the same from her post as Treasury Secretary for the Biden administration.
Meanwhile, Powell is working for the American-based power faction that’s broken ranks with the globalists.
As such, Powell presided over the most aggressive interest rate-hiking cycle in history –despite the globalist power structure screaming at him to stop. And, as we’ll see in just a moment, he was central to liberating US monetary policy from globalist influences.
While we tend to view the Fed as reactionary and hapless, it turns out they’ve been executing a master plan for several years now. That plan began with something called the Secured Overnight Financing Rate (SOFR).
Restoring America’s Financial Sovereignty
SOFR (pronounced “so-fur”) is now the interest rate benchmark for dollar-denominated loans and derivatives. It’s based exclusively on transactions in the US Treasury repurchase (repo) market.
SOFR was created in 2018 and rolled out gradually over the next several years. It then replaced the London Interbank Offered Rate (LIBOR) in January 2022. SOFR is now the exclusive interest rate benchmark here in the US.
This is an esoteric corner of the global financial system… but it’s critical to understanding what’s playing out today. Especially on the geopolitical and macroeconomic level.
Financial institutions use interest rate benchmarks to price loans. That means interest rates throughout the economy are directly influenced by the benchmark used. Prior to 2022 it was LIBOR (pronounced “lie-bore”) for dollar-denominated loans. Now it’s SOFR.
Remember, the Federal Reserve cannot “set interest rates”. All it can do is adjust the fed funds rate. That’s the rate at which banks lend money to each other overnight.
The fed funds rate does affect the interest rate benchmarks… but differently for each.
With SOFR, the fed funds rate has a direct impact. It sets a floor below which SOFR is unlikely to fall.
However, the fed funds rate did not have a direct impact on LIBOR. It only had an indirect influence.
That’s because LIBOR was calculated based on daily estimates submitted by a panel of 16 banks. That panel consisted of 11 banks headquartered in Europe… three American banks… one Japanese bank… and one Canadian bank.
For this reason, the fed funds rate could not set a floor under LIBOR. Because the global banking consortium could always submit lower estimates to push rates down. And that’s exactly what they did…
In 2012, the “LIBOR Scandal” broke. We learned that some of the panel banks were submitting artificially low rate estimates to manipulate LIBOR lower.
When LIBOR was the benchmark rate for dollar-denominated loans, the US economy was tied to the agenda established by the power factions controlling the European Union (EU). Because those 11 panel banks in Europe could manipulate interest rates through LIBOR should it favor their agenda to do so.
And notice the difference between SOFR and LIBOR here. It’s critical.
SOFR is based exclusively on transactions in the repo market. These are real transactions that have occurred. Contrast that with LIBOR… which was based on estimates submitted by a panel of banks – not actual transactions.
That means SOFR allows the market to have a direct impact on long-term interest rates again. This is critical for pricing credit with reasonable accuracy.
With SOFR now in place, those European banks have no influence on dollar-denominated interest rates. I don’t think it’s an exaggeration to say that SOFR liberated US monetary policy from the globalist influence.
This has paved the way for what I’m calling America’s Great Reorganization…
Normalization, Markets, and Rates
It’s no coincidence that Federal Reserve Chairman Jerome Powell started raising the fed funds rate in 2022 – four years into his term.
Powell had to wait until SOFR replaced LIBOR as the US benchmark. Otherwise the financial interests beholden to the EU could have thwarted his efforts to raise rates by manipulating LIBOR lower.
In other words, SOFR enabled Powell to break ranks with the global central bank cartel.
Of course, the financial media didn’t talk about it this way. I suspect many financial analysts still don’t realize what’s going on.
What we’re watching play out is an effort to “normalize” the US financial system. And interest rate policy is a big part of this normalization.
The Fed cut the federal funds rate by 50 basis points (0.5%) in September 2024 – beginning a new rate-cutting cycle. The financial media took this to mean that the race to cut rates aggressively was back on. They said the Fed “pivoted”.
That’s not at all the case...
Powell is on record saying that he wants the fed funds rate to be “neutral”. That is to say, he doesn’t want it to be a key driver of rates throughout the economy. He wants those rates to be determined in the marketplace – as SOFR allows.
We can be skeptical about this. But Powell has been a straight-shooter ever since he began hiking rates at the most aggressive pace in history in 2022.
If we remember, the media kept saying back then that he was going to “pivot”. But he never did. He signaled to the market what he was going to do… then he did it.
If we take Powell at his word, he plans to normalize interest rates. This would force a massive reorganization of the American economy.
The fact is, virtually every aspect of our economy has been “financialized” over the past 50 years. That is to say, we reorganized our society to favor financial activities and financial assets over the production of goods and services.
While this has been a major boon for Wall Street and the stock market, it’s hollowed out the American middle class and the small business community. Bill and I demonstrated this extensively in a report we called America’s Hidden Depression several years ago.
This report published in the Bonner-Denning Letter, which was under the Bonner & Partners banner back in 2018. It demonstrated, using economic data, that 2,278 counties in the US had effectively been in a recession for much of the prior decade.
The reality is that “cheap money” cheapens everything. When we push interest rates to zero and print trillions of dollars from nothing, it encourages financialization, speculation, and waste.
I think the case of Downer’s Hardware illustrates this dynamic rather well.
I bought my Virginia mountain property from the family who owned Downer’s Hardware. It was a small hardware store in the nearby town. They opened it in 1953 and ran it for just over 50 years.
When the family-owned store first opened, it could sell individual screws, nuts, and bolts for a penny each and still make enough money to keep the lights on. That’s $0.01 – the lowest denomination of the dollar. One penny still held purchasing power in the 50s and the 60s.
Fast forward to today and you can buy individual screws for around $0.65 at Lowe’s or Home Depot. But nobody does.
Instead, we buy a pack of 200 screws for $5.99. Then we use the one or two screws we need, and we put the rest on the garage shelf.
We’ll have plenty of screws for the next time we need them, we think. Then 10 years go by and we forget we even have those 198 screws on the shelf. But we don’t care—they only cost $5.99. That can’t even buy us a nice lunch today.
This is how cheap money encourages waste…
We needed two screws… not 200. But we bought 200 because that’s how they were packaged—and they only cost $5.99.
We got a “deal” and Lowe’s got to add some revenue in its endless quest to meet quarterly earnings forecasts. But 198 screws went to waste.
What else could that metal have been used to make? How else could that labor and machinery been directed?
Meanwhile, Downer’s Hardware isn’t around to sell us screws in any quantity. Because it couldn’t afford to keep the doors open selling screws for $0.03 each ($5.99 / 200).
Is that a bad thing?
Perhaps not. The Downers found other work and we can still buy screws for $0.03 per screw. But only if we buy 200 of them. If we just want one screw it’s $0.65.
But what did we give up?
We used to be able to get one screw for $0.01. That penny in our pocket held actual purchasing power. And we could buy that screw from the nice family who made their living running a hardware store.
What we’re talking about here was a fundamental reorganization of our society. The same thing that happened to Downer’s Hardware happened to millions of small businesses on Main Streets all across America.
That’s how we got cheap McMansions in the suburbs and fancy cars that nobody knows how to fix when something goes wrong.
It’s how we got strip malls and big box stores everywhere… and empty Main Streets. It’s how we got legions of sociology and diversity studies majors… and few people who know how anything actually works.
But lest we forget – there is a time for everything… and a season for every activity under the heavens. That’s from the book of Ecclesiastes.
SOFR replacing LIBOR and the Fed’s break from the globalist agenda signals that an American counter-revolution is underway. And the breadcrumbs are starting to line up…
Taking on the Deep State
If I’m correct that the power structure at the heart of America’s financial system is in self-preservation mode – and if Powell stays true to his normalization efforts – we can be confident that the days of cheap money and artificially low interest rates are behind us.
It follows then that the cheap money era which reshaped our society over the past five decades is coming to an end. That which was sustained by cheap money and artificially low interest rates will come to an end with it.
And that shines the light on Congress and fiscal policy...
For decades, the US Congress has operated under the assumption that it could spend money without consequence. Low interest rates enabled by cheap money policies allowed for ever-increasing deficits with no immediate repercussions.
As it stands, Congress is set to add over $2 trillion to the national debt each year going forward... and that’s just the tip of the iceberg.
The US government’s debt level has become unsustainable. Its interest expense topped $1.1 trillion this past fiscal year – making interest payments the second line item on the federal budget.
To illustrate how extreme this is, let’s look at the largest federal expenses for fiscal year 2024:
Social Security: $1.5 trillion
Interest Payments: $1.1 trillion
Medicare: $869 billion
Defense: $826 billion
At the same time, $16.8 trillion in federal debt is coming due over the next four years. There’s no money to pay this debt off… so it can only be “rolled forward” by issuing new debt in the form of Treasury securities.
But why would anyone buy this new debt? The current trajectory shows very clearly that the US government is on the path toward a self-reinforcing debt spiral.
If nothing changes, at some point the biggest buyers of US Treasuries will say “no mas”. That would lead to a sovereign debt crisis… and make it exceedingly difficult for the US Treasury to raise money.
Of course, such a scenario would be quite chaotic… if it gets to that point.
The fact that Elon Musk and Vivek Ramaswamy have teamed up to form the Department of Government Efficiency (DOGE) suggests that some powerful influences truly recognize the need to cut federal spending aggressively now – so that a sovereign debt crisis might be avoided.
The DOGE team vowed to balance the budget by cutting nearly $2 trillion in federal spending. But are they serious?
This would involve eliminating massive amounts of what we call corporate welfare and downsizing the federal government’s employment roll dramatically. There will be tremendous pushback against this.
What’s more, the DOGE team would necessarily need to take a chainsaw to the regulatory state if they hope to cut such a gargantuan amount of spending. They would have to eliminate scores of regulations and fundamentally cripple the US administrative state that operates as an unelected shadow government.
That’s the fight we’re set up for. DOGE versus the Deep State. And they know this...
Incoming Office of Management and Budget (OMB) Director Russell Vought articulated what I think is a very well-thought-out plan in his interview with Tucker Carlson just before Thanksgiving. It’s clear to me that they understand the inner workings of the system and what they are up against.
They also seem to know that the hour is late.
If the federal government’s run-away spending isn’t stopped, we’ll face a sovereign debt crisis within the next four years. And because the US dollar and US Treasuries are fundamental to the entire global financial system, such a crisis would lead to something much worse than what we saw in 2008.
I suspect the globalist faction sees that event as their moment of opportunity.
As we noted, the globalists already laid some key infrastructure for their “Great Reset” throughout the Covid hysteria. A global financial crisis of epic proportions would give them a window of chaos through which they could usher in the rest of their agenda.
The good news for those of us who don’t want to live under a grotesque form of neo-feudalism and techno-communism is that America can still be saved.
To be continued tomorrow….and in the meantime…if you’d like to hear more from Joe on how to invest in America’s Great Reorganization, please go here.