Unfortunately, the major threat facing the planet is not A World Without Military Blunders, the major threat to the planet is A World Without Money...
We Live In A Massive Credit Bubble, Controlled By Sociopathic Buffoons
Thanks to the election, we were all just jack hammered with a mind numbing barrage of disinformation from all corners of the Idiocracy. I'm still recovering. A river of dumb and unsustainable ideas, mostly surrounding the fiscal cliff, which is a major crisis requiring immediate legislative action so we can find new ways to bankrupt our grandchildren and otherwise maintain this consumption-oriented fantasy. What a dilemma. All of these bad ideas are based upon the same critical (and flawed) assumption, which is that the status quo is indefinitely sustainable. A never-ending pyramid of stupidity. So, my epiphany last night was that all of these comfort seekers who are attempting to propagate the inherently unsustainable, really don't get it. Even the self-nominated "best and brightest" don't have a clue. Go figure. They really think that all of this over the top ludicrously profligate and wasteful behaviour is normal. Therefore we can only conclude, that they are all willfully ignorant as to how the economy really works and hence oblivious to the critical driving factor behind this entire bubble illusion we call the economy.
That key factor which is the critical enabler of the pathological mass consumption and other grotesquely amplified behaviours that signify this era, is the multi-decade expansion of credit which has subsidized all manner of unsustainable policies - the Military Industrial Complex, Interminable Military Blunders, Wall Street, Corporate Mannekins, Political Mannekins, Multi-billion dollar Presidential Campaigns, Mass Consumption, $60k/year Harvard Tuitions to generate more sociopaths etc. etc. All of this of course, comes at a cost, which has yet to be paid. We are living through the longest uninterrupted expansion in credit in human history, without any comparison. This credit expansion has been amplified and magnified by the various levers of our time - derivatives, globalization, technology, monetary expansion, quantitative easing, fiscal and trade deficits etc. Implicitly, the expansion rests upon the key delusion that all debts get repaid. It's a reach-around Ponzi Scheme. In other words, the first movers, and the ones at the top of the Ponzi, foolishly reinvested their proceeds back into the Ponzi, under the premise that they will get repaid. After all, that's precisely what 2008 was all about - a massive bailout to make sure that all debts were paid, therefore allowing the Ponzi to continue growing, even larger.
An Ever-Growing Credit Supply is the Fundamental Fatal Assumption of Our Time
Unlike Zimbabwe which prints physical cash to generate inflation - the U.S. (and developed world) money supply is overwhelmingly dependent upon the supply of credit - lending and borrowing. There are two primary factors in the willingness to lend, first is the interest rate/yield aka. the return on capital. The second implicit factor is confidence or the perceived likelihood of being repaid aka. the return of capital (principal). In the present situation, Central Banks worldwide have pushed interest rates to zero AND flushed the system with cash to buy up risk assets. These actions have pushed the return on capital towards zero. What incentive is there to continue lending when the return on capital is zero? Zero. So in essence, the Fed and other Central Banks have inadvertently done the opposite of what they intended - they eliminated the marginal incentive to take risk. More importantly, the other element of the equation has been a non-factor so far i.e. confidence - the perceived likelihood of repayment. As I said above, the current expansion is predicated on the implicit assumption that all debts get repaid. Once, that assumption is tested and proven false, then the willingness to extend credit and hence the money supply will go into reverse. Rather quickly. Globalization has ensured that the vast majority of nations' economies and financial systems are inextricably linked, so a credit crisis in one part of the world will quickly spread to other parts of the world in rapid contagion - just as occurred in 2008, only this time policy-makers will have squandered their dry powder on four years of get-me-re-elected Extend and Pretend. Also, unlike Zimbabwe, that part of the developed world economy based on credit dwarfs the cash-based economy. So when the credit supply collapses, it will take along with it the largest part of the economy.
Speaking of Confidence
Overlooked amid all the phony misdirections of this election week, was the fact that consumer confidence came in at a multi-year high. So far, so good - it was the highest level of consumer confidence since July 2007. Unfortunately that July 2007 reading coincided with the all time high in the stock market. That's right. It turns out that Joe Sixpack is pretty good at top ticking the market. Which reinforces the idea that the stock market is the ultimate barometer of social mood.
Overlooked amid all the phony misdirections of this election week, was the fact that consumer confidence came in at a multi-year high. So far, so good - it was the highest level of consumer confidence since July 2007. Unfortunately that July 2007 reading coincided with the all time high in the stock market. That's right. It turns out that Joe Sixpack is pretty good at top ticking the market. Which reinforces the idea that the stock market is the ultimate barometer of social mood.
Buy Gold, Get Rich Quick
That gets me back to the point of this post and the ever raging battle between the inflation theorists and the deflation theorists - the latter of us being outnumbered 100 to 1. Definitionally, we all know intuitively that inflation is too much money chasing too few goods, thereby increasing prices. And of course die hard Libertarians tell us that a beneficent gentle deflation based on "sound" money, against increasing productivity, is the key to an inexorably rising standard of living. As in, hey this computer is now cheaper, let's go get one. Sign me up - I want that MaxIpad.
No Money, No Funny
Unfortunately, what none of the gold addled disinformers of today have figured out is that what we are about to experience next is neither of those scenarios. What we get to experience due to our delayed ingratification, is called Extreme Deflation. Which in its simplest form can only be described as NO MONEY, chasing too many goods. Imagine going into your local mall or store and looking around at the 99% of goods that no one really needs to own. Now imagine an economy where no one buys those trinkets, because they are saving every last penny to buy Top Ramen and Kraft Dinner to feed their impoverished kids. That is Extreme Deflation.
p.s. The below chart, illustrates my point. The stock market and confidence both peaking at the same time, far right. The leading stock of our time, Apple, is already crashing - the canary in the coal mine. In 2008, credit led and equity followed (middle spike). This time around, equity is leading, so credit will follow. This will be the last time. We were warned in 2008 and ignored the warning. We are now fully exposed. This will be the end game - the hook is set.
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