Saturday, December 15, 2012

Global Economic Depression is Unavoidable

The magnitude of an economic depression is proportional to the magnitude of the asset bubble preceding it. Therefore we can fully expect that this impending depression will be of unprecedented magnitude, given that this credit-inflated asset bubble we euphemistically call the "economy" has been leveraged to an historically unprecedented magnitude.

And thanks to their sycophantic subservience to Wall Street, global economic policy-makers, having squandered massive public resources on the bailouts from 2008, have only guaranteed that this impending depression will be ten times worse than it would have been, had the bailouts never occurred in the first place...

The long-term implications of the 2008 bailouts is the 800 pound gorilla that everyone wants to ignore. The bailouts were intended to avert depression by preventing asset deflation, which is theoretically why policy-makers placed public resources at risk to save private investments.  

Unfortunately, this is the critically false and yet widely accepted assumption of our era, that it's possible to avoid an asset deflation that was caused by excess borrowing in the first place.  If policy-makers had any commonsense whatsoever, they would have allowed the asset bubble to deflate in 2008, allowed the debt liquidations and bankruptcies to occur, and then applied public resources to restart the economy and rebuild with a debt-cleared slate.  But since they serve wealthy investors and not the middle class, policy-makers couldn't wait for a full scale credit liquidation to occur, so they stepped in to avoid it, and squandered massive amounts of public resources in the process.  This was all done again, under the widely accepted implicit assumption that these asset values were sustainable in the first place - which they were not, as was already self-evident in 2008.  So all they did was squander public resources to re-inflate already unsustainable private investments that were the result of an enormous misallocation of capital aka. leveraged speculation.

The real disconnect in this entire equation is the fact that policy-makers only bailed out the wealthy lenders and not the struggling middle class who are still expected to make good on all of their massively accumulated debts and ongoing inflated financial obligations.  So while policy-makers have fooled themselves into thinking that they can indefinitely sustain inflated asset prices, via liquidity programs, they seem to have forgotten that the solvency (aka. interest and principal repayment) on these $200 trillion of global capital assets depends solely on the health and economic vitality of the middle class, which never got any bailout.  Meanwhile, these massive deficts that every developed country has been forced to accumulate over the past four years are all attributable to the 2008 financial collapse.  So Central Banks are now assuming that the middle class can sustain its own debts on top of the massive public debts arising from the bailouts and ensuing fiscal deficits, all while facing declining real incomes and diminishing job prospects.  

Here's $9 Trillion of Newly Printed Free Money, Go Have Fun...
The other risk amplifying factor that differentiates this period from 2008, is the amount of leverage now available to well-connected speculators.  Global Central Banks have added $9 trillion of highly leveraged hot money to world financial markets in the last four years.  Unwinding those leveraged carry trades in the teeth of another asset deflation, is going to make 2008 seem like a child's picnic.

So now, at the precipice of another even larger asset deflation, we all get to pay a ten-fold price for the ongoing greed of highly leveraged wealthy speculators, all due to the infinite duplicity of the game show hosts running the global economy.

The critically flawed assumption of all these greed addled fools is believing that the Middle Class can be milked into oblivion, with no consequence to the wealthy.