When the Mayhem is Over
Board: Macro Economics
After sending this email to a buddy in Texas, I realized that it is a METAR post, so here it is.
This chart shows why we are in trouble economically. The banksters and Wall Street are debt merchants so they want to ascribe this depression to anything else but debt, just as they did in the Great Depression, but it's the debt levels that are killing us. They are trying to "stimulate" by creating more and more debt, but of course: that is what they sell for a living They print money, and rent it out. It's like the car rental business with imaginary cars, just rental contracts. More fool us for buying their crap.
This is how it goes: we borrow money and use it to bring consumption forward from the future. As long as we continue to borrow more every year, we live better and better until the point of debt saturation when we have to borrow just to make the payments and we can no longer expand consumption. Then the system is unstable, and something gets the crash going. Then the debt gets destroyed as the chains of indebtedness disappear and the banks get ruined, and the debtors go bankrupt. The fastest way out of this situation is to stand back and let it happen so that prudent people who did not get ruined can buy everything up on the cheap and run things more efficiently than before. This approach to a depression has not been tried though since 1920 when it was last done and worked fine.
It is generally accepted that WW2 brought us out of the depression. Bull. Look at the chart and you will see that total debt fell all the way through WW2 to a low level when the war was over. At that point the economy was running on money, not credit, and was stable. The massive government debt that had built up during the war was more than offset by the reduction in private debt that started in October 1929 through bankruptcy and lack of available credit and the means to pay for it. Through the war, personal consumption was low due to the low rate of household formation, lack of auto and housing production, lack of luxuries in the stores, investment in war bonds and so on. Thus by 1945 people and businesses were free of their crushing debt loads and were once again able to take on a lot of new debt and grow their consumption faster than their incomes, which is exactly what they did as soon as the war economy could convert back to civilian production.
Everything stayed on a growth track again, magnified by credit growing at an ever-increasing rate for half a century until, in the late nineties we had the Asian contagion, which was over quickly through a beneficial depression in the East. Then during the LTCM crisis, instead of taking our medicine, we got flooded with new credit. Then we went on to the full flowering of the tech bubble and by 2,000 were back at 1929 only worse (see chart). The fed and the govt. bought us off from that depression with money printing and deficit spending on a new scale, maintaining one percent interest rates for a year or two, flooding the US and the world with credit and bringing on the housing bubble and restoring the stock market to ridiculous levels considering the outlook.
So here Washington is trying to fend off the same depression for a third time by borrowing and printing and spending heroic, totally unprecedented amounts of credit (see chart) and have helped us to arrive at the most indebted level anywhere in world history, along with most of the developed world. Not included in the chart are the spectacular levels of unfunded obligations that the govt. has incurred for the baby boomers' retirement benefits, from Social Security and Medicare to military pensions and the Pension Benefit Guaranty Corporation, which of course is already underwater with a lot more to come.
Financial system fragility is exacerbated by the hundreds of trillions of unregulated exposures to the new derivatives like credit default swaps and interest rate swaps and futures; another level of risk that is unprecedented in world history and REQUIRES low interest rates to continue if catastrophe is to be averted. On top of all this the banks are now allowed to invent the value of the mortgage securities they still have on their books, and someone (their identity is now secret due to the new accounting rules, but may include Fanny and Freddie and the fed) is still holding all those broken securities that were in the process of destroying the financial system in 2008 when they mysteriously dropped out of view.
The federal reserve itself is now leveraged 50-1 and is very likely technically bankrupt itself through all the securities it has bought.
China is also in financial trouble but their govt. has huge financial reserves, as do the more prudent Chinese. Who knows what will happen, but projecting the trends of the last decade forward for another decade is just silly I think. We have just started buying gold coins for the first time. I expect a currency crisis together with a default/devaluation/hyperinflation outcome to take place within two or three years in the US, Japan, and several European countries.
When the mayhem is over (the sooner the better) I expect the power of the American economy to reassert itself because the only thing wrong with it is all the financial distortion wrought upon it by the banksters and their tools in Washington. We may be getting a little long in the tooth by then, but at least there will be interesting news for us to watch on TV for quite a while.