Debt Rattle May 28 2014: Everything You Think You Own Has Been Borrowed
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Esther Bubley Soldier treats his date to a coke, Idaho Hall, Arlington Farms, VA June 1943 Let’s take another look at debt. We’ve probably all gotten
[See the full post at: Debt Rattle May 28 2014: Everything You Think You Own Has Been Borrowed]Interest rates won’t go up significantly, ever. It’s because TAE is right: deflation will win. Credit still expands and interest rates stay low. Imagine when credit collapses. As the frog might say, NIRP, NIRP.
All money is borrowed into existence, except for physical cash, which is a tiny fraction of the money supply. If the debt money system collapses through cascading debt defaults, the asset values of everything must drop to (practically) zero. That is why there is zero chance that the experiment ends this way — and why there is a near 100% chance that the experiment ultimately ends in hyperinflation/destruction of the currency.
If interest rates stay close to zero, then asset prices need to keep going up at 7% per year. Otherwise the pension funds go bust, and that can never be allowed to happen. On a nominal basis this means policy makers will make sure that everything keeps going up. If credit collapses they will keep the game going with base money. The deflationists are right, right up to the very end, and then they get it wrong. Politically, deflation (and by this I mean a deflationary spiral and not the deflationary hiccup from 2008) is unacceptable. Policy makers will choose a hyper-inflationary reset every single time.
Boogaloo:
A slightly different analysis here. Sorry, but I don’t have a lot of time for details or links, etc.A nation’s money supply can come into existence in one of two ways. One way is for the government to print it. Examples: Weimar Germany and Zimbabwe. Too much printing brings about inflation or hyperinflation.
The other way, as you pointed out, is for money to be borrowed into existence from banks (at interest). Too much borrowing gives rise to too much money in circulation, and that’s inflationary. Example: the United States. Binge borrowing for the last several decades was inflationary, but now, with the exception of borrowing for bailouts and student loans, other forms of borrowing have finally crested. Borrowers now struggle to make payments, so additional borrowing is either curtailed or ends entirely. Money for bank bailouts does not make it into circulation because it’s being applied to additional derivatives games. In tandem with this, banks have become increasingly reluctant to lend (people maxed-out with debt are no longer a good credit risk). There is no place from which additional floods of money can come. There is no way to hyper-inflate a debt money supply when the end of a debt cycle is reached and the only remaining borrower is government.
Zero interest rates are destroying the economy, not helping it, so issuing additional debt is speeding us toward debt collapse, not delaying it.
You’re right to say that TPTB will “go to the mat” to make sure a deflationary collapse is averted – – for them. But in the mean time, their policies bankrupt the middle and lower classes. Rich and powerful people will weather the coming deflationary collapse in style, but the vast majority of the population will suffer terribly. What we can anticipate is a long trend toward decreasing money velocity, decreasing liquidity, and increasingly restive masses. That is why TPTB have stockpiled military ordnance and troops right here in the “homeland” – – to quell civil unrest with lethal force when the time comes for revolution. That is why martial law and war are being discussed more and more, just about everywhere.
Decreasing liquidity and decreasing velocity are deflationary, and short of helicopter drops of sacks of money – – BIG sacks of money – – on people like you and me, there is no way that deflation can be averted.
Diogenes Shrugged: I agree with you right up to the very end. That’s where I see the Federal Reserve buying all of that failing debt for cash, 100 cents on the dollar, the currency be damned. That will be seen as the best way to alleviate the social unrest, and the banks will be happy because they will be the first in line to receive all that newly minted cash. The “helicopter” promise was a lie all along. Ben was never going to drop the money on the masses, though as Steve Keen argued, that probably would have been a whole lot more effective.
Boogaloo & Diogenes,
Im not an economist, but if i understand you correctly, does this mean that when the next correction comes, central banks will hop back on the QE train? In other words the FED will go back to buying 85 billion a month (maybe even more).
Koso_Man, I cannot speak to the “next correction” but for the final end game (whenever it comes) I think it’s one of two scenarios: deflation or hyperinflation. In the deflation scenario we see austerity, widespread defaults, civil unrest, the government killing its own people, debt servitude, lenders trying to squeeze blood out of every last turnip, pension cuts, social security cuts, and the process dragging out for what seems like forever. In hyperinflation you get basically the same thing for a long time, up until the point the people rise up and the government caves in. The government buys all the bad debt, restores all entitlements in nominal terms, and everything goes up in nominal terms, which is a whole lot easier to handle psychologically — even if the end result is the same. It is the only possible end game IMO. Though how we get there and how long it takes I cannot say.
Boogaloo,
I think we can all see what the end game is. My question is what options do central banks have left when we have the next inevitable correction (read: recession, stock markets getting hammered etc).
Boogaloo:
I guess I need some clarification. You say, “That’s where I see the Federal Reserve buying all of that failing debt for cash, 100 cents on the dollar, the currency be damned.”
Fed purchase of non-performing debt would make the current holders of those failing “assets” whole, but would further redden what is rumored to be an already bankrupt Fed balance sheet. I’m afraid you’re speaking above my head because I’m unable to think through the consequences at that point. Would the debt be written off somehow by the Fed, thus effecting a jubilee? If debtors are still required to pay off their debts, would they send their monthly payments to the Fed? Would that actually accomplish anything more than changing the name on the monthly payment envelopes?
You say, “That will be seen as the best way to alleviate the social unrest, and the banks will be happy because they will be the first in line to receive all that newly minted cash.” Would the floundering banks, now made whole, suddenly feel inclined to issue huge amounts of new debt? Wouldn’t the market demand for that debt be identical to the market demand for debt right now? I’m still unable to figure out who the borrowers of vast quantities of new debt money would be. Answer that, and I might change my mind and come to agree with you.
One more sticking point: Fed purchase of non-performing debt is effectively a bank bailout, and previous bailout funds have not flowed into new loans. Instead, as I understand it, those funds have been largely applied toward new derivatives contracts – – a dead end for liquidity when the economy falters like it’s presently doing. Besides, bailouts are not cash gifts, they’re loans. “Money out of thin air” is owed back to thin air because it’s debt from the moment of its creation. If I borrow a hundred-trillion dollars in cash from a bank, bury it beneath my basement floor and then die, that wouldn’t be inflationary, right?
Hopefully you can tell me what I’m missing in a sentence or two without having to address each of the separate questions I’ve asked here. Thanks.
Koso_man:
You asked, “… does this mean that when the next correction comes, central banks will hop back on the QE train? In other words the FED will go back to buying 85 billion a month (maybe even more).”I’m not an economist either, but if you ask me, QE will continue as long as there are Wall Street banks to bail out. Lose one of the big five and the rest will collapse behind it, so keep doing the only thing that appeared to work in the past. I’m probably wrong, but I suspect that a collapse of GM would have led to at least one bank collapse.
Diogenes Shrugged, I do not expect a return of “animal spirits” after the banks are made whole, at least not in the sense of a return of the appetite for banks to lend and borrowers to borrow. Instead, I expect a series of cascading defaults that carry over into derivatives, and make the scale of the defaults far greater than they were in 2008. All of this will be papered over just like before, only this time with a much larger increase in base money creation. As you say, the Fed’s balance sheet is already a disaster, so another tsunami, and bigger tsunami, will ultimately cause a loss of confidence in the currency. When do we get there? I cannot tell you that. But I can tell you this: The defaults are coming and the Fed will continue to bail out the banks until we reach the point of that loss of confidence.
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