₿oogaloo
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Diablo, what is socialism? I am not sure what that word means anymore. You mention the Soviets. But what about the Germans? Are they socialist? What about the Scandanavians? The Venezuelans? There are a lot of diverse systems that have been labeled socialist, some more successful than others. America is now a banana republic crony capitalist system. Is that any better? If so, for who?
I would like to keep property in private hands, but I think that tax policy should operate to prevent extreme concentrations of wealth. Rather than blowing up the Middle East and stealing Libyan and Iraqi gold I would like to see a US aircraft carrier park off tax havens like the cayman islands. Let’s instead steal all of the money illegally stashed offshore and distribute it all back to the American people. Is that a socialist idea?
Disblo and Diogenes,
I think you both approach the subject with too much commitment to an ideological position. I think this is a mistake. I think the focus should be on what actually works. I have lived in the US, Austria and Korea. The US system is a complete disaster in my opinion, and the sooner the whole system implodes, the better. Then we can finally start with a new foundation. The Austrian system is a hybrid system. There is univeral health care, but there is also an overlapping private system that gives you more choices. And if you don’t want to wait in the doctor’s office for more than an hour, with private insurance you can cut to the front of the line. Everyone gets basic care, but it’s not a purely socialist system. The Korean system relies on price controls. If you are on the government plan, it only costs $3 for a doctor office visit. Some procedures like an ultrasound will cost closer to $50. An MRI will be about $400. A two week stay in the hospital will be about $2000 in a shared room. If you are a visiting foreigner not on the government plan, the prices are higher but still reasonable. Care is good quality and affordable. There is also private insurance, but most people just rely on the government plan. Almost everyone likes the system except the hospitals and the doctors. But there are still plenty of qualified people eager to become doctors. Both systems work 1000x better that the US system and give good care without pushing middle class people into bankruptcy. Kunstler is spot on that the US system is one big racket. Single payer raises obvious ideological issues, but it would work much better for most people. I can understand why hospital, insurance and pharmaceutical executives want to keep yhe system just as it is.I used to think like Diablo, but rising inequality has forced me to rethink my views. Now I hear “the right to be left alone” as code words of the Kochs. The system is rigged. As Kunstler constantly emphasizes, many of our institutions like health care and higher education have become criminal rackets to extract every last dime from the people. The billionaires promoting the austerity propaganda don’t really believe in balancing the budget for the common welfare. Rather, they have every intention of using the government’s improved balance sheet for their own ends. In an ideal world everyone should pay their own way for healthcare, housing, and education. But what about when the system is rigged?
Will F, Private property is a good thing, but it needs to be accompanied by tax policy to prevent overconcentration of wealth. Tax policy makes it extremely difficult to accumulate $1 Million because it taxes the hell our of wages, but makes it a lot easier to accumulate the second million, and then the third, and so forth. That’s because once you get over the hump you can live on the labor of others. That’s what needs to change.
V. Arnold,
Korea suits me, but it certainly isn’t for everyone. Speaking the language helps a lot, but no matter how well I learn to speak the language, I will always be regarded as an outsider. I am fine with that.
V. Arnold
Korea, with no plans to ever live in my home country again. I have thought about retiring in Vietnam or Malaysia if circumstances change for the worse here. Thailand is also a good choice, but I have not been there for many years.
I meant to chime in when the question arose whether there are any younger readers of this blog. I do not really count as young — I am in my mid-40s. But I have been reading this blog for a long time. I even remember when Ashvin was writing for TAE, and that was quite a long time ago.
I think there are a few people in every generation who grasp the problem. But what to do about it? I got out of the financial system in 2008. I paid off all my debts including my mortgage. I keep my savings in physical cash and physical gold. I try to avoid the banks as much as possible. I lost some weight and started exercising to maintain and improve my health. We have a car, but my wife drives it. I ride the bus to work (which would be impossible in America but is very clean, convenient, safe and reliable where I live). We ditched the television when my daughter came along. I have a good job and live in the city. If things go south I will move out to the countryside where my wife’s extended family still farms, and where I could dramatically reduce my expenses practically overnight. What else can I do? Maybe buy some land and a place in the country? I am still thinking about that one. I think prices will come down and my purchasing power will go up if I wait.
Having done all of these things, I don’t have much to say. This is why I do not post very often. To think about these things regularly, for me, is like watching the teakettle to see when it will boil. I tend to be right in the long term, but all wrong about timing. I knew Countryside would eventually collapse, and I bought puts on it. Well, it kept going up and I lost my money on that bet. Then a couple years later everything finally unraveled and it collapsed. I was right, but all wrong about timing. I feel that the entire economy is one big Countryside at the moment. But I have no idea when we will reach the tipping point. I may be wrong about all this, in which case that’s just fine.
This is all quite simple, so simple that my seven year old can explain it in a single sentence.
I was explaining to her why I hate buying stuff that comes with a lot of packaging: because of all the trash. I was explaining why it is virtuous to try to live simply and not try to consume as much as possible. I asked her “Where do you think all that trash goes?” She immediately grasped the lesson but then asked: “Yeah, but what about all the other people–how can you stop them from making trash?”
And that, dear friends, sums up our predicament. That is why we will never solve these problems. That’s why we as a species will kill the planet.
V. Arnold is right.
A random aside: I am in Japan at the moment. Don’t believe all the anti-Japanese propaganda you hear in the US financial press. This country is doing just fine. Two decades of crippling deflation? No signs here that macroeconomics have turned the citizens into growth zombies. The infrastructure is great, everything is clean, and people preserve a sense of balanced aesthetics even in parts of the city that are not wealthy. A demographic time bomb? The Japanese will get by just fine. There is still a sense in this country of making things by hand, as opposed to the center of the Empire where everything is mass-produced crap manufactured somewhere else. If deflation is the future, the Japan model is one to embrace.
daisychain asks “What I don’t understand is why we can’t just ‘reset’ the economy.” Indeed we can, and indeed we will. What is a dollar? Nothing but an idea in your head, backed up by a few electrons. We can reset the entire world financial system, and we will. But the trigger will likely be involuntary. A reset is a short term catastrophe to people up to their eyeballs in debt because they will lose their jobs and risk losing just about everything they have. A reset is both a short term and long term catastrophe for the 1% because they are heavily invested in the system and the owners of all that debt, as well as asset prices that are inflated because of the existence of all that debt. The 1% will try to scare the hell out of the debt slaves and trick them into saving the system.
The only people who want to reset the system are those who are less dependent on it: people out of debt, people who have pulled their savings out of the system. This is actually a very tiny minority and will certainly remain so until calamity strikes.
Has TAE commented on the final MH17 report? I have been very busy recently, but definitely want to tune in to read Raul’s reaction.
Variable81, these are all good points, all factors that one should consider when making decisions. However, I get the sense you approach this as an “all or nothing” proposition when you present it as a choice of either/or. In fact we are not presented with one path to follow, but multitude of decisions we need to make individually and as part of our communities. I agree with you that many who are “stacking” take a view that is narrow and naive. But I think it is also narrow and naive to not buy any gold at all. I think this is just as foolish as living in a small flat in a big city with no more than 3 days of food on hand. Isn’t there a middle path, a path of moderation, a path with the common theme of “get out of the financial system and into the physical world”?
When the financial system collapses, the real world, the physical world, will still be with us. And when that happens, everything in the world will be revalued against things in the physical world. Ownership may change, but there will still be an owner for everything capable of ownership.
You seem to take a view that it will be a long slog, one that will last decades. That may be true, but then again it might not be. There may be a sudden collapse, followed by just a few months of chaos, followed by a whole new steady state financial system, where everything is suddenly revalued against the one physical asset that has been used for centuries for that purpose. Or there may be war, to accelerate our journey to wherever we are going. One way or another, there will be another side for some of us who live long enough to see it.
I for one do not think that things will get so bad, and stay bad for so long, that the only people who survive are the people on the TAE commune. Rather, I think it will get very bad, and be resolved fairly quickly, but with a new steady state system characterized by a massive rich-poor gap (one that makes the current gap look like a crack in the sidewalk). And there may be some people kicking themselves saying “What was I thinking, thinking that I could go back to farming — when I don’t know anything about farming? Why didn’t I sell that crap in the garage and at least buy a few double eagles?”
Who knows? It is impossible to be prepared for everything . . .
The end of my last message was rushed because my wife was yelling at me that it was time to go.
I wanted to add a point that Nicole touches on in the article, and that sculptor also touches on by referring to “whatever emerges on the other side”, and that stands in sharp contrast to Greenpa’s concern (in jest?) about getting change at the gas station. My point is this: Nobody should buy gold with the idea that they will sell or barter it away to get through the crisis that is coming. The whole point of saving gold is to have something once you get through on the other side. As for getting through the crisis, that is where the perspective of TAE is so helpful. We all need to be prepared so that we can get through this crisis without the need to buy anything. That means getting out of debt and eliminating dependence on cash flow is the top priority. If you can do that first, then it makes sense about how to save up some wealth that you hope survives to the other side. If you need to sell your savings during the crisis, before the final death throes of the system that is on its last gasps, you might need to sell at prices still set in the futures market, which may have a long way to drop before the rubber bank finally snaps and we find real price discovery in an un-leveraged all physical market.
A thought provoking essay, but I have a few objections. First, gold has not held constant purchasing power over time. An ounce of gold had far far far more purchasing power during the Roman Empire than it holds today: https://ancientcoinsforeducation.org/content/view/79/98/
There are many historical merchant records from the Venetians that also confirm gold purchased a lot more throughout the middle ages than it does today. Why is that so? On the runup to peak debt in our modern world, virtual “financial wealth” competes against gold and other material world items as a store of value. I think that Nicole is right that the whole world of financial wealth is going to come crashing down. When that happens I think gold we be de facto revalued much higher relative to the current purchasing power.Nicole is right that in a financialized world supply and demand do not set the price. And for that very reason I think Nicole may be wrong that the purchasing power of gold will be falling because people are forced to sell.
Variable81, in addition to credit money and physical currency, there is another category, which is base money. Base money is not created by credit expansion and does not disappear in a credit contraction. Although it does not yet exist in physical form, the government has an obligation to print it in physical form on demand. In that sense physical cash is what backs the system today (instead of gold, for example). The reason for all the new zeros on the currency during a hyperinflation is because the government has already “printed” as base money. When there is not enough physical cash out there to handle a run on physical cash, the government simply adds more zeros. Although we think of hyperinflations as too much worthless paper money, the reality while its happening is that there is always a shortage of cash, hence the additional zeros.
Variable81, I think you should not be so dismissive. A few things to consider:
1. Many hyperinflationists believe that the deflationary death plunge is likely, if not necessary, before the collapse of confidence. Deflation is the theme of Act 5 of our five act play, but hyperinflation is the final scene of Act 5. In other words, deflation and hyperinflation are often presented as either-or, when in fact it can be both, in rapid succession.
2. As any student of monetary history knows, the actual hyperinflation, the printing, takes place long before the loss of confidence. We often think of hyperinflation as “will they print in the future” when in fact they already have. Base money has increased dramatically. It is sitting in bank reserves. It is dangerous, which is why the Fed does not want any more QE if it can avoid it.
3. Even though the printing has already happened, look at the chart in the article and ask yourself this question: When the deflationary spiral comes upon us, what will the response of the authorities be? Will they sit back and say “We have tried everything, and nothing worked, so we now give up”???? Do you think this is a politically viable solution? The public will be demanding that the government “do something” and the banks holding all the bad debt will be using their political connections to pressure the Fed to pay them 100 cents on the dollar . . . just like in 2008. All to save “the system”. So there is damn good chance, I’d say a near 100% chance, that the chart in the article is a prelude of what’s to come. So, more dry tinder.
4. The chart that is missing from the article is overall bank assets. To understand the danger, you need to consider that base money as a percentage of overall bank assets. That percentage rose dramatically after 2008.
5. TAE rightfully emphasizes the importance of velocity, or lack thereof. As long as nobody is spending all that base money, it does not flow into the economy and so the deflationary spiral continues as we keep throwing more dry tinder on the pile. Here is the quadrillion dollar question: How fast do you think velocity can change? If you think of velocity as the Titanic, you probably think that this can only gradually change direction. But that is because you think of the economy as a huge, stable, machine. But if you think of the economy as human and psychological and prone to emotion, even mass hysteria, then you must at least acknowledge the possibility that velocity can stop on a dime and change direction faster than you can have time to react, faster than the Fed and other Central Banks have time to react. You might consider this to be a low risk event, but I think it is a feature of most, if not all, historical hyperinflations. And I submit that the massive imbalances that have built up have left the entire global and monetary system unstable. One of Nicole’s theme’s has been that the trip down the slope on the other side will not be gradual and stable. It will be characterized by sudden shifts. I think that is right on. What seems inconceivable now, including the possibility of hyperinflation, may seem more obvious decades down the road with the benefit of hindsight.
I think TAE has seen the future. Those of us claiming that hyperinflation is the end of the line does not reject TAE’s argument. Rather, we think it’s what comes after all TAE has predicted comes to pass. It will be the end result after factoring in the human element, the political element, the crony capitalist element.
bluebird,
The banks will get bailed out. It might not be from fiscal spending authorized by legislative bodies, but instead from central banks through the back door. Banks will offload their bad assets for cash from the central bank. You suggest that there may be bail-ins. So it is true, some depositors may also take a haircut. But bail-out or bail-in, the purpose is still the same: to save a failed institution, to save the system. In the end the politicians and power brokers will save the system — in nominal terms. Base money will replace credit money and the deflationary spiral deepens and the central banks save the TBTF banks, and then one day there will be a spark that ignites all that base money and the whole forest will burn down.Dear Ms. Foss, thank you for your reply. I think we are 99% on the same page. The only point where we disagree is about the political response at the very end of the process. I think that TPTB, though they cannot prevent the collapse, can and will “do something” after it happens — they will destroy the currency by buying all the bad debt with new base money. The precedent was already set in 2008. TPTB prefer bailouts, and they have the political power to make sure they get bailouts. Even if there is political opposition to bailouts, the central banks can and will execute the bailouts through the back door of monetary policy. The central banks will purchase the bad debt. Base money as a percentage of bank assets will continue to rise until it first reaches 100%, then exceeds 100%, then the whole system will go up in a short lived hyperinflationary conflagration. The central bankers and politicians will have political cover because they are doing whatever it takes to save the system. As you say, many assets will be destroyed. Many who hold vast sums of financial wealth will see it go up in smoke. But on a relative basis, the people who are now rich will still come out ahead on the other side (though with major casualties, and psychologically they will not see it as coming out relatively unimpaired), and those who are in debt now will be massacred even with a hyperinflationary reset.
We both agree on the play up until the final act . . . .
TheTrivium4TW,
I’m afraid I have to agree with PLnL. Once the deflationary spiral begins, there will be enormous political pressure to “do something”, and that will translate into the central banks saving the system (nominally) at all costs by buying up all the bad debt. This will not be out of concern for the serfs, but out of concern for the holders of all that debt (serfs don’t own it). The lenders want to be paid 100 cents on the dollar, and sooner rather than later. They do not want massive defaults, where they have to foreclose on collateral they do not know how to manage or maintain. Hyperinflation will not help the serfs. The serfs will be the last in line to touch the new money will all the new zeros, and they will be wiped out by the blowout costs of necessities. Hyperinflation will help the political class because they are the ones closest to the printing press. When the dust settles they will be miles ahead of the serfs and they will still own everything. Hyperinflation will help everyone who cares about nominal performance — like pension fund managers who cannot survive with interest rates at zero. Think about it: Deflationary collapse is bad for social stability and can easily lead to revolution. Hyperinflation is no picnic, but usually had more social stability and is usually short lived. If you are one of the elites, which outcome do you favor when looking at it from that perspective?I would like to believe that Tspiras has a Plan B. If Varoufakis can now say that Germany wanted to push Greece out all along, then there is no excuse for the failure to make emergency plans. However, the word from all sources, MSM or otherwise, sympathetic to Syriza or otherwise, is that there is no Plan B. If that’s true, Tspiras is no hero. He’s incompetent. I hope I am wrong. I hope there is a secret plan. But I am not holding my breath.
Raul,
I am surprised that you would consider the US Supreme Court’s decision to be a positive development. My initial reaction was “This is par for the course. Another nail in democracy’s coffin.” Regardless of whether one believes in gay marriage or not, the conservative Justices are right that this should be decided by the legislative branches. This is one issue over the last 20 years that led to a lot of political engagement. The effect of this decision is to signal to the masses that it does not matter what you think or how you vote. You have no direct input on policy. Your masters will decide for you. In that sense this decision is no different from the narrative about the unstoppable NSA, about the FED, about the TPP, about an unregulated Wall Street, about fracking up our groundwater, about anti-Russia NATO propaganda, about the sale of the political process after Citizens United, about the destruction of the planet to suit the agenda of big oil, about all the related narratives where the underlying theme in the centralization of power. The lesson of this case is this: Just when you get people interested in politics, we will take the decision out of the hands of the voters. How can that be something to celebrate?I find it odd that people think it is unhealthy for adult children to live with their parents. In Asia it is actually the norm for children to live with their parents until they get married. Even after the kids get married, historically it was considered ideal to have multiple generations under one roof. However, the smaller living spaces often make this impractical.
Compare this to the West where the homes tend to be way too large and people idealize owning a home where most of the rooms will be empty and unused. Seems bizarre to me.
I think it is a healthy thing for the children to return home. It might actually strengthen some of the social bonds that have been growing progressively weaker over the last half century. If economic necessity forces that, so what?
I generally find myself in agreement with almost all of the essays on this site. But for today’s essay I somewhat disagree. Germany/Schäuble are in the position of wealthy creditor. Greece is in the position of impoverished debtor. The debtor-creditor relation and dynamic goes back to time immemorial. This time, once again, the creditor demands a pound of flesh. Can we really express SURPRISE? Can we really pretend to be shocked and outraged when a creditor expects to have some say in the debtor’s affairs? I think not. That has always been the rule. Of course Greece should tell Germany to go to hell. But c’mon. Surprise that Germany wants to call the shots? No surprise here.
Do I really blame the victim? Do I really regurgitate what I read in the MSM? I do not live the US anymore, and I do not read the MSM. I think every case of homelessness has a different story, and I try to resist making generalizations.
@V Arnold
I agree that we certainly need to ask “What is the reason the homeless, drug addicted, and mentally ill are forced to live like that?” And yet while we meditate on the answers to that question, what does that mean in the meantime? Should the homeless drug addicts be able to sleep in the church alcoves — or not? There are several charities that are operating in the Tenderloin to help, and they have rules that the homeless need to follow to get a bed (such as no drugs and no violence). If these charities toss out epople for breaking the rules, does that mean they are being merciless? Does that mean they are asking the wrong questions? I’m sorry, but I think this is a more complex issue than you seem to make it out to be.
Hmmm. I used to live in San Francisco, close enough to the Tenderloin to see quite a few members on the San Francisco homeless community on my way to and from work every day. I tried to keep an open minded view, realizing that many were probably down on their luck. And yet in the Tenderloin there is a lot of chronic homelessness where drug addition and mental illness are pretty common. And for those who do manage to take up residence in the Tenderloin, there is a higher than average concentration of sexual offenders. The Church that had the sprinklers installed in located just outside of the Tenderloin. They do quite a lot of charitable work for the homeless community. They initially defended this action on the ground that there were hypodermic needles found in the alcoves where people had been sleeping, that children pass by this area on their way to and from school, and some elderly who attend services at the church felt harassed. I don’t know what to think. I can see the reasons for concern. In my mind, this is a little more complicated than a simple case of the well to do having contempt for the poor. Once high rates of drug addiction, mental illness, and criminal history are mixed into the picture, well, what then? This is a chronic problem in San Francisco, and has been for decades, regardless of all the governmental and private charitable attempts to improve the situation. Am I heartless and merciless if I don’t want drug addicts sleeping in the alcoves? Hmm. Lord have mercy on me.
Crack dealers and faith healers? Better make that OMNIPOTENT crack dealers and faith healers. At least for now.
Before the era of omnipotent central banks, we had a series of economic potholes spread a few years apart: 1987 crash (1987), S&L crisis (1989), Asian Flu (1996), LTCM (1998), dotcompop (2000), subprime (2007) leading to the Bear/Lehman meltdown an Paulson’s abyss (2008) and and S&P500 low of 666 (2009). All of these events had the potential to bring down the system, or so it was thought. Then the central banks revealed themselves to be omnipotent, and see what has happened? Peace and stability in the financial markets. Poverty in the streets, for sure, but peace and stability and prosperity in the financial markets.
Look at what happened in the wake of 2008. Peter Schiff and his ilk promised imminent hyperinflation and chaos, but there was no sudden loss of confidence, at least not among the people whose opinions matter. Hard landing in China (2008-2015)? Commodities have crashed, but China keeps plugging along. PIGS debt crisis (2010)? Just breathe the words “anything it takes” and the crisis just melts away like an ice cube in the Santorini sun. Abenomics and the expected implosion of the Yen (2012)? The Yen is doing just fine, thank you. Student loan bubble (2013)? Just keeps going higher. Negative interest rates in Switzerland (2014)? The market shrugs it off, even as NIRP spreads like a virus. Busted SNB Euro peg (2015)? Got people excited for a couple days, but is now long forgotten. Oil price implosion (2015)? Yawn. The theme behind all of these recent crises is that they get everyone upset and worried, for a few weeks, and then … nothing happens.
The take home lesson for me is this: Throw out all of your preconceived ideas about how long this stability can (or cannot) last, and if you can, enjoy the moment. Sure we can all plan ahead with the expectation that this will not last forever, but let’s plan without all of the anxious hand-wringing.
The previous government was obviously corrupt, but was also democratically elected. The situation was stable. Until Victoria Nuland changed that. There would be no war if it had not been for the US sponsored coup. Nobody suggested to blame a centuries long feud on a single person. But the key event that was calculated to start the current war can be.
If the Greek banks are all insolvent, why not sacrifice the banks, declare a debt jubilee, and then recapitalize the banking system with the new currency? People are broke because they are weighed down by debt. They have no equity in their homes, no positive net worth. Erase the debt and they suddenly have net worth again. Not a good plan for renters, but they could add a law that any tenant living in a rented unit that had a bank mortgage can purchase the unit for a nominal payment. If people suddenly have unencumbered assets, it should be no problem to jump start the economy again as long as they have a medium of exchange. What’s wrong with this plan?
Syriza needs time to find wider support from the other peripheral countries. They have two choices. They can use the 30 day playbook or they can use the 150 day playbook.
If they engage in brinksmanship too soon, they risk loss of ECB support at the end of February. If they can get past the end of February, the next looming deadline will be in June.
They need to drag this out. Yanis is a great spokesman. Come March 1 I would rather see him making impassioned speeches to his fellow Europeans rather than scambling to impose capital controls and hastily roll out the new dranchma.
Why do you blame the debtor? the creditors knew what they were getting themselves into, and they should have known better.
Let the new Greek government drag this out long enough to inspire the Italians, the Spanish and the Portuguese to follow in their footsteps. Strength in numbers.
With regard to the “50% of Americans receiving some kind of government benefit” — this ris eally the key to the master plan. If not for those government benefits, the situation could potentially become very volatile and get out of hand. Imagine if hungry formerly middle class people actually started marching in the streets and demanding reforms! Imagine how terrifying that would be for the ruling elite! The government benefits are designed to suppress all that. Sure conservatives hate them in theory and rail against them, but if push comes to shove, they prefer government social programs to social upheaval and revolution. They will talk about eliminating these programs, but the talk is just that — talk. They may scale them back a little bit or trim them at the margins, but these government programs are now the key to maintaining order and a clueless/dependent populace.
Triumvium, I generally share your deep aversion to the banks, especially the biggest banks, but I am not so sure about this part: “The bust is being orchestrated to transfer the physical assets of society to the oligarch corporate fronts.” I recall that during the 2008 crisis, the big banks pretty much did the opposite. They were in no hurry to move the foreclosure process along. They had no interest in taking title because they were not set up to take care of the vacant properties and there were not enough buyers to show up at the foreclosure sales because credit had dried up. The banks would much much much rather be paid 100 cents on the dollar from the Fed on all those bad loans than to deal with the mess. They don’t want your house. They really don’t.
The distinction is important, because in the end the big banks will get what they want. That’s the key lesson from history. Think like a TBTF bank! You have two choices: Behind Door No. 1 50% of the people are defaulting on their mortgages, car loans, small business loans, whatever. Do you think any bank is really set up for this? Sure in theory they can make your life miserable and turn you into a debt slave, but can they do that with you and 50% of your neighbors simultaneously? Who is going to buy at all those foreclosure sales? Behind Door No. 2 the Fed says “No worries, just turn all of those bad loans over to me, I will pay you full value, and then you don’t have to worry about it anymore.” If you are a bank, which alternative is most attractive?
Now once the Fed buys all of that debt, in theory they can resell it. But who will be the buyers? And what happens when 50%+ of mortgages are in default? That’s when populist politics will finally influence policy, and the people will welcome hyperinflation with open arms as a better alternative to the deflationary spiral. Hyperinflation resets the system. The deflationary spiral just makes things worse and worse and worse. Pressure builds. Extremist political partys rise. Bad news all around. Hyperinflation solves all the problems after 6 months of chaos.
daisychain, regarding your first point, some corporations do fund their operations out of their own capital. For those that don’t, many of the times it’s by design. The design is to strip everything of value out of the company and load the company under a mountain of debt. If the company does well, the company distributes the profits to the shareholders. If not, let the company’s creditors pick over the carcass.
Regarding your second point, “Collateral becomes worth way less than before, and if repossessed will find no buyers at any price” — yes, that’s theoretically how it’s supposed to work in deflation (and that is what Ilargi is predicting if I understand him properly). However, I think there’s 0% chance that the authorities will allow deflation to run its full course all the way down the spiral. Instead, they will do exactly what they did in 2008. They will save the debt, save the big banks, save the system, at all costs. They Fed will buy up all of that bad debt and socialize it. They will support collateral prices in nominal terms even if they destroy the currency in the process. We will never, ever, ever see the day when things ground down to the point that respossed items cannot find buyers at any price. The Fed will buy everything, and when the political pressure is high enough, the government will have no choice but to write off and forgive much of that debt.
The lesson from the oil crash and the SNB surprise is that leverage will kill the system. Stability (as evidenced by years of a very low VIX) in a low growth environment is what encourages increased leverage. And increased leverage works until there is an unexpected downside surpise. We have now had two surprises in relatively rapid succession. The house of cards is tottering.
