₿oogaloo
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I turned on my BS detector as soon as I saw the first headline. But you know what stands out to me as being so odd? businessinisder.com has been really really quiet about the whole thing. Why do they suddenly have nothing to say about a headline grabbing event? In contrast, their site was plastered with propaganda stories the day of MH-17 and the day of the Sony Leak. Maybe they did not get a phone call from the government this time asking them to write something? Still scratching my head wondering what’s really going on.
The propagandists have been with us as long as I have have been alive, and have controlled the MSM for longer than any of us would acre to admit. The change I have noticed this year is the aggressive spread into alternative media, particularly a source that Raul links to occasionally: businessinsider.com The propaganda on that site is so brazen that it makes anyone half grounded in reality laugh (or cry) out loud. Mixed in with the Elon Musk, Mark Cuban, Richard Branson, Marissa Mayer, Steve jobs hagiographies, there is a steady stream of anti-Snowden, anti-Russia, pro-Sony, pro-Wall Street, “the world is wonderful and the economy is doing great” drivel straight out of Orwell.
Ilargi, it’s impossible to even have a civilized conversation about politics in the United States anymore. Americans of all political stripes have been fed a steady stream of propaganda for too long, and not just from the MSM. People hold all sorts of contradictory positions, all based on conflicting ideologies. The so called right is full of people who simultaneously describe themselves as religious, but who now try to justify torture because their guys Cheney and Rumsfeld supported it. They embrace Ayn Rand, even though she detested their religion as a sign of weakness. The so called left tries to sound as progressive as possible, but without actually adopting any progressive policies, and has now wholeheartedly embraced war and empire. There is no rule of law anymore. The ruling elite is exempt from enforcement. On the flip side, everything has now been criminalized, so anyone who crosses a prosecutor may spend years in prison for no good reason. It’s all arbitrary. There is no common culture anymore, so the idea that the people can collectively rise up and reclaim their democracy is laughable. You think that white folk and black folk in Ferguson are going to join forces to demilitarize the police? Ha! You think that poor white folk and Hispanic folk are going to find common ground in anything with all the pent up resentment against illegal aliens? Ha! All of the groups in the U.S. that should be coming together have been thoroughly divided so they are not a threat to anyone. The only way out of this mess is through the rise of secessionist movements. Their is no way to change the whole because there is no common ground, no common culture, to appeal to. The only way is to retreat at the local level to start rebuilding communities.
“Then the old man got to cussing and cussed everything and everybody he could think of, and then cussed them all over again to make sure he hadn’t skipped any, and after that he polished off with a kind of a general cuss all round, including a considerable parcel of people which he didn’t know the names of, and so called them what’s-his-name when he got to them, and went right along with his cussing.”
-Adventures of Huckleberry Finn, Chapter 6.
The reason we desire growth is because we have a debt-based monetary system. There is not enough money in existence to repay all of the existing debt with interest. For that reason every year the economy must expand to cover the existing interest payments — it’s part of the architecture of the system. Otherwise we enter into a deflationary cycle of cascading defaults. There is no avoiding it.
When growth is insufficient, we can mask it with debt. But when the debt grows too large, the choice is either debt collapse or monetary collapse. I am betting on the latter, but right up to the very end I think it will look a lot more like the former.
huckleberryfinn, get a life. It’s not like TAE is the only blog out there that accepts donations. Take a look at all of the highly rated financial blogs and you will discover that virtually ALL of them accept donations. Virtually ALL of them. Let that sink in. You might not like the message on this site, but don’t complain that the blog accepts donations. Next point: you bitch and moan that TAE believes that “we are all eventually completely doomed.” I don’t think that any of the regulars around here understand that to be the take home message. But I think most of us accept the premise that the global financial system is on an unsustainable course, that there has not been enough organic growth to sustain the course, and that the system has relied on debt for decades to make up for the shortfall. Eventually something has to give, and on that point the world generally divides into the deflationist camp and the hyperinflationist camp. Ilargi is a deflationist and I am a hyperinflationist. But do I think the systemic collapse is going to be the end of the world? Of course not. Just a stormy transition to a new system.
You can dismiss this out of hand and say we’re all nuts and we do not know anything about finance. Fine, go about your business and take your venom and personal insults with you. If you think that everything is just great, the economy is fine, the BLS numbers prove we’ve turned the corner, real estate can never go down, the world will continue to get better and better, the markets are well regulated (or need no regulation), the Fed has masterfully managed the economy, wealth will trickle down from the overclass . . . if you believe all that, then why are you here vandalizing the message board? Go back to your MSM sources, keep drinking the kool aid, and remember to say a prayer for all of us lost souls.
huckleberryfinn, you have no manners. If you want to come on the board and debate, fine. If you want to strongly disagree with TAE, great. Just stick to the issues and avoid the ad hominem attacks. If you need to study a template for how to disagree, even strongly, without unnecessarily insulting the host, check out alan2102’s post in the Elephant post. I welcome a robust discussion, but attitudes like yours we can all do without. Cheers.
Sounds like huckleberryfinn is a big believer in “the recovery.”
I think Nicole is being conservative with that 90% figure. What would you pay for this?
Ilargi, not a comment on this piece, but on the topic of deflation in general. I know you reject the hyperinflationary thesis because you do not think there is any excess savings out there, only a mountain of dollar denominated debt that will guarantee a constant demand for dollars as far as the eye can see. This piece may answer your questions/objections:
https://fofoa.blogspot.com/2014/12/global-stagnation.html
It is long, and requires two or three reads, but I think it is well worth the time. Among other things, it explains why there has been price stability despite massive printing (and even cites sources going to back 1999 explaining why this is so), and it also explains where all of those dollar savings are hiding. YMMV.
alan2102, I cannot remember when or where I read it, but I vaguely recall a story by a Japan bear whose perspective dramatically changed after he actually visited Japan. He was so in awe of everything he saw, he came away with the impression that the Japanese will be just fine. Even when the end comes, the sun will come up tomorrow, and Japan will still be an amazing place.
The big risk I see is war. That could be the wrench in the machinery that changes everything.
alan2102, I wonder whether the positions are mutually exclusive? I fully agree with you that China has been positioning itself the right way. I would go further and say that China has used these last days of current global monetary financial system to amass as many physical assets as possible, with the full knowledge that its own course and the entire system is unsustainable. A crash is coming, China knows it, and the entire system will reset. A massive amount of debt will be destroyed. And when the dust settles, China will be sitting on a mountain of gold and a country full of new infrastructure. In the meanwhile, it is in China’s interests to keep the present system going as long as possible. If that means cooking the books, so be it. If that means a massive unregulated shadow banking system, so be it. Smart move in my opinion.
Yet it doesn’t change what the China bears are saying, does it?
I also disagree with TAE that all of this is going to end in a big deflationary collapse. I agree that there will be a collapse, and I agree that in the beginning stage it will be deflationary, but I think it will culminate in a one-off reset event where the dollar will be subject to an (almost) overnight revaluation — not just against other currencies, but against the real world (including gold, all of those new Chinese cities, and everything that exists in the material world). But enough of what I think. The point I wanted to make is that I don’t see that much difference between what you are saying and what TAE is saying.
Sounds like Stephen Hawking and Elon Musk finally got around to watching the Battlestar Galactica reimagined series, which was a superb production IMO.
Ilargi, I mean the bondholders, not us small fish little people. And I disagree with you about the Euro. The Euro will remain a strong currency as long as Germany is a part of it.
Golden Oxen, I just don’t see the so-called Leftists you speak of as having much interest in the debate. The opposition to gold comes from banking interests and is thoroughly mainstream in the West. And as long as gold is priced through the futures market it is and will remain just another a financial asset under the thumb of the bankers. But gold will be by far the best asset to own if an when the system really breaks. When could that happen? On one hand it could happen any day. On the other hand, in this day and age of central bank coordination, it could be a long time. Your reassurances that gold has performed well over the last 10 years will be small comfort to those who bought two years ago.
I think falling oil prices is a mixed bag. Obviously good for some parts of the economy. Obviously a disaster for over-indebted drillers, and yes, the loss of jobs in this sector will turn North Dakota into a ghost town. It was not too long ago that the conventional wisdom was that we would never see recovery because oil prices would never fall back below $100. High oil prices were the problem. Now it seems that the problem is low oil prices that are too low.
I for one suspect that oil prices were manipulated lower to try to kickstart a “return to growth.” They already tried monetary policy. That failed. So why not try lowering the price of the most important commodity to the entire world?
Ilargi, I have a question about this sentence in your post: “And sure, the USD will fail at some point, but who would doubt the euro will go first?” Here I guess it depends on what you mean by the Euro failing. When I imagine failure of the dollar, I imagine holders of dollars wanting to see their dollars to buy something else, perhaps gold, perhaps another currency, perhaps an operating business, perhaps land … you get the idea. And what would trigger that? Because virtually everything on the Fed’s balance sheet are dollar denominated financial assets.
But when discussions come up about the “failure” of the Euro, the topic tends to focus on the breakup of the Euro zone. The focus is more on the politics, rather than holders of Euros losing faith in the value of their Euros and wanting to hold something else instead. I think it is altogether possible, if not likely, that a political crisis could actually cause the Euro to strengthen. If Greece leaves the Eurozone, for example, what do you think Greeks and Greek banks would prefer to hold, Euros or the new Drachma?
Take one look at the ECB balance sheet and you see that gold makes up more than 50%. For the Fed the amount is miniscule.
So I think the eventual crisis for the dollar and the eventual crisis for the Euro are going to be completely different in character, and a political failure of the Euro might actually enhance its strength as a currency.
John Day, Raleigh, my grandmother was born in 1917. Before she passed on a couple of years ago, I sat down with her one afternoon and peppered her with all sorts of questions about living through the Great Depression. She shrugged it off like it was no big deal. She said: “We lived on a farm. We grew our own food. Sure we were all poor, but it wasn’t much different from before or after the depression.” On another occasion I asked her why the whole family moved from Nebraska to California during World War II. She said: “Everyone was poor back then, and the best job opportunities on the West Coast.” It was only after the move to California that they started climbing the ladder into the middle class.
I guess that’s when it hit me. The Great Depression was a bigger calamity for rich people than it was for poor people. For poor people it was just life as usual, maybe a bit worse, but not the “sky is falling” panic it must have been for the banking class.
Of course my grandmother was a teenager during those years, and I guess if you don’t own anything, you just sort of shrug everything off.
Patricia, I think our fears of disorder and breakdown are greatly exaggerated. Periods of chaos and upheaval following economic collapse tend to be brief and localized. The only exception is when all of the angst gets channeled into the war engine, and I think that is where the real risk lies.
In fact many fund managers did quit once the Fed became the market. I do not begrudge Hugh Hendry. Yes, he is making money, but his position also gives a certain legitimacy to his warnings and criticism. If he had closed up shop and retired, would anyone pay attention to him anymore? Many of the sharpest critics of the financial system are themselves products of the system. Rather than suggest they should stop making a living off their knowledge of how the system works, I think our efforts should be directed to waking people up to hear their message about how the system should be changed.
Gerold, on repeated occasions you assert that nobody forces anyone else to become a debt slave. I disagree. When the market is saturated with cheap credit it drives up prices. Take housing, for example. I don’t want to become a debt slave, so I decide not to buy a house. But plenty of other people have no reservation about borrowing 105% so it pushes up prices much higher than they would otherwise be. That also ends up pushing up rents. So even though I am very conservative with my finances, I end up paying more and more of my income to my landlord as rent because I decided not to participate in the madness. There is no way to opt out of the system. It affects me no matter what I do.
Take higher education in the U.S. where costs are out of control. Why are they out of control? Cheap credit. Even if I do not want to borrow $50,000 per year, there are plenty of people who are, and their willingness to assume that debt determines the price. What are my options? Sure, I can forego higher education, but that increases the odds that I will live in poverty. What type of choice is that?
I got out with a lot less debt than many of my peers, and I paid off my debt a lot faster. But I still resent the system and the ocean of cheap credit that made it more difficult for me than it should have been.
Ishkabibble, I had a somewhat different thought. The opposite thought actually. Given that the authorities have not been able to stimulate economic activity though extraordinary monetary policy, why not try manipulating the price of the most important energy input artificially low to try to jump start growth again? They won’t stop at anything to hasten a return to growth, will they? Sure it causes pain to the North American suppliers in the near and mid term, but they will have their 15 minutes of fame sometime in the future when those supplies are really needed.
This pattern will continue until we see a run on the bullion banks. That is the only way to break the immense power of the central bankers and those they serve.
Economic chaos runs its course and stabilizes fairly quickly. Having said that, we know how the government expects this to play out. The national guard is armed to the teeth with enough firepower to kill everyone 10x over. Even so, policy will only change for the better when we start to see mass protests.
Variable81, collapse is definitely coming, but the elites are determined to make sure it happens slowly. If it happens suddenly, there is a risk of chaos and instability, and if there is anything the elites fear, it is chaos and instability. If it happens slowly, they hope that they can use propaganda to gradually pare down expectations and grind everyone into servitude.
If the collapse were allowed to happen suddenly, I think it could be short lived. We could reset the monetary system, wipe away all the debt, wipe away all the imbalances and find real price discovery. I think there would be chaos for 3-6 months, but the world would find its footing again. Does this mean a return to growth and everything like it was before? No, not at all. Living standards would definitely fall. But at least we would be able to get rid of the yoke of all that debt.
Of course this is what the elites fear the most. That’s why Hank Paulson warned of the abyss. Fear mongering at it finest. You miserable serfs! If the financial system collapses, terrible things will happen. Unspeakable things might happen. Like what, you ask? You might lose your subsistence job and …. well, then what? Do they really think all economic activity will suddenly grind to a halt, the earth will stop spinning, and there will be no tomorrow?
A sudden collapse would be painful for almost everyone in the short run, and better for almost everyone in the long run. That’s why they’re determined to drag it out as a slow grind. And only feet in the street will change the direction of history.
William, you believe that China is selling their gold reserves to stabilize what, the Yuan? Why wouldn’t they sell off some of their USD reserves instead? Why would they dump the gold that they have been strategically accumulating for more than a decade? If they were running low on USD reserves I would understand your reasoning, but if anything they have too many USD reserves, don’t they?
I wholeheartedly agree that gold cannot become religion and one should not “bet his life” on it. But in prior posts Ilargi seemed to recommend hoarding cash instead, fearing a deflationary collapse. I would not “bet my life” on cash either.
Perhaps common ground (and common sense) is to hold at least some assets outside of the banking system — perhaps a combination of cash and gold and other physical assets. I remember a Marc Faber interview where he commented that any rational adult who sees what central banks are doing is crazy to not invest at least a small amount in physical gold on a regular basis — simply because of the uncertainty about what will happen when all of this eventually unwinds.
XYZ, yes, exactly. A revaluation, as in a sudden overnight jump (as distinguished from trading up to a new, higher position). It could happen as part of a coordinated move — meaning a conscious policy choice from a Bretton Woods-type multi-lateral summit. This is a scenario Rickards and Brodsky see happening. But theoretically it could also happen in a chaotic and uncoordinated way, such as if one of the bullion banks failed to make delivery and the physical gold market froze up. In today’s slow-moving environment the latter seems unlikely, but if a crisis were to return, things might change very quickly.
Replying to khiori’s last comment from Debt Rattle 10-23 asking why only bloggers are talking about a currency reset …
First of all, it’s not just bloggers. Steve Keen came out very openly advocating a debt jubilee. Jim Rickards has long been predicting that there will be a coordinated revaluation of gold, perhaps in connection with increased use of SDRs. Paul Brodsky wrote quite a bit on the subject while he was at QBAMCO.
Second, the suggestion that a revaluation is “something the rich people might try to fight against”: I think there are different kinds of rich people. There are the nouveau rich banking elite from Wall Street who rely on leverage and financial engineering and who spend a lot of money for political influence to keep the game going. This group will definitely fight against any revaluation. However, there are other rich people who just want a reliable and stable savings vehicle, along with social and political stability, and who recognize that the current financial system has grown unstable. I think not all rich people have the high risk casino mindset of the politically connected bankers.
I agree with you that the powers that be will not be proactive. They will wait until the next crisis forces a change. That may take a long long time. When it finally happens, however, I think it will be done secretly and suddenly. There will be a bank holiday one Friday afternoon that affects the whole world.
The other way to declare a jubilee is to simply revalue the only asset on central bank balance sheets that is not someone else’s debt. That would allow all the world’s debt to be repaid in nominal terms, while at the same time immediately restoring solvency to the entire global financial system in one fell swoop. Simply revalue gold at $100,000 per ounce by fiat (by declaring this to be the open bid that central banks are willing to purchase gold). It throws everything into chaos for a couple of months, but it’s simplest, cleanest way to manage a reset.
Raleigh, I don’t think there is much disagreement here, just a difference between the world the way it ought to be and the world as it is. As a result of original sin (in the eastern sense, not the Augustinian sense), the strong instinct in all of us is some variant of “me first” or “me and my family first” or “me and my country first” or “me and my — fill in the blank — first” and it takes work, real work, to overcome that instinct and collectively reach an agreement to set policy that puts something else first. Even when that something else is what we all need. Making things worse is that the psychopaths are the ones with the strongest lust for power, and it takes work for everyone else to keep them in check.
I recall something David Stockman said a few years ago: Austerity is not something people choose. “Austerity is something that happens to you when you’re broke.” That is the way the vast majority will experience the new reality we live in.
I do not mean to suggest that “hyperinflation, technology will take care of everything.” As I said, hyperinflation will destroy the standard of living of the great majority of people. However, there will be a silver lining, and that is that the debt will be gone. And that will be a good start. But will be go back to where we were before? No, I never meant to suggest that.
As for ebola? Sure, it might wipe out half of humanity. Unlikely, but possible. But in the end it is just a virus. If it becomes a priority, treatments will improve and the disease will be overcome. The sun will come up tomorrow!
I think today’s essay may go a bit too far. Yes, people love their own children, but they do not share the same love for their children’s entire generation (or the generations that come after them). And its human nature for a sizable majority of humanity to overconsume, take on too much debt, and fail to plan for a rainy day.
I think we can pitch this idea that we are saddling the next generation with a huge debt burden they will never be able to work their way out of. Debts that cannot be paid will not be paid. Wealth that is stored in the form of debt will vanish overnight. Oh, the debts will be paid in nominal terms, but not in real terms. Hyperinflation as the grand finale of a deflationary collapse will solve a lot of problems. It will bring a few months of chaos, but all of that debt will vanish. So will standards of loving, but the debt in real terms will be gone.
Likewise I think the hype about peak oil and peak cheap energy is a bit overdone. Sure, energy will become a lot more expensive. But so what? People will adapt. Household budgets will adapt. Sure, people might spend 40% of their budget on energy, or even 80%, but that might still be better than trying to work the farm with a pair of oxen.
Sure, there will be chaos and upheaval in the years ahead. But life will go on, at least for some of us. For me the real question is whether our elites will deliberately cull the herd by bringing war or pandemic upon us to reduce the global population. If that happens who knows.
Trumvium, let’s think this through. Obviously Mr. Middle Class with the mortgage and a modest net worth is not the person whose marginal vote counts when deciding whether to maintain confidence in the currency or lose it. If he has debt he needs currency to repay the debt, so he does not have the luxury of being choosy. During good times he may have stashed away a few gold coins to get some wealth out of the banking system, but probably not enough to over all those unpaid obligations. His vote is obviously not the one that counts.
“Ah, but I am one step ahead of you” you say as you rightfully point out that the vast majority of dollars are borrowed into existence, and all those borrowed dollars are what supports asset prices of . . . everything. Collectively all of those so called rich people holding plenty of equity in their homes and everything else stand to lose everything if asset prices of everything go down the toilet in a deflationary collapse. Imagine that all debt suddenly vanishes and every asset in the country crashes down to its cash price, as a proportion of all the tangible currency out there. You might be able to buy a home for $100. Of course that would never happen. Nobody would allow it to happen. It would be the end of the world, right? Of course not, but it sure would feel like the end of the world to anyone who thought they had some assets. But imagine it did happen. All of the assets in the real physical world would still be here. They would just be valued differently.
Something is going to happen on the way to that $100 house to prevent that outcome from ever happening. Can you guess what it is? People will demand that the government and the central banks step in and do something. What can they do? They can pay nominal prices for all debt to save the debt at all costs. When they do that they replace credit money with base money.
“Ah, but I am one step ahead of you” you say once again as you rightfully point out that printing all that base money does not cause hyperinflation as long as the money simply sits in the bank and never gets spent into the economy. But as the relative proportion of base money increases compared to credit money, the risk grows. Ultimately it will be those who control that mountain of base money who decide whether to hold it or exchange it for things in the real world. But I submit that they do not need to be fully divested, not even close, for the hyper-inflationary spiral to have passed the point of no return.
And I think that the next time around the shock will be bigger and faster than in 2008, and that the next deflationary shock will not be a simple rerun, but will be a different experience altogether if people lose confidence in central bank omnipotence.
I will add a third possibility to your list as a potential trigger for a loss of confidence in the dollar, and that is a delivery failure in the gold futures market. If there is ever a run on the bullion banks, the next phase of history will be ushered in faster than any of us ever thought possible.
Diogenes Shrugged, H’inflation in the final denouement, the last stage of a deflationary collapse. They are not opposites, though they are often presented as such by hysterical bloggers. Keep an eye on the proportion of base money to total money supply.
Note that even Michael Pettis, who hardly qualifies as a sensationalist blogger, predicts a major near term change in the role of the dollar in the most recent post at his blog.
And another astute blogger over at Golem XIV asks the question what will happen if the next crisis comes before we have recovered from the crisis we are still in? I think there are some variables that could speed up the course of history in a way that might surprise us all. It’s way too early to call this game IMO.
I am an avid reader and a fan of Raul’s essays, and I think this one is the best in 3 months. But then again, I am always partial to reminders that self-deception is the greatest threat of all.
I like my idea for free money more: The US Treasury should melt down the 8133 tonnes of gold into American Eagle gold coins and send them out as stimulus payments to the taxpayers. After all, gold is nothing more than a barbarous relic, and it makes no sense for the government to incur costs to vault a barbarous relic. Some people love gold and some people hate it. Those who hate it can either eat it or sell it. Those who love it can go on loving it, with a little more in their pockets. We can call the law the “Give it Back Act” or the “throw Out the Trash Act” — and it will prove that the government really believes its own propaganda.
“Shock and awe” did not work so well in Iraq, at least not as a long term strategy.
But maybe it will work in Ferguson, MO?
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
[12 USC 225a. As added by act of November 16, 1977 (91 Stat. 1387) and amended by acts of October 27, 1978 (92 Stat. 1897); Aug. 23, 1988 (102 Stat. 1375); and Dec. 27, 2000 (114 Stat. 3028).]
Diogenes, not looking for a debate. I spent the first half of my life as an atheist, and never even set foot in a church or any other house of worship until my college days. I was repulsed by religion in general, and Christianity in particular. Then I read Dostoevsky, and it changed everything about the way I see the world. For the first half of my life I saw the world as Ivan in the Brothers Karamazov, but now Alyosha is my hero …. I feel I could never go back to being an atheist now, even if I wanted to.
I know that Raul occasionally throws in an anti-religious dig here and there, and I respect that because he’s got so many other insights and intelligent things to say. I agree with him at least 90% of the time. How could someone so like-minded be so anti-religious? I don’t get it — I really don’t. Same with Yves over at NC. She’s brilliant, insightful, and has great judgment on just about everything … except when it comes to religion. IMO. Oh well ….
