₿oogaloo
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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 ….
“If you were a religious person, and one of those helpful arrows . . .”
“By the way, “Satan” is at best a metaphor and in no way answers the question . . .”I don’t really understand the anti-religious angle.
The more I see what is happening in the world today, the more I think the atheist mindset is pure madness. How could anything thinking person conclude otherwise? For centuries there has been a push in the West to de-tooth the religious tiger in our public discourse. Is the world better off for it? Has enlightenment brought us paradise on earth? I suppose if you are one of the elite and you don’t mind trampling the planet and 99% of the people on it, the answer is an unequivocal yes.
The warmongering, the fraud, the propaganda, the mind control, the corruption, the desecration of the planet, the mass surveillance, where does the list end? … it’s all evil. And no, I do not mean that as a metaphor.
Is it just me or does the whole world seem surreal these days? Or am I just spending too much time at TAE? I take nothing at face value anymore. I have always known that the media is nothing but propaganda, but the recent anti-Putin propaganda was so over the top that it woke me from my slumber. The Marie Harf video was really hard to watch. Is it too much to ask that the mouthpiece of the government be a little more articulate, composed, and competent? At least then I might be taken in by the propaganda and stay in the Matrix. This is all bad quality B-move propaganda that even lacks residual entertainment value.
Maybe it’s not just the propaganda. A light came on when I read Rapier’s comment yesterday that “One inch past our borders and the government is only criticized for being too weak, too timid.” So true. In fact, Michael Snyder hast a list up today of issues where Americans are politically divided:
America The Divided: Everyone Knows We Have Problems But There Is Very Little Agreement On Solutions
Note that virtually all of the issues are domestic — I don’t think that’s an accident. And though all of the issues are important, some are obviously more important than others. Yet there is no sense of priorities in the U.S., no grasp of the big picture.That realization, and perhaps the realization that others are realizing the same thing, makes the whole world seem all the more dreamlike and unreal.
koso_man, what can possibly be said about the tragedy in Gaza? The Israelis do not recognize Palestine’s right to exist and the Palestinians do not recognize Israel’s right to exist. That means the conflict will continue until the stronger party annihilates the weaker party. The Palestinians live in slums, without clean water, without adequate food and nutrition, without an army, without passports. It’s only going to get worse. The conflict will only end when the Israelis kill every last one of them. And terrible as it is, that’s exactly what’s gonna happen.
My bullshit detector started beeping as soon as I heard the news about MH17. My first thought was: False Flag. But then I was amazed at how much invective started seeping into American media even as the facts remained unclear. The worst of the offenders IMO was Business Insider — not just the articles (which were uniformly and vitriolically anti-Russian) but also the comments seemed to be pushing a narrative crafted by the CIA. Anyone who wanted to talk about facts or evidence was shouted down.
If this is the state of affairs for our public discourse while times are good and we are in the midst of a prolonged recovery and a return to normalcy, I am afraid to think what things will be like when the wheels come off the economic bus.
Has Odysseus been drinking the MMT koolaid?
“How much sovereigns can spend is directly related to the amount of available productive work.”
Yet even if there is a “direct relation” the amount of available productive work is not the only factor (and besides, how do we define what is “productive” and what is “wasteful”?) the other limits are the price and availability of natural resources, the acceptance of the currency in international trade, and the trust currency holders have that the currency is a reliable store of value.
The function of the shiny yellow rocks is to keep the system honest, a virtue sadly lacking in the modern monetary system.
jal, What it means is this: No worries. Sure, the bank lost your dollars, but there’s no reason to be upset. When the bank loses your dollars, the central bank simply makes more and gives them to your bank for free. So you will get paid. No problem. Don’t believe everything you read in the newspaper. Janet Yellen has your back.
jal and bluebird, you seem to believe that a dollar is something real. But what if a dollar can be conjured out of thin air? If a dollar can be conjured out of thin air, then everyone can be made whole in nominal terms if and when the system collapses. Everyone is going to get paid in nominal terms. Everyone. Cyprus was a head fake, and even then it only worked because Cyprus cannot print its own currency. You can ignore all the warning about Cyprus being the blueprint for the future. Fuggedaboutit. As you say, people are gonna get angry, so they are going to be paid. Their dollars aren’t going to have any buying power, but that’s another story.
This has nothing to do with religious fanaticism. Yellen works for the big banks. Her priority is protecting the big banks. Money printing protects and feeds the big banks. It’s really as simple as that. Does she believe a word she says? Does it even matter? The policy ain’t gonna change. Yellen ain’t gonna fall on her sword. What are you expecting, Ilargi? A selfless public servant?
The political angle is substantially the same. No politician wants to face the pain today when they can kick the can down the road. Money printing and QE kicks the can. Sure, there is a little political resistance for show, but for the most part the status quo helps the politicians too. No politician wants to preside over a deflationary collapse. If things have to get bad, a slow grind is much better for politicians and central bankers, because as lockandload says, its a whole lot easier to cook the proverbial frog in the pot (while at the same time building up the security surveillance state just in case things don’t turn out so good).
I think we need to at least consider the possibility that we might never see a correction or a crash in the stock market in nominal terms. In real terms, of course, it will definitely happen. It has to happen. But in nominal terms the market could go from here to infinity.
I do not expect the central banks to change course. If markets start to swoon, they will double down. They will keep pushing in this direction until they push everything over a cliff.
Perpetual growth is a requirement of the modern banking system.
https://www.peakprosperity.com/video/224/playlist/153/chapter-8-fed-money-creation
“How is debt supposed to be paid back if there is no growth?”
The Fed will all the bad debt with new base money, as this is the only expedient political solution.
The only antidote for our malaise is to start rebuilding communities at the local level. The decades of centralization and propaganda have left our culture impoverished. Nothing on TV is worth watching and the vast majority of new books aren’t worth reading. The materialist lifestyle has been an escape in itself, but one that is very very hard to escape from. Everybody knows that, but the only thing that will change it on a wide scale is necessity. Sure, a few adventurous and forward-thinking souls might form communities like Atamai ecovillage or Finca Bellavista. But most of us are content to stay on the treadmill, eyes glued to the internet, shaking our heads and saying “Something is definitely wrong.” We know what we have to do, and we know what we will do when necessity pushes us. And when that happens, I think many will look back and say that it was all a change for the better.
Rebuilding our local communities will be like returning to our past, and in that sense I think Raul is onto something. It’s not really happening yet, though there is a growing consciousness that it needs to happen. My prediction for the future is the rise of more local secessionist movements, something reminiscent of the utopian communities of the 19th Century. But it will take time before these pick up momentum.
I would join or found one now, but am I really ready to leave my job? Nope. No way. Not yet. But when the collapse does come, I will embrace it, and I think it will be liberating. In 2008 when things started to collapse I thought that the system would reset, and I looked forward to it. Instead we got more can kicking and policy response was to drag things out slowly. For the last 6 years I feel like I have been living in a suspended time warp, and history seems to have slowed to a snail’s pace. Maybe that’s what you are talking about, Raul?
My grandmother lived through the depression. I asked her what it was like. She said it made no difference in her life. “We lived on a farm and we grew our own food, so we were not affected very much.” Of course many farmers were affected because of debt and falling crop prices. But for most people who lived on farms and who were not overleveraged, life went on as normal. When the collapse comes I will move back to the countryside, to the farm community where my wife’s relatives live. They grow their own food. They breathe clean air. They wake up to the sound of the bird chirping. They all know their neighbors.
It’s exactly what I need. But not yet.
Why are we chasing growth? To answer that question we need to conceptually separate economics from the fractional reserve monetary system. Can we have a steady state no growth equilibrium economy? Of course we can, but not with a fractional reserve monetary system. With a fractional reserve monetary system, the economy MUST grow so that debts can be paid back with interest. It is an inherent mathematical feature of the system.
Once the idea goes mainstream that real growth is not coming back, it will be interesting to see whether people keep hard assets in the global monetary financial system. There is not enough collateral to back all the debts in the system, which will collectively come under increasing pressure when the system stops expanding.
Raul, just to be clear, I am not predicting the hyperinflationary collapse until the last scene in Act V. I think we are still in Act IV, or maybe even still at the end of Act III (recall that it took half a year to get from the Bear Stearns collapse to the Lehman collapse, and things tend to move faster during the acute phase). Up until the last scene in Act V, I think the story will be deflation, deflation, deflation. That falling velocity is part of the reason they will need to replace credit with base money to keep everything afloat in nominal terms. As you say, we have already hyperinflated with the biggest money supply increase in history, and that will only continue until the system breaks. The tinder was already a big pile to begin with from the petrodollar, and it just keeps piling up. The only thing that is missing is the spark, the sudden collapse in confidence that turns everything moving 180 degrees in the opposite direction in a moments time.
I think it’s a question of personality. Hard money types, delayed gratification types, fiscally responsible types, sustainable living types would prefer to take the pain now, solve the problems, and get on with life. Bring on the crash! Bring on hyperinflation! Bring on the jubilee! Easy money types, live for the moment types, put it on the credit card types, and drill baby drill types would prefer to pretend that the depression is only a figment of your imagination. Unfortunately these people are running the show, and they are a sizable majority.
There are plenty of petrodollars parked overseas. There is already enough base money out there for a hyperinflation — the dollars have already been printed. The only thing required is a spark, a loss of confidence. Meanwhile, as more and more credit money gets converted to base money, the Fed keeps adding more tinder.
Diogenes, as I gaze into my crystal ball, here is what I see… two alternatives, but with the same result. In the first alternative, the gold market freezes up first, perhaps in connection with a political event. The result is a collapse in the monetary plane as physical gold becomes the only refuge and the currencies suffer a loss of confidence and hyperinflate. That could be the event that overcomes the present inertia.
The second possibility reverses the sequence. The currencies hyperinflate and trigger the rush into bullion. Only a small handful of people thought it conceivably possible that the dollar could hyperinflate and were predicting that outcome in September 2008. Now the view is more widespread that it is at least possible. Watch what happens if there is another deflationary swoon. If that happens, you are right, there’s all that unrepayable debt. But it will be repaid in nominal terms. The lenders will not lose a cent as all those bad debts become converted to base money. Historically money came into existence in the form of debt, but in a deflationary envirornment it is as you say — nobody wants to take on new debt. So base money becomes a much higher percentage of the money supply. As that process continues the Fed and other central banks lose more and more control. At some point velocity can and will change direction immediately. I am not looking for a gradual change. I am looking for a sudden reversal that will become unstoppable. You speak of pundits making such predictions for the last six years as if six years is a long time. But is it? For someone watching the pot waiting for it to boil, six years seems like an eternity. But the water will boil. It’s the only possible outcome.
Given the policy response from and after 2008, this had to happen. With interest rates at zero, all the pension funds will collapse unless we see nominal increases in asset prices, — and the only way to see nominal increases is for the central banks to be the buyer of last resort.
This will go on until the system resets. What will that look like? I don’t think it will be as bad as many fear. I expect a rush into physical bullion at some point, possibly precipitated by the PBoC and/or the Russians openly bidding for all available bullion (which might be triggered by a political event). That will collapse the futures market and lead to a week long banking holiday worldwide. The central banks will save all debt in nominal terms as all currencies will hyperinflate, but in real terms the debt will crash. Much of the world will resort to a barter economy for three months, but that will be short lived. Gold will resume trading at a significantly higher value and will de facto replace the dollar as the reserve currency (along with oil), but without a return to a fixed exchange standard. The dollar will become like the peso. It will continue to exist, but its purchasing power will be only a tiny fraction of what it is today. And after three months the world financial system will become stable again and we will “start over” in a whole new world financial order.
