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Here’s What We’ll Try — And What Will Fail — Next

The UK’s Guardian newspaper, of Edward Snowden leaks fame, just published a good overview of the world’s recent financial missteps titled The world economic order is collapsing and this time there seems no way out.

Some excerpts:

The heart of the economic disorder is a world financial system that has gone rogue. Global banks now make profits to a extraordinary degree from doing business with each other. As a result, banking’s power to create money out of nothing has been taken to a whole new level.

The emergence of a global banking system means central banks are much less able to monitor and control what is going on. And because few countries now limit capital flows, in part because they want access to potential credit, cash generated out of nothing can be lent in countries where the economic prospects look superficially good. This provokes floods of credit, rather like the movements of refugees.

The false boom that follows seems to justify the lending. Property prices rise. Companies and households grow overconfident about their prospects and borrow freely. Economies surge well above their trend growth rates and all seems well until something – a collapse in property or commodity prices – unravels the whole process. The money floods out as quickly as it flooded in, leaving bust banks and governments desperately picking up the pieces.

The result, says the Guardian, is a crisis in three acts. Act one was the 2008 bursting of the housing/derivatives bubble that nearly wiped out the global banking system. Act two was the 2011 euro crisis in which the idea that Greek, Italian and Spanish bonds were equivalent to German paper was abruptly discredited, again nearly wiping out the big banks.

Act three, now in progress, is the bursting of the emerging markets bubble, led by China (great stat: “China manufactured more cement from 2010-13 than the US had produced over the entire 20th century.”)

China’s banks are, in effect, bust: few of the vast loans they have made can ever be repaid, so they cannot now lend at the rate needed to sustain China’s once super-high but illusory growth rates. China’s real growth is now below that of the Mao years: the economic crisis will spawn a crisis of legitimacy for the deeply corrupt communist party. Commodity prices have crashed.

Money is flooding out of the EMEs, leaving overborrowed companies, indebted households and stricken banks, but EMEs do not have institutions such as the Federal Reserve or European Central Bank to knock up rescue packages. Yet these nations now account for more than half of global GDP. Small wonder the IMF is worried.

So far so good. But then the Guardian ruins its perceptive analysis by proposing more of the same:

The world needs inventive responses. It needs a bigger, reinvigorated IMF whose constitution should reflect the global balance of economic power and that can rescue the EMEs… It needs western governments to launch massive economic stimuli, centred on infrastructure spending. It needs new smart monetary policies that allow negative interest rates.

This isn’t surprising but it is instructive because it represents the thought process at work in the upper echelons of virtually all the major economies: What we’ve tried has failed, but the fault is with the execution rather than the concept. We didn’t go big enough. We didn’t borrow enough money, we didn’t build enough roads and bridges, we didn’t push interest rates down far enough. So let’s hit the emerging market crisis with everything: bigger multinational institutions making vastly larger development loans, rich-world governments ramping up spending and paying for it with borrowed money, and central banks pushing interest rates down to negative mid-single digits.

For those who view this as the financial equivalent of a junkie doubling the dose of heroin to ensure a permanent high, the question isn’t whether some mutant strain of easy money will save us, but what dosage will turn out to be fatal. And of course which asset classes will benefit from the intervening high.

At the risk of sounding like a broken record, the negative interest rate/high debt/rapid money growth world envisioned by the Guardian looks like a precious metals paradise.

35 thoughts on "Here’s What We’ll Try — And What Will Fail — Next"

  1. “And he causes all, the small and the great, and the rich and the poor, and the free men and the slaves, to be given a mark on their right hand or on their forehead, 17and he provides that no one will be able to buy or to sell, except the one who has the mark, either the name of the beast or the number of his name.”
    With all the world’s nations producing fiat currency faster than they can create wealth (pathological borrowing) and pretending to not know what to do. (There IS only one solution.) The risk of failure rises. That failure could be precipitated in many ways. Our tremendous debt means that our wealth has been pre-spent. And with a hundred or so trillion of yet unspent but promised to spend commitments, borrowing for new and improved government spending projects begins to look ridiculous. Especially when you realize that the government is STILL subsidizing most of it’s programs.

  2. Where I live inflation is clipping along faster than during the Carter administration ($7.49 for hamburger at Safeway as of this week? Rents up more than 50% in 24 months time? Come on, just got my auto insurance renewal and for the second year in a row it is up, now more than 30% since 2013, and that is in spite of my clean record and 58th birthday impending, and trading my BMW convertible for a pickup truck).

    My disabled veteran COLA for 2016 is zero percent because they say there is NO INFLATION!

    In such a world there is nothing but collapse and despair coming. In such a world if anything close to a real inflation rate were used as the GDP deflator we would see that our economy is in a second collapse that rivals the 2008 collapse, they are just hiding it behind fake inflation stats.

    1. Sanguine? The outlook just looks more bloody to me …. blood in the streets. Wars. Pestilence. Cash bans. Capital controls. Police state. Full on tyranny.

      Send thank you notes to Bernanke, Yellen, et al. and don’t forget to send flowers to Krugman.

  3. One can only hope when negative interest rates arise, people will pull their money from the banks and force the collapse sooner than later.

  4. Considering the fact that the main problem is excessive global debt and inflated asset prices because of it chances are whatever the financial authorities decide to do makes gold/silver a long term good investment.

  5. It’s only money. No intrinsic value, just pieces of paper with pictures on them so we don’t have to kill each other to eat. But people gotta eat, so stuff with real intrinsic value (food, energy, water) is where it’s at….

  6. Want to stick it to the banks & financiers?
    The next President after the current Degenerate in Chief in the White House leaves must reinvent Executive Order #11110. Executive Order 11110 was originally created by JFK in June of 1963.,that would really stick it to the Fed & the other vultures in the financial sector.
    This new president would need to be sure to beef up his personal security & make sure he doesn’t have a Vice President like LBJ,& last but not least,avoid riding around in open unprotected limousines!

  7. The simple truth is that the banks &,the financial sector in general,are like locust,they will eat up everything in their path until they destroy society & when there is nothing left for them to feed on they will be the last to go under! Either the American people shut them down of it will be the end for the American people!
    It’s either us or the Gordon Gekkos of the world,both can’t survive!
    John Dalberg,1st Baron Acton (Lord Acton) famously said that “The Issue that has swept down the centuries & will have to be fought sooner or later is the people vs.the banks”

  8. But first we will see 40 year mortgages, 15 year car loans, Gov matching of 401k’s, More confusing tax laws, with more tax audits, ban on American’s living overseas, pay for public schools fees. We haven’t seen the hyperinflation hit yet, military draft, Civil unrest, shortages and rationing. There are a whole lot of tricks left in the book to be pulled. Don’t expect the bottom to fall out yet. We need at least one full term of Hillary at least to see the end.

    1. Alan,your assumption is that the situation will continue to be controlled by the financial elites in the back rooms of banks & imposed on an unsuspecting public by the politicians.Their whole game plan is based on secrecy & control of the public by brainwashing it with constant repetitions of the establishment narrative.The narrative is starting to unwind & the public is starting to awake!
      When a frightened public starts to get involved in these financial matters the situation will no longer be controllable.
      When the middle class finally goes down for the count the consumer economy will crash with it.A deflated consumer economy that has crashed means no economy at all & no economy means complete chaos!
      Our society & civilization is not a perpetual motion machine,..it won’t just go on & on in perpetuity,sometime soon it will crash as social & political consideration that are not strictly financial will come into play!

    2. “We haven’t seen the hyperinflation hit yet…”

      A) define hyperinflation.

      Does not need to be 1,000’s of percent to qualify, only needs to be widespread and persistent inflation over the 20% rate.

      I do not know about where you are but in this region we ARE seeing hyperinflation in three of the most heavily weighted sections of the CPI. And I grant that some of it is regional for reasons that do not necessarily affect your area the way it has mine, but when I see rents exploding upwards at more than 50% in two years and GAINING momentum, food up 40% in aggregate with some staples like hamburger up 300% in the same time (as of this week $7.49 a pound at Slaveway), insurance (auto AND health) up more than 30% in the last 18 months and a 33% increase for health insurance in January, and a host of other prices rising just as fast, well, that to me is hyperinflation.

      And it is just getting started. Economic collapse is the only thing that will trigger disinflation or deflation back to normal prices.

  9. If you haven’t started battening down the financial hatches already, I don’t know what to say. I do not know what will happen, but I can assure you, whatever it is, it will be bad.

  10. “The world needs inventive responses….” Such as more of the same, only bigger? Hardly inventive, is it?

    Simply handing every family $2,000 would be more effective than “infrastructure building.” This is not the era of FDR when we got back additional dollars in increased production for every dollar spent. At least if you give a working class family cash, they’re going to spend it at parity or (taking inflation into account) close to parity. Better than printing it and giving it to banks and getting back what, 5 cents on the dollar? Helicopter drops to the bottom 90% would be more consistent with The Guardian’s politics than a bigger (fer chrissake) IMF, usually the punching bag of the left and rightly so. “Rescue” the EME’s? Are they even passingly aware of the history of the IMF???

    I had another of those moments, reading the above, when I thought “Oh my god… they really are going to inflate to oblivion and cause a global Weimar. They really are.” I still hope not, but the collective blindness is astonishing.

    1. The alternative is for the “monetary authorities” to just accept that debt saturation is extant and that there simply can’t be the roughly 2% per year ideal growth rate ad infinitum. It’s not clear to me that that would collapse the system or just cramp some lifestyles.

    2. They don’t care,
      The Guardian is just another establishment rag & it’s scribblers write what they are told to write.Truth & logic have nothing to do with anything,..this is all for the benefit of the Narrative!

      1. exactly. just see the first paragraph:

        “The heart of the economic disorder is a world financial system that has gone rogue. Global banks now make profits to a extraordinary degree from doing business with each other. As a result, banking’s power to create money out of nothing has been taken to a whole new level.”

        No mention of the role of Govt and Central Bankers who are the key enablers of the disorder!! Centralization of regulatory authority finds no mention, but the conclusion is arrived at nonetheless – it’s the fault of some generic “banking” action!

    3. If you want to jump start hyperinflation, just give people cash. That is why they don’t do it. Better to give it to their cronies and themselves.

  11. Having just returned from vacation, I’m so mellow and centered now that I just can’t imagine that any of the ideas these knuckleheads are suggesting will actually happen. Most people don’t understand negative numbers, for example, so negative interest rates will just get a lot of people upset. It already “pays more” to pay down debt than save at near zero rates so negative ones will only be like trying to squeeze blood out of turnips. “Helicopter money” continues to be my personal favorite act of desperation but for some reason it doesn’t get a lot of press (I guess that’s just too crazy!!), so I don’t know what they’re going to do. Another idea would be to forgive/”write-off” all existing debts and then start the whole process over again. Lenders may balk but the money they lent wasn’t real anyway, so they’ll get over it.

    1. Helicopter money causes consumer price inflation difficult to obscure and that is specifically what isn’t wanted. People act when they recognize something hurting them. Storing consumer price inflation by tying up the currency as “potential money” is the current plan. Helicopter money signals an increase in the downward slope

      1. Maybe. It depends upon what people do with their windfall. If they use it to pay down debt then price inflation would not necessarily rise. If they use it to by consumer stuff then yes, but why would they complain if it’s free? Everything would eventually go up including wages and salaries to reflect the devaluation. I bet people would choose the “free” money even if they knew it would cause price inflation. Personally, I would use it to buy PMs.

        1. I am already seeing consumer prices rising here at more than 20% annually so a little free money would just keep a roof over my head. As it is I plan to file chapter 7 and permanently leave the USA.

        2. “Everything would eventually go up” that is the point and only those who still had a job at a company that survived might have a chance of a raise. Unlikely in my view

    2. What we are seeing is an economic orgy. The emperor has no clothes but then neither does anybody else. The public is dancing in the streets butt naked as the emperor passes by. But winter is coming and when it hits, people will realize just how naked they are.

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