A Deflating Bubble

PARIS – “Cor-ROO-ption! Cor-ROO-ption! Cor-ROO-ption!” It only took a couple of minutes to realize our taxi driver had lost his mind.

“You can’t trust anybody in Buenos Aires. Not the government. Not the police. Not the taxi drivers.” Especially not the taxi drivers…

Back to our race across Buenos Aires in a minute. First, we pause briefly just to check in on the markets.

The Dow fell 290 points on Friday, a disappointing day… and potentially very worrisome for the Fed. Failing to raise rates as promised may have prevented the stock market from crashing on Thursday. But it did nothing to keep prices from falling on Friday.


DJIAThe DJIA, daily – since the FOMC announcement, the trend has changed to down again … click to enlarge.


As our friend Richard Duncan, who heads up advisory service Macro Watch, recently pointed out, “excess liquidity” has been largely responsible for driving up stock market prices for the last seven years. Now that excess is disappearing.

Much of the liquidity came from foreign central banks – most notably China – recycling export dollars back into U.S. financial assets. Global liquidity increases when central banks print money and buy foreign exchange. But as Richard warns, “It shrinks when central banks sell their foreign exchange reserves, as is happening now.”

Total U.S. dollar foreign exchange reserves peaked in 2014. They’re now falling. Also, instead of being the engine of growth for the world economy… and expanding its consumption of raw materials… Chinese demand for resources is shrinking.


China ReservesChina – foreign exchange reserves plunge – click to enlarge.


This leaves commodity-exporting nations with lower sales, higher debt burdens, and staggering currencies. And it leaves the U.S. with consumer price inflation at near record lows.


More Fed Easing Ahead

Nobody wants the Fed to tighten. And probably nobody less than the Chinese, whose already shaky economic model will be in real trouble when the Fed finally raises interest rates.

The Chinese currency, the renminbi, is pegged to the dollar. Higher interest rates in the U.S. would lead to a stronger dollar. And a stronger dollar would automatically lead to a stronger renminbi, leaving Chinese exports even less competitive versus its rivals.

That’s bad news for the Chinese economy. It largely depends on selling things to foreigners – many of them Americans – who don’t have the money to buy them. Most buying is done on credit. As interest rates rise, credit becomes more expensive. And China’s exports take a big hit.


China -current account, reserves growthChina’s current account declines, and with it reserve accumulation turns negative. Reserves growth is primarily driven by capital flows these days and has been negative even during months when a trade surplus has been recorded – click to enlarge.


This is not just a problem for the Chinese. As China’s export machine splutters, world trade declines… and the world enters a recession. Make no mistake: The global credit bubble is deflating.

The Fed won’t raise rates under these conditions. Instead, at the first sign of real panic, it will ease credit conditions further.
Our taxi driver had picked us up at the ferry, after we returned to Buenos Aires from a trip to Uruguay. He spoke Spanish with what sounded like a Russian accent. His hair was curly and bushy… and stuck out on both sides of his head. His face was thin and long. His eyes were wild.

And he was driving through the middle of town in a rickety old taxi – a tiny Chevrolet model never sold in the U.S. – at 70 mph, weaving through traffic dangerously.

He looked like the sort of man who might have assassinated Archduke Franz Ferdinand. But it was our life we were worrying about now. He was crazy. But he must have some survival instinct, we thought; otherwise, he wouldn’t still be on the road.


principGavrilo Princip, the guy who shot the Archduke Franz Ferdinand – these days, he drives a taxi in Buenos Aires….and is complaining a lot.

Photo via Wikimedia Commons


“I have a PhD in micro-chemistry. And look at me… driving a taxi. On Sunday! Cor-ROO-ption

“Everything is corrupt in this country. Everything. That’s why 97% of the people live in poverty.”

“Ninety-seven percent seems like a lot,” we ventured.

“More than that!”

We looked out the window. The part of town we were rocketing through must be where the 3% who were not living in poverty lived. They all looked well fed. Well dressed, too.

Women wore the highest heels we have ever seen, maybe 9 inches high… with a 4-inch platform under the fall of the foot. These heels are supposed to make women look taller and sleeker, but we were so curious about the physics of them we scarcely notice the women wearing them. Almost all the young women of Buenos Aires are walking on stilts!

It was a beautiful spring day in the city. The sun was shining. Trees were in bloom… some in bright red… some bright yellow… and some had what looked like large cotton balls hanging from their limbs. There was even one tree we saw that, improbably, had a mixture of purple and white flowers.

The sidewalks were full with young people… many of them couples pushing strollers and baby carriages. Jugglers performed on street corners… stepping out in front of traffic at stoplights… then hastily trying to cadge some tips before the light changed.

In the parks, artisans set up their stands – hundreds of them – offering everything from honey to silver bracelets to picture frames made out of cactus.


It’s All Corrupt, Anyway

We are most familiar with the Palermo neighborhood. Shops and restaurants change there so quickly it is hard to keep up. We get used to going to a coffee shop for breakfast. When we come back six months later, it’s turned into a boutique selling shoes.


DSC_7151A cobble-stone street in the Palermo neighborhood in Buenos Aires

Photo credit: Brian Barbutti


It reminds us a little of Venice Beach, California. The buildings are rarely more than two or three stories high. Many are graceful and grand reminders of a more prosperous city a century ago. Many have since been transformed into gritty storefronts, apartment houses, restaurants… even hotels.

Rarely does this sort of conversion improve a building; most often, it ruins it. But the experimentation and innovation continues. We’re often happily surprised that on the third or fourth try the result is quirky and interesting. Our driver dodged a pickup truck and pulled up to our hotel. He thought for a second and then announced …

“That will be 280 pesos.”

“What? It’s normally only 100 pesos.”

“But I’m not working on a meter.”

“What are you working on?”

“It’s 280 pesos. Besides it’s Sunday.”

“I’ll give you 150.”

“Okay. It’s all corrupt, anyway.”


Image captions by PT


Charts by: stockcharts, Financial Times/Haver Analytics


The above article originally appeared as  “Cor-ROO-ption! Cor-ROO-ption!” at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.




Dear Readers!

You may have noticed that our header carries ab black flag. This is due to the recent passing of the main author of the Acting Man blog, Heinz Blasnik, under his nom de plume 'Pater Tenebrarum'. We want to thank you for following his blog for meanwhile 11 years and refer you to the 'Acting Man Classics' on the sidebar to get an introduction to his way of seeing economics. In the future, we will keep the blog running with regular uptates from our well known Co-Authors. For that, some financial help would be greatly appreciated. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


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