Misadventures and Mishaps

Over the past decade, in the wake of the 2008-09 debt crisis, the impossible has happened.  The sickness of too much debt has been seemingly cured with massive dosages of even more debt.  This, no doubt, is evidence that there are wonders and miracles above and beyond 24-hour home deliveries of Taco Bell via Door Dash.

 

The global debtberg: at the end of 2017, it had grown to USD 237 trillion. Obviously this is by now a slightly dated figure, as debt issuance has continued with gay abandon this year. [PT]

 

But how can dosages of more debt be the cure for too much debt?  Can more Cutty Sark be the cure for a dipsomaniac?  Certainly, in both instances, and after some interim relief, the cure always proves to be much worse than the disease.

Without question, a moment of clarity is approaching that will bisect the world of today from the world of tomorrow, like the Patriot Act bisects the present world from its prior state of bliss.  Thus, what follows is a rudimentary preview of what’s in store.  But first, some context is in order…

The fake money system – a system centered on debt based legal tender and centrally fabricated interest rates – produces booms and busts of greater extremes with each progression of the business cycle.  This century alone we’ve experienced two iterations of these boom and bust scenarios.  First the dotcom bubble and bust.  Then the housing boom and crash.

 

The “well-contained” end of the housing boom…  [PT]

 

Make no mistake, these booms and busts were anything but garden variety gyrations of the business cycle.  In fact, the Federal Reserve’s finger prints are all over them.  The booms originated from Fed monetary policy misadventures.  The busts were triggered by Fed monetary policy mishaps.

 

Anatomy of a Mishap

Presently, we are closing in on a decade’s long economic boom and bull market in stocks. This boom, like the boom of the mid-2000s, advanced during an extended period of monetary policy misadventures. This was the ZIRP and QE misadventure from 2009 through 2015, which distorted financial markets and disfigured the economy.

The last several years of this boom and bull market, however, have been a monetary policy transition period. First the Fed tapered back QE. Then the Fed began ever so slightly reducing its balance sheet and raising the federal funds rate.

 

Total assets held by the Federal Reserve system and the federal funds rate. It will be interesting to see at what level the next bust will be triggered. In fact, busts have already been triggered elsewhere in the world, as a number of emerging markets have recently gone over the cliff. [PT]

 

Obviously, the Fed’s tightening operations over the last several years have been done with kid gloves.  The tightening increments have been subtle. They have also been telegraphed from a mile away.  But that doesn’t mean a monetary policy mishap, and subsequent bust, will somehow be averted.

The crossover into the monetary policy mishap stage is never apparent until well after the fact.  In truth, the crossover may have already happened… and we just don’t know it.  The mishap will come as a surprise.

On a glorious day, much like today, when everything appears to be unfolding according to plan, all of the suddenly, out on the margins, an emerging market economy will be stricken by a debt crisis and go kaput.  Moments later, during much confusion and panic, another two or three more emerging markets will also croak.

 

Is something sinister lurking in Lehman’s ruins? [PT]

 

Then Fed Chair Powell, just as Bernanke did at the onset of the subprime mortgage meltdown, will step forward with calming confidence and declare the sickness to be contained.  But the reassurance will be short lived.  Because the contagion will have already spread to the center of the financial system.

Then, to Wall Street’s astonishment, a major financial institution will collapse – like Lehman Brothers a decade ago – and the flow of credit will be reduced to that of cold molasses.  After that, things will really get out of hand…

 

Honest Work for Dishonest Pay

The impending crisis, intensified by the dual stressors of currency and trade wars, will bring with it a vast collection of state sponsored solutions to save the world from itself.  Any and all ideas, ranging from the absurd to the ludicrous, will be put to the acid test so long as they meet two very critical criteria. They must preserve the status quo and further concentrate wealth into the hands of the few.

One trio of bad ideas, which was burped into the atmosphere last weekend by former IMF chief economist Olivier Blanchard, is for the Fed to combat the next recession by buying stocks, financing the deficit, and directly purchasing goods.  Surely, Blanchard’s a clever fellow.  He’s even a Professor of Economics emeritus at MIT.

 

Optimized credit crunch outcome. You need a scientific monetary policy for that… [PT]

 

Yet, predictably, Blanchard didn’t mention that the Fed would need to create money from thin air so that it could buy stocks, loan it to the government, and go on its massive spending spree.  Perhaps these massive helicopter money drops would prevent asset prices from deflating.  But they would also destroy any remaining semblance of market-derived pricing and perpetuate an upside-down economy.

Blanchard also didn’t mention that these actions would transfer the ownership of publicly traded companies, and future tax payer labors, to the Fed.  Conceivably, there are infinitely many places where this could all lead – though we don’t suspect any of them would be very appealing.

 

Former IMF chief economist and arch-Keynesian Olivier Blanchard – a well-known fount of truly atrocious voodoo-economics ideas, one nuttier than the next. The books in the background of this picture are probably meant to indicate that he’s been properly indoctrinated (they certainly haven’t made him any smarter). We have yet to come across a headline with his name in it that doesn’t cause us to inwardly cringe. Where do they find these people? Well, this one they found in France, inter alia home to luminaries like Marxist economist Thomas Pikkety, a country in which government spending has reached a staggering 58% of GDP, which has become one of the poster children for economic stagnation. It is hard to believe that economists like Turgot, Bastiat or de Molinari also came from France. What has happened to the French classical liberal tradition? Very little of it, if anything, seems to have survived. If we sound less than respectful it is because we consider people like Blanchard a danger to civilization – as are all central planners and would-be central planners. It is utterly appalling how much outright economic nonsense is paraded as the “solution” to the rolling catastrophe the interventionism of bureaucrats of his ilk has brought about in the first place. [PT]

 

One direction Blanchard’s plan would take us is to a place where taxpayers and the company’s they work for would be reduced to milk cows not for the federal government… but for private bankers.  This, in turn, would complete the central banker’s long desired wealth extraction scheme.

Still, that doesn’t mean things would be all bad. Here at the Economic Prism we are eternal optimists. We see the glass half full. We make lemonade with our lemons. When we spill salt, we throw a pinch over our left shoulder and right into the devil’s eyes.

Moreover, as a milk cow for private bankers we’re confident we would still find plenty of satisfaction – and have a little fun too – while providing an honest day’s work for a dishonest day’s pay.

 

Charts by Bloomberg, St. Louis Fed

 

Chart and image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 

 

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7 Responses to “Honest Work for Dishonest Pay”

  • Hans:

    An excellent article today in Barrons.com

    https://www.barrons.com/articles/were-using-the-future-for-a-fiscal-dumping-ground-beware-trillion-dollar-deficits-1536975444?mod=hp_RTA

    This is one of the best pieces I have read regarding federal spending
    and revenue.

    Hard decisions will have to be made, which will expose the largess of
    all of these programs.

  • Hans:

    Mr Gordon, our Concierge of Debt. In less than two decades world debt
    has exploded three fold !! And how much of this is second and third
    world debt? Which will in times of stress go into and stay in default.

    In only a short period of time, when interest rates normalize and
    the debt load become quite precarious, as interest payments soar and
    soar, taking an ever large chunk of the budget.

    Then all that is need for the proper ignition and explosion, is the long
    awaited business cycle shifting gears into reverse; which of course will
    require more debt in more to stem the collapse.

    All too many economies are operating under the auspices of your unelected
    and theme planners known as the central banks. Just like the CB, debt will
    reveal its inefficiencies and non-productive capital, which will exact a pound of
    flesh.

  • utopiacowboy:

    But Blackstone billionaire Tony James was saying today that he doesn’t see an economic downturn anywhere on the horizon? You can’t both be right?

  • How many times do you have to be corrected on this?

    The legal tender is not debt based.

    Why do you keep propagating that lie?

    • TheLege:

      Lol. If this is not how it works, please explain how you think it does? It should be obvious that, if the banking system is capable of providing practically unlimited dollars at a (virtually) fixed price that those dollars must, by definition, be created out of thin air.

      • RedQueenRace:

        Well, Lege, you’ve opened yourself up to a pedantic discussion of “legal tender,” “money” and “bank credits” that if one were to go simply by the laws as written would be correct, but which are meaningless based on how the system works in practice. Good luck.

      • Hans:

        TheLege, I have task Mr Didley on other similar issues
        only to be presented with theoretical and unworkable
        nonsense. He is a student of theory, rather than pragmatically
        concerning himself of a very likely international debt crisis, which
        like the govcession of 2008, will have serous and damaging effects.

        Not only can the banking industry print money but the
        FRB as well.

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