This Post takes an article from Mike (Mish) Shedlock’s blog, edits and unpacks it with my commentary [in green].
I wonder if you would be able to comment on this from Bill Gross in For Wonks Only:
“A credit-based financial economy (as opposed to pure cash) depends on an ever-expanding outstanding level of credit for its survival. Without additional credit, interest on previously issued liabilities cannot be paid absent the sale of existing assets, [Yes]
which in turn would lead to a vicious cycle of debt deflation, recession and ultimately depression. [ Depression… ? I don’t think so. Unless you are a big money investor. Then yes, you would be subject to a vicious cycle of debt(and asset) deflation. I can see how that could be depressing – if you were losing Nett Worth – what a tragedy, for you… ]
Put simply, if credit needs to expand at 4.5% per year, then the private and public sectors in combination must create approximately $2.5 trillion of additional debt per year to pay for outstanding interest.”
This seems to correlate to reality 100% but the implications are stunning. It means that assets must increase in value at the rate of the original loan plus all interest payments ever made.
I always assumed that debt levels would just reach a very high plateau and stay there but Gross is saying that is not possible.
If the system we have, requires the interest to be created every year (in the form of new loans) to survive that seems like the very definition of a ponzi scheme. [what…Fraud you mean…? I’m shocked – shocked I tell you. Or… alternatively, the biggest Crooks in the room are not the mafia, but the Bankers – ya think…? ]
We are in this mess precisely because of fractional reserve lending and never-ending policy of Inflation by central banks that do not seem to understand the long-term ramifications of exponential math.
There is nothing wrong with credit expansion used for productive purposes. If we had a 100% gold-backed dollar without FDIC, bad debts would be extinguished automatically. Interest rates would be low for low-risk ventures and high for high-risk ventures, with lenders taking the risk. On high risk ventures, some projects would lose and some win, as it should be.
Deflation (a natural state of affairs because of rising productivity) would provide price stability central bankers now claim they want.
But that is not the world we live in.
Unfortunately, we live in a fiat world, not a 100% gold-backed dollar world. It’s a recipe for disaster.
Thanks to central bank encouragement and unnaturally low rates for a fiat scheme, credit is out of hand. Loans that have been made cannot possibly be paid back.
Worse yet, real wages are falling because of central bank inflationary policies in a productivity-driven world increasingly dependent on robots, not human labor. [Labour is the one ‘Cost’ that can be reduced – regardless of the larger-picture cost to the real economy] Fiscal policies, interest rate policies, public unions, and inflationary policies in every phase of government make it likely that companies will use robots at a far faster pace than they would otherwise. Something has to give and it will.Debt Malinvestments and the Zero-Bound Problem
Pater Tenebrarum (of the Acting Man blog) writes:
The reason why debt was able to grow to such immense proportions is that interest rates fell for over 30 years. But now we have arrived at a critical juncture, because interest rates can no longer go any lower. The possibility to refinance existing debt again and again to lower its cost has come to an end.
The size of a debt is immaterial if the debt has been used for productive purposes, and is so to speak ‘self-liquidating’. If you employ this money to produce goods that have a net profit margin, the repayment of the debt plus interest poses no problem.
But a lot of debt in the system today is a “dead weight” that will produce nothing. All government debt is only a reflection of past spending, and the funds have been 100% consumed. [an argument could be made that some government debt is a productive investment, i.e. education, but it is a minority of .govt spending, and real cost control and efficiency measurement there is missing in action]
In the realm of corporate debt, which may be considered to be productive (in principle), there is the problem that many of the investments that have been undertaken are really malinvestments, as economic calculation has been falsified by monetary pumping.
The problem is that central banks believe in inflating debt away and keeping prices “stable”. So we currently have a systemic [institutionalised] bias toward more and more debt expansion. Obviously, debt service costs in this system are slated to rise, while an offsetting creation of wealth is no longer guaranteed.
You can see this from the fact that more and more new debt is added per dollar of GDP growth. So Gross is quite correct that there is a problem – the problem is the ongoing bubble. Such a bubble does indeed require a constant acceleration in debt and money supply to keep going. Seems to me that it is a system that is coming ever closer to a cliff.
On the Edge of a Cliff
- Japan is on the edge of a cliff
- Europe is on the edge of a cliff.
- China is approaching the cliff, if not already on the edge.
- US is approaching the cliff.
No one can be sure when some country is going to fall off that cliff, but exponential finance, Ponzi financing schemes, and zero-bound interest limitations suggest the outcome is sooner rather than later.
As I have stated before, a global currency crisis awaits. [Yes – this!!!]
And we had better get our heads around this approaching currency crisis.
It will be the most important factor in the well being of our society for the next couple of generations.
Our Reserve Bank blithers on about how our currency is too high, or interest rates need to be this or that.
It is all bullshit.
The Reserve Bank wouldn’t know what a correct level was if it bit them on the bum.
And a large part of that is because of the way we choose to be a part of the international trading and currency system.
But because we are such a microscopic participant in that, we are going to get slaughtered by the manipulations from the big players.
There is a saying, if you are playing in a poker game, and you haven’t figured out who the patsy is within the first five minutes – then it is you.
Here’s the truth of it…
If we let our future be dictated by criminals who manipulate money for fraudulent purposes, we are worse than patsy’s, we are lazy, stupid fools who deserve what happens too us.
And the big Reserve Banks ARE criminal enterprises – make no mistake about it.
They will talk about sound money, and prudent supervision.
But when their actions are the complete opposite, time after time, then the truth is in their actions.
Look at what they DO, not at what they SAY.
They “loan”(print/forge/pluck from thin air) money at essentially zero percent interest to big banking and finance institutions.
They then “invest” it in “assets” – and somehow that is supposed to help the economy.
That is complete bullshit. It helps the big financial players.
And they have the political system and the monetary regulators bought and paid for.
The problem is that those assets they are buying (for free) are what we would own if we weren’t outbid by phoney/fake money.
“We” take their fiat cash, and think we are rich – more fool us.
Their plan of forever-inflation (which inflates away their “debt”) eats us alive.
And now we have to pay for the use of what was ours with their depreciated money.
They give us a dollar, but then when we come to spend it, suddenly it is only worth 80 cents…
And then after 10 years it is only worth 60 cents.
this dynamic rolls on throughout the whole economy, as our incomes stagnate, and our expenses increase.
Expenses dictated to us by the foreign ownership of all the major goods and services.
Where the currency thing comes into it is that in theory our floating exchange rate means that our currency will float to create a level of equivalent value between domestic and foreign goods and services. One litre of our milk equals one litre of their petrol.
And that ‘s all fine and good – except where the criminals have figured out a scam to get around the system.
Ohh, and “getting around the system”… that means figuring out a fraud to perpetrate on the patsy.
if they are “getting around the system” that doesn’t make them clever – it makes them criminals.
Fraud is fraud, and is a crime, regardless of whether you have found/manufactured some loophole or other.
And the governments and their agencies that allow it to happen are co-conspirators.
However, back to the currency issue:
When we make something here and look to sell it abroad, we need to ensure that what we get paid for that, is paid in genuine money.
Not monopoly money.
And at this point, that is about all there is circulating in the world.
At some point, when the Ponzi scheme collapses, we will end up with useless “cash”.
and they will end up with all the actually valuable assets.
They are not stupid – they know what is actually worth something.
Food, water, shelter. (and telco’s, transport, energy, education… )
Those are the assets that everyone needs, and will pay dearly to be supplied.
The purveyors of the Monopoly money will have ended up, like the game, sitting on all the hotels and demanding your cash every turn and every time you land on their properties. They will bleed you dry. Because their survival (and comfort and luxury and power) is more important than yours.
They will make slaves of you if you let them. That is what their ilk have done throughout recorded history. And the same patterns get repeated again and again. Because most people are too ignorant or lazy to stop it being done to them.
However, again, that is the broader picture.
In respect to currency, a country like New Zealand needs to structure their currency and trade in such a manner that it can’t be gamed.
And in that respect, this is where the idea of a gold standard is significant and important.
When we trade on the international stage, we need to ensure we are being paid in “real” money.
And apart from gold, it is a really short list of alternative options.
So assuming we go with gold, it would mean that when some-one wants to buy our milk (for example), they would need to convert whatever currency they have and use, into the currency we will accept. Typically in the recent past, that commonly accepted currency would have probably been the US dollar. But seeing as the USA is run by the biggest crooks on the planet, that is not really a good bet, trade or deal for the future.
What with computers and certain derivatives, using a “gold standard” is completely do-able.
It would take a while for everything to adjust to the new system.
But we need to do it – as soon as possible – and hope we have time to transition.
Because the current system is both unstable and fraudulent.
And if (when) the current system collapses, we need to be holding something that actually is worth something.
Piles of hyperinflated cash, in a marketplace that doesn’t trust any fiat cash, isn’t going to buy you squat.
When some of the best minds tell you a currency crisis is coming, you should probably listen.
And what they are telling you is that the medium of exchange we are all using – will fail.
i.e. NOT WORK.
Inconceivable as that concept is for most people.
And just to reiterate one more time – the reason it will fail, is because it has been fraudulently manipulated – on a massive, mind-boggling scale.