Sunday, March 8, 2020

Major Worldwide Crack-up, Crisis and Depression

In my very recent post "1971-The Beginning of the End: Massive Monetary Disorder, I explain why unsound money is really the root cause of most of the economic and social disorder in the world today.

Nixon abandoned our last vestige of sound money by cancelling the Bretton Woods accord (the gold-backed dollar) in 1971 to fund the Vietnam war.  That has led to a 50 year period of rising debt, budget deficits, trade deficits, inflation, financial asset inflation, repeated bubbles and the resulting instability (collapsing bubbles) and deep recessions resulting in falling living standards, inequality, monetary disorder, instability, the rise of China, the Petro-dollar, endless wars, the massive military-industrial complex, a leviathan surveillance state, mega corporate monopolies, massive US government growth, government malfeasance and corruption, national de-industrialization, wealth inequality, the Eurodollar rise and fall, widespread US intervention and manipulation in nearly every global nation -- all continuing to the present day. All fueled by easy (unsound) money and unbridled spending.

It didn't have to be that way. Those persistent budget and trade imbalances over the past decades could never have happened with "sound" money, as the deficit nation would have seen a loss of gold (money) that would have slowed the economy and reduced imports to a balance with exports. And debt creation would have been severely limited since new money would have to be backed by gold-- and the quantity of gold is limited. Exchange rates would have been very stable too. Trade wars, kinetic wars, trade and budget deficits don't exist with a gold standard. That is the beauty of a world-wide gold standard. That's also why gold standards rarely last long.

The result, in part, is that our society, our culture, our civic order, our work ethic, our moral bearings have all decayed and diminished. Our social contract has also been torn asunder. It's not just in the US, but all over the world. All this is basically started with Nixon's abandonment of the gold standard: the adoption of unsound money!

But That's Not All!

I also lay out some of the similar themes in my post Extremes in Unsound Money and Finance are Leading to Catastrophe from February 2018.  

In my post Our Finite Limits, I discuss that the massive rise of debt, especially from China after 2009, has led the world to the end of affordable commodities due to the reality of the world's finite resources. 

This has two elements: 

One factor is that, in the hollowed-out economies of The West (due to persistent trade deficits with Asia-caused by unsound money), the non-elite workers have stagnant wages and fewer breadwinning jobs as entire industries fled to China and the rest of Asia.  Most gov't statistics don't capture this well as the top 10% are doing very well giving the aggregate statistics an optimistic spin.  

The second factor is where commodities, which are finite in supply, that their prices tend to rise as all of the easy-to-extract stuff becomes exhausted as we keep demanding more. You get to the point that more growth causes high prices in the important commodities like oil.  But consumers no longer can afford high commodity prices, therefore there can be no growth! It's because growth causes high prices!

Put another way, the world, and humanity, is reaching the limits of growth -- growth pushed by rapidly rising debt (unsound money). But no growth will make the mountains of debt, accumulated so far, unsustainable since that debt was sold and predicated on enough growth to pay back capital with interest. There comes a point where the debt defaults, the economy collapses and economic depression sets-in.

I discuss in my post Modern Civilization is at Risk, how crisis tends to wipe-out that excess money and debt --(unsound money). I suggest there that our world's population might not be sustainable.  Also see my post How Your Money Goes "Poof" to Money Heaven that lays out a scenario where world bonds crack up first leading a stock market crack-up.  It could be stocks to crater first.  At the end, markets close as stock prices plummet to trading halts and markets can't re-open as futures stay limit down.  When markets do re-open, stock prices are 80 to 90% lower. "Poof!"

From Sven Henrich, "We’re witnessing the most profound challenge to central bankers since the great financial crisis of 2008/09. Their appeasement of markets since 2009 has left us all vulnerable. The constant subsidy of markets and the economy as led us to the largest credit and asset bubble in our lifetimes and the architects of the monstrosity have left themselves weak and depleted."

Also see very recent posts warning of rising risks: Rising Risk of Financial and Economic Chaos and Rising Risk of Financial and Economic Chaos, Part 2.
The world is reaching the end of a very long road. That post dates from October, 2018.  I'll paste-in part of that post below (unedited so you can see what I got right and wrong).  We might be facing the end of civilization as we know it.

How We Arrived at the End of the Road:

1) Rising debt in the US has hid the increasing poverty caused by the wealth transfer from US to China (and Japan before them) for awhile. Debt levels have risen everywhere and it's marginal utility to produce growth is nearly gone, even in China. Debt levels continue to rise faster than GDP (everywhere).  If the world economy continues to stagnate, there is a potential of corporate debt defaults especially in Emerging Market countries first. Even sovereign debt is at risk, first in commodity producing countries and peripheral EU countries like Greece and Italy then the rest. Interest rates might rise at the worse possible time as a result of debt distress and defaults.

2) Zero interest rates have prolonged the game for awhile but low or zero rates are unsustainable.  Pensions are already failing in many cities in the US and around the world as investment returns in bonds has dropped so low that pensions don't have enough money to pay benefits. Also, there are far too few workers per beneficiary now (see Demographics are Destiny below). The math doesn't work. Expect cuts in benefits which lower consumer income and spending. But the necessary higher interest rates would blow up the deficit here and kill the economy.

3) Trump is right, the US economy is hollowed-out with the loss of manufacturing jobs and the loss of entire industries. The non-elite workers in the US are financially tapped-out with stagnate incomes and burdened with rapidly rising costs of healthcare, healthcare insurance, rents, food, drugs. Our imports are down. China is feeling this as their exports are way down. World trade is stagnating. The manufacturing sector in this country has been in recession for years now. General recession may be just around the corner.

4) The economy is in near-recession despite rising debt bubbles. The US government has racked up $10 Trillion in debt in just 10 years. In recent years, if you subtracted the debt racked up by the government, our nation's GDP would have been negative for much of the last 10 years. China racked-up double that amount of debt in the same time frame. A vast expansion of US auto loans that some people say is reminiscent of another subprime bubble has propped-up the auto sector. A trillion dollars in student loans have been given to students in the past 8 years and 43% of these loans are now not being payed back.And the US is still making more of these loans!

5) Demographics are destiny. The working age population is beginning to shrink in all of the important economies. This portends shrinking demand for everything which means the end of growth for the entire world. Companies can automate, but who will they sell to?

6) The real money supply to the world, the "Eurodollar" and it's associated derivatives, has been in decay since 2011 (see HERE) and the great financial crisis. Since then, banks have been exiting these shadow banking markets at an increasing rate. Just look at bank stocks to see the decline in their trading and profits. Central bankers haven't noticed this most important development as they are willfully blind and/or incompetent . They don't know what they are doing!

7) QE doesn't work. That's obvious. Even the educated idiots at central banks can see that! They just can't admit it and it's making them look like fools. They are starting to tip-toe away from it.

8) NIRP and the risk of depositor "bail-ins" is killing the EU banking system! And NIRP and ZIRP is killing pension funds, insurance companies and retirees everywhere. The situation is completely unsustainable. Never in history have interest rates been zero or negative. It's absurd and causing more harm than good. EU banks are a systemic risk to the world. What can't be sustained, won't! The EU is likely the epicenter of the next financial crisis which may be triggered by a political crisis.

9) 30 years of declining interest rates is over. So just steady rates is a trend change. US and world rates are now rising as front-running investors can "smell" that the EU and Japan are about to get out of the QE business. Interest rates are rising now in the US; not falling.

10) EU banks are a royal mess. Chinese debt system is a royal mess. The risk of a sudden and substantial Chinese devaluation is increasing as they will surely nationalize huge amounts of bad corporate debt that they created since 2009. Already the Chinese currency is falling slowly this year and is back to 2010 levels. Even small devaluations have roiled markets recently.  A sudden and substantial devaluation would set off a world-wide crash. It's possible that civil unrest may lead to social disintegration if not outright revolution at some point in China.

11) The era of cheap energy is over. If the economy tries to recover, oil prices rise so high that it kills the economy/consumers. If we can't afford high oil prices, then we cannot have growth. (because growth causes unaffordably high oil prices!) And the price at which oil is affordable, ie., $30 to $40 per barrel, kills the oil producers and oil producing countries (and kills oil export country government revenues). The cost of extraction of a "marginal" barrel of oil is much higher now. So, energy production will eventually drop and all the oil and commodity producing countries will remain in recession or depression. What's needed to "save" us is cheap, ie., $10 oil, for an extended period or a miracle in cheap energy technology.

12) The Middle East and North Africa is already in a state of collapse, setting off a disastrous migration crisis into Europe. It's going to get worse as low oil prices will collapse Saudi Arabia and the other countries that have managed to avoid chaotic crashes. That entire region will collapse.

13) If growth is dead, then the mountain of debt, which continues to accumulate at a rate much higher than nominal GDP growth worldwide, is unsustainable. The end of the road is defaults, crises, recession and depression. Debt defaults by companies and entire countries will cause a new round of banking troubles and trouble in global supply chains. It happened in 2008 after all. Collapse is a real possibility. When it happens is the $64 Trillion question.

14) Economic stagnation, if prolonged, will cause political turmoil that will eventually affect markets and economies. Witness Catalonia, the recent Austrian election, Brexit, the election of Trump, etc. There is trouble brewing even in the US as the entire government is full of liars and cretins including the deep state, who is dedicated to overthrowing Trump's election and his plan to reform the economy. This means that, even in the US, a large portion of the US govt, the deep state, is engaged in sedition and treason.  The Deep State doesn't want reform!

15)  The USA may now be a failed state due to stupidity, corruption, and utter and complete collapse of competence of the Fed. Govt. There is utter gridlock of political discord as the Democrats have completely lost their minds along with their constituents. Corruption under Clinton and Obama is coming to light that may put an end to the Democratic Party. Meanwhile, everything is broken and un-fixed in the nation at the same time there is a non-functioning government. There will be consequences to such chaos especially when financial and economic crises erupt (very soon).

So, we really are reaching the end of the road. We're all in for a rude awakening.


Bromley Simon said...

Why is this commentary dated two weeks from now?

Doug said...

Hey Bromley, I set a future date to keep this post at the top of the list. It was written/posted on March 8th