Our subject yesterday was the destruction of our civilisation.
Today, we take up a related question: so what?
You’ll recall, we’ve been reporting on the work of macro-economist Richard Duncan. We went down the road with him, from the causes of the stock-market boom to the inevitable bust, thence to the Fed’s inevitable reaction and to another leg up in the stock market. But here is where we part company.
Mr Duncan believes that a credit deflation would be devastating. We have come to rely so heavily on credit from the Fed, he says, that taking it away would mean chaos, depression and war.
“In all probability, our civilisation would not survive it”, he concludes.
Faced with such a calamity he believes there is no way to go back to the sound principles of 19th century banking and finance. Instead, we have no choice but to go ahead.
But to where? And how?
Hold on. One question at a time, please.
To where? Japan! How? Use the same techniques the Japanese used. It worked there, didn’t it?
The Fed is fully committed to staying the course. That is, if credit deflation gets established in the US, it will have to be over Janet Yellen’s dead body. Ms Yellen is not likely to let it happen; not if she can prevent it.
But there’s the rub. If credit is going to keep expanding, someone has to borrow more – a lot more.
Bill Bonner on markets, economics & the madness of crowds
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Debt in the household sector topped out in 2007. With total US debt at more than 600% of disposable income, and mortgage debt far out of proportion to rents, households were tapped out. They had spent so much in the past they had nothing left for the future.
Since then, they have managed to reduce their debt levels, although the last few months showed that they may be getting ready to borrow a bit more. In any case, they won’t be able to borrow much, because they don’t have the disposable income to support it. And there is no sign that incomes will increase substantially.
If households can’t continue to add debt, who can? Next in line is the corporate sector. Corporations have been doing a manly job of borrowing lately. As if to show that the guys who get the big bucks are no smarter than anyone else, they are borrowing money on an epic scale largely to buy their own shares at record prices. That’s right – buy high – at least it helps raise the bonuses.
But there can’t be much more of that juice in the lemon, either. Corporate earnings are now heading down. Like a household’s disposable income, lower corporate earnings leave the sector with less money to pay finance charges.
That leaves the government. Bless their greedy little hearts, politicians can be relied upon to do the worst thing at the worst possible moment. What is the worst thing a highly indebted government can do? That’s right, borrow more. When is the worst time to do it? When there is no real reason to do so, no national emergency that makes it necessary. In WWII, borrowing was an emergency. Today, it is an imbecility.
We could add an additional question. What is the worst possible way for a government to borrow money? It is to borrow it from the central bank, which merely prints up the cash on request.
That is what the US government will do. More or less like the Japanese. That is what we expect. It is also what Richard Duncan expects. But he thinks it is something the feds must do to avoid the collapse of civilisation.
The Japanese government has about twice as much debt/GDP as the US federal government. That gives the US lots of room to add debt – about $17trn worth. And that is where we leave him.
A financial system that makes bankers, speculators, and Washington insiders rich, while everyone else gets poorer and more heavily laden with debt is not worth saving. The sooner we have shucked it off, the better off we will be.
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