When the debt bubble pops

Stocks up 91 on the Dow yesterday. Gold was flat after getting battered last week.
Today, we go even further into the unknown, beyond eventually and past sooner-or-later to what happens next.

Specifically, we don’t think central bankers are going to take the end of the world lying down. No, they’ve got tricks up their sleeves. These are not new tricks. They’ve been used many times in many different forms. But never have they been used on the scale we now foresee.

But before we begin guessing, let us tell you a bit about what is really happening here where we are at Finca Gualfin. Three days ago, Jorge – the farm manager – came to us with a problem:

“Señor Bonner, we found two calves, dead. They looked fat and healthy. I’m afraid it is a disease, called ‘la mancha’. I saw it many years ago. Healthy young cows just all of a sudden fall down and die. It almost wiped out our herd.”

We still don’t know what ‘la mancha’ is. But it is evidently not something to trifle with. Word went to Salta City, six hours away, that we had an emergency. A veterinarian advised us to inoculate the whole herd. Within hours, the medicine was on a bus bound for Molinos, about an hour and a half from the ranch.

The next morning, all the hands were turned out – including your editor. We mounted up and headed out to the ‘campo‘ – an immense valley of some thousands of acres. Our job was to sweep the valley of all the cows, driving them to the main corral, where they would be vaccinated.

The whole operation took three days. Your editor was probably more of a liability than a help. Driving cattle is not as easy as the gauchos make it look. More on this later.


Bill Bonner on markets, economics & the madness of crowds

To sign-up to Bill's free daily email just enter your email address below

Because these emails are completely free, we do have to fund them with advertising. Occasionally we will send you promotional emails, however we will never give, sell or rent your email address to any other companies.For more information, please see our Privacy policy.


Meanwhile, back away from the ranch…

To back up a bit, the end of the world comes when the debt bubble pops. But before we get there, we will see more attempts by central banks to keep the debt bubble expanding.

Richard Duncan: “Given that the Fed has been driving the economic recovery by inflating the price of stocks and property, it is unlikely to allow falling asset prices to drag the economy back down any time soon. To prevent that from happening, it looks as though the Fed will have to extend QE [quantitative easing] into 2015, and perhaps significantly beyond.”

So far, so predictable. But there is a ‘sooner or later’ for QE too. There will come a time when the world can take no more debt and the debt bubble finally blows up. Then, we get the normal equal and opposite reaction. Asset prices that have been inflated by debt will be deflated by debt de-leveraging. A depression will most likely follow.

This is not a bad thing, not at all. Contrary to popular opinion, crashes and depressions do not destroy wealth. They merely tell you that the wealth you thought you had really didn’t exist.

As long as the EZ money flows freely mistakes remain invisible. Rotten companies are kept alive. Bad speculations seem to pay off. Debts that can never be paid are still serviced. Asset prices go up.

Then, when the bubble explodes, the mistakes become painfully obvious. Phoney gains return whence they came. Assets are re-priced at more realistic levels. (After first going to unrealistically low levels.) Only then, when the economy has been thoroughly thrashed can it get up, dust itself off, and get back to work.

But the feds are not likely to let it happen. They’ve made their careers by pretending to improve the economy. When the bust comes, they will swing into action, with more quack cures.

That is when we arrive at the second stage of the coming debt deflation. It is when we will wish we had bought more gold, more real estate, more old cars and new potatoes.

Most likely – but this is not guaranteed – central banks will find new and bolder ways to get money into consumers’ hands. This will be followed by a crisis of a different sort – high levels of consumer price inflation.

Put on your seat belt – it’s gonna be one helluva ride.

• Don't miss Bill's next Daily Reckoning. To receive the next article straight into your inbox as soon as he's written it, enter your email address below.

Because these emails are completely free, we do have to fund them with advertising. Occasionally we will send you promotional emails, however we will never give, sell or rent your email address to any other companies.For more information, please see our Privacy policy.

[xyz_lbx_custom_shortcode id=5]

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

Comment on this article

MoneyWeek magazine

Latest issue:

Magazine cover
Hard cash

What's next for gold and silver?

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues
Shale gas 'fracking' promises to transform Britain's energy market. Find out what it is, what it means, and how to invest.

More from MoneyWeek

FREE REPORT:
What you should really do with your money (2014 Edition)


How to buy and sell penny shares

A beginner's guide to investing in gold

How to invest in British fracking