The next 2008 disaster…will be the last disaster that the current monetary system can handle, sweep under the rug or push any further down the road. Over the weekend there were several ominous interviews and articles put out regarding the global “credit bubble.” Articles and interviews such as these are not uncommon (and are correct in my opinion) but rarely if ever have I seen such a cluster all at one time. Maybe these articles are clustered because of the debt ceiling fight and possible govt. shutdown? Maybe it’s because we have entered the “hibernation season” or maybe it’s just become so obvious that it’s an easy topic to cover?
For whatever reason (reality) “debt” (too much of it) is finally getting the spotlight that it deserves which needless to say is a dangerous situation. “Too much” debt throughout history was never a “problem” until 1 of 3 things occurred. These are obvious, when the debt (interest) becomes un-payable; the borrower gets shut off and cannot borrow more or when investors finally begin to arrive at this notion and thus confidence breaks. I would also add to this list when borrowers themselves realize that they cannot carry any more debt.
As I started this piece, “the next disaster will be the last” is another way of saying that the system has gotten so large and the debt so pervasive that another 2008 episode cannot and will not be “contained.” When it comes to a bank or broker “breaking the chain” this is obvious. Another area rearing its ugly head is the municipality situation which Detroit is currently the figurehead. The list of potentials is long and includes derivatives and sovereign governments to name just a couple more but one area that has gotten little if any discussion is that of “opposites.” “Bubbles” have historically burst because of this, let me explain.
First, in the case of the current fiat bubble, interest rates must remain low to enable existing debtors the ability to refinance and pay interest. Rates must remain low to encourage MORE debt which is the cornerstone of any bubble since more debt is the only thing that can “bring new money” to the Ponzi scheme. Ah…but here is a small problem, interest rates also at the same time need to be high enough to entice “demand” to “invest” in the debt and ultimately in the currency itself. If rates aren’t high enough then there is no incentive to lend. Since fiat money is created only with the creation of new debt then less demand for debt will mean less demand for the underlying currency and thus a dropping “exchange value.” This then means that capital will flow elsewhere which is another problem because often times it will flow into commodities and precious metals which compete with the fiat currency.
Another way to look at this “opposite” is the fact that in order to avoid a deflationary collapse, the debt and currency base must grow…until it must grow exponentially and grow…until it must grow parabolic ally. Remember, this has to happen in a world where “stuff” is finite in supply so prices will continually rise. This is a problem because it displays that the currency is dropping in value. None of this is new and this has played out in the history of fiat currencies time and time again. This is a Mother Nature thing; this is why a fiat currency cannot stand the test of time…because the continuation of the currency stands in the exact opposite contrast of what it would need for its continuation. Namely “finite” issuance and a stable, not continually dropping value. BUT in the real world the opposite is also true, fiat needs inflation to wash away the burden of debt already in existence…
Do I know for a fact that we cannot withstand another 2008 crisis? No I don’t. But I do sense that BECAUSE sovereign governments INCLUDING and SPECIFICALLY the issuer of the reserve currency (the U.S.) have thrown their balance sheets into the ring to save the world on the last go ’round…there will not be another episode that can be saved. I guess the best metaphors would be like two drunks holding each other up or two people drowning and grabbing each other to save themselves. It doesn’t work, has never worked and will not work this time because no legislation, belief system or “confidence” can negate the laws of Mother Nature…especially when the “policy” itself is opposite of what is natural.