With each passing day we are apprised of new problems financial and proposed old solutions. The “old solutions” worked…until they didn’t which was circa 2007. This was the year that the “virtuous circle” stopped working because the world had reached the debt saturation level where few other than governments had the will or ability to borrow more while the banking sector either did not have the ability or the will to lend, the classic debt stall followed by contraction. The “virtuous circle” worked because each time the economy slowed down or asset prices stalled or contracted, adding $1 of debt created at one point better than $5 of economic activity. Fast forward to present day and $1 of new debt is adding less than .75 cents. People sense this and feel it which is why “velocity” is crashing along with volumes in the global equity markets.
To look at other “circles” that are spiraling downward we can look to Europe. The heavy debt burdens (real estate, personal, corporate, state and sovereign) have put in place a system where the collateral has been impaired (as to equity remaining) which in turn punctured bank balance sheets. These injured banks have gotten bailouts from sovereign governments which increased the debt burdens on the sovereigns which in turn has lowered their credit ratings, increased their risks and thus lowered what investors will pay for the bonds. One big happy circle! Central banks loan capital to the banks, the banks buy the sovereign debt, the sovereign debt goes down in value and the banks need more bailouts again as their balance sheets expand in assets and contract in equity. …The Central banks loan more capital…and around and around she goes!
Same thing here in the States, the Fed prints Dollars, uses those Dollars to buy debt that the Treasury cannot sell to foreigners or other investors, collects interest (Dollars) from the Treasury but has to print more Dollars each time the Treasury needs to borrow. Again, one big circle. Please keep in mind that if the Treasury DOES NOT borrow and spend the current $1.5 Trillion annual deficit, this amount would come out of GDP and we would watch as the economy contracts a PERMANENT $1.5 Trillion per year. Unless they continue to borrow and spend the extra $1 Trillion+ minimum, the result is an instant depression. This is the current state of the economy that supports the currency which acts as the main reserves to the world’s banking system. Another circle, one based on hope and confidence but not solid fundamentals nor logic of any sort other than faulty.
These “circles” that have so far “worked”, are beginning to fail because more and more investors are wising up and exiting the game. All you need to do is look at the velocity of money, employment trends or trading volumes, these speak volumes and they are not saying anything good! In blue collar or street talk, there is no “money on the street” which just doesn’t make sense to our central planners and central bankers because they keep adding more. It seems as if the faster they have added money, the slower velocity has become, the more sluggish employment (economies) has become and the lower trading volumes have gotten. Under Monetarist or Keynesian theories, THIS is not supposed to happen. Under Austrian theory, THIS is ALWAYS the end result of a fiat founded system. It really is very simple, the “circles”, by definition, ALWAYS break if the “money” itself breaks. I bet you can guess on your own what all these breaking/broken circles are forecasting!