Musical Chairs, Hand Grenade Version

With stocks in Moon Launch Mode after China’s central bank “surprised” everyone by promising to turn more debt into wealth with the wave of a magic wand, it’s time to review what apparently very few people see.

Most of the time, when someone issues an IOU the only reason it is accepted is that the person agreeing to hold it believes he’s get paid. This is obvious.

Once in a great while, the masses of men become so self-assured and giddy with the fruits of their innovative brethren that they embrace notions that are completely inconsistent with reason. Never has this been more true that now, when “everyone” agrees that, for instance, a firm that produces barely me-too but extremely fashionable electronic gadgets should be the most valuable business on Planet Earth.

All of this is quite obviously a late-stage development of the collectivist political philosophies of the last 150 years. For that entire time, one philosopher after another celebrated the omnipotence of the central political state and its administrators’ ability to move mankind toward Utopia. This is true of Progressivism as much as it is of communism, national socialism and Fabian socialism.

Today, the consensus view is that no matter how much value in IOU’s is issued by any sovereign political system in the world (Japan, China, the US, the EU….), those IOU’s are as good as gold because those political entities can either tax enough to cover the coupon forever or, in extreme but frankly unimaginable circumstances, they can simply issue  trillion dollar (or quadrillion yen) coins and pay off the debts, voila, and simply go on with business as usual.

This consensus remains no matter how many reports are issued detailing the parabolic rise in per-capita debt burdens and endless hand-wringing. The continuation of parabolic growth in IOU’s is itself cited as proof positive that no matter how absurd the process becomes, it is permanent. If Japan’s Abenomics is not an open representation of this belief, then what could be?

Central banks around the world entered the Mad Hatter stage of our visit to Wonderland with the direct debasement of the value of their sovereign debts via Quantitative Easing. Clearly, the success so far of creating credit from nowhere, then allowing sovereign countries to issue debt to access that credit without causing so much as a ripple in the capital value of both the newly minted IOU’s and the ocean of previously existing IOU’s, has emboldened the Cargo Cultists running the world’s countries in their belief that exponents can be ignored.

For many years, hard money advocates have written of imminent hyperinflation. I suggest we’re getting it, only that as central banks collude with their political systems to “print” vast, exponentially-growing totals of IOU’s, all that “money” is simply filling an ocean of IOU’s on which all the world’s economic boats float.

To the extent that “money” borrowed by governments is spent on the stuff politicians fund, we are seeing vast inflation in medical care, higher ed and military spending. Because all of this looks like “economic activity” and counts directly into GDP, credit-from-nowhere-borrowed-by-governments LOOKS like bonafide GDP growth. (It is nothing of the sort.)

The other effect of the issuance of exponentially rising IOU’s is that people TRUST the “money good” value of those IOU’s. This has the effect of creating an illusion of vastly rising wealth, and wealthier people behave in certain predictable ways.

The closest analogy I can think of is this: Imagine everyone plays the lottery, and everyone THINKS they just won a huge payout. What would happen? Even prudent people would put some of it in stocks, some of it in bonds, they’d buy a house or three and some fancy cars, they’d take some vacations and maybe head to a casino for fun.

What if it turned out that someone hacked the lottery and that the entire game was a fraud. Instead of collecting a huge payout, suddenly people realize their ticket is worthless. They bought all that stuff (and because everyone believed the same story, they bid the prices for everything into low Earth orbit.) Now they have to liquidate all those positions, and markets for all that stuff collapse. They end up bankrupt, worse off than had they never played the “game.” Substitute the 401(k) “buy and hold for the long term, modern portfolio theory” system for “we all won the lottery” and it all makes sense.

The rich today are getting richer much like a group of players at a poker table might begin to issue personal IOU’s to each other until each pot is stuffed with IOU’s supported by IOU’s supported by IOU’s. If you ask each player what he’s worth, he counts up all the IOU’s and gives you their total.

This appears to work until the game gets so out of hand that players are issuing IOU’s for billions of dollars. We all know that at some point prior to that first “IOU a billion dollars” that the debts are uncollectable, but for a while everyone is drunk or stoned and they’re having great fun. Remember, people go mad in herds….

Today, everything we buy is priced to reflect this vast ocean of IOU’s representing wealth. For every single person’s lifetime (and several generations before that) the IOU’s have always been “money good,” and if everyone else is going along with the game then prices will reflect this belief whether we share their belief or not. Not even the Great Depression fundamentally threatened this system.

Buying a house, a business, a round lot of stocks or a gold coin today is based on the price structure supported by the exponential growth of political government IOU’s (abetted by their central banks.)

If you think the exponential growth of IOU’s can continue forever, then you believe in hyperinflation in a credit economy and should act accordingly.

I do not think this is a perpetual motion machine. I think the success of exponential growth of sovereign debt is not a signal of its permanence, only of a once-in-centuries mania that now dwarfs all the examples Charles Mackay cited in Extraordinary Popular Delusions and the Madness of Crowds published in 1841.

When the time comes that this mass, worldwide delusion ends, the value assigned all those IOU’s (new and old) will fall, and once it begins to fall, nothing will stop it from eventually reaching a total figure that then-pessimistic people will believe. I suspect that figure is a vast percentage down from here. The uber-rich will be lucky to still be wealthy at all, no matter what machinations they employ.

The only question to me that matters is “When?” Given that this has far, far, far exceeded my wildest imagination, I have no answer. That we are in the openly exponential phase of it suggests to me that the end cannot be far off (days, weeks, months, a few years at most), but I’d have written the same thing in March of 2000 and look what happened since then.

I can’t help believing that someone buying a home today for $200,000 might find the value for it closer to $20,000 after a full-scale repudiation of the unsupportable ocean of IOU’s has occurred.

I don’t know the future, but I do fervently believe that there’s nothing new under the sun; that Japan and now China have decided to push the credibility of their debt systems beyond the orbit of Neptune suggests that our antebellum period of tranquility nears its end. What happens after that will undoubtedly surprise and shock us all.

Author: DC Sunsets

Married, with grown kids. Occupation: salesman (in medical fields) Philosophy: "Imagine standing in a darkened warehouse; you can't see the walls or ceiling, only a small radius around you lit by a flashlight, but you sense that the room is enormous. The room represents the sum of all possible knowledge, and the flashlight's beam represents your own knowledge. When you learn something new, your flashlight gets brighter...you can see more of your surroundings....but.....your sense of the total size of the room grows exponentially. No matter how knowledgeable you become, your share of the sum of total knowledge is insignificant. Wisdom is recognizing that there are no masters, only students on a path. "The wise are hesitant while fools clamor to rule. This is why humanity is always ruled by fools or by sociopaths, for fools lack the humility of wisdom and seek power, life's most addictive and abused substance, while for sociopaths, the exercise of power over others is their highest joy, akin to love's adoration in normal people."

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Fiatman60
Fiatman60

And so it goes…..

This is why those who are in control, do not want a return to the “gold standard”. The gold standard puts HUGE constraints on those with the power in ways that give’s them nightmares. Gold cannot be printed out of thin air; someone has to go out and dig it up. Secondly, if those in power, want to print money with gold backing, they either force the price of gold up, or devalue their currency, both at the behest of it’s citizens. Hard to imagine a government that has to control spending and be small in size, and have to answer to the people that it serves.

This experiment will NOT end well, for just about everyone on all continents

Jim
Jim

I think you’re right on, the only question is when the charade collapses. I remember Kunstler around 2008 calling for ultimate collpase and he was right too– but he made the mistake of attaching time frames which alas, never occurred. No one can predict when only that it will happen, As an aside, Kunstler also made the very astute observation around the same time of people just going through the motions, it was surreal. I see the same mindlesss sheeple today, as well as the Wall Street crooks just going along like nothing will happen. We’ll see.

Jim
Jim

Another bloke who threw out defined dates was Glen Beck. I agree in principle with his message, but once again, he was discredited when you link the message with unkowable future dates of catastrophe. He really is uncredible anymore, despite his generally correct message.

OUTTAHERE
OUTTAHERE

Glenn Beck has NO credibility left at all. He has done a 180 and is now saying he was wrong in what he was saying and doing before. Forget Glenn Beck!

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