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World in a Box

Of all the problems with fiat currency, the most basic is that it empowers the dark side of human nature. We’re potentially good but infinitely corruptible, and giving an unlimited monetary printing press to a government or group of banks is guaranteed to produce a dystopia of ever-greater debt and more centralized control, until the only remaining choice is between deflationary collapse or runaway inflation. The people in charge at that point are in a box with no painless exit.

Prudent Bear’s Doug Noland describes the shape of today’s box in his latest Credit Bubble Bulletin:

Right here we can identify a key systemic weak link: Market pricing and bullish perceptions have diverged profoundly both from underlying risk (i.e. Credit, liquidity, market pricing, policymaking, etc.) and diminishing Real Economy prospects. And now, with a full-fledged securities market mania inflating the Financial Sphere, it has become impossible for central banks to narrow the gap between the financial Bubbles and (disinflationary) real economies. More stimulus measures only feed the Bubble and prolong parabolic (“Terminal Phase”) increases in systemic risk. In short, central bankers these days are trapped in policies that primarily inflate risk. The old reflation game no longer works.

In other words, most real economies (jobs, production of physical goods, government budgets) around the world are back in (or have never left) recession, for which the traditional response is monetary and fiscal stimulus — that is, lower interest rates and bigger government deficits. Meanwhile, the financial markets are roaring, which normally calls for tighter money and reduced deficits to keep the bubbles from becoming destabilizing.

Both problems are emerging simultaneously and the traditional response to one will make the other much, much worse. Some more specifics from Noland:

Let’s begin with a brief update on the worsening travails at the Periphery. The Russian ruble sank another 6.5% this week, increasing y-t-d losses to 37.9%. Russian (ruble) 10-year yields jumped another 146 bps this week to 12.07%…

Increasingly, emerging market contagion is enveloping Latin America. The Mexican peso was hit for 1.6% Friday, boosting this EM darling’s loss for the week to a notable 3.0%. This week saw the Colombian peso hit for 4.3%, the Peruvian new sol 1.1%, the Brazilian real 0.9% and the Chilean peso 0.6%. Venezuela CDS (Credit default swaps) surged 425 bps to a record 2,717 bps. Brazilian stocks were slammed for 5% this week and Mexican equities fell 2.2%…

Declining 1.3%, the Goldman Sachs Commodities Index fell to the low since June 2010. Crude traded to a new five-year low. Sugar fell to a five-year low, with coffee, hogs and cattle prices all hit this week.

And a quick look at the bubbling Core: The Dow 18,000 party hats were ready, although they will have to wait until next week. The S&P500 traded Friday to another all-time record. Semiconductor (SOX) and Biotech (BTK) year-to-date gains increased to 31.4% and 48.1%, respectively. The week also saw $4.0 Trillion of year-to-date global corporate debt issuance, an all-time record. Italian (1.98%), Spanish (1.83%) and Portuguese (2.75%) yields traded to all-time record lows again this week.

What differentiates today’s reflation from those that “worked” in the past? The current reflation has overwhelmingly manifested within the Financial Sphere. And that’s the essence of why I believe the Bubble is now running on borrowed time. It’s a critical issue that goes completely unrecognized these days: In the end, Financial Sphere inflations are unsustainable…. The entire world believes central bankers will support stock, bond and asset prices. Everyone believes central bankers will ensure liquid markets. Most believe global policymakers will forestall financial and economic crisis for years to come. And it is these beliefs that account for record securities prices in the face of a disconcerting world.

We are, in short, down to the final myth that animates the blow-off phase of most bubbles: that of the omnipotent government/central bank which likes the status quo and has the power to maintain it. They don’t have that power, of course, or else financial bubbles would never burst and we’d still be living in the golden age of junk bonds, dot-coms and subprime mortgages.

What’s different about this iteration is that instead of being confined to a single asset class, the bubble is in financial assets generally, including fiat currencies, government debt, corporate bonds and equities, along with all their related derivatives. Where previous bubbles accounted for hundreds of billions or at most one or two trillion dollars, this one is denominated in hundreds of trillions spread from emerging market bonds to money center bank interest rate derivatives. The number of moving parts and the magnitude of the hidden risks guarantee that when it comes, the dissolution of today’s myth structure will be like nothing any of us have ever seen.

19 thoughts on "World in a Box"

  1. Pingback: The Küle Library
  2. ” Fiat currency empowers the dark side of human nature.”————this could be true there are definitely a lot of cases where people have opted out of a reasonable existence and settled for a pimp and a nice ride.

    America = Endless Ideological Bullshit………AND…….. Endless Masquerading………. if you can get through this human chain of sinister ideas you can possibly get through your next visit to the grocery store!

    Love Each other as you would your favorite thing in life that you willingly get tired of and finally forget about!

    Life is but a mystery toying with your connections:)

  3. You cannot “invest” in Armageddon. You can only stockpile ammo, bottled water and canned goods to physically defend your gold and silver.
    Perhaps what is ignored by the author is the overriding transactional efficiency of fiat currencies, which has lifted us far out of the state of local barter. “Store of value” is not as important when money is received/spent in a fairly short time frame.
    Do central banks abuse power and corrupt currency? Sure, but the paper dollar is still king, and the Fed balance sheet has not “left the helicopter. ”
    There is reason for hope, especially with cheap oil.
    As for gold and silver, they are commodities with their own unique characteristics and supply/demand. It is good to have some just in case fiat currency does inflate too far too fast. But it should be seen as portfolio insurance.
    You need to invest in things that pay dividends.

    1. “You need to invest in things that pay dividends.”

      That’s because if you don’t your money will lose buying power. What right does the central banking system have to devalue my cash? Why should I have to risk it by investing in things that pay dividends just to stay even? The wealth and purchasing power that I earn should not be lost by the passage of time. It’s an inherently corrupt and unsustainable system that robs most people of their wealth over time.

      As Jefferson said, “I believe that banking institutions are more dangerous to our liberties
      than standing armies. If the American people ever allow private banks to
      control the issue of their currency, first by inflation, then by
      deflation, the banks and corporations that will grow up around [the
      banks] will deprive the people of all property until their children
      wake-up homeless on the continent their fathers conquered. The issuing
      power should be taken from the banks and restored to the people, to whom
      it properly belongs.”

      1. Money is like manure. It grows a lot of things when it is spread around. But it makes a big stink if piles up in place.

  4. The globalist bankers economic opportunistic plane has left the once great la la land airport and is now headed for other destinations to start the cycle anew. Well o.k. that happened with Japan in the 50-60’s, China in the 70-80’s and once we are all ground down financially to 3rd. world status then it will be our turn again with maybe China having rights to our land and us as laborers because our government “sold us down the river” for various reasons (1) balance of trade (2) gold leasing agreement. ++ several other factors. I ain’t got the smarts to figure the rest of it out…if in fact what has been stated is correct ??

  5. I think what gives this last and greatest myth so much power is that it is both true and not true at the same time.

    Governments and central banks may not be omnipotent, but they do like the status quo and we give them the power to maintain it. However, the “status quo” means different things to them than to us. To them it means constantly centralizing and expanding statist power by periodically inflating and then deflating entire economies. When this latest bubble crashes it may be on purpose to create such chaos, confusion, disillusionment and desperation that their ultimate one-world government and currency “solution” may finally be accepted.

  6. Going back to the gold standard is not any better and is out of the question as history of it shows. The fiat currency would have worked if the government hadn’t aloud the bankers to turn the banks into casinos. Until this is shut down we are going to see bubbles and then a total collapse and maybe people banks accounts tapped just like they tried to do in Cyprus, but the people will revolt and the government will have to once again take over the banks and reset the system. It’s the history of capitalism and busts.

    1. Gold takes decisions about the value & supply of money out of the
      hands of bureaucrats whose judgment is too often in error or driven
      by politics. Bureaucrats can no more guess the need for money than
      central planners could run an economy in the days of the Soviets.
      Seemingly sophisticated equations & various measures of money can
      never anticipate what people actually do.
      The job of a govt’s central bank would simply be to maintain a stable
      gold price. In a gold standard system, the price of gold acts as a
      barometer. It indicates whether there is too much liquidity in the
      economy & whether we’re heading toward inflation or if there’s too
      little liquidity & possible deflation.
      The demand of money reflects the ever-shifting actions & desires of
      billions of people in global markets, many of whom are reacting to
      thoroughly unanticipated events. Gold prices convey these changing
      needs better than anything else.
      Opponents also believe a peg to gold opens up the U.S. & others to
      runs on gold supplies. This isn’t true either. The focus on gold’s
      supply (or the lack of it) is the same mistake made by mercantilist
      monarchs who thought gold in & of itself constituted wealth. Gold’s
      power lies in its effectiveness as a /measure/. A gold-based system
      can work even if a country doesn’t own a single ounce of gold.

      1. Anything other than gold/silver will just be printed to infinity and the cycle starts all over. Bankers/politicians do not likes gold/silver because they can’t print it. Its seems to always come down to fighting a war that they need to print. This seems to be the scam of choice.

  7. “More stimulus measures only feed the Bubble….” Yes, because so far stimulus has gone only to the rich, who, operating under the current financial repression, see little choice except to roll the dice on equities or the like and hope the bubble continues expanding.

    We could have given stimulus (via the tax system in reverse) to those making <90th percentile income, let's say. The poor, and increasingly even the middle class, have things they truly need that they would immediately purchase, thus stimulating production.

    Of course, most production happens overseas, and this would lead to greater price inflation that would reduce the ultimate efficacy of such measures, but I'd opt for that over simply handing the money to the primary dealers. That has to be just about the stupidest form of "stimulus" one can conceive of.

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