Tuesday, June 23, 2015

Pop goes the Bubble

Running a fundraiser (which, by the way, has been a great success—thank you all very much!) has prompted me to think about money more deeply than I normally do. I am no financial expert, and I certainly can't give you investment advice, but when I figure something out for myself, it makes me want to share my insights. I know that many people see national finances as an impenetrable fog of numbers and acronyms, which they feel is best left up to financial specialists to interpret for them. But try to see national finances as a henhouse, yourself as a hen, and financial specialists as foxes. Perhaps you should pay a little bit of attention—perhaps a bit more than one would expect from a chicken?

By now many people, even the ones who don't continuously watch the financial markets, have probably heard that the stock market in the US is in a bubble. Indeed, the price to earnings ratio of stocks is once again scaling the heights previously achieved just twice before: once right before the Black Tuesday event that augured in the Great Depression, and again right around Y2K, when the dot-com bubble burst. On Black Tuesday it was at 30; now it's at 27.22. Just another 10% is all we need to bring on the next Great Depression! Come on, Americans, you can do it!

These nosebleed-worthy heights are being scaled with an extremely shaky economic environment as a backdrop. If you compensate for the distortions introduced by the US government's dodgy methodology for measuring inflation, it turns out that the US economy hasn't grown at all so far this century, but has been shrinking to the tune of 2% a year.

And if you ignore the laughable way the US government computes the unemployment rate, it turns out that the real unemployment rate has grown from 10% at the beginning of the century to around 23% today.

So how can an ever-shrinking economy with a continuously rising unemployment rate be producing ever-higher stock valuations?

Simple! The stock prices are being driven up by the actions of the Federal Reserve. Since the great financial crisis of 2007, when the entire financial system almost collapsed, the Federal Reserve, through its Quantitative Easing (QE), has been making funds available at minimal cost to a set of financial institutions deemed “too big to fail.” (What that means is that they cannot be allowed to fail, because that would almost bring down the entire financial system again, but must be artificially propped up no matter what.) This financial life support has dramatically driven up the Fed's balance sheet, which now stands at $4.5 trillion (it was less than $1 trillion before the great financial crisis of 2007).

The mechanism by which QE drives up stock prices is indirect, but the connection is easy to trace. The Fed makes money available by buying up various types of securities: lots of mortgage-backed securities (many of them worthless, but the Fed doesn't care), lots of US Treasuries (and the Fed should care that they don't become worthless), plus a little of this and that.

By doing so, the Fed artificially drives down interest rates on what are traditionally the safest investments—those that people like to put their savings in if they don't want to risk losing them. But when the returns on these “safe” investments become lower than the rate of inflation, the risk of loss becomes 100%, and people are forced to choose between other, less “safe” options, and watching their savings slowly evaporate. The pressure to find ways to invest money more gainfully drives money out “safe” investments and into unsafe, speculative ones: stocks, that is. And this has created the bubble in stocks.

At this point, someone might want to ask a perfectly reasonable question: What is the purpose of having a stock market anyway? Well, theoretically, its purpose is to provide public companies with a way to raise money for their operations. Investors look for safe but gainful ways to allocate their capital, and, through their efforts, allocate this capital efficiently, so that it drives an economic expansion, and produces prosperity. But there is no economic expansion, and no prosperity! Maybe that's because public companies haven't been making use of the stock market to raise funds to invest in productive activities. And what have they been doing instead? They have been taking advantage of very low interest rates to borrow money, and using that money to buy back their own stock:

Why? Because that drives up the price of their stock, and because their chief executives (who already make 300 times more than their employees) are even more hugely rewarded if the stock price goes up. Hearing this causes some people to exclaim: “Hey, that's corruption!” No, it's just the American way of doing business. But what, pray tell, is the difference? In any case, stock buybacks are now going for a new all-time record. (The previous record was set right around when the entire financial system almost collapsed, in 2007.) According to WSJ, “The rise now puts 2015 on pace to reach $1.2 trillion worth of announced buyback programs, shattering the 2007 record of $863 billion in authorized buybacks, Birinyi said Thursday.”

Now, please note that it is not the purpose of a stock market to keep shareholders happy through borrowing and stock buybacks: this is unproductive for the economy as a whole. Also please note that this can't go on forever. The Fed has been lowering interest rates more or less continuously since 1982, when the then Fed Chairman Paul Volcker succeeded in fighting off inflation by briefly hiking the rate up above 18%. Continuously dropping interest rates make it possible for big financial players to gamble with borrowed money almost risk-free. If they gain—great; if they lose—they can still be sure of being able to roll over their debts at a lower rate, and play again.

But then in 2009 the Fed funds rate went to zero, and stayed there. This condition has a fancy name: Zero Interest Rate (Monetary) Policy, or ZIRP. Because it's an actual “policy,” that makes it all right; it's the difference between falling flat on your face because you tripped and stretching out on the sidewalk just to do some yoga.
The rate would like to go negative, but it can't. Because, you know, that's the kind of debt even I wouldn't turn down (by the way, I don't have any debt). It's the kind of debt where you give me your money, and then you keep paying me periodically to hold on to it, or spend it, or gamble it away—that's none of your business—until forever, because I have no intention of ever paying you back; I'll just keep rolling it over at ever more negative interest rates, and you will have to go on lowering them, because if you don't I might cut down on my gambling and crash the financial system again. If you agree to these terms, then you might as well also give away your wallet and your car keys—just to see what happens.

The Fed dropping interest rates below zero would be approximately as funny as that. And so the Fed funds rate is stuck at zero: it can't go down and it can't go up. The Fed keeps making periodic threats about raising it—by a whopping 1/4 of 1%—and this causes a brief swoon in the financial markets each time, but then everything goes back to normal (if you want to call it that). If the Fed ever did raise the rate, that would pop the bubble, and we'd be right back to collapsing like it's 2007.

It is worth noting that these financial shenanigans are having a profound effect on the real economy of jobs and goods and services: they are starving it. Many observers have noted that the Fed's actions are driving up wealth inequality to ever-greater heights. But this is just blah-blah-blah: wealth inequality in the US has been on the rise practically forever, with just a few minor setbacks here and there, so there is nothing new here. Ever-increasing wealth inequality is as American as eating out of a bag, neck tattoos, gaudy diamond engagement rings, knee-length swimming trousers and Mickey Mouse. They might as well claim that Fed policies are making Americans fat, lazy and stupid. Are they?

But the ever more bloated financial sector is definitely crowding out the other sectors of the economy—ones which actually produce goods and services that people use. No matter how easy monetary policy becomes, the opportunities to invest in the real economy just aren't there. Consider:

• You want to invest in agribusiness? Well, Americans are already fat as pigs; the last thing they need is more high fructose corn syrup.

• You want to invest in the automotive industry? Well, the people are already spending an average of 14% of their waking hours driving mostly short distances, sitting in traffic, breathing carbon monoxide and giving themselves mild but progressive brain damage; where do you want to go with that?

• You want to invest in gadgets? Well, Americans are already glued to a screen of one sort or another throughout most of their waking hours. Sure, there are lots of business plans out there, but most of them look a lot like this:
1. Monetize sexting (or whatever)
2. ???
3. Profit!
(By the way, I think that's called Snapchat, and its valuation is around $15 billion.) But none of them seem like real breakthroughs, because they still require people to be glued to their little screens 24/7, and we have already achieved that. We'd need to make gadgets for their gadgets to play with, to free up their time so that they can get something useful accomplished, but nobody has figured out how to do that yet.

• You want to invest in military hardware? Well, nobody wants tired old American stuff; just about everybody—even our friends the Iraqis, and now even the Saudis—are interested in buying Russian. Plus the Americans don't even know what to do with the stuff they already have. Accidentally give some more of it to ISIS or to the Yemenis? Abandon it in Afghanistan for the Taliban to play with? The latest plan is to stockpile it on Russia's borders, so that the Russians can use it for target practice, blowing it up with their long-range artillery without having to invade anyone.

And so on.

And so all that Americans can do with all this free money is gamble with it. There are lots of worthwhile ways to spend money—build public transportation, for instance—but the problem is that none of them make money. And that, stupid though it seems, is a requirement. But creating a huge, wasteful financial casino alongside the real economy doesn't help the real economy—it crowds it out. And it doesn't really make money either; it makes bubbles. This should in some measure explain the more or less continuous economic shrinkage that has been happening in the US so far this century.

It is also worth noting that, dire though these negative effects already seem, Americans have by no means seen the worst of it yet. The story one commonly hears is that the US is the richest country on earth. Well, that may be true, on average, if you include financial wealth (which tends to be rather ephemeral), overvalued real estate (which is another great big bubble), promises that won't be kept (such as the various retirement schemes that will never pay out) and much else that isn't quite real. But it is definitely true that the US also has the largest group of incredibly poor people—much poorer than the poorest person in the poorest country on Earth.

Their wealth is measured in the hundreds of thousands of dollars—but with a negative sign in front. They are deep in debt from investing in overvalued real estate (most houses in the US aren't really worth the skinny little sticks that hold up their roofs), or from getting an overpriced higher education (which has qualified them to serve coffee), or from running up other kinds of debt. Some of them may still look rich and prosperous for the moment, but that's only because... you guessed it, four whole decades of ever-lower interest rates! Once interest rates start ticking up, and their entire incomes are gobbled up by interest payments, they will start looking as destitute as they actually are.

How might this transition come about? Well, it might be catastrophic: some day some fat pig of a trader comes back from his 1000-calorie buffet lunch and passes a massive volume of gas. His explosive flatulence causes his colleagues to either faint, projectile vomit all over their trading terminals, or run for the exits. In the meantime, their high-frequency trading algorithms, left unattended, flash-crash the entire financial system to kingdom come.

But let's not wax apocalyptic here, because a much more mundane scenario will do just as well. Some day soon the stock market suffers a wee drop. This causes a little bit of a shuffle toward the exits and into “safe” investments in the form of US government debt. But that day there are a few more sellers of US government debt than usual, and the price of it drops. That's because over a third of it is held by foreign entities, many of which have been working hard to get out of the US dollar for some time now. China is at the top of the list with $1.3 trillion in US Treasuries, and has been busy signing bilateral trade agreements that circumvent the dollar system. Spooked by the sudden drop, foreigners start dumping US Treasuries. The traders see an advantage in getting out of stocks and into the suddenly much cheaper Treasuries, the trickle turns into a stampede, and stocks and Treasuries both crash because there are now many more sellers than buyers of either.

Next, the sellers of Treasuries rush to sell off their hoard of US dollars for other currencies—the ones they now use to trade with each other—and the dollar drops in value. The resulting scene looks like this. The stock market has cratered (so it's time to break open your child's piggybank and buy her a handful of railroad and utility stocks). US Treasuries are trading at a fraction of their face value, promising huge gains once they reach maturity—but to be paid out in worthless dollars. The Fed is helpless to do much of anything except print-print-print more worthless dollars as long as there is more paper and the lights are still on. The US Treasury starts trying to issue debt denominated in foreign currencies—with poor results, because foreign investors think that the US is too risky. The terms “capital controls” and “national default” are thrown around, just like they are in Greece at this very moment.

Regardless of what the Fed tries to do or say, the effective new interest rates are much higher, and most borrowers are no longer able to roll over, never mind expand, their debt. This includes the federal government, US states and municipalities, and corporations: kiss your benefits and your retirements good-bye. For importers, securing access to imports, such as oil, now involves borrowing in foreign currencies—at exorbitant rates of interest because the US is now a bad credit risk.

It is only at this point that I imagine an appreciably large number of Americans will put down whatever they happen to be mindlessly stuffing into their faces, pull their eyeballs away from the nearest screen, look at each other and ask: “Why did this happen?” Well, I am no financial expert, and yet I was able to piece all of this together based on freely available information, much of it from the US Government and the Federal Reserve, the rest from sources such as shadowstats.com, which I know and trust, and from having watched things collapse at other times and in other places.

So, let me ask you some questions: What, if anything, is unclear to you about any of this? Does any of this come as a surprise? Why do you think this is this so difficult for so many people to understand? and, What are you waiting for?


Judy said...

I have been pondering debt this week too. Mainly because I am in debt, which most people can't admit because of the stigma. It is that stigma and inability to open up about it that leads to suicides, something that shouldn't be happening for debt created by banks by typing numbers on a keyboard.

I was looking at the uk national statistics on wealth here http://www.ons.gov.uk/ons/dcp171776_362809.pdf. It turns out I am just below the median for wealth in UK despite being heavily in debt. How does that work? Just as you say my house price is inflated (double what we paid for it 15 years ago) and my husband's pension (from before he was made redundant) has been increasing in value even though we aren't adding to it. The trouble is we have no access to this "wealth" without selling our home. Pensions are locked in until you are at least 50.

All our debt is from education, from my engineering degree to our kids education, because of the failing school system.

It seems to me that I should sell our house and try to buy something mortgage free, but as you can see house prices are inflated and we have 6 people and 2 businesses dependent on this home. On the other hand none of my debt is secured on my property. Do I even need to worry because it is all fake anyway? (see positive money for how money is really created http://positivemoney.org/)

peakfuture said...

A succinct summary of the mess we are in. The issue that drives most of us crazy, I suspect, is that classic dictum, "The market can remain irrational far longer than you can remain solvent." You certainly can't short this market, as things are so distorted, and any sort of rational planning is difficult.

The best way to play is not to play at all, it seems. Investing in real relationships and productive things seems to be the only way to go.

Chris said...

My problem with this scenario is that it has been predicted to happen for at least 7 or 8 years now. I remember reading a book by Peter Schiff many years ago that basically argued the same thing. Shadowstats has been predicting imminent financial collapse and an Inflationary great depression for at least a decade now. It's always, yeah, it will definitely happen in 2008. No, actually 2012 will be year. Sorry, I meant 2014... After a while people like this lose all credibility in my eyes, even if in the end they're proven right. It is the classic problem of crying wolf too many times and far too early.

My donkey said...

Potential marketing blurb:
"Overconsumption of low-quality food causes physical obesity, or fatness. Likewise, overconsumption of low-quality information causes mental obesity, or stupidity."
Note: this may stretch the truth, but what is marketing?

The world is awash in low-quality information; it may be worse in the US but the phenomenon is present to some extent worldwide. We have an obesity pandemic for sure, and now we have a stupidity pandemic to accompany it. So why haven't entrepreneurs and corporations capitalized on stupidity reduction like they've capitalized on fat reduction?

This 2009 article predicted that the global weight-loss market would be worth more than half a trillion dollars by 2014. It's probably more than that now.

It's very easy to convince fat people to [at least try to] shed pounds of fat, so it should be even easier to con stupid people into shedding pounds of stupidity, yes? Are there currently fortunes being made in this field? If not, why?

Veronica said...

And what about the latest scare going the rounds of the alternative pov financial blogs and newsletters - the limitation or even outlawing of cash? It sounds too bizarre even for this looking-glass world, but I gather it is being lofted as a trial balloon by some politicians both in the US and Europe. A combination of the "bail-in" laws that says that you are now an "investor" (i.e. voluntary risk-taker) in the bank, not a depositor, so in the event of a bank failure, your deposits - whoops, sorry, investment - in that bank may be legally harvested to save the skins of the bankers, and NegativeIRP, the next stage after ZIRP. But since who in their right mind would leave cash in a bank where you know ahead of time that it will be eaten away until it is gone, we now have the prospect of a world where all money is electronic only, and therefore readily harvestable by both banks and government. Ironic, isn't it? Banks were set up as a place to put your money so it would be safe, because cash was so easily stolen. But now there is the prospect of being forced to hand it over to guaranteed thieves, instead of just taking your chances with occasional thieves. Please tell me that there is some kind of statute of limitations at work, and that this one really is too bizarre to be tried...

My donkey said...

Speaking of corruption, I always laugh when the US accuses other countries of corruption.

The financial meltdown of 2008 represents the biggest case of corruption in history, with US subprime mortgage fraud leading the way. No big banker or CEO has gone to prison, no too-big-to-fail banks have been broken up, and nothing has been done to prevent similar fraud from happening again. In fact, corruption in the US is not just limited to individuals or corporations; it has now become the very basis of a "new normal" financial system in which the rule of law is ignored and fraud is Full Speed Ahead.

In terms of the capacity to cause damage, the United States' dual corporate-political system of governance is by far the most corrupt in the world. William Black describes how pervasive and all-encompassing US corruption really is:

k-dog said...

My twisted gamble is to keep working and saving money. As a former member of the long term unemployed I was able to regain employment about seven months ago. Now seduced into gambling with 'funds' with a part of my meager surplus because my employer matches at 50% I gamble that when shit hits the fan I might have something left over due the generous retirement fund match. The rest of my meager surplus I bank and had your fund-raiser gone into a third week you might have gotten a slice of that.

So I gamble by working and saving money and I understand well enough your lesson. It is not unclear or a surprise to me and regardless of what happens Obama is going to be a billionaire. Once he is out of office he is going to have generous hookups for all the wonderful things he has done for Wall Street.

It is not unclear or a surprise to me what is going on, so what am I waiting for? Your question seems odd. What should I be waiting for? I work, I save, I stay out of debt and all my financial understanding does is make me nervous about the future. What should we be doing? All my knowledge does is let me know I am powerless.

You have put out an excellent lesson. today but what now? The ship is sinking and the band plays on. What should we be doing? My funds won't buy me a lifeboat. All I get is a front row seat to the horizon that tips more and more as the ship lists and makes ready for its plunge into the deep.

tom said...

"So why haven't entrepreneurs and corporations capitalized on stupidity reduction like they've capitalized on fat reduction?"

I think you are overlooking something, My donkey. Stupidity reduction would enable the consumers to see through the marketing lies. Whether they got paid or not - at least the first instalments - the marketers would rapidly find themselves hanging from trees.

Jim R said...

One of your insights, Dmitry, has kept my attention on your blog. And it was from years ago, in Reinventing Collapse. The reversal of cold war roles, and the laughable propaganda lies from the weaker side ... a truer prophecy was never written.

Those wretched Moskals in the Donbass area, for example. Their pensions and benefits (in near worthless Hryvnia) cut off by Keiv, they live in filth and squalor, not to mention the weekly reports of columns of Russian tanks.

As for the 'economy' as represented by the Dow, S&P and Nasdaq, it is now apparent that it will all be up, up, up, until the day the machines are turned off. By the afternoon of that day, it will be another verse of James McMurtry's Can't Make it Here.

Nicole Foss did predict, in 2008 or 09, that this would be the mother of all dead-cat bounces, and boy, howdy! Well, anyway, gotta go. Love your writing, keep doing it!

William Daugherty said...

As for the people who say those predicting collapse are crying wolf (like Chris in the comments above), I wish these people would spend some time acquainting themselves with modern weather forecasting technology. It's amazing. Sophisticated math, Doppler radar, etc., and yet they still get tomorrow's weather wrong. Yet people expect others to predict the timing of global economic cataclysms precisely. I'm not a financial expert either, but from what I've learned from experts, once the fundamentals are out of whack enough, it's only a matter of time. Since so many have so much to lose, delaying the inevitable continues as long as possible, but eventually it's too irrational for people in the market to risk someone else moving first. And then it's all over.

Howard Skillington said...

What length swimming trousers do you recommend?
(I don't think they wore swimming trousers in Waterworld)

David Kopriva said...

I completely agree with Chris comment. Everyone has been crying wolf for too long. If you cry long enough you will eventually be right. But we are becoming desensitized to the idea of an imminent crash and after a while we just shrug our shoulders and say, yeah, so what. Meanwhile the doomsayers make money by writing books, selling gold and silver coins and nothing happens. So people like us who read these things and think, yup, this makes a lot of sense end up looking like fools.

My donkey said...


I'm not overlooking anything. A stupidity-reduction industry would actually fail to make people smarter just as surely as the half-trillion dollar fat-reduction industry has failed to make people slimmer.

The average American is fatter than ever before, and getting fatter by the minute, in spite of the ever-increasing amounts of money being sunk into various "health" products & programs.

Probably the best way to increase stupidity is to declare "war" on it, like so:
First, create a brand new industry targeting the mentally obese, then sit back and watch as the incidence of stupidity skyrockets and your pockets fill up with $billions enthusiastically donated by the terminally stupid. Talk about a fund-raiser – Whoo-eee!

If you've been thinking lately that the world is approaching maximum stupidity, think again; a program like this would quickly push Peak Stupid into the next century.

Dmitry Orlov said...

My Donkey,

Consider it done. It's called higher education.

ivar laegreid said...

a HUGE part of it is plain ignorance. another very large element is a misunderstood idea about patriotism. willful denial, bordering on mental illness, accounts for the very many "whistling past the graveyard". religious ideas about solutions and atheist ideas about technology captivates millions, and so on...

- the most dangerous are probably those who have no illusions about how the USA have been securing about 25% of the earth's energy and all other natural resources for it's population, but have become delusional about the ability to continue to consume disproportionally.

pyrrhus said...

Excellent summary! I would add that even the "E" of the P/E ratio has become quite debased, with all manner of creative accounting turning money losing companies into money making ones, on paper. Hence it is likely that the true ratio has reached all-time highs. Another all-time high is margin debt, as the ever expanding casino requires even more borrowing....

Clay Dennis said...

Chris and David, I would buy your cry wolf analogy if the economy and real economic indicators moved around from good to bad with progress being made on debt, or income per capita during periods and not in others. But the predictions and truth about the economy are like an engineer predicting that a bridge will fall down. He predicts that the bridge is in such bad shape that it will fall down soon, and it takes a bit longer than predicted, but each week more pieces fall off the bridge, it sags further and further, more bolts rust and fall out, more chunks of concrete fall off in to the river. The fat cats speed along over the top admiring themselves in the rear view mirror of their new car and say," see nothing is wrong with this bridge." But the bridges progress towards collapse is steady and inevitable and nothing that the engineer said was wrong. If the bridge magicaly rebuilt itself, or stopped any kind of deterioration for a long period of time the engineer would be wrong. But as long as the bridge continues its steady decline towards an inevitable "suprise" collapse he is still right.

David Kopriva said...

Clay, a good and reasonable analogy. I don't disbelieve in the ideas that have been presented but fully believe that a crash or continual downward trend to the bottom is imminent. My frustration as well as many others is the governments ability to postpone the obvious. The frustration of waiting for the inevitable that should have already taken place is painful in many ways. The generation of the working class in the 50's - mid 70's are oblivious to what is going on and will not taste the wrath that my generation will have to endure which bugs me just a little. Yes they experienced war like my generation did not and the mental scars that were left over took a long time to heal. But my generation will live a war of poverty and little opportunity for many generation to come in a few years and there will be no way out. That's what bugs me the most.

Rolnard Covzure said...

A wink and a nod to Kunstler today (neck tattoos).

I can answer the last question: what everybody is waiting for, is the beginning of the stampede for the exits. Nobody wants to be the first to leave while there's all that "money" being "made." The ideal time to leave the party is of course 10 seconds before the gunshots begin. But nobody knows when those are coming and it's easy to deceive oneself...

rapier said...

Matters of money, credit and finance require hard study. Dimitry's summary fits well into the alt economics school, I will call it, that is at least 15 years old.

Ask yourself, what is money? If you don't have an instant answer then there is no way around the need for study. The facts of money, credit and banking/finance are nearly counter intuitive or at least far from what those who don't think about such things think they are.

Until you know, really know, know down to your bones that today's money is debt, then you simply don't know what you need to know.

I suggest reading the entire archived output of Doug Noland's Credit Bubble Bulletin, for a start. I kid you not. Look around the Web and YouTube for anything by Steve Keen.


In relation to Dimitry's overarching message I will note that Russia and Russians it seems are about the only people on earth who seem to have a natural distrust of credit. This is in fact their greatest sin in the eyes of our elites and why everything possible will be done to diminish or even destroy Russia as we know it.

Michael said...

Thanks for all your good work, Dimitry!

For some time now I have seen that the Stock Market is past it's use-by date. It is now a major impediment, when squillions are made by shuffling bits of paper - oops, electrons - and producing nothing. And worse - the focus of companies shifts from production & innovation to satisfying shareholders.

Maybe we need to start GROSS (Get Rid Of Stocks & Shares) :)

Or ONTHE-NOSE (Only Naughty Trillionaires Having Everything-No One Safe Ever)

Good luck one and all as the last of the available fingers are shoved into the dykes.

Cindy Shirar said...

I almost fell out of my chair laughing at Dmitry's response to My Donkey: "My Donkey, consider it done. It's called higher education..."

Dmitry read my mind! I needed that chuckle!

Cindy Shirar
Irving, Texas

P.S. - Dmitry, my family and I are so happy you can repair your boat now. You are one resourceful man... Congratulations...!

palloy said...

> "... print-print-print more worthless dollars as long as there is more paper and the lights are still on."

The electricity companies need steady cash-flow to keep the lights on. So shortly after the financial crash, the lights will go off. That will plunge everyone into darkness, with no screens to look at, no air-con, no water coming out of the taps, no sewage magically disappearing, no way for shops to sell goods on plastic and re-order new supplies, no way for gasoline stations to sell fuel or pay for re-supply. And no one will know what the hell is going on because the phones aren't working. Instant collapse of civilisation.

I guess TPTB have thought of that, so there must be plans to take over electricity companies and coal mines and force the workers to keep working. Plus the farmers to keep farming, the truckers to keep trucking food, the fuel stations to keep pumping, the refineries to keep refining, the drillers to keep drilling ...

Might as well take over everything and force everybody to keep working, because once it stops, the interdependencies of this complex system mean that it will be impossible to get it going again. Perhaps that's what all those militarised police are for.

forrest said...

Letting the big financial institutions collapse might have barely saved the real economy. Preserving them while sucking everything useful dry to keep them fed -- That was a worst of all worlds scenario.

I liked the comment, by a homeless guy with a math degree, in his 'Real Change' column a few years back, that he was looking forward to when the price of houses fell to $1; that he could have afforded!

Stephen Carter said...

The one unforeseen effect of this will be a categorical, unsurpassed hatred of the United States for bringing this voodoo economics on the world. Even America's closest allies have come to believe that the US's partners never ultimately benefit, and in fact end up much worse off. In every trade deal it's the same. Work for a US company and it's the same. Publish your work through US channels and it's the same. Produce a smashing film or TV series and the US scoops it up and you're left with nothing. It's always and everywhere the same when you deal with Americans. I'm not saying this is factually correct, but it's a very real perception. Look at how Israel is being treated now! Or ask America's 2 nearest allies, Mexico and Canada - is it a blessing or a curse living next door to the US? 99% of both countries would unequivocally say it's an absolute curse. And that perception is slowly gaining traction, the entire world will think that way after this collapse. It's simple, the perception will be that no foreigner ever truly benefits from any contact with the USA. And that will be a shame b/c American conservatives are about the most reliable, tolerant, generous, forgiving salt-of-the-earth people on the planet. And they're systematically cast into the outer darkness by American liberals, Democrats. America has apparently become the Democratic Party. So I just give up on America now. It's become the great whore of the world. Nobody wants contact with such a country.

Iain said...

Forrest - Letting them collapse would not be a good idea. They should have nationalised them and used the anti trust legislation to break them up while at the same time eliminating all the junk financial instruments. Regulate what salaries the CEO and others earn and turn them into public banks that are as exciting as utilities.

Robert Magill said...


You wrote:
'In relation to Dimitry's overarching message I will note that Russia and Russians it seems are about the only people on earth who seem to have a natural distrust of credit. This is in fact their greatest sin in the eyes of our elites and why everything possible will be done to diminish or even destroy Russia as we know it.

Add to this the millions destroyed or about to be for practicing Sharia no interst banking.

Zagor said...

Well, we are all missing the point. the financial collapse has already happened. "They" are just trying hard to keep it hidden, pretending all is well. When huge systems collapse, there is certain inertia, so things keep going on 'by itself'. Dmitry has witnessed a collapse first hand, I have lived through one (Yugoslavia, Serbia) and he is spot on. When financial collapse happened in Serbia, for while all looked OK, then money simply disappeared. We continued to go to work, since we did not know what else to do - pure inertia. Electrical grid worked, with hiccups, and blackouts, but worked somehow. After some time, hiccups became too serious. 24 hours without power is still better than, say, 6 days in a row - because deep freezers melt and your food supplies are gone. Then people remembered that you can preserve food by immersing it in boiling hot animal (pig's) fat. All utilities continued to work, with hiccups, but they worked. And just as now in the Western world, not just USA, the economical collapse happened much earlier than we noticed. First pensions and salaries started to decrease, 5% this month, 10% next month, then payments were not on 30 days, but on 40, 50 days, so you received only 6-7 pensions over a year. Workers were paid in bread and non-perishable food, or laundry detergent. To get stitched at emergency, you had to bring your own bandages, stitches at all. For some surgical procedures you had to provide your own anaesthetic or not have them at all. See, it is much easier for individual person to use connections, favours, bribery, contraband, anything, to obtain one dose of anaesthetic, then for the hospital to keep the stock of them. All goods disappeared from the stores, the stores were literally EMPTY. Yet, people showed up for work. And neighbours, relatives, friends, co-workers were looking after each other, more than usually. So, the total social collapse was avoided. Even today, 20 years later, nothing is like before, but Serbians managed to survive. Much lower standard of life, much lower expectations from the future, but at least most of the people are not starving. Mind you, not all, just most are not starving. It will be worse, but at much slower pace, so at least some people will have enough time to adapt.

So yes, the economic collapse has already happened, we just either don't want to see it, or we do not see it because powers to be are hiding that from us. The same signs I saw in Yugoslavia before their collapse, I see them here, in Canada and USA, all over western Europe. Of course, USA is the leader of the pack, like always, most advanced in everything...

Once you clearly see the collapse, it will be too late, then you will realize that it did happen, not in 2008, perhaps even earlier. The patient is on life support. For how long, nobody knows. It could be prolonged coma, or sudden collapse of all vital organs.

What to do? Unfortunately, nothing will work. When social collapse happens on the grand scale, I assume some sort of chaos happens for a while, and when the dust settles down, survivors will figure out what to do. Luck and chance will play significant role. Some boat people will survive, some will not. Some peppers will survive, others will become targets because they have "stuff" that everybody needs.Semi-rural, slum-like communities appearing in Detroit and similar places will have greatest chance of survival. Thy have too little possessions to be considered a target worth attacking, and plus they have certain experience, for them every kind of collapse has already happened, while their surrounding is still kind of 'normal' - there is still a lot of stuff to steal or scavenge.

I am sorry if this sounds too depressing. I myself went on Zoloft when visiting Serbia couple of years ago.

Skip Radau said...

I remember Peter Schiff being denounced by the talking heads on mainstream TV when he was predicting the 2008 crash. No one laughed at him afterwards. He is now saying that that those financial patterns are repeating themselves. I assume the talking heads are doing their usual cheer leading.

This reminds me of Dubya's push to privatize Social Security back in 2005. If he succeeded we would now be standing in soup lines. Of course the banksters knew what was coming and were looking for an early influx of cash. They just have to be a little more patient.

jsn said...

It is all a big bubble, but like the myth that if the demos ever figures out what fiat money is their elected representatives will bribe them into a state bankruptcy, in fact a narrow elite has figured it out and is bribing the government to hold a rotting system in suspended animation by hosing them with free money, the worse the fuck up, the more money the get. And with QE, they've trapped themselves in it, ( http://www.golemxiv.co.uk/2015/06/trapped-bubble/ ) there is no way out except to liquidate their own holdings.

The problem is, in 2008 the SEC and Fed waived "mark to market" rules to prevent total collapse, and that has become a trap as well: you mark to market now and the whole house of cards comes down. So instead we have a communism of the rich where any minor ructions in what we now quaintly call "markets" induces fits of fiat support. Monetarily it can go on for ever, its fiat money, but it has consequences in the real world that are looking increasingly dangerous.

I wish I had a boat like yours!

Nathan Donaldson said...

The financial markets have been boring for five years, having gone from being openly fraudulent to opaquely fake. Only insiders will ever know how much bad debt from things such as commercial real estate and shale oil junk bonds will eventually find it's way on the Fed's balance sheet. The only thing worth thinking about as an outsider is just how great a difference between a fake "official" reality and a real reality a society will tolerate before losing it's mind. My guess, considering the results of the Ashe Conformity Test, is that anyone who thinks hard enough about the question will lose it's mind before our society does.