Wednesday, June 26, 2013

The Tapernanke has spoken

Kevin Best
If you've noticed, the financial markets have been in a bit of a state lately. The latest crisis has been triggered by the Federal Reserve Chairman Bernanke publicly mouthing the opinion that there shall be a “tapering off” of the frenzied free money printing and US government debt-buying scheme that he has been running for quite some time now.

Before proposing the alcoholic “tapering off” metaphor as a viable therapy for what ails the financial realm, Bernanke should have consulted some medical web sites around the internet, to see if it even works. If you are a serious drunk and suddenly go “cold turkey,” then you run the risk of developing Delirium Tremens. Same thing happens if you attempt to “taper off”: withdrawal symptoms are withdrawal symptoms, no matter whether the withdrawal is fast or slow. They include nervousness, depression, not being able to think clearly, fatigue, irritability, jumpiness, nightmares, clammy skin, dilated pupils, insomnia, loss of appetite, sweating, rapid heart rate, pallor, tremors, agitation, severe confusion, hallucinations, fever, seizures and death. Successful detox therapies substitute some other, less addictive drug for alcohol, and then taper the patient off that drug. Unfortunately, Dr. Bernanke has just one drug in his bag—free money—leaving just two equally non-therapeutic options: “cold turkey” or “tapering off.” And the latter only sounds better if you don't happen to know much.

And now that he has said it, there is nothing he can do to un-say it. The denizens of Last Chance Saloon now know that their friendly proprietor will no longer let them continuously run up a tab to keep their habits going, and, once they get miserable enough, they are going to completely lose it and smash the place up. And once that happens there will be no more drinks for anyone, free or otherwise.

Looking at the first three stages of collapse—financial, commercial, political—it is clear why financial collapse should, and to some extent already has, come first. Commercial collapse results from the disruption of the physical flows of products and services; political collapse occurs when governments are no longer able to fulfill their obligations to their citizens in the wake of commercial collapse; but all that is required for financial collapse is for certain assumptions about the future to be invalidated, for finance is not a physical system but a mental construct, one resembling a house of cards that, to stretch this metaphor just a little, can remain stable only while continuously adding more cards, in the sense of continuous credit expansion supported by economic growth. But we are entering a time when a wide variety of physical constraints are making themselves felt around the world, from the depletion of fossil fuel resources, metal ores, phosphate, fresh water and arable land, to massive disruptions because of droughts, floods and heat waves brought by accelerating climate change, to the political instability and upheaval which sweep the world in the wake of each food price spike. All of these elements combine to make a rosy projection for global economic growth untenable. In turn, an extended period of economic stagnation followed by a sustained, perhaps terminal contraction is fatal to a financial system that constantly requires more debt, and more growth.
 The system is no longer self-stabilizing. Its sustained existence requires a continuous, concerted intervention: bailouts, “quantitative easing,” “liquidity injections” and so on—all euphemisms for printing money and handing it out to insolvent financial institutions to allow them to continue functioning. Left to its own devices, the financial system would collapse instantly. Nor are these interventions sustainable: the position of the governments that are continually backstopping and papering over the losses in the financial system becomes more and more untenable every time they step in. Although at present the United States is still able to borrow at record low rates, this is not because its debt is any more repayable than Greek or Spanish debt; it is because the markets think that it will be last to default; the United States has been described as“the best-looking horse at the glue factory.” It is the place where big money goes to die. With the US Federal Reserve now committed to endless money-printing and financial asset-buying, the prospects for the US dollar grow dim, and since it is still the reserve currency throughout much of the world, with it grow dim the prospects of other paper currencies around the world. A case in point: Bank of Russia has more than enough foreign currency reserves to buy up every single ruble in circulation, but such a defense in depth against a run on the ruble becomes ineffective if the foreign currency reserves themselves plummet in value, causing the ruble and the dollar to plummet together, like star-crossed lovers jumping off a cliff, embracing each other all the way down. This is why Russia (along with other countries) is now busy accumulating gold.
These quotes are from my Five Stages of Collapse, which is available from all the usual places, pulled from the beginning of the long chapter on Financial Collapse, which goes on to describe ways of cashing out of the system before cash (along with all other financial contrivances) becomes worthless, how to trade in absence of banks or other financial institutions (you can trust) and what life without (access to) money tends to look like.


MARIUS said...

Bonjour Dimitri

Votre livre est enfin arrivé en Guadeloupe où il était attendu avec impatience.
Sur cette petite île de la Caraïbe, où l'esprit de résistance n'a jamais faibli et où les solidarités familiales et locales sont toujours très fortes, il contribuera à bien nous préparer à ce qui nous attend tous...

Encore merci !

Michel Bescond

Oxenhandler said...

The Serenity Prayer (Adopted by Alcoholics Anonymous)

God grant me the serenity to
Accept the things I cannot change the
Courage to change the things I can and the Wisdom to know the difference.

The Slogans: "One Day at a Time" and "Easy Does It", may also help.

mm said...

Thank you for the head's up Dmitry.

Anyone remember Basel II, which sucked the leverage out of the system and crashed everything? That was November, 2007. Basel II is where "mark-to-market" came from, which caused forced liquidations. The BIS waited for peak leverage and then dumped the whole thing, transferring the bad debt onto the books of the governments. (Why do sovereign governments listen to the BIS anyway? Hmmm...)

Well, here we go again. Basel III will do the same thing. But this time, no bailouts. This time it will be bail-ins.

Here is a superbly well-reasoned play-by-play of what is about to happen. It is deep down the rabbit hole but well worth your time (whether or not you have assets that depend on paper promises):

Thank you for your wonderful new book Dmitry. You are a national treasure.

k-dog said...

A financial system built on sustainable principles is entirely possible but that would require changes in the power structure of the economy and the way it is run. The entrenched momentum may be so strong that changes to the system may be prevented and collapse will not be averted.

Perhaps the experience of going 'cold turkey' would in a free society induce sufficient cognitive dissonance to lead to a realistic assessment of our predicament and solutions would be implemented.

In a free society irritability jumpiness and nightmares would be experiences willingly shared. Agitation and confusion would be dealt with and discussed. But we don't have a society like that.

Instead the public will will be fed heaping spoonfuls of propaganda some now custom tailored to intended recipients. Dissent and discussion will be suppressed and only the most brain dead middle of the road tired old economic policies will be considered.

The laws of physics kick in and a death march to collapse commences. Expecting an economy to run based on an of infinite growth financial model in a world where the limits of growth have already been reached is lunacy. Lunacy, unless you are on top of the pile and your primary interest is maintaining your position and control over the pile is your main concern. If maintenance of position and status is the main concern survival of society comes in second place to those without hearts. With each passing day, with each new revelation. I become more convinced of our inability to choose leaders with hearts.

I'll be examining a new twist on our inability to meaningfully deal with reality and make the fundamental changes to our lifestyle we need to make to survive tomorrow on my own blog.


Anonymous said...

I agree with your assessment, and thus financial collapse will most assuredly occur, a la Orlov. I see it as sooner rather than later, as the governmental pronouncements are become stupider and more bellicose. This tends to lead to a lack of confidence by all concerned and a withholding of letters of credit that keep the whole scheme of debt furtherance afloat.

(Sure, there have been some fine tricks and accounting frauds applied in the last couple decades, but they're getting thinner and more 'translucent' as their frequency rises.)