For many years I have been discussing what I referred to as a coming "supernova economy" which is characterized first by a deflationary crash which would then be followed by massive inflation. I've looked at a lot of indicators including mania charts from bubble housing markets, etc. to figure out where we are in the process but to date have not seen real evidence that the deflation phase has worked its way through. In fact, quite the contrary. Things should be crashing like nobody's business but we are muddling through. This is the power of the "exorbitant privilege" of controlling the world's reserve currency. We get to print money from thin air to fight deflation and then to export the associated inflation AND the civil unrest and revolution which results from people overseas having difficulty affording food and other basic necessitates.
Because of the power wielded by government and the Federal Reserve, this is not a real economy and these are not real markets. Price discovery of assets is not happening because losses are being papered over thus slowing the liquidation of the underlying assets. Nobody could expect that the Fed could keep the Ponzi plate spinning this long. The fact that it has managed to do so only proves that fantasy can go on a lot longer than anyone could think is possible. Look how long Madoff got away with it and Enron too. If you have a pile of losses and debt that you can just basically ignore then sure, all new money coming in looks like massive profit. Let's all party like it's 1999!
The main thing that blindsided deflationists (so far) was that they expected the rule of law to hold. But laws no longer apply. Rule of law is dead and now we have rule of man, rule of make it up as you go along, rule of political expediency. History shows that the ability to change rules on a whim never works out very well for the people so I guess we just have to hope it's different this time. I'm mainly referring to the "regulatory forbearance" associated with mark to market of assets held on the books of the banks and shadow banks. They are basically being allowed to sequester their losses, sometimes in plain sight and sometimes off balance sheet, and to ignore them. The interest rates are being held artificially low so they still have no problem servicing the debt even though it is massive. These unprecedented manipulations allow the companies to actually appear healthy instead of being bankrupt like they really are.
Because of this strange new twist it's entirely possible that the bubble economy hasn't even peaked yet (although I'm not betting in that direction yet). I am now on the lookout for signs of massive inflation setting in which I expected would follow the deflation (which has indeed occurred in many markets -Detroit
Along those lines, today I found this story which indicates venture capitalists are giving out lots of small bits of money but at really excellent terms. They are just shot gunning money into the hands of many small garage inventors instead of throwing a lot of money at small number of venture started by Harvard grads. Investors appear to be figuring out that the college really isn't as important as it cracked up to be and that the main driver of business success is heart and soul and sweat. In other words, they have figured out that new value comes from labor, especially reasonably priced labor, not from overpriced PhDs strutting around like big men on campus puffing out their credentials and demanding to be referred to as "Doctor".
Still, the key is that they are shot gunning the money which means malinvestment will occur. The economy is not demanding more stuff, these people are in the process of trying to think up new stuff for the economy to learn to demand in the future. It might work and then again it might just be an echo of dot bomb where everyone with a business plan was given startup cash. If the government starts getting involved then one has to consider the real possibility that the next massively inflationary credit bubble might be forming.
Because of the power wielded by government and the Federal Reserve, this is not a real economy and these are not real markets. Price discovery of assets is not happening because losses are being papered over thus slowing the liquidation of the underlying assets. Nobody could expect that the Fed could keep the Ponzi plate spinning this long. The fact that it has managed to do so only proves that fantasy can go on a lot longer than anyone could think is possible. Look how long Madoff got away with it and Enron too. If you have a pile of losses and debt that you can just basically ignore then sure, all new money coming in looks like massive profit. Let's all party like it's 1999!
The main thing that blindsided deflationists (so far) was that they expected the rule of law to hold. But laws no longer apply. Rule of law is dead and now we have rule of man, rule of make it up as you go along, rule of political expediency. History shows that the ability to change rules on a whim never works out very well for the people so I guess we just have to hope it's different this time. I'm mainly referring to the "regulatory forbearance" associated with mark to market of assets held on the books of the banks and shadow banks. They are basically being allowed to sequester their losses, sometimes in plain sight and sometimes off balance sheet, and to ignore them. The interest rates are being held artificially low so they still have no problem servicing the debt even though it is massive. These unprecedented manipulations allow the companies to actually appear healthy instead of being bankrupt like they really are.
Because of this strange new twist it's entirely possible that the bubble economy hasn't even peaked yet (although I'm not betting in that direction yet). I am now on the lookout for signs of massive inflation setting in which I expected would follow the deflation (which has indeed occurred in many markets -
Along those lines, today I found this story which indicates venture capitalists are giving out lots of small bits of money but at really excellent terms. They are just shot gunning money into the hands of many small garage inventors instead of throwing a lot of money at small number of venture started by Harvard grads. Investors appear to be figuring out that the college really isn't as important as it cracked up to be and that the main driver of business success is heart and soul and sweat. In other words, they have figured out that new value comes from labor, especially reasonably priced labor, not from overpriced PhDs strutting around like big men on campus puffing out their credentials and demanding to be referred to as "Doctor".
Still, the key is that they are shot gunning the money which means malinvestment will occur. The economy is not demanding more stuff, these people are in the process of trying to think up new stuff for the economy to learn to demand in the future. It might work and then again it might just be an echo of dot bomb where everyone with a business plan was given startup cash. If the government starts getting involved then one has to consider the real possibility that the next massively inflationary credit bubble might be forming.
