Let me recap and extend:
- All the talk about the “paradox of thrift” (i.e. blaming thrifty savers for the global financial crisis) and other smoke screen rhetoric is gone. The problem is and always has been debt. The only way to rack up these unsustainable levels of debt is through fractional reserve banking. PERIOD. If credit could not be conjured infinitely from thin air then high risk debtors would never be allowed to overextend themselves and creditors would never become big enough to be systemically risky.
- Only a few quarters ago the focus was all about how bad the US banks were and Euroland seemed to be getting a free ride in the press. Back then I reported many times that I thought Euroland and Asia were both in very bad shape and likely even worse shape than the US. Not that the US banks are any good, most of the big ones are completely insolvent to the point where I have removed all of my money from them. They would have been shut down already if they were forced to do an honest accounting. But the US owns the world’s reserve currency still and that means the world is willing to extend us more credit to kick the can down the road further than it will do for Euroland or Asia. We are the lead Ponzi operator and we will be the last to really fall hard IMO.
- Euroland just pledged nearly a trillion dollars to prop up their scam but the Euro is still falling. Ponzi theory suggests that as the Ponzi nears the collapse phase it takes more and more promises and guarantees to keep the system from collapsing and each round of promises has less effect than the last round even though the size of the promises continues to grow. This is because the Ponzi is based on faith and confidence and as the herd begins to lose confidence it becomes exponentially more difficult to instill confidence. Nobody in the herd wants to leave the watering hole too soon but everyone in the herd knows that the last to leave become breakfast for the lions.
- Mauldin: Europe has 2 options: continue borrowing until nobody will lend anymore and then the fly hits the windshield or they voluntarily stop borrowing. Both he and Whalen think they will choose option 1. It doesn’t really matter because both avenues lead to a reduction in the credit portion of the money supply which is far bigger than the monetary base. Both avenues lead to the same result – depression and heavy handed government which tries to put down the civil unrest commonly associated with sudden poverty.
- The suggestion from the interviewer that (paraphrased) “We’ve been kicking the can down the road for a long time and we seem to be OK” drew a round of laughter from Mauldin and Whalen. Make no mistake, we are on life support.
All of this is Austrian economics 101. For decades Keynesians suggested that we could kick the debt can down the road forever but there always comes a time in any Ponzi that the participants fear the Ponzi is going to be unable to pay them back the money that they put in and so they stop putting more money in, and worse, they begin pulling money out. Have we reached the “end game” of the Ponzi as Mauldin (formerly known as Mr. Muddle Through) suggests? I don’t know and neither does he but the data suggests that risk (…all you ever get when dealing with chaos are odds and probabilities…) of a global collapse has never been higher. In fact, the people seem to be actively driving it by electing people who are vocally against government spending which is a strong force propping up the Ponzi. That which most people think will lead to stability is actually going to hasten the inevitable demise of the Ponzi. Only after the Ponzi collapses will real stability be free to take place.
The good news in all of this is that the world does not suffer from shortages right now but rather credit driven overcapacity. We have an amazing abundant planet with amazing people and amazing technology. In other words, if people have to do without it isn’t because we don’t have the wherewithal to feed and clothe ourselves but rather because it would not be profitable to the people who have plenty of money that run the show. What this means is that a global financial rebalancing could go a long way to fix the problems pretty quickly and in fact that is likely the only way out of this mess. In the video, Whalen refers to the jubilee (which required that all property be returned to its original owners every 50 years) and suggested that inflation was the modern mechanism for doing this. In a credit driven economy, truly wealthy people are wealthy because others owe them money borrowed in order to create production capacity. But massive inflation wipes away debts on manufacturing equipment thus reducing actual production costs. Unfortunately, lots of people’s savings which are stored in fiat currency will be wiped out too. Remember, the dollar is a debt note and inflation wipes away debts of all kinds. Of course, there will be no inflation until the Great Deflation is allowed to play out and the faster and more severe it is allowed to happen the sooner we will emerge on the other side.
What I hope happens at the end of the day is that we get rid of fractional reserve lending and return to honest money where people get what they work for and where the stored fruits of their labor (retirement savings) are not at constant risk of evaporation if the monetary system collapses (something that can only happen if the money supply is fraudulent like fiat currency). We will know that we have such a system if innovators and producers, not bankers and bureaucrats, occupy the top rung on the societal ladder. That is obviously not going to happen overnight.
