When we look around it is hard to really see that anything is seriously amiss. Most people are still working, the electricity and water still work, everything looks pretty normal. There is no rioting in the streets, no firebombs being thrown, no cars being turned over and no mass looting taking place. Politicians are not being dragged through the streets. It makes people who are reporting on the true state of things look a bit like alarmists or possibly conspiracy theorists. It's a strange feeling having people cock their heads sideways and roll their eyes when I explain the math to them. Math doesn't matter to people, only the here and now and the current perception matters. I was warning people before the housing bubble and the stock crash that these things were coming. Some listened, some didn't. That's just people. Of course that's how Ponzi schemes work. All is OK until they collapse and then everyone gets a sudden wake up call. What's happening at the state and federal levels is Madoff on steroids. It is guaranteed to collapse at some point.
Nobody can predict the exact future and the timing is always the hardest part. Heck, look at the Bible! Jesus predicted all sorts of things for the end of the world but the timing he would not commit to. He admitted he didn't know the timing; he said only God knows the timing. That's how difficult it is to predict the timing of future events! Still, lots of people can lay accurate odds about the general direction. It's just not that difficult to see where the math is taking us. If states don't get a bail out I can say with pretty high confidence that poor people who lose their food stamps and section 8 housing subsidies are going to be wondering rather loudly why banks got bailed out but poor people got thrown under the bus. They are unlikely to just quietly starve to death and if they are allowed to build momentum it will affect everyone because angry crowds target everything and everyone they see. The major issues we have to work through are all symptoms of the overarching debt Ponzi:
- States are bankrupt and will soon have no choice but to default on their debt in some form or fashion. What cannot be paid will not be paid. This will initially affect pensioners, pension funds, and bond holders but it will crash the credit rating of the states so they can no longer borrow cheaply. Over time everyone will suffer from infrastructure that is run down with no money to maintain it. How do I know this? Because it was all debt financed to begin with. That means that the people of the states couldn't really afford it. That is best case. Worst case is that angry poor people decide that if they don't have food to eat then nobody else is going to have anything nice either.
- The commercial real estate meltdown is going to be as bad or worse than the residential real estate meltdown. The math says it's coming and it's difficult to see how banks are going to handle it gracefully.
- The Federal Reserve can try to print its way out of these problems but interest rates are rising rapidly which means the rest of the world is tired of loaning us bail out money at ridiculously low interest rates. They are beginning to want higher interest rates to compensate them for the risk they are taking that they might not get repaid. The Federal Reserve has just about shot its wad and we should not expect the government to be able to intervene in the next crisis the way it has in the past. Contrary to popular belief, the government is not made of money although it sometimes looks that way. A limit will be reached at some point and then the pain step forward front and center and rising interest rates are the canary in the debt Ponzi coal mine.
- Euroland is by no means done with its problems. Ireland will probably default on sovereign debt and then Spain and Portugal too. It could set off a "contagion" which is well described as a domino chain of debt. One failure pushes the next weaker player over the edge until everyone has collapsed.
- China has been buying stuff from everyone in order to build real estate to nowhere in order to keep its labor force from starving to death. Of course, all that internal real estate was built using credit. They are now raising rates to slow down the use of credit because it is causing food prices to rise rapidly and threatening the lower middle class' ability to feed itself. As China cools down so will Australia and Canada who have been selling China commodities. Brazil is probably in a similar boat.
