Global credit is crashing. Markets will likely follow.

Mish is reporting on the most important economic data in the world today while sleepy sheeple are kept in the dark by the completely useless news at Google, Yahoo and Bing.   While it may not be as easy to understand as Lindsay Lohan's new role playing Liz Taylor, the fact that global credit is collapsing at a staggering rate is completely understood by anyone who knows how money works and who understands the eventual result if this continues.

First, please understand that the importance of this is directly tied to the fact that our money supply has no real money in it.  It consists completely of debt.  The dollar, the Euro, the Yen: all debt notes.  The US started the world down this fraudulent path in 1913 with the creation of the Federal Reserve and then sealed the world's fate in 1971 when Nixon defaulted on gold convertibility of the dollar.  Since then, all paper money in the world has had no backing whatsoever.  You might just as well call it "faith money" as fiat currency.  Another word for faith is "con".  As in con game.  More to the point, a global debt Ponzi scheme.

Once the value (i.e. the work needed to create new money into the economy) was removed from the currency then it was not difficult to game the system by creating seemingly unlimited amounts of credit in that system.  After all, if debts go bad in such a system, just print up new money, right?  Well the truth is that you don't even have to do that!  You simply change the rules to allow more loans on top of the reserve cash you already have.  So instead of loans being backed by 50% in cash reserves or even 10% cash reserves, they are backed by 3%.  In other words, leverage is increased by those who have been given special permission to create credit (i.e. the banks).  If asset prices drop by as little as 3% for many big bankers, all of their assets (and the assets of the people who stored their money with them) are wiped out.  If you don't understand this leverage, read up on Bear Stearns. As all of this was happening, the global money supply expanded mainly because of the expansion of credit, not primarily because of the expansion of actual money (aka the monetary base).  But the markets can't tell the difference between money conjured into existence by the Federal Reserve and credit conjured into existence by banks in the Federal Reserve system and so prices are pushed up across the board by the exploding credit supply.  Over time, credit becomes the major component of the global money supply.

Unfortunately for the con men running this scam, what looked initially like a "free money", "can't lose" scenario for them was actually a "guaranteed to blow up in your face eventually" scenario from the very start.  There are two reasons no con ever lasted (or will ever last) forever.  Either the con men wipe out all the patsies and there is nobody left to try to con (except other con men) or the patsies wake up, smell the con and run away.  In the case of the former, the patsies wish they could still play but they have been fleeced.  The casino has all their money and so they are out of the game not by choice but by circumstance.  As for the remaining players,  well,  you can't con a con.  So if all that are left in the game are con men then the con is ripe for collapse.  The con men will take to infighting, trying to run the con on each other, etc.  Equally matched, nobody can make further gains despite hundreds of millions invested in attempting to do so.  So they either go to war or they give up and go do something else.  In the case of the latter, the patsies have had enough.  They have gotten pounded and now they are afraid of losing everything to the scam.  So they are hunkering down.  They are saving instead of spending and what they do buy, they buy with cash. 

In either case, the credit / debt supply of the world begins to reverse course and with it the money supply contracts.  Governments try to counteract this deflation by printing up money from thin air but they have to be very careful because after a certain point the people realize that the government knows no constraints on money printing.  When the people finally realize this they run away from the scam of fiat currency itself.  This is what Ben Bernanke fears right now.  He sees the rising prices of gold and silver and he knows that the smart, educated money is taking this time to build a large store of wealth outside of the fraudulent paper money system.  He is monitoring gold purchases very carefully and trying to keep gold prices from going wild.  Unfortunately for him, China and others know that Ben's QEx efforts are screwing them out of the wealth that they have stored in USD denominated assets.  As a result, each time Ben and friends drive the price of gold lower, China and friends buy more of it on the cheap.

Ben knows the golden rule is still true: at the end of the day, he who has the gold makes the rules.  This is because educated people know that gold is money and everything else is credit.  Credit can be defaulted on but money cannot.  If Ben keeps trying to drive gold lower while at the same time printing more funny money dollars from thin air then China will build up a gold stash to rival the U.S. and what will follow is the rise of China as a world leader.  Not just as a place to buy low cost, high quality goods but as a global power that actually sets policy, wins disputes over lands and natural resources and other sovereign claims.  Elements of Chinese law would become global law.  Elements of Chinese culture would become global culture.  Chinese military power would settle arguments the way US military power does today.  In other words, the very concept of western dominance of the future of the world is at stake here.  Perhaps 1 in 1000 have even a clue about this but it is the story that has been told and retold throughout human history: he who has the gold makes the rules.

Because of this, Bernanke is being very careful about announcing any further stimulus.  It may just be that he thinks that if he announces QE3 then it will be the straw that broke the camel's back.  Many things Bernanke is saying lately tell me that he is fearful that such a move would drive so many people out of his funny money and into physical metals that he and his cohorts will not have the means to suppress the price of gold anymore.  If he allows that to happen, the gold price will skyrocket and the currency will crash.

At the same time, if he doesn't continue printing money to make up for the falling credit and debt supply then the overarching money supply will massively contract and there will be a greater depression globally than the world saw during 1929 and following years.  Without intervention, the math of the current system demands that deflation occur.   But, if the people stop trusting the current system and abandon it at the herd level then the historical result is hyperinflation.  I can't tell you how few people understand this delicate dynamic.  It means that very few people are factoring in the risks that are in play today.  I say again, deflationary depression is what will happen if Bernanke goes laissez faire on the system like he should do but that hyperinflation could rapidly result if he continues printing money or if Congress takes over the responsibilities of the Federal Reserve.  If Congress ever takes over control of the money supply, that's it, game over, hyperinflation is assured.

The above paragraph will confuse many and so I want to say some final words about it.  The main question from people will be how can we go from deflation to hyperinflation at the drop of a pin?  How can the whole thing possibly rest on a knife edge like that?  It is the basic lack of understanding about debt based money which makes people ask such a question.  So here is the answer: the money in your wallet, in your bank account, and in your 401k has no inherent worth.  Why?  Because it took no work for the issuers of it to conjure it up in the first place.  In the case of bank accounts and 401ks, nobody has even bothered to print up most of the paper bills to back it.  It's all just numbers in a computers.  Once the act of money creation is separated from the act of working to bring it into existence, the money is inherently worthless.  I didn't say that you didn't work to get it and I didn't say that other people won't still accept it in trade (key word: "still").  I said that the owner of the money supply, the Federal Reserve, didn't work or even collect taxes on your labor in order to get the money in the first place.  This did not used to be the case when the USD was gold and silver backed but that ended long ago.  So today, the only thing and I mean the ONLY thing that gives your US dollars any purchasing power in the market is faith and confidence.  If the faith and confidence in the issuing authority of fiat currency collapses, so will the purchasing power of the currency it issues.  Again, this is history talking.  It cannot be argued.  It is what it is.

As you can see, there is a lot more at stake here than the price of gas or US employment numbers.