CNN: The world is drowning in debt

I have a good friend who sent me a link to this CNN article today with the comment that he hopes I am wrong about my predictions for our economic future but he's beginning to worry that I am right.  Funny, I have been providing links and facts that point to this for a long time but if CNN says it then it carries weight somehow even though I have been studying and writing about this longer than the author of that article, Anneken Tappe, has been out of college (she graduated from The Hague University in 2010).  It's a good example of human herding.  Instead of paying attention to the facts, the herd pays attention to the podium they are being spoken from.  Someone standing at the CNN bully pulpit must obviously know more about this than some guy with a blog.

Of course I cannot blame people for being human even if it doesn't always make sense.

My view on all of this is that if hope is our only strategy, we can always keep hoping that the collapse happens after we die, thus leaving it for the next generation instead of us.  For many, that is not an unreasonable strategy.  I personally don’t like it but I can see how for many it could be a choice between trying to be fair/honest to the future while not accepting all the pain for us and our families for mistakes that others have done in the past. That's a pretty tough choice for someone who does not struggle with money but a much harder choice for the masses that can barely make ends meet right now.

For example, neither you nor I decided to go off the gold standard which, even though the USA cheated on it when it was policy, provided at least some level of restraint on debt based spending.  The people who charged up the moon missions and Vietnam war leading to the realization by the French that we were cheating on the gold standard left that US default for next generations to deal with.  And to be fair, that generation in turn got shit on in their lifetimes when the federal reserve was born and then over time debased the money supply, first getting physical gold out of the equation and then removing all the physical silver from the coinage and then eventually removing the disingenuous backing (AKA gold “standard”) of the dollar by gold. All generations must take some pain I guess.

Bottom line is that hoping one way or the other for the timing of the collapse to change (either sooner or later) is one thing.  But hoping it will somehow magically not happen is like living off your credit card for a long period of time and never expecting to be asked to pay it off.  It never worked before and no, it won’t be different this time.  We just don’t know exactly when.  But I can say the debt is going exponential right now and that exponential functions have the effect of shrinking time between events.  When it collapses, most people will say they never saw it coming.  Exponential finance 101.

By my reckoning we have another few years, not decades.  When the collapse occurs we will recognize it by the resurgence of "massive inflation" and then perhaps hyperinflation, both of which are different than inflation; they have different causes even though they share the word "inflation".

Inflation is simply the watering down (debasement) of the money supply.  It’s adding more water to the kool-aid in order to get more kool-aid even if the resulting product is weaker.  While the most notable side effect of money printing is higher prices over time, people are sometimes confused into thinking that if prices are not rising then there is no inflation.  This is just wrong.  Inflation is inflation and rising prices are rising prices.  They are not synonymous.

We already have inflation.  The FRED website from the St Louis federal reserve provides this chart view of it. Below we can see that M2 was just over 8 Trillion in 2010.  Today it is just under 16 trillion (the chart is behind by a quarter).  So we can estimate it will have doubled in the past 11 years.  If you do the math as I have, the rule of 72 shows that M2 has been increasing at about 6.5% per annum.  I suspect if we had exact numbers, the inflation rate would be 6.66% but 6.5 is easier to remember.

So that’s the bottom line on inflation.  But now let’s talk about rising prices.  Even though inflation is constant at ~6.5%, prices have not been rising at that rate (leading very smart but economically ignorant people to think there is no inflation).  So how does it happen that an increase in money supply doesn’t cause an immediate rise in prices?  Let’s take the case in point of oil which is far below it’s late 2008 peak despite 10+ years of 6.5% currency debasement. 

How can that possibly be? The chart below explains it.  The US knew that the fed’s money printing was going to tank the dollar and so in order to back the petrodollar with something they released the debt spigots to fracking companies.  The exponential rise in US oil supply has moved the US up from being a net importer of oil to being the #8 exporter of oil in the world.  This massive influx in brand new oil has kept global oil prices down even though the dollar gets less valuable each year.  This is just one example of how correlation in the short or even medium term is not assured between inflation and rising prices.

 



Of course, this will end soon enough.  Most people don't know it but fracking wells have production charts that match the typical mania chart: rapid rise in out put but then a peak and a massive and super rapid decline to less than where they started.  This is depicted in the chart below.  When shale goes bust, the US will again become a net oil importer and the dollar will suffer.  In addition, all of this productive capacity was installed using, you guessed it, massive debt.  So the short term benefits will be gone but the debt will remain as an even bigger burden to the US economy in the coming years.



This is why I have been telling my subscribers to start buying the drillers again (like RIG and DO): they got screwed when shale went exponential but they will be loved again when shale goes bust.  The chart below is when I began recommending a buy because the falling wedge was in throw under.  It's already up one dollar since then (18.5%).



So right now we have inflation but not rising prices.  What about "massive inflation" and then hyperinflation?  How are these different than inflation?  In short, massive inflation is when the government has to go into overdrive money printing when the debt begins to collapse.  As the debt collapses, someone has to pay for it.  There are only  a few known ways to do it:

• borrow it
• print it out of thin air
• tax the workers for it
• go to war with the creditors, kill them, cancel your debt to them and take their stuff 

In a debt collapse environment nobody will be loaning anything.  Also, the workers are living hand to mouth as is so you get a pitchfork rebellion if you raise taxes.  See Chile. If you go to war in a nuclear world there might be nothing left afterwards.  So printing it from thin air is really the only option.  In massive inflation, prices begin to go up rapidly because of the influx of money but the price rise is not even.  Some asset classes get blown up but others remain tame.  In the US we have some evidence of this with the high prices of the stock market and of other assets (like coastal housing, again).

Hyperinflation is a completely different animal.  Fiat currency (i.e. fake money) has no backing and thus no intrinsic worth.  It works in trade only because people have confidence in the issuing authority.  Hyperinflation happens when, for whatever reason, the herd loses that confidence and then the fake money returns fairly rapidly to its intrinsic value of zero.  In hyperinflation, the government rushes its currency printing in order to try to keep up with it, not the other way around.  In other words, the trading value of the currency falls faster than the government can print.  So the decline in value during hyperinflation is clearly not a function of the new printing; it is simply the sudden awaking by the herd to the fact that fake money is in fact fake value and that they were suckers ever to have thought otherwise.

Here is where I just have to stop ignorant people from saying "well gold and silver only have value because of confidence too" in a childish attempt to equate fake paper currency to real money.  To that I simply say, the issuing authority of paper currency is some institution of man.  The issuing authority of gold and silver physical bullion is G_d.  Faith in G_d is way down on planet Earth right now because people have put their confidence in godverment.  But as I predicted long ago, when the collapse comes that will change.  There will be a massive reversal in this and people will come back to G_d.  Not to the churches mind you; they have screwed their reputations over so badly that I do not see how they ever fully recover.  But confusing a man-run religion with G_d is just as dumb as confusing fake money with Gold.

Along the same lines, morons will tell me "but you can't eat gold".  Gawd what foolishness!  You can't eat paper currency, stock or bond certificates or oil for that matter.  They are not food.  Where do people come up with these childish notions of conventional "wisdom", anyhow?  Not from my blog, that's for sure...