Guest Post: A 5-Year Scenario: 2011-2016

Tyler Durden's picture

Written by Charles Hugh Smith from Of Two Minds

A 5-Year Scenario: 2011-2016

In this scenario, the wheels fall off the debt-fueled global "recovery" and assets bottom in 2014.

Here is one possible scenario for the next five years. Why do I consider this somewhat more likely than other possible scenarios? Here some undercurrents which may be generally under-appreciated:

1. There is a difference between speculative and organic demand. The two are of course related, as industrial consumers of resources must hedge against rising prices using the same instruments as speculators--futures contracts, etc.

2. Follow the credit, not just the money. It's not just the U.S. economy which is dependent on cheap, abundant credit--the same can be said of China and the European Union to some degree.

Just because Chinese buyers put 50% down on their fourth flat doesn't mean they don't need credit for the other 50%. Chinese developers are heavily dependent on credit issued or backed by the Central Governments banks and proxies.

Credit is not cash, and creating credit is not the same as printing cash. Shoveling $1 trillion in zero-interest credit into the banking system does not necessarily mean that $1 trillion flows into the real economy--that can only happen if someone or some entity borrows the credit.

This is why some claim that hyperinflation has never occurred in a credit-based system; it can only arise in a monetary system in which cash itself is printed (i.e. Zimbabwe et al.)

I am not making any such broad claim, but to identify the two as identical seems to me to be a profound confusion.

This distinction plays out in a number of ways. If the Fed had actually printed $1 trillion in cash and dropped it from helicopters, then those collecting the cash on the ground might have spent it, creating more organic demand for goods and services.

If the Fed creates credit and loans it to banks at zero-interest rate, the credit only flows into the real economy if somebody borrows it.

Without borrowers, the "money" just sits in reserves, where it does not spark inflationary organic demand for resources, goods or services.

If someone borrows the "money" to refinance existing debt, the only money that flows into the real economy is the difference between their original debt servicing costs and their new debt servicing costs, presuming the new costs are lower than the original. (Not always the case if said borrower had an interest-only "teaser rate" mortgage that he/she is now rolling into a mortgage with principal payments and a market rate interest payment.)

Or a large speculator (trading desk, hedge fund, etc.) could borrow the credit-money to speculate in commodities, driving prices up on the widespread expectation of higher costs in the future. In this case, the credit-money does influence the real world economy by driving commodity prices above levels set by organic demand.

But speculative "hot money" is not organic demand; it flees or is lost if trends suddenly reverse.

Since commodities such as oil are priced on the margins, this matters. A sudden decline in oil from $86/barrel to $76/barrel would trigger an exodus from speculative long positions, reinforcing that decline in a positive feedback loop.

3. Hoarding is a special flavor of organic demand. Like speculative demand, it vanishes once the fear of ever-higher prices evaporates.

4. The global GDP is around $60 trillion; the Federal Reserve has "printed" $2 trillion in the past three years. Placed in the proper context, the Fed's printing and asset purchases are large enough to influence the U.S. stock and bond markets, but they simply aren't significant enough or focused enough to enslave the entire global markets in stocks, bonds, precious metals and commodities.

Other players are busy printing and issuing zero-interest credit, too, of course, but we should be wary of sweeping generalizations about the deterministic nature of these central bank campaigns.

As further context, consider that the Fed's vast interventions have distributed some $2 trillion into the financial sector; meanwhile, U.S. homeowners saw their net equity decline by some $6 trillion.

OK, on to the scenario which will get me in all sorts of trouble:

Here is the sequence of events I consider rather likely:

Q3/Q4 2011-2012: extend and pretend fails. The wheels fall off the global "recovery," the emerging market equity bubbles, oil, China's equities and its property bubble, and most if not all commodities. Gold and silver swoon as per late 2008 as raising cash become paramount. Oil retraces to the $40/barrel level, and then drops further as exporters ramp up their exports to generate desperately needed cash.

Interest rates rise sharply, risk assets tank, borrowing dries up, housing prices "slip" to new lows (the stick-slip phenomenon), and the hated/loathed U.S. dollar confounds almost everyone by breaking out of technical resistance levels.

Civil disorder spreads along with recession and lower energy prices, which devastate oil exporters' primary source of government revenues.

With better grain harvests stemming from improved weather, declining meat consumption in 2012 due to recession and the implosion of the market for corn ethanol, grain prices plummet, wiping out all the speculators who reckoned 2010 had set the trend for the decade.

All of this starts slowly in Q3 2011 but gathers momentum in 2012.

Unfortunately for central banks, all their printing and credit creation is analogous to insulin resistance: without borrowers and solvent banks and consumers, their frantic efforts to "stimulate" their economies with additional liquidity come to naught.

The Central State's other gambit, monumental fiscal "stimulus," runs into the brick wall of rapidly rising interest payments and a political revulsion triggered by the realization that only the financial and political Elites actually benefitted from the trillions squandered in the 2008-2011 orgy of Central State "stimulus" and backstops.

With asset prices collapsing in a phase shift, the equity needed to float new loans vanishes; with risks rising, the market for junk bonds and other risk-laden debt also disappears.

All those who clung on through the "recovery," hoping to made whole, are wiped out. Their bankruptcies trigger a new wave of selling and writedowns.

2013-2014: Re-set and reckoning. Widespread political and financial turmoil leads to a few central choices:

1. Repudiation of the Neoliberal Central State/Financial Oligarchy strategy of 2008-2011 which focused on preserving the insolvent (but politically dominant) banking and Wall Street financial sectors and transferring their private losses to public entities/taxpayers.

2. Replacement of incompetent, venal, exploitative dictatorships with some new flavor or autocracy, oligarchy, theocracy or dictatorship, most of which will prove to be equally incompetent, venal and exploitative--but shorter-lived.

3. Experimentation with new models of governance, "growth" and credit/debt. Some modest recognition of the profound failures in the "extend and pretend" status quo generates a sense that these catastrophically destructive policies have been recognized as such and corrected.

These years will see the near-term bottom in housing, equities, and other assets. Those few who preserved cash during the meltdown are in a position to snap up assets on the cheap. Those who depended on credit/debit find borrowing is now difficult and dear. Those who "bottom-fished" real estate in 2011 are wiped out, along with those who bet that commodities were heading straight to the moon.

2015-2016: false dawn. Things get better; prices stabilize, assets and commodities start rising in price and a sense of hope replaces widespread gloom and distemper.

The real crisis has been pushed forward to 2020-2022. Nonetheless, 2015-2016 will offer those with cash tremendous profit opportunities.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Lost My Shorts's picture

This sounds like the same deflationist thesis which has been articulated umpteen times before and was supposed to happen yesterday already.  Probably it will be repeated over and over, with an incrementally delayed timeframe, until it finally comes true, sometime between tomorrow and never.

Henry Chinaski's picture

I read something somewhere about "on a long enough timeline..."

Herd Redirection Committee's picture

I just don't understand how it would even be possible for the dollar to rally, never mind relative to what.  How is money created out of thin air going to become REALLY valuable again? The only way is if the supply of USD shrinks significantly.  This means the end of all liquidity provided by central banks (not going to happen) and the Fed (and China) would have to sell every Treasury they own, in order to soak up 'excess' dollars.

malikai's picture

Hyperinflation was also supposed to happen umpteen times already as well. Either or both are still quite possible.

MachoMan's picture

Everyone, in the end, is a hyperinflationist...  we just put on different coats based upon our daily forecast of the weather.

downrodeo's picture


I've observed the same thing lately. Even some of the more die-hard deflation callers have started to change their tunes. History, it would seem, sides with hyperinflation.

jswede's picture

yea - there's no deflation out there - housing is skyrocketing for example

Herd Redirection Committee's picture

And after housing what is your best example of deflation???? Is there a 2nd example even?  There is credit-related deflation right now, meaning, deflation in everything that is bought with 90%+ credit, and inflation in everything else (groceries, energy, insurance, tuition, health care costs, etc.)

ciscokid1's picture

Anyone bought a car lately...prices are coming down.

Herd Redirection Committee's picture

Bought with 90% credit, right? So yeah, the price will be down vs the price in the middle of the credit boom.  People are saturated with debt, already, lessing the appetite for additional debt, and thus, driving down demand for credit-based purchases.

Lord Koos's picture

Coming down because there is no demand, people can't afford new cars.

DosZap's picture

Credit is not cash, and creating credit is not the same as printing cash. Shoveling $1 trillion in zero-interest credit into the banking system does not necessarily mean that $1 trillion flows into the real economy--that can only happen if someone or some entity borrows the credit.

I agree with your premise, but the money is ( a shit load) missing, and lent out, and not to banks.

Thats distribution its in the system, therefore it is real dollars running amuck, where, ALL it went we do not know.

But companies have been  handed it hand over fist.


If it were not loose, then why not call it back in from the banks and we have solved the issue of the 3.5 Trillion in debt we have incurred?.

When your loaning FRNs to McFracking Donalds, who the hell else is getting it, besides GE?, Uh Huh, and where is the 800,000.000.00 thats missing?,no one has a clue.

hedgeless_horseman's picture

It sounds like you are just arguing how long and how deep deflation lasts.  If this scenario were to gain any traction, then Ben would drop hard currency from helicopters.  He said as much.

That is why many say deflation/stagflation first, then hype-inflation.

Sudden Debt's picture

This article actually predicts deflation on a massive scale but says inflation out loud.

I'll give this article:


SheepDog-One's picture

Yea any 5 year prediction I dont pay much attention to. This article assumes a lot of things, and leaves out a lot of reality such as the dollar being replaced as world currency, its already happening. -1

oddjob's picture

He assumes dollar hegemony like its some sort of right.

DaveyJones's picture

silly, it's the same right that allows us to target the dictators who need toppling.

william the bastard's picture

Fredric Mishkin said this morning on CNBS, "Not a snowball's chance in hell for QE3"


tmosley's picture

He said the same thing about QE1.

Bob's picture

As if they'll have any real choice.

jus_lite_reading's picture

What if hell froze over? I mean, everything normal is upside down...

snowball777's picture

Beware the sixth sigma snowball!!

eddiebe's picture

But the bankers need more money and the derivatives monster needs to be fed, so Benny and the inkjets need to give more to keep the bond high to finance the . So no, the assessment is all wrong, the theory ass backwards.

 There will be Q.E. III and IV. and the dollar will be managed lower and commodities and stocks will continue to rise, and the poor around the world will starve, and the elite will become richer and more powerful.

grunk's picture

And if QE3 does happen, he can blame his epic fail on the snow.

bunkermeatheadprogeny's picture

"...the wheels fall off the debt-fueled global "recovery"..."

New preschool song for all babies born this year:

"The wheels on the press go round and round, round and round, round and round..."

InconvenientCounterParty's picture

"the hated/loathed U.S. dollar confounds almost everyone by breaking out of technical resistance levels"

The Bernank is declared man of the year again and goes on to directly monetize another 2-4 trillion of U.S. deficit spending on the back of USD strength. Quoted as saying "how do you like me now?"

snowball777's picture

The answer comes in a volley of gunfire from angry exporters.

InconvenientCounterParty's picture

In the U.S.? I think not. The spigot of tax cuts and what not will be opened far enough to keep USD trending at some down slope determined by the sophists.

I'm no PhD, but in my world model, we are 40 years into WW3 and the U.S. is winning.

First-mover advantage still rules the day.


snowball777's picture

Ah, destroying our manufacturing base, becoming beholden to foreign creditors, and debasing our currency to support pointless wars were just clever feints!


snowball777's picture

As frightening as it is prescient. Bravo.

bunkermeatheadprogeny's picture

WTF is happenin to Priceline?

hedgeless_horseman's picture

Sunset.  The sky is always prettiest right before nightfall, when the GS alumni rotate out of one "chosen" position, and into another. 

The heard must move on, it is the way of the wild.  The 401k managers will buy it high for one end-of-quarter window dressing, and then stay long for many more quarters as the preferred clients are rotated out.

401k is the freshman water carrier whose parents are happy just to see him out on the field wearing the team colors.

bunkermeatheadprogeny's picture

Let's see, Disney posted record profits for 2010 citing recovery, attendence to parks, ad revs. (thanks to the Bernanke put).

This morning, around 5am, I learn that Starwood was shed by institutional investors in Q4, Marriott to spin off timeshare unit.

Frontrunning a downturn in the overall economy this summer? Me thinks so.

DosZap's picture

Home Depot is hiring 80,000 this summer..................$2.00 a day, most likely.

Same money Lil Indoogoo Obama makes in Kenya, as his own half brother King of the Universe won't give the time of day.

orangedrinkandchips's picture

analogous to insulin resistance

Our fat cells, the Govt fat cells, are so big that it takes so much insulin to "manage" and do it's job. With a smaller fat cell it's easier but as it gets to be the size of JDSU's market cap now (1999 anyone? but it's diff this time! swear!)
but the fat cell gets so large you cant get enough NATURAL insulin to work it so you have to shoot up.

solution? lose weight.

easy. really.

waterdog's picture

And let us not forget that during this same period, China will execute 400 million citizens, the US will not cause any wars, 90% of the US population will be able to read at last on the fourth grade level, advertisers will stop using television as a source of revenue, and, college football will have the same racial mix as the racial mix of the campus.


Hearst's picture

3/Q4 2011-2012: extend and pretend fails

"Gold and Silver swoon as per late 2008 as raising cash become paramount."

Does the author mean paper Gold and Silver?  I'd love to see the premiums next time around on physical if this does happen.

snowball777's picture

He meant physical. Swoon as in in dive to the 700s.

Hearst's picture

Not sure if he meant physical.  I could see the ETF's selling off (even more than now) to raise cash.  But I think most of the bullion currently resides in strong hands or at least much stronger than the 2008 shake out.

Lord Koos's picture

Yes this was my take as well.

c-rev with a twist's picture

Not sure about deflationary outcome, who could be?  This article assumes alot and ignores too much.

Thunder Dome's picture

For this to happen the overlords need to go broke--not gonna happen.

lynnybee's picture

......... luv Charles Hugh Smith, read everything he writes, can't get enough of his articles.     

jus_lite_reading's picture

One caveat- the contradiction with the inflation/deflation proposal.

In his best efforts to stave off deflation, Dr. Deficit will 'print' endlessly. It is a catch 22 situation however, and according to my calculations, the wheels fall off this year. Social unrest explodes, the EU implodes and China assumes top dog position, with the US putting up a big fight. In short, WWIII is imminent.

spinone's picture

Care to share your calculations?