The boom is unsustainable. Investment and consumption are higher than they would have been in the absence of monetary intervention. As asset bubbles inflate, yields increase, but so do inflation expectations. To dampen inflation expectations, the Fed withdraws stimulus. As soon as asset prices start to fall, yields on heavily leveraged assets are negative. As asset prices decline, increasingly more investors are underwater. Loan defaults rise as mortgage payments adjust up with rising interest rates. When asset bubbles pop, the boom becomes the bust.
In Reality, War Will Bring An End to the Petrodollar, and Impose Hardship on the Average American ...
The Great Depression did not represent the failure of capitalism or some inherent suicidal tendency of the free market to plunge into cyclical depression - absent the constant ministrations of the state through monetary, fiscal, tax and regulatory interventions. Instead, the Great Depression was a unique historical occurrence - the delayed consequence of the monumental folly of the Great War, abetted by the financial deformations spawned by modern central banking. But ironically, the “failure of capitalism” explanation of the Great Depression is exactly what enabled the Warfare State to thrive and dominate the rest of the 20th century because it gave birth to what have become its twin handmaidens - Keynesian economics and monetary central planning. Together, these two doctrines eroded and eventually destroyed the great policy barrier - that is, the old-time religion of balanced budgets - that had kept America a relatively peaceful Republic until 1914. The good Ben (Franklin that is) said,” Sir you have a Republic if you can keep it”. We apparently haven’t.
By now everyone knows there is an unprecedented student debt bubble, amounting to well over $1 trillion and rising at a rate of nearly $200 billion per year. However, what is far less known, is what all these hundreds of billions in government loan proceeds are being spent on. The following two charts should shed some light on this all important matter just how Government money goes from Point A to Point B, using indebted to the hilt students as a pass-thru.
Ghandi was once asked, "What do you think about Western Civilization?" to which he famously replied "I think it's a good idea." He may as well have been talking about free market capitalism. Capital in the 21st Century has hit the world like a new teen idol sensation. Everybody is drinking the Kool-Aid and it's being held up as the most important book ever written on the subject of how runaway capitalism leads to wealth inequality. Paul Krugman of course, loves it. As does every head of state and political hack in the (formerly) free world. So let's do something different here and accept a core premise of Capital, and say that wealth inequality is increasing, and that it's a bad thing. Where the point is completely missed is in what causes it (ostensibly "free market capitalism") and what to do about it (increase government control, induce more inflation and raise taxes). The point of this essay is to assert that it is not unchecked capital or runaway free markets that cause increasing wealth inequality, but rather that the underlying monetary system itself is hard-coded by an inner temple of ruling elites in a way which creates that inequality.
Now that Q2 is not shaping up to be much better than Q1, other, mostly climatic, excuses have arisen: such as El Nino, the California drought, and even suggestions that, gasp, as a result of the Fed's endless meddling in the economy, the terminal growth rate of the world has been permanently lowered to 2% or lower. What is sadder for economists, even formerly respectable ones, is that overnight it was none other than Tyler Cowen who, writing in the New York Times, came up with yet another theory to explain the "continuing slowness of economic growth in high-income economies." In his own words: "An additional explanation of slow growth is now receiving attention, however. It is the persistence and expectation of peace." That's right - blame it on the lack of war!
Anyone reading the regular Federal Open Market Committee press releases can easily envision Chairman Yellen and the Federal Reserve team at the economic controls, carefully adjusting the economy’s price level and employment numbers. The dashboard of macroeconomic data is vigilantly monitored while the monetary switches, accelerators, and other devices are constantly tweaked, all in order to “foster maximum employment and price stability." The Federal Reserve believes increasing the money supply spurs economic growth, and that such growth, if too strong, will in turn cause price inflation. But if the monetary expansion slows, economic growth may stall and unemployment will rise. So the dilemma can only be solved with a constant iterative process: monetary growth is continuously adjusted until a delicate balance exists between price inflation and unemployment. This faulty reasoning finds its empirical justification in the Phillips curve. Like many Keynesian artifacts, its legacy governs policy long after it has been rendered defunct.
We have a few things to say about the recent debunking of established monetary theories. Effectively, the BoE joined forces with the rebels in economics who’ve long argued that standard models are bunk. Moreover, the BoE’s report discredits many well-known pundits, some more so than others. We’ll pick on one from the “more so” category: Paul Krugman.
The US economy is a house of cards. Every aspect of it is fraudulent, and the illusion of recovery is created with fraudulent statistics. American capitalism itself is an illusion. However, Washington has unique subjects. Americans will take endless abuse and blame some outside government for their predicament – Iraq, Afghanistan, Libya, China, Russia. Such an insouciant and passive people are ideal targets for looting, and their economy, hollowed-out by looting, is a house of cards.
It is only one word, but it has been repeated so many times by FOMC members in the past year or so it has taken on the imprimatur of officialdom vernacular. Whenever speaking of bubbles, these policymakers inevitably include the word, “obvious.” Long is the list of internal literature that purports to place bubbles in the same category with the Supreme Court’s definition of pornography – we know it only when we see it. In that respect, “obvious” is the perfect qualifier that situates even the brightest of the PhD’s in the same herd as the little guy investor. It would be hard to blame them in disaster if that were actually the case since “everyone” else missed it too. The “good” news is that we will know for sure, including Yellen and her FOMC conspirators, at some point once it all becomes perfectly clear in hindsight. What a way to craft scarily intrusive policy!
The debate over Thomas Piketty’s new book Capital in the Twenty-First Century is as dumb as every other issue-set in the public arena these days - a product of failed mental models, historical blindness, hubris, and wishful thinking... We doubt that the Warren Buffets and Jamie Dimons of the world will see their wealth confiscated via some new policy of the Internal Revenue Service - e.g. the proposed “tax on wealth.” Rather, its more likely that they’ll be strung up on lampposts or dragged over three miles of pavement behind their own limousines. After all, the second leading delusion in our culture these days, after the wish for a something-for-nothing magic energy rescue remedy, is the idea that we can politically organize our way out of the epochal predicament of civilization that we face. Piketty just feeds that secondary delusion.
Bad Government and Central Bank Policy Are the MAIN CAUSE of Runaway Inequality
While the Fed has clearly had a problem with reflating the broader housing bubble, one which would impact the middle class instead of just those who are already wealthier than ever before thanks to the Russel 200,000, one place which not only never suffered a housing bubble pop in the 2006-2008 years, but never looked back as it continued its diagonal bottom left to top right trajectory is Canada. As the chart below shows, the Canadian housing bubble has put all attempts at listening to Krugman and reflating yet another bubble to shame.
With all that has been written in respect to Thomas Piketty's new book "Capital", you would think someone would remark on the odd coincidence of timing of the rapid rise in inequality that the Professor is so upset about. It’s the issue of the hour. Yet when it comes to the timing at which this phenomenon presented itself, nada. Omerta from the liberal intelligentsia. What could have marked 1971 as the year the picture began to change in respect of inequality in America? It turns out that was the year America defaulted on its obligation under Bretton Woods to redeem in gold dollars held by foreign governments and the era of fiat money began.
The Spirit of Keynes he'll consult...