Guest Post: The Global Endgame in Fourteen Points

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

An over-indebted, overcapacity economy cannot generate real expansion. It can only generate speculative asset bubbles that will implode, destroying the latest round of phantom collateral.

I have endeavored to lay out the global endgame in four recent entries:

Is This the Terminal Phase of Global Capitalism 1.0? (February 8, 2013)

Note to Fed: Giving the Banks Free Money Won't Make Us Hire More Workers (February 11, 2013)

Cheap, Abundant Credit Creates a Low-Return, Bubble-Prone World (February 12, 2013)

Europe Is Not "Fixed": Two Charts (February 13, 2013)

For those seeking a summary, here is the global endgame in fourteen points:

1. In the initial "boost phase" of credit expansion, credit-based capital ( i.e. debt-money) pours into expanding production and increasing productivity: new production facilities are built, new machine and software tools are purchased, etc. These investments greatly boost production of goods and services and are thus initially highly profitable.

2. As credit continues to expand, competitors can easily borrow the capital needed to push into every profitable sector. Expanding production leads to overcapacity, falling profit margins and stagnant wages across the entire economy.

Resources (oil, copper, etc.) may command higher prices, raising the input costs of production and the price the consumer pays. These higher prices are negative in that they reduce disposable income while creating no added value.

3. As investing in material production yields diminishing returns, capital flows into financial speculation, i.e. financialization, which generates profits from rapidly expanding credit and leverage that is backed by either phantom collateral or claims against risky counterparties or future productivity.

In other words, financialization is untethered from the real economy of producing goods and services.

4. Initially, financialization generates enormous profits as credit and leverage are extended first to the creditworthy borrowers and then to marginal borrowers.

5. The rapid expansion of credit and leverage far outpace the expansion of productive assets. Fast-expanding debt-money (i.e. borrowed money) must chase a limited pool of productive assets/income streams, inflating asset bubbles.

6. These asset bubbles create phantom collateral which is then leveraged into even greater credit expansion. The housing bubble and home-equity extraction are prime examples of theis dynamic.

7. The speculative credit-based bubble implodes, revealing the collateral as phantom and removing the foundation of future borrowing. Borrowers' assets vanish but their debt remains to be paid.

8. Since financialization extended credit to marginal borrowers (households, enterprises, governments), much of the outstanding debt is impaired: it cannot and will not be paid back. That leaves the lenders and their enabling Central Banks/States three choices:

A. The debt must be paid with vastly depreciated currency to preserve the appearance that it has been paid back.

B. The debt must be refinanced to preserve the illusion that it can and will be paid back at some later date.

C. The debt must be renounced, written down or written off and any remaining collateral liquidated.

9. Since wages have long been stagnant and the bubble-era debt must still be serviced, there is little non-speculative surplus income to drive more consumption.

10. In a desperate attempt to rekindle another cycle of credit/collateral expansion, Central Banks lower the yield on cash capital (savings) to near-zero and unleash wave after wave of essentially "free money" credit into the banking sector.

11. Since wages remain stagnant and creditworthy borrowers are scarce, banks have few places to make safe loans. The lower-risk strategy is to use the central bank funds to speculate in "risk-on" assets such as stocks, corporate bonds and real estate.

12. In a low-growth economy burdened with overcapacity in virtually every sector, all this debt-money is once again chasing a limited pool of productive assets/income streams.

13. This drives returns to near-zero while at the same time increasing the risk that the resulting asset bubbles will once again implode.

14. As a result, total credit owed remain high even as wages remain stagnant, along with the rest of the real economy. Credit growth falls, along with the velocity of money, as the central bank-issued credit (and the gains from the latest central-bank inflated asset bubbles) pools up in investment banks, hedge funds and corporations.

The net result: an over-indebted, overcapacity economy cannot generate real expansion. It can only generate speculative asset bubbles that will implode, destroying the latest round of phantom collateral.

Here are three charts that illustrate #14:

Eurozone credit since the inception of the euro. This is roughly equivalent to TCMDO (Total Credit Market Debt Owed) in the U.S.

Eurozone credit growth:

Money velocity in the U.S.:

That is the endgame in three charts. Checkmate, game over.

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Dr. Richard Head's picture

So what happens when money velocity reverts to the mean, even at 1.7?  Shit meets the fan for costs of goods?  Coming soon me thinks.

Bicycle Repairman's picture

Time for a little alternative truthiness:

"Is This the Terminal Phase of Global Capitalism 1.0?"

Yes, but it is Global Capitalism 2.0, Capitalism 1.0 died in 1914.  Consult your history books for the next chapter in history.  Meanwhile, socialism has been implemented.  Feel free to mourn the death of markets.  They don't care.  Socialism doesn't work?  Maybe not in the long run.  You won't live to see the collapse, if any.

"Note to Fed: Giving the Banks Free Money Won't Make Us Hire More Workers"

Note to small business:  The Fed is handing out EBTs, Obama-phones, etc.  Keep your pathetic low-paying, no benefit jobs.  Why don't you suck on Obama-care and die already.

"Cheap, Abundant Credit Creates a Low-Return, Bubble-Prone World"

Fed response?  It's our dollar, but it's your problem.

""Europe Is Not "Fixed": Two Charts"

Why not 8 or 10 charts?  "Fixed" depends on your reference point.  To the banks, it's fixed.  EOS.

SamAdams's picture

fair enough, here is a quote worth pondering:

"You can be sure that one of the side effects of the eventuality of the US dollar losing its status as the world's premier reserve currency is that the US government is going to squeeze its citizens as much as they can, and in as many ways as possible.

This is the very nature of political risk and is by no means unique to the US government – desperate governments will implement desperate measures, to the detriment of the wealth and wellbeing of its citizens."

This is an accurate statement that is already in full swing. 

Bicycle Repairman's picture

I agree the people are being squeezed.  There is a war on, and the people are paying for it.  If the US wins, the $ is going nowhere.  If they lose, then there will be some compromise, and the people will be devalued in some fashion.

Totentänzerlied's picture

Actually this is more like Capitalism 5.0.

hedgeless_horseman's picture



Regarding Eurozone credit growth, the ECB can just lower reserve requirements, again, from 1% to something like 0.1% and all is hunky dory.


"...the system of reserve requirements is not needed to the same extent as under normal circumstances to steer money market conditions." me.


When would Europeans ever want to get more than 1% of their money out of the bank?  Are reserves more likely to be needed under normal circumstances, or abnormal circumstances?


Historical changes reserve ratios:

Country                   1968    1978    1988    1998
United Kingdom         20.5     15.9     5.0      3.1
Turkey                     58.3     62.7     30.8    18.0
Germany                  19.0     19.3      17.2   11.9
United States            12.3     10.1       8.5   10.3
India                           3         6       10     10-11

                                                                           2011    2012

Europe (ECB)                                                           2         1


Draghian philosophy states:

There can be no more bank runs;

Thus, there will be no more bank runs.

Party on, Wayne! 

Party on, Garth!

SamAdams's picture

Might as well lower reserve requirments to zero since that is essentially what they have on reserve, nothing of real value.  Of course, this will solve nothing as the scam eats itself in an accelerating manner as interest is loaned to pay interest.  Great fun there! 

btb2010's picture


SheepDog-One's picture

ALL they can do is add more debt! Shoveling the peasants faster into the boiler to keep the shit ship afloat a bit longer, that's all they can do.

flattrader's picture

Because it feeds your sick and twisted psycho-sexual fantasy about having stacks of gold and silver eagles and how many women you can buy since you are the only one who will have food etc...?

Me, I've got scrap gold and silver because I know there is just about now way anyone will make change for all those gold and silver eagles and it just makes you a "target."

ATM's picture

What will you have of any value when the next financial system comes into being?

Gold isn't for trading for food during the coming tumult. It is so that you have saved something of value for after.

I'd like to carry some wealth with me and not start with nothing. Gold is one of the things that will have value then just as it fdoes now. Paper assets, not so much. Real Estate can be taken by government fiat or taxed and stolen.

Gold is high density wealth.

flattrader's picture

I'll have my gold and silver scrap and won't have a big-assed target painted on my back because I'm trying to spend Eagles should the SHTF in the interrim.

If Gold isn't for trading for food during the coming tumult, what is?  Will they take your shitty fiat currency for food, medicine etc.???

I wouldn't.

Bryan's picture

Excellent summary, IMO.  I especially like this part:

8. Since financialization extended credit to marginal borrowers (households, enterprises, governments), much of the outstanding debt is impaired: it cannot and will not be paid back. That leaves the lenders and their enabling Central Banks/States three choices:

A. The debt must be paid with vastly depreciated currency to preserve the appearance that it has been paid back.

B. The debt must be refinanced to preserve the illusion that it can and will be paid back at some later date.

C. The debt must be renounced, written down or written off and any remaining collateral liquidated.

Which one or more of the three choices do you think was made?  Who made the decision and why?  Which would be the "right" choice?

ATM's picture

They choose B first and then almost always A. Very few will ever choose the right answer - C.

Theta_Burn's picture

Only 1-2 riots over there worth mentioning in the past mth. really quite considering past 'riod flare ups, and you have to go and fuck our day up with this..

I guess Japan got the wink to attention whore this week.

Good luck all...

LongSoupLine's picture

I'll fucking shorten it...


1) the fucking Fed and Treasury - Rubin, greenspan, Bernanke and their fucking TBTF bank fiat stuffing ponzi

2) CONgress - and their fucking greed, cronyism and no fucking adherence to the constitution or any fucking loyalty to their fucking voters.

3) Voters - fucking full retard lemmings whom believe any and all fucking lies pumped out like hot virus liquid shit by the MSM.  fucking welfare, non english speaking,writing or reading retards who fucking step on each others fucking heads to get a $4 fucking toaster one day a year, or riot when their fucking choice for fucking American Idol gets voted off, but in the same fucking day re-elect Pelosi, Reid, Obama and fucking Maxine Waters.  assholes.

Timmay's picture

So much free time to defraud and be defrauded, really makes you want to curse the opposing thumb huh?

Liberty2012's picture

LOL- Exactly ;)

It's long past crying time - Life is beautiful - Truth is good

I choose

Truth => Individual => Responsibility => Freedom

adr's picture

But equity valuations tell me that every shoe will be a Nike, every product will be sold only by Amazon, all restaurants will be Chipotle, and every movie and TV show will only be watched through Netflix on a fruit logo phone.

The stock market can't be wrong, CNBC told me so.

centerline's picture

"every restaraunt is taco bell now"

nobusiness's picture

This is all true, But never before have governments been so stupid as to indebt there citizens while transfering bad paper from bankers to government.  fanny and Freddie have taken massive losses which chould have been the banks and trillions of debt are now on gov books worldwide.  Until people say enough and rebel Japan shows it can continue for a long time (20+ years)

viahj's picture

you speak of government as if it is some sort of sentient being.  it's not and those who are being so "stupid" by allowing the transfer of bad debts from banks to government (taxpayers), will flee with their ill gotten gains when it all collapses.  thieves and cowards, but not stupid.  (qualifying statement: yes, some are stupid but they are not the ones leading this fleecing)

nobusiness's picture

You are correct.  The taxpayers have allowed the fox to guard the hen house

virgilcaine's picture

LOTS of Faith in Paper/Fed promises... no?  what could possibly go wrong?

Bill Blackstone's picture

I'm sick and tired of waiting around for this vaunted "endgame" to happen.  Every system has pressure points, where the application of a little bit of force sets off massive reactions.  Where are the "pressure points" of our $y$tem?  Can ordinary people push them?  If so, how?

john39's picture

stop paying taxes...   if afraid of prosecution.... stop earning money, therefore no taxes to pay.   stop supporting the banking/consumer system however you can.    no, not easy... but no one said it would be.

Bill Blackstone's picture

Cash rules everything around me -- C.R.E.A.M., get the (sound) money, silver silver coin y'all

aphlaque_duck's picture

Collect all the entitlements you can. Get back what they took.

Spastica Rex's picture

If 50% of the people stopped buying 50% of all the crap that they want, but don't need, I bet things would freeze up pretty fast.

To what end?

Bill Blackstone's picture

> To what end?

The world is stuck in a holding pattern, choked and immobilized by its old paradigms.  The current system has to burn to the ground before change can happen, for better or worse.  Even a change for the worse would be preferable to the current pattern; there can be no adaptation without change.

Spastica Rex's picture

I hear you.

Be careful what you wish for.

flattrader's picture

Amen, Brother.

No more consumer item type purchases from retail stores unless it is a charity resale shop...with no sales tax.

Buying tools and related items from Craigslist at deep discount, flea markets, yard sales etc...with no sales tax.

Buying new or refurbished items on line with free delivery...and no sales tax.

Buying as much food seasonally from local farmers directly...and with no sales tax.

F my local government that wants to give TIF to a Big Box Chinese Vending Machine.

Me and others starving the beast from within...while saving lots of $$$.

Zap Powerz's picture

Bill Blackstone,

Well, you could build an EMP and detonate it.  Im sure that would fuck something up pretty bad.

Peterus's picture

As long as the debtor keeps getting "one last" lone he seems alright and can persist like this for extended period of time. I guess his credibility is his weakest spot.

Though this is one huge $y$tem. They have a lot of hidden valves to push the building pressure on more and more segments, putting the eventual blow up further away. I'd say that ordinary people's effort will only have some minor effect as long as it does not hit precisely into credibilty. There are already legions of people that were productive once, but now suck the resources from this monster, yet it still stands. There is growing minority of vocal opponents - but it just goes on. Majority still takes the banknotes for their work and there is still a pretense that this future productivity could maybe, some day, somehow pay all of this down.

imbrbing's picture

Never ever ever EVER borrow zeros and ones or pieces of paper on plastic or bank loans EVER AGAIN! Frikin Mcmansion society wants everything now ( I was gullty ) and borrow to get it.

The fast food i have to have it now mentality beaten into our noggins has created a monster.

"But I need that new TV, My car has 100,000+ miles on it, my wife want's that new couch, and we need it NOW" blah blah blah.


scottch's picture

Remove all but absolutely necessary assets from banking system.  Get out of fiat currency and buy physical assets.  Payoff ALL loans.  Prepare for SHTF scenario

Haus-Targaryen's picture

*Waits for Steve to blame world's problem on us having cars.* 

flacorps's picture

Overlooked in this discussion is the bright spot: technological renewal.

Inevitably major recessions and depressions usher in new technologies while putting old ones to bed. Horses and carriages give way to automobiles. Coal gives way to fuel oil, natural gas and nuclear.

This time we may see automotive fossil fuels replaced by batteries and fuel cells ... or we may see nuclear and fuel oil give way to natural gas and solar/wind power. The relative efficiencies of the various technologies may be wildly debated by partisans using suspect figures, but real-world results will drive the actual changes.

Inefficiencies tolerable during a bubble become intolerable after its bursting. Investment will find its way to real value creation rather than frippery.

And then expansion--real, beneficial expansion--can begin again.

LawsofPhysics's picture

"Inevitably major recessions and depressions usher in new technologies while putting old ones to bed."


Only if the capital and resources are availabe to do so.  If they are not, you get easter island and then after a major depopulation in whatever was causing the resource mis-allocation and mal-investment, then you might get back to growth.

Place you bets...

flacorps's picture

Realistically, the Easter Island scenario on a global scale is Malthusian nonsense. Not because it could never happen, but because the globalists (Chatham House/CFR, Trilateral Commission, Club of Rome, Bilderbergers, etc.) are not going to let it happen. For all their evils, there is a silver lining to their machinations.

LawsofPhysics's picture

LMFAO!!!  Several thousand years later and folks still believe that gods walk the earth and disbelieve that for every action there is an equal and opposite reaction.  My money is on the laws of nature and physics.  Fucking halarious.  Go ahead, "outlaw" gravity or poverty, there is no fixing stupid my friend.  Don't know who is junking you for such "insight".

flacorps's picture

The technology and the will are there, and the restraining morality is not. This is what they plan to do:

There is a question in my mind whether they will leave a proportionally greater population than survived on Easter Island. But there is no question in my mind that they will avoid Easter Island's final atavistic frenzy. They will do things as methodically as the Nazis did.

centerline's picture

I would not necessarily use the term "Malthusian nonsense" when the shoe fits one way or another.

The rub here is that various groups that have a "plan" don't all agree.  East versus west, religious groups, industrialists (or should be call them post-industrialists), etc.  There is quite a bit that can go wrong.


kentmills's picture

Right. Everybody has a plan. Sort of like a weird, huge Adam Smith - like invisible hand where monster interests seek to take care of themselves and inadvertently balance themselves out - somewhat. Without free markets though, it won't balance and will send the world teetering like an unbalanced washing machine.

michael_engineer's picture

Regarding growth, that might have to wait another 20 million years for the next batch of carbohydrates to cook into hydrocarbons. Some have already been folded down to near cooking depth so maybe it won't take an extremely long time.

ElvisDog's picture

The problem is that technology and energy are not the same thing. Oil was the greatest energy source ever. You don't have to manufacture it, just pump it up from the ground. It has a high energy density. It can be stored and transported at room temperature in vast quantities. It doesn't explode. Oil is strongly net energy positive, meaning that you get a lot more energy out of it then it takes to produce (more true in yesteryear than now).

So, we're going to switch to batteries and fuel cells, eh? What is the energy return on those batteries compared to the energy and resources required to build? Can we produce and replace batteries to power 200 million cars in the U.S? How much lithium or other rare-earth metals will that require? Same is true for solar and wind power. How long does it take after you build the panels/turbines, install them, and build the storage and transmission infrastructure does it take for solar/wind to be net energy positive? No amount of techology will overcome the laws of thermodynamics.