The 14 Steps From Credit Expansion To Speculative Bust

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Is pushing consequence forward the same as eliminating consequence? We will find out at some point in the near future.

Today's project is to overlay The Global Endgame in Fourteen Points (February 15, 2013) on the classic cycle of credit/speculative expansion and credit destruction/speculative bust. My monthly video program host Gordon T. Long helpfully provided this chart of the modern credit cycle, which examines the Cycle of Deflation through the lens of financialization:
The key point being made in The Global Endgame is that the entire global economy is in the final stages of the "winter" cycle of credit destruction and collapse of phantom collateral. Let's start with the 14 points:
1. "Boost Phase" of Credit Expansion
2. Overextended Credit Expansion and Over Capacity
3. Financialization and Collateral
4. Era of Financialization
5. Growing Malinvestment
6. Phantom Collateral from Asset Bubbles
7. Bubble Implosions
8. Impaired Debt and Policy Decisions
9. Stalled Consumption
10. Cheap Money Offered
11. Shrinking Loans and Bank Speculation
12. Search for Yield from Shrinking Pool of Productive Assets
13. Increasingly Speculative Investments with high Risk
14. Stagnation: Over-indebted, overcapacity with limited growth
The key dynamics here are debt saturation and diminishing returns: piling on more debt (i.e. borrowing more money) to stimulate spending only leads to fantastic excesses of speculation and mal-investment: $70,000 biopsies, $200 million fighter aircraft, $200,000 bachelor's degrees, McMansions in the middle of nowhere, and so on.
The actual yield on all that borrowed money keep falling: ever-larger sums are borrowed and spent, but there are fewer jobs created and ever-diminishing returns of value created.
Even though central banks are holding interest rates near zero to enable governments to borrow vast sums, substituting debt expansion for actual value creation eventually leads to debt-serfdom as interest payments start crowding out all other spending.
All too soon governments and households alike are borrowing more just to pay the interest on the mountain of existing debt. This is the inevitable result of incentivizing credit expansion and speculation.
The central banks are attempting to nullify the cycle of credit expansion and destruction by buying much of the sovereign debt being issued by profligate, hopelessly insolvent governments. Left to the open market, interest rates would rise as the risk of massive debt expansion becomes undeniable.
Eventually, higher rates would pinch off borrowing or trigger default.
The central banks are playing an unprecedented game: suppressing interest rates by expanding their balance sheets, i.e. creating money, and buying vast quantities of government bonds.
This has given government leaders a free hand to keep borrowing more to avoid any politically painful limits on substituting debt for tax revenues. The expansion of central bank balance sheets is apparently painless and apparently consequence-free. So what if the Fed expands its balance sheet from $3 trillion to $30 trillion as it enables the debt-junkies to keep borrowing without limits?
Is pushing consequence forward the same as eliminating consequence? We will find out at some point in the near future: perhaps 2015, perhaps 2021.

Gordon T. Long and CHS discuss The Global Endgame (25 minutes, 30 slides)

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madcows's picture

Where does " People dying in the streets" followed by "mass uprising" fit in?

american eyedol's picture

we need growth, growth is coming

DJ Happy Ending's picture

Fiat makes beggar thy neighbor easy and will continue for decades, it will be a very long time before pricing power returns.

I did it by Occident's picture

Don't forget about WWIII.  That might fit in somewhere after hyperinflation but before empire collapse.  Not sure though, most likely non-linear though so could happen in any order and at the same time even. 

falak pema's picture

You forget one thing : the irrepressible exuberance to impose their will of the Oligarchs on the sheeple; to the point of changing the goal posts at every change of seasons.

Remember Vivaldi and his "four seasons"?

Get ready for the Oligarchy symphony of the four seasons in repetitive cycle of Q-infinity can kicking.

Simple ducky! Its only electronic money, so debt and asset can interchange at the drop of a CB bowler hat in City, and Jamie can then change it on the click of a mouse or a sliding moving finger on an Ipad, as he is King of fractional reserve, the real game in town!

Omar Khayyam go drink your wine, the finger that has writ can now "unwrit", so don't cry for me,  I'm Mammon!

King of Libertarian Mordor.

dontgoforit's picture

Mammon.  Not good.  Can the end of the world be far behind?  They say this is the last Pope to fulfill a middle-age prophesy.  We'll see.  You can't buy your way into heaven and you can't buy your way out of hell.

falak pema's picture

one thing should be clear for all catholic bible believers : when Mammon meets Pope who isn't papal poop of Borgia vintage, then burning Bush beware, as the sacrificial golden calf is not far away...Oh Moses of osmosis its time to turn salt water into bloodwine of eucharist  and derivative shit as eucharist bread, by transubstantiation...becomes true body of real economy.

If Ben of Bernanke is last Pope of economy as well, oh glory alleluiah, we are saved as Q-infinity is eternal corn of abundance flowing into Elysian fields of last day of judgement. 


NoDebt's picture

I'll be dead from old age before we see that turn at the bottom.

css1971's picture

Eh didn't we have this same article the other day?

dontgoforit's picture

Yes - hasn't been too long ago - I remember it too.

Bam_Man's picture

Where is the step called "War"? I don't see it anywhere on the diagram.

I did it by Occident's picture

So I guess that's pretty soon then?  Damn  :(


Relentless's picture

Round about #13, except chs labels it "Risk"

AldoHux_IV's picture

Every "cycle" and "this time is different" is predicated upon one huge assumption: the prevailing system endures. I personally think that if any derivation or iteration of this current system endures, then all the talk about creative destruction and reforms are nothing more than slight of hands to fool us all into the "new normal". All this sit tight and wait rhetoric from the market punditry is very comforting at least...

omi's picture

"$70,000 biopsies, $200 million fighter aircraft, $200,000 bachelor's degrees, "


What if you're just getting a glimpse into 90% devaluation, and prices are actually reasonable?

hooligan2009's picture

500,000 biopsies, 800 million fighter aircraft, 1 million bachelors degree in just a few short years? i hear that..and the labor component of each will be 50%, 75% or 95%?

hooligan2009's picture

i'd have more faith in the charts if they had been rolled out 7 years ago in 2006 and correlated the bottom of the s&p of 666 with the short squeeze caused by a fed injection of 3 trillion and fiscal deficits over 7 years of 8 trilllion. seems to me that you could reconcile the change in s&p market value from 666 to 1555 pretty closelt to deficits and monetization.

i still have a couple of imponderables in the grander scheme of things..

1. Why isn't the government creating money when it runs a deficit.

2. Doesn't the interest rate set by the Fed increase money supply (low rate/below inflation rate = tightening of policy, since it could "inflate money supply with a higher interest rate).

3. since the Fed is a government body, why can't it cancel the debt on its balance sheet? it does not affect anyone else since it is an intra-government transfer.

oh well, back to the you go a bit of blur (red vision nam style).



Slipmeanother's picture

LOL @ the FED is a government body

Silveramada's picture

7. bubble implosion?>>>>>>boo boo, we are still blowing hard into BONDS, MUNI-BONDS, all flavored derivatives, THE DOW, S&P...

Kirk2NCC1701's picture

This is a nice chapter of academic... literature to test out on ZH, but it reminds me of a med-school class where they describe the alcohol cycle in a sober, drunk and recovering person.  Without going into the details of the biochemical impact on the organs.

You don't need med-school training to know that your buddy had too much to drink and is going to die, if you don't get him into ER and get his stomach pumped.  Nor do you need a PhD in Economics (the pseudo-science), to know we've gone too far, and that we're screwed.

He just needs the brains & balls to tell us:  1. Is this cycle same as the past ones, i.e. recoverable, or 2. Have we gone too far, and we're "dead".  3. How will this "toxic fiscal poisoning" play out:  A slow or fast death?  If we can't pump the stomach full of excessive liquidity, can we lessen the pain during the dying process?

A med-school sophomore can tell you how alcohol or any other poisoning plays out.  Why can't he do the same?  Will giving the patient coffee (a stimulant) help the detox?  Hardly.  Yet all these "Economic-MDs" from Chicago, Ha'vard and MIT (Dr. Bernanke, Dr. Krugman) keep prescribing Coffee as the Rx.  Fucking wankers and frauds-with-degrees, god-damn Quacks!

"Economics isn't an exact science", its practitioners claim.  No, "If it's not exact, it's not a science"!  So let's stop peddling snake oil as a prescription drug.  And fix that chart for when the patient is dying of 'fiscal sepsis' or 'asset toxemia'.

A person can't practice medicine without a real degree in Medicine (from a real university), because they will endanger a person's life.  Yet these Economic Shamans (witch-doctors) prescribe 'medicine' that destroys the lives of millions, if not billions of people. 

dojufitz's picture

The only thing of mine that can grow in someone else's hands is my cock.