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)