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How Economies Collapse: Systemic Friction And Debt Are Self-Liquidating

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Paying for unproductive friction with borrowed money has generated the illusion that free to me is actually free - it isn't.

We all understand how friction slows our progress: flatten the tires on a bicycle and it becomes much harder to maintain speed. If a brake pad is rubbing against one wheel, it gets even harder.

 
If we pile on additional sources of friction, eventually forward motion stops. In systemic terms, the system freezes up and collapses.
 
Here are some examples of systemic friction in the U.S. economy:
 
1. College degrees that cost four times as much but yield diminishing value in the job market.
 
2. Millions of needless medical tests performed to maximize profit or deflect future lawsuits (i.e. defensive medicine).
 
3. Weapons systems that cost four times as much as the system they replace while being less effective and more costly to maintain/repair.
 
The list of such sources of friction is essentially endless. Why is this so?
 
The answer is: rentier skims and offloading risk onto the system are forms of friction, and as noted yesterday in The Slide to Collapse Is Greased with Self-Interest, rational self-interest is best served by transferring personal risk of loss onto the State (i.e. taxpayers). Influencing the State to protect one's private skims, job, income, pension, profits and gains offloads risk onto the taxpayers.
 
All this systemic friction adds cost and precious little increase in output or productivity. Nobody's actually healthier or more productive because millions of useless tests have been performed, just as nobody actually learned more as a result of their college costs soaring from $25,000 for a bachelor's degree to $100,000 for virtually identical courses, professors, curriculum, etc.
 
These charts shout diminishing returns and unsustainable expansion of debt borrowed by uncreditworthy borrowers.
 
In effect, we've paid for all this systemic friction by borrowing vast sums of money--money that has been squandered paying for unproductive friction under the guise of "investing in education, healthcare and national defense." But since there is no systemic mechanism for discovering the price of this friction or disciplining unproductive spending on friction, there is no structural restraint on this Status Quo "solution" other than the debt itself.
 
The ultimate discipline in using debt to fund friction is the rising cost of interest on all this debt. Even at low rates, interest absorbs an increasing percentage of national income.
 
As long as the interest rate on debt is low, the path of least resistance is to keep borrowing to support politically untouchable programs, cartels and  constituencies. Eventually, the cost of servicing the debt overwhelms the diminishing returns on using debt to pay the soaring costs of friction.
 
Here is the Federal debt, not including the bogus inter-governmental debts (money owed to the illusory Social Security Trust Fund).
 
 
Everyone knows Federal debt has skyrocketed, but so has the debt of state and local governments: state and local government debt has risen by 250% just since 2002.
 
 
 
If we add up all debt--household, finance, corporate and government--we see debt has soared and growth has stagnated: this is a classic case of diminishing returns as more debt is required to add each additional increment of GDP.
 
At some point, additional debt is taken on to simply make interest payments; at that juncture, there is no consumption/buying taking place with the new debt: it's simply keeping the borrower out of default.
 
In other words, by using debt to pay the rising costs of friction, we've added another layer of friction: interest payments. In effect, we've "solved" the problem of rising friction by borrowing money that creates its own friction.
 
Paying for unproductive friction with borrowed money has generated the illusion that free to me is actually free--it isn't. It's also generated the illusion that piling up debt is risk-free as long as interest rates are low and the government backstops all the debt.
 
The final illusion is that there is no mechanism to brake the expansion of debt: that the "solution" to rising interest costs is to borrow more money.
 
We will discover, to our detriment, that friction and debt are both self-liquidating:that is, they bring about their own liquidation via systemic collapse.
 
Related topics:
 
 
 

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Tue, 08/05/2014 - 14:13 | 5050074 passenger_pidgin
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Geez... Those debt charts nearly made me liquidate myself!

Tue, 08/05/2014 - 14:23 | 5050137 y3maxx
y3maxx's picture

...Gen X / Y / Milenials should just say "Fuck You" to Washington/Bankers and refuse to pay back their debts. Can't arrest 100 million Americans.

Tue, 08/05/2014 - 14:24 | 5050155 lester1
lester1's picture

That will eventually happen anyway when the idiots at the FED try to raise interest rates in 2015-16.

Tue, 08/05/2014 - 14:28 | 5050179 LawsofPhysics
LawsofPhysics's picture

please, look at the E.Z., interest rate hikes will be "just around the corner" indefinitely...

Tue, 08/05/2014 - 18:55 | 5051474 RockyRacoon
RockyRacoon's picture

Looks like Stein's Law illustrated with a few pertinent graphs....

Tue, 08/05/2014 - 14:31 | 5050201 sessinpo
sessinpo's picture

 y3maxx   Can't arrest 100 million Americans.

---

No, but you can infect them with ebola so at least they aren't part of the welfare state anymore. of course I'm being sarcastic. But I also don't trust government.

Tue, 08/05/2014 - 14:34 | 5050217 power steering
power steering's picture

It's been about an hour, isn't it time for an ebola update?

Tue, 08/05/2014 - 14:42 | 5050262 sessinpo
sessinpo's picture

No but I just made my first barter trade. I think barter will be a big thing for survivors or those trying to survive.

I have stockpiled ammo for years and traded some ammo I could spare for a nice compound bow. I'll be looking locally to possibly trade for a decent crossbow.

Tue, 08/05/2014 - 15:03 | 5050418 ebworthen
ebworthen's picture

Bullets travel faster and farther than arrows; but I like the stealth factor of an arrow.

Nice and quiet, shhh...thup!  Barter will be even more important when they get rid of cash.

Tue, 08/05/2014 - 15:23 | 5050570 power steering
power steering's picture

I'll trade you a fruit bat ranch

Tue, 08/05/2014 - 15:06 | 5050448 Groundhog Day
Groundhog Day's picture

my wife who works in ER in NJ says they have had a few cases from travelors coming back from Ethiopia

 

 

Tue, 08/05/2014 - 14:39 | 5050244 Bill of Rights
Bill of Rights's picture

Problem with this theory is most are immune to Ebola, they smoke cigarettes lol

Tue, 08/05/2014 - 17:38 | 5050397 sessinpo
sessinpo's picture

Bill of Rights   Problem with this theory is most are immune to Ebola, they smoke cigarettes lol

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With an estimation of 40 - 60 million smokers. that leaves at least 200 million. LOL

---

I'll add to that the the smokers get the cancer. Put that with Obama care, that could eliminate 90% of us. Still LOL?

Tue, 08/05/2014 - 14:46 | 5050290 PartysOver
PartysOver's picture

Then all those Pension Plans / Retirement Plans will take the hit.   DC created such an Eff'd up situation that somebody is going to get hammered.   Class warfare V4.0 (or whatever the version is up to) to commence in 5, 4, 3, 2......

Tue, 08/05/2014 - 14:46 | 5050297 SAT 800
SAT 800's picture

How economies collapse; the short version; "Governments try to run them with Central Planning and Regulation".

Tue, 08/05/2014 - 14:58 | 5050377 JRobby
JRobby's picture

Lot of good charts. All pointing to collapse.

Tue, 08/05/2014 - 14:16 | 5050087 PlusTic
PlusTic's picture

Sounds complicated, I like simple answers...the system is run by maggots with self-interest who collude with their friends  ;)

Tue, 08/05/2014 - 14:21 | 5050124 espirit
espirit's picture

How about maggots eating each other?

Tue, 08/05/2014 - 14:48 | 5050315 sessinpo
sessinpo's picture

 espirit   How about maggots eating each other?

---

Unlikely. Maggots are often parasitic like. They are larva that live off of others. Government is parasitic. It lives by taxing and bankrupting the citizens.

Tue, 08/05/2014 - 14:21 | 5050123 LawsofPhysics
LawsofPhysics's picture

Sustainability?

you want the ugly truth about that? 

 

Please, humanity isn't simply another ponzi, it's the ponzi.

 

Tue, 08/05/2014 - 14:22 | 5050129 RiskyBidness
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All the BTFD's who were buying back at DOW 17,000 just looked up and saw DOW 16393.  Kinda like Wyle E. Coyote......doesn't fall till he looks down.  OH! NO!!!!

Tue, 08/05/2014 - 14:25 | 5050160 LawsofPhysics
LawsofPhysics's picture

"the secret to successfully flying is to simply throw yourself at the ground, and miss."  - Hitchhiker's guide to the Galaxy

Tue, 08/05/2014 - 14:58 | 5050383 bid the soldier...
bid the soldiers shoot's picture

What about Jack who planted his magic beans at DOW 6500 and climbed all the way to the top of DOW 17000?

He'll be getting a pretty big margin call when he gets back to Tribeca

Tue, 08/05/2014 - 14:22 | 5050135 Thomas Aquinas
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"Until the control of the issue of currency and credit is restored to government and recognized as its most conspicuous and sacred responsibility, all talks of the sovereignty of Parliament and of democracy is idle and futile... Once a nation parts with the control of its credit, it matters not who makes the laws....Usury once in control will wreck the nation."

William Lyon MacKenzie King, former Prime Minister of Canada

Tue, 08/05/2014 - 14:23 | 5050140 lester1
lester1's picture

A massive economic crash is coming as soon as the FED tries to raise interest rates.

Then what will save the economy when the FED has no tools left??

Tue, 08/05/2014 - 14:27 | 5050182 Dr. Engali
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Which is why the fed will never lift short term rates beyond 1%.

Tue, 08/05/2014 - 14:52 | 5050337 sessinpo
sessinpo's picture

Dr. Engali    Which is why the fed will never lift short term rates beyond 1%.

---

I like most of your post Engali. This is where the confidence game comes in and when is the question. Government doesn't have to raise interest rates, it is the buyers that do that by refusing to buy at yields the government offers. But again, when is the question.

Tue, 08/05/2014 - 15:21 | 5050562 Dr. Engali
Dr. Engali's picture

As long as the fed can keep the corner on treasuries there will always be a shortage of "good" collateral. The fed will never have to raise the short end because they have created a faux demand. 

Tue, 08/05/2014 - 15:37 | 5050632 sessinpo
sessinpo's picture

Dr. Engali   As long as the fed can keep the corner on treasuries there will always be a shortage of "good" collateral. The fed will never have to raise the short end because they have created a faux demand.

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Okay, so we are posting on a thread that seems to expose that this said collateral is not so "good." And again, the fed doesn't have to raise interest rates, bond buyers do that by demanding it. The question is when. That is when the free market actually returns. Yes, I admit it hasn't been around for some time.

Let me make another comment. As we have less taxpayers (the base), and more of those using taxpayer money, then the quality of said collateral declines. Many thought that when the number of those using subsidies or on welfare outnumbered the taxpayers would be the line. But it wasn't. But at some point that line will be passed where those that are productive and pay the taxes can no longer support the parasitic government and those that are on the government teat at taxpayer expense. The question still becomes when.

Tue, 08/05/2014 - 15:55 | 5050728 LawsofPhysics
LawsofPhysics's picture

What you are hinting at is complete currency collapse and it will come, as it always has.  All currencies today are in fact fiat currencies.  They are in fact promissory notes.  Promises that some future worker, through his/her productive labor, will provide and delivery on those promises for you.

Good luck with that.

Tue, 08/05/2014 - 17:41 | 5051215 sessinpo
sessinpo's picture

LawsofPhysics    What you are hinting at is complete currency collapse and it will come, as it always has.  All currencies today are in fact fiat currencies.  They are in fact promissory notes.  Promises that some future worker, through his/her productive labor, will provide and delivery on those promises for you.

Good luck with that.

---

So what do you mean by "good luck with that?"

In your own posts, you suggest it is inevitable -" What you are hinting at is complete currency collapse and it will come, as it always has."

So what is your point? You didn't quite make one except to reaffirm what I said, in which case, I thank you.

Tue, 08/05/2014 - 16:01 | 5050760 Dr. Engali
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I can virtually guarantee you that the currency itself will collapse before rates rise. There is simply no collateral and .gov can not afford higher rates. We are japan, and as long as we have the reserve currency of the world we can keep rates as low as we like. 

Tue, 08/05/2014 - 17:54 | 5051241 sessinpo
sessinpo's picture

Dr. Engali    I can virtually guarantee you that the currency itself will collapse before rates rise. There is simply no collateral and .gov can not afford higher rates. We are japan, and as long as we have the reserve currency of the world we can keep rates as low as we like.

---

And we have dramatic changes just within this year to change that reserve currency status.Do I need to make a list?

Yes, it hasn't been enough yet, but the changes have been dramatic in just one year. And as you say, as long as we have the currency reserve - that goes back to the question of when.

However, I would suggest that interest rates can still rise while the US has the world's currency reserve. That might be the tipping point and the signal that confidence is lost - and that is the when I keep talking about.

But you seem to missing my main point I have posted twice already. You said "There is simply no collateral and .gov can not afford higher rates. We are japan, and as long as we have the reserve currency of the world we can keep rates as low as we like."

That ignores my point that at some point confidence is lost and bond buyers refuse to buy US bonds. I know you have it in you use basic supply and demand. If there is less demand for bonds that means bonds must go down (rates rise).

Maybe you are thinking that the US government will then FORCE the world to buy bonds. They have so in a way by manipulating the markets to make most believe it is the safest investment. But eventually, at some point the majority will catch on. Heck, you did! Rates then rise before a total collapse of the dollar.

And BTW, that happens historically. Why? Because people scramble to pay down debt which is a scramble for that currency. But when the debt can't be settled, that currency and empire collapses.

Wed, 08/06/2014 - 00:07 | 5052676 LostandFound
LostandFound's picture

I dont think that will happen, the FED has liquidating the too big to fail banks over the last 7 years, in return for this bailout the commercial banks will buy US Bonds as and when required by the FED to keep the demand going despite the FEDS 'official tapering'

I agree with LOP, this is history repeating itself. The FED is talking about raising rates at the end of 2015, the raising of rates will always be 'another year away'. Right now the current debt looks unsustainable even at current low rates, imagine the amount of debt that could accumulate by the end of 2015....

The momentum of de-dollarisation will probably cause the collapse but it has some way to go....i am saying that but who knows what the eventual tipping point will be.

On a long enough timeline, all FIAT goes to zero, this is a global currency war and a race to the bottom.  

 

Tue, 08/05/2014 - 14:28 | 5050185 passenger_pidgin
passenger_pidgin's picture

Last time I checked, there are still plenty of tools at the FED.  As for ways to save the economy- we might not be so lucky.

Tue, 08/05/2014 - 14:57 | 5050381 AdvancingTime
AdvancingTime's picture

I  respectfully disagree with your premise. The Fed may delay the end game but cannot save the economy!

Tue, 08/05/2014 - 15:09 | 5050465 ebworthen
ebworthen's picture

I think your use of "tools" at the FED was slightly misunderstood by some.

Bernanke and Greenspan - two of the biggest tools in FED history.

Janet has yet to prove herself, but is off to a good start.

Tue, 08/05/2014 - 17:42 | 5051219 passenger_pidgin
passenger_pidgin's picture

Cheers, ebworthen! I definitely counted Yellen as one of the tools.

Tue, 08/05/2014 - 15:40 | 5050657 Thomas Aquinas
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""It was a carefully contrived occurrence. International bankers sought to bring about a condition of despair, so that they might emerge the rulers of us all.""

Louis McFadden on 1929 Stock Market Crash. Louis McFadden died of poisoning shortly thereafter.

 

"For a long time I felt that FDR had developed many thoughts and ideas that were his own to benefit this country, the United States. But, he didn't. Most of his thoughts, his political ammunition, as it were, were carefully manufactured for him in advanced by the Council on Foreign Relations - One World Money group. Brilliantly, with great gusto, like a fine piece of artillery, he exploded that prepared "ammunition" in the middle of an unsuspecting target, the American people, and thus paid off and returned his internationalist political support.

"The UN is but a long-range, international banking apparatus clearly set up for financial and economic profit by a small group of powerful One-World revolutionaries, hungry for profit and power.

"The depression was the calculated 'shearing' of the public by the World Money powers, triggered by the planned sudden shortage of supply of call money in the New York money market....The One World Government leaders and their ever close bankers have now acquired full control of the money and credit machinery of the U.S. via the creation of the privately owned Federal Reserve Bank."

Curtis Dall, FDR's son-in-law as quoted in his book, My Exploited Father-in-Law

Tue, 08/05/2014 - 14:27 | 5050158 Dr. Engali
Dr. Engali's picture

There's a lot of "self-liquidating friction" going on at the midget tranny porn watching SEC.

Tue, 08/05/2014 - 14:33 | 5050214 Postal
Postal's picture

Darn you! I nearly liquidated coffee on the keyboard.

Tue, 08/05/2014 - 14:35 | 5050218 starman
starman's picture

I see, so the higher the debt the better the recovery.  Makes sense. 

Tue, 08/05/2014 - 14:36 | 5050230 Bill of Rights
Bill of Rights's picture

And Gold as well as Silver are on sale....life is good.

Tue, 08/05/2014 - 14:41 | 5050260 Yen Cross
Yen Cross's picture

  Never go full NINJA...

Tue, 08/05/2014 - 14:49 | 5050310 AdvancingTime
AdvancingTime's picture

A great deal of our economic system is about debt. It is important to remember not all debt is created equal. A mirage is a naturally occurring optical phenomenon in which light rays are bent to produce a displaced image of distant objects. Joining the idea of a mirage and contagion with the reality of collapsing debt forms an interesting subject.

It is important to remember all debts and obligations do not come due at the same time. Also, it must be noted when a bill is not paid or defaults it often starts a long and drawn out legal battle, this collection process that may extend years without harsh consequences. This my friends is the reality of modern life in America and much of the world. More on this subject in the article below.

http://brucewilds.blogspot.com/2014/05/debt-mirage-always-moving-into-di...

 

Tue, 08/05/2014 - 16:51 | 5050969 daveO
daveO's picture

Student loans reintroduced slavery after they became 'bankruptcy immune' in '06. The students haven't caught on yet. Give them a few more years. Then the level of SL's will plummet. I've already heard of one couple who couldn't get a home loan because of it.   

Tue, 08/05/2014 - 14:49 | 5050320 SmittyinLA
SmittyinLA's picture

Paying for unproductive friction with borrowed money has generated the illusion that free to me is actually free - it isn't.

Americans literally financed a Mexican Socialist invasion with their SS contribution "savings". 

The Mexicans will thank us by voting for more debt.

Tue, 08/05/2014 - 14:53 | 5050326 AdvancingTime
AdvancingTime's picture

 It might soon become apparent the economic efficiency of credit is beginning to collapse and the additional money poured into the system coupled with lower rates can no longer drive the economy forward.  When this happens we are at the end game.

At some point the return on loaning money is simply not worth the risk!  Why do you want to loan money if most likely you will never be repaid or repaid with something that is totally worthless? When this happens the only safe place to store wealth will be in "tangible assets" and the only lenders will be those who print the money that nobody wants.

The collapse of credit can pose major problems such as what we saw when many sellers were forced to demand payment up front before shipping goods in 2008. More on this subject below.

http://brucewilds.blogspot.com/2014/06/the-economic-efficiency-of-credit...

 

 

Tue, 08/05/2014 - 16:46 | 5050942 daveO
daveO's picture

That point was reached back then(08). Gov. debt has papered over the gapping hole ever since. The majority of the inflation has been exported. They can get away with this until foreign countries abandon the Sesterce, I mean Dollar.  

Wed, 08/06/2014 - 00:14 | 5052687 LostandFound
LostandFound's picture

According to Shadowstats the US has been bottom bouncing for a while but is now at its turning edge, the only way is down coupled with the slow momentum of de-dollarisation

Tue, 08/05/2014 - 14:54 | 5050356 malek
malek's picture

 just as nobody actually learned more as a result of their college costs soaring from $25,000 for a bachelor's degree to $100,000 for virtually identical courses, professors, curriculum, etc.

But doesn't anybody think about the children of all those administrators who's wages are paid from increased tuition! /s

Tue, 08/05/2014 - 14:54 | 5050362 ejmoosa
ejmoosa's picture

Government is friction of the first degree.

Tue, 08/05/2014 - 15:02 | 5050409 Itchy and Scratchy
Itchy and Scratchy's picture

Almost as bad a crotch friction!

Tue, 08/05/2014 - 15:05 | 5050422 SofaPapa
SofaPapa's picture

In effect, we've paid for all this systemic friction by borrowing vast sums of money--money that has been squandered paying for unproductive friction under the guise of "investing in education, healthcare and national defense.

I like this sentence.  It does a nice job of identifying the pure waste represented by what politicians like to call "investment".  Investment has ROI.  In the government case, this is always a negative number. Not investment - pure waste.

Tue, 08/05/2014 - 15:04 | 5050430 ebworthen
ebworthen's picture

Debt jubilee, or eternal forbearance.

Janet, where's my tax free check for $3 Million?

Tue, 08/05/2014 - 15:13 | 5050502 LawsofPhysics
LawsofPhysics's picture

^^^this, without retribution the same fucking criminals just keep stealing motherfuckers.

3 million each or your fucking heads.

Tue, 08/05/2014 - 15:21 | 5050541 GooseShtepping Moron
GooseShtepping Moron's picture

I know it's old hat, but some things bear repeating. The debt and deficit problems are strongly coupled to the generational dynamics of American society. The sheer numbers and influence of the Baby Boomers will insure that their interests (e.g. SocSec. Medicare, pensions, interests rates, etc.) are protected at the expense of the system. When the Boomers finally pass from the scene, the Xers will have neither the numbers, the ability, or the will to keep the machine running the way it has been. These processes positively feed back on one another, resulting in higher highs and lower lows than either would be capable of producing alone. The Boomers enjoyed a spectacular high throughout the '90s and '00s, and are still strong enough to hold down the fort for the remainder of the '10s; but the next two decades after that will be so devastating that nothing of the Great American Century will endure.

By the way, this isn't some generic "fuck the Boomers" post. It's just a plain description of reality which is not meant to praise or blame.

Tue, 08/05/2014 - 16:01 | 5050761 LawsofPhysics
LawsofPhysics's picture

I don't think the world's monetary system will last more than a decade in it's current state.  All currencies are in fact promissory notes.  Simple promises that some future worker will deliver on through their productive labor.  That which cannot be sustained, won't be, and exponential equations are a bitch.

Despite the propaganda, there are physcal limits on "growth".

Going forward, the average person accepts a lower standard of living, period.

So the individual "solution" is and has always been very simple.  Don't be average, or start the culling...

Tue, 08/05/2014 - 16:38 | 5050908 daveO
daveO's picture

Right. Don't be a borrower heading into deflationary times. Even if your mortgage rate is 3.5%, your real cost could be far higher.  

Tue, 08/05/2014 - 17:50 | 5051252 FredFlintstone
FredFlintstone's picture

"Don't be average"... I like it. I have been wrestling with downshifting in my career as my kids have been leaving the nest. There has been a nagging feeling that I shouldn't do this. Your post gives words to this uneasy feeling...don't be average (in this economy). Good advice for us all. Easier said than done for many.

Tue, 08/05/2014 - 16:35 | 5050892 spinone
spinone's picture

The average age of boomers is 60.5. They should start to leave the job market en masse when they qualify for full social security benefits at 62, which is a year and a half, or the end of 2015. After that there should be an accelerating downward slope to the economy as we pass 'peak boomer' they retire, downsize, and begin liquidating assets to fund their retirement. This will accelerate faster when they reach 70.5 and must begin mandatory IRA withdraws. This will be in 2024.

Tue, 08/05/2014 - 17:04 | 5051031 yogibear
yogibear's picture

when they qualify for full social security benefits at 62,

No it's at age 66 for those folks. So 5 years and 6 months from here.

Tue, 08/05/2014 - 19:43 | 5051652 spinone
spinone's picture

So the question is, can the market run go 5 more years?

Wed, 08/06/2014 - 12:40 | 5054510 SofaPapa
SofaPapa's picture

Yet there have been several articles pointing out that retirements aren't happening.  They can't retire, because there's no money.  The 55+ age group is where the jobs are going.  As to the "liquidating assets" part, this has been underway for the past 6 years. If it weren't for QE^x, this would be clearly visible in the markets, but it has been hidden with printing. Not sure there will be much difference a year and a half from now.  More important is when the printing band-aid disintegrates.  That's what we're all waiting to see now.

Tue, 08/05/2014 - 16:16 | 5050819 Bemused Observer
Bemused Observer's picture

I have a question about this whole 'interest on debt' thing. If a person decided to set up a system where debt plays such an important role, wouldn't it be sensible, prudent even, to specifically ban the compounding of interest on that debt? I mean, wouldn't it occur to that person that compounding will only exert more extra pressure on that system than it could handle?

There's no reason to HAVE compounding interest, it serves no useful purpose except to over-burden debtors.

And another thing...These "interest rates" they keep yakking about? They need to stop lying. Interest rates are NOT at zero for the majority of us. What credit card is charging ANY kind of single-digit rate for the money they lend? The money they BORROW from the Fed for NOTHING! So, shut THAT zero-interest rate bullshit DOWN! Interest rates are NOT at zero, not in the real world!

Tue, 08/05/2014 - 18:13 | 5051317 crazybob369
crazybob369's picture

Sorry to rain on your parade, but actually they are. You can go out and purchase just about any car and pay 0% interest for up to 6 years. Most credit card companies (if you have decent credit) allow you to pay off your other credit cards at 0% interest for up to 24 months (although they usually charge about a 2% transaction fee which makes the actual rate around 1%). And, even if you believe the gov numbers about inflation being 2-3%, and if your mortgage rate is 2-3% you actually have an effective rate of interest of 0%. And, if you believe, like I do, that inflation is more like 5-6% in essence your mortgage rate is actually negative. By the way, there are a myriad of reasons for compounding interest. This is not the venue for a full explanation, but suffice it to say that compounding is how the real world works. Inflation compounds, for instance, therefore interest has to compound, since interest is supposed to reflect, in part, the risk of getting paid tomorrow with devalued currency.

Tue, 08/05/2014 - 18:15 | 5051331 Ghordius
Ghordius's picture

compound interest is indeed seen as unethical and fordidden by many schools of thought and religions

very good article. friction, corruption, and failure to economize - three facets of the same thing

Tue, 08/05/2014 - 17:56 | 5051267 messymerry
messymerry's picture

The standard question appies:  How much longer have we got?  Come on ZH'ers, show some huevos and go out on a limb. 

When is all this going to blow up in our face? 

Tue, 08/05/2014 - 18:43 | 5051431 mastersnark
mastersnark's picture

This article had very little sex for all its references to "friction." [Down arrow]

Tue, 08/05/2014 - 18:59 | 5051486 messymerry
messymerry's picture

The article may be pretty dry, but hte comments on it are extra liquid.  See below...

Tue, 08/05/2014 - 19:05 | 5051501 RockyRacoon
RockyRacoon's picture

What... you didn't like all the boner-inducing chartporn?

Do NOT follow this link or you will be banned from the site!