This page has been archived and commenting is disabled.

How Developed Markets Become Banana Republics: "Debt Is A Much Easier Way To Gather Consensus"

Tyler Durden's picture




 

Perhaps the most dangerous thing about where the world seems to be headed now that central bankers have not only lost credibility in the minds of investors, but in their own minds as well, is that it’s not entirely clear what will happen to society if credit suddenly dries up. 

That is, if the central bank put finally disappears and the market is once again free to purge speculative excess and correct the rampant misallocation of capital, the days of easy money will quickly come to an end as rational actors begin to make decisions based on prudence and fundamentals rather than on the assumption that because the cost of capital is effectively zero, and because central planners will never “allow” the system to fail, credit can safely be extended to unworthy borrowers. 

We’ll likely get an early indication regarding the market’s tolerance for a return to some semblance of normalcy in the coming months as capital markets become less forgiving towards the exceedingly uneconomic US shale space. But as mentioned above, the truly interesting question is what happens when everyone else starts to get the bankrupt shale driller treatment because after all, in a world where everybody is living on cheap credit, metaphorically speaking we’re all just broke US oil producers, surviving on debt and the willingness of our neighbors to finance that debt. 

It’s against that backdrop that we bring you the following excerpts from RBS’ Alberto Gallo, whose latest note takes a look at the history and proliferation of the fiat regime.

*  *  *

From RBS

Bretton Woods ended shortly after (1971), while Fannie, Freddie and various other programmes that followed marked the gradual change to a monetary system based on fiat currencies, and later on, on fiat credit. 

The use of government subsidies to encourage private borrowing to purchase a house, a car, or any other goods was since then imitated in other developed countries. It was the start of the so-called let-them-eat-credit policies and the transformation of democracies into debt-based democracies. No government, wrote now RBI Governor Rajan, prefers the tough reality of declining growth or of a crisis. Debt is a much easier way to gather consensus, and to postpone structural issues.


“Politicians are resourceful people. Their political skill lies partly in proposing solutions that keep their constituents happy without venturing into the rocky terrain of real reform. In the case of inequality, politicians know intuitively that households ultimately care most about their consumption over time; incomes are only a means to obtaining that consumption stream. A smart politician can see that if somehow the consumption of middle-class householders keeps rising, if they can afford a new car every few years and the occasional exotic holiday, and best of all, a new house, they might pay less attention to their stagnant monthly paychecks. And one way to expand consumption, even while incomes stagnate, is to enhance access to credit.”

*  *  *

For now, we'll forgive the fact that that quote comes from a central banker that just days ago slashed rates by 50 bps in an epic dovish lean that surprised 51 out of 52 economists and simply note that the dynamic described above is exactly how a developed, powerhouse economy gradually becomes a banana republic and if EM continues to follow this blueprint, the roundtrip from frontier market to investment grade and then back to frontier "junk" won't take long. 

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 10/06/2015 - 19:14 | 6637632 Usurious
Usurious's picture

''Since the medium of exchange in a debt backed by debt system is debt, the only way to service a debt is with debt and the only way that can be sustained is if debt inflates by the required amount''

hypertiger

http://hypertiger.blogspot.com/2008_02_01_archive.html

Tue, 10/06/2015 - 19:26 | 6637683 OC Sure
OC Sure's picture

To say the problem began as this article does is false.

This is sophmoric sensationalism.

Clicks.

Tue, 10/06/2015 - 19:49 | 6637776 Zen Master
Zen Master's picture

Some of the Hypertiger stuff is spot on ... but the numerology artifice he is into now makes him a hard read.

Tue, 10/06/2015 - 20:02 | 6637781 ThroxxOfVron
ThroxxOfVron's picture

""In geometry, a pentagon (from the Greek ????? pente and ????? gonia, meaning five and angle) is any five-sided polygon. The sum of the internal angles in a simple pentagon is 540°."

540/5 = 108 Five = 42 Angle = 39 = angel

regular pentagon has Schläfli symbol {5} and interior angles are 108°. 

261? 9 x 29 = 261 "English has developed over the course of more than 1,400 years. The earliest forms of English, a set of Anglo-Frisian dialects brought to Great Britain by Anglo-Saxon settlers in the fifth century, are called Old English" 2 x 61 = 122 Anglo = 49 Saxon = 73 Michael = 51 = my first name Leopard = 71 = my last name 51+71 = 122 49+73 = 122 1+2+2 = 5

October 1st, 2015 10/01"

hypertiger

 

95% of what 'hypertiger' writes is hoodoo numerology fabala cabala crackhead gibberish.

I tired of wading through the debris looking for the broken trampled shards of pipe singed reason twisted into amusing shapes...

A waste really.  & who knows for sure what or who it is even a waste of?  

 

Sad -and painfully familiar.

Sounds a lot like a really brilliant musician lady I once knew that destroyed her mind one Burning Man doing ecstasy and fucking strangers until she found herself abandoned crying and crusted with shit in an empty van in the desert; -never the same again...

Wed, 10/07/2015 - 08:31 | 6638976 Farqued Up
Farqued Up's picture

Blame it on the Nevada high desert dehydration,

Tue, 10/06/2015 - 23:45 | 6638481 All Risk No Reward
All Risk No Reward's picture

No, the only way to completely service the debt is to have no non-specie money. Specie is non debt-based money.

The only way for Main Street to have enough money to pay off their monetary debts is for the oligarchy to have a net monetary worth of ZERO.

The net monetary wealth of the oligarchy is, by definition, THE INEXTINGUISHABLE DEBT EVERYONE ELSE!

Wed, 10/07/2015 - 08:37 | 6638993 ThroxxOfVron
ThroxxOfVron's picture

This is why .GOV debt is the Road TO Serfdom.

Assets cannot be collateral as assets do not pay debts.

Only people pay debts.

Human productivity is the only collateral that exists in the entire world.

Selling .GOV debt is selling people: Treasuries are a form of Slave Trade masked by Securitization.

Any flavor of Democracy that employs debt funding is perpetuating slavery, the selling of minorities, the expropriation of human productivity/capital.  Slavery is not morally or ethically acceptable even if the majority of the populace condone it via plolitical demands for the proceeds garnered by such a de-facto the slave trade.

Thu, 10/08/2015 - 04:05 | 6643204 All Risk No Reward
All Risk No Reward's picture

Throx, you are correct about all this debt being a form of slavery, but it is worse than your explanation. Human productivity can't pay down debt-money debts. Only the proceeds of debt-money issuance (what we think of as money) can pay down debts.

During the Great Depression, it didn't matter how productive you were because the Debt-Money Monopolist banks simply weren't lending new money to society so society was going to go bankrupt according to their plan regardless of how hard anyone worked!

"If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon."
by:Robert Hemphill, Credit Manager of Federal Reserve Bank, Atlanta, Ga.
Source: In the foreword to a book by Irving Fisher, entitled 100% Money (1935)

Tue, 10/06/2015 - 19:17 | 6637641 Hohum
Hohum's picture

Sad to say, but no debt, no exotic vacations for the middle class. 

Tue, 10/06/2015 - 21:21 | 6638149 Lets Buy The Dip
Lets Buy The Dip's picture

I had to +1 it is true - no debt, no exotic vacations for the middle class

This guy is rediculosuly accurate with his market calls this year, and notes the high yield blowing up here => http://www.bit.ly/1jLMmPk

That could mean, while the market is stable, and still in a bull market, we will get a crash in a few years from now!, that is quite possible. 

 

I think markets will eye the overnight statement for indications on what the Bank of Japan might say in its prospectus and outlook for the economy at its more important meeting on Oct. 30.

The European Central Bank is scheduled to hold a monetary policy meeting in Malta on Oct. 22. That will be a big highlight, as they will probably take some sort of measure there. It will most likly be really really BULLISH for the market, too. 

It's kind of a situation like the Fed is talking tough, like they're going to raise, but the data (doesn't support it). I don't think the Fed has the audacity to raise rates. They keep saying they will, but DONT. Anyone see a trend there. LOL :-D  

Tue, 10/06/2015 - 19:22 | 6637661 Redart
Redart's picture

Interest rates should stay low. It benefits the heavy arms of the economy.

Tue, 10/06/2015 - 19:47 | 6637662 Ham-bone
Ham-bone's picture

I believe the debt is simply a reaction to the declling growth on the other side of the ledger...

Forget Peak Oil - It's All About Peak Population Growth

http://econimica.blogspot.com/2015/10/forget-peak-oil-its-all-about-peak.html

Tue, 10/06/2015 - 19:51 | 6637789 Hohum
Hohum's picture

So you think more people will lead to more "growth?"  Well, that's one way to view things.  Another is that the cornucopia of yore isn't there.

Wed, 10/07/2015 - 09:11 | 6639118 MEAN BUSINESS
MEAN BUSINESS's picture

You obviously didn't read his article.

Ham - Bone, I'm getting to the point where I'm gonna start saying :"If you really love your kids, don't have any" Sounds mean eh? Beyond 2050, coupled with global warming? Yikes! (I'd be 88 in 2050). Thanks for the link.

Tue, 10/06/2015 - 19:31 | 6637712 will ling
will ling's picture

IT'S NOT DEBT! it's just givin' free money to the elittists. round them up and eliminate them and confiscate their ill-begotten gains.

Tue, 10/06/2015 - 19:40 | 6637739 two hoots
two hoots's picture

Banks benefit with low interest rates (cheap debt) with economy of scale and scope.   

Tue, 10/06/2015 - 19:56 | 6637803 ThroxxOfVron
ThroxxOfVron's picture

Counterfeiting fucks up economies.

Politicians like counterfeiting more than prioritizing and balancing budgets.

Bankers like counterfeiting because they get to charge interest on the phony money.

 

See how short and to the point this shit can be?

-What else do you want to know?

Tue, 10/06/2015 - 20:01 | 6637822 OC Sure
OC Sure's picture

 

"What else do you want to know?"

How to stop it?

Wed, 10/07/2015 - 07:49 | 6638897 The Limerick King
The Limerick King's picture

Well done...a perfect summary.

Tue, 10/06/2015 - 20:01 | 6637817 Catullus
Catullus's picture

It's just control. It's consensus building because those in control agree that you should kick the can so they can remain in control. That's all a bailout amount to.

Otherwise you have a liquidation. And that means another person is in control.

Until a sizable number of people find an alternative to the dollar, they can continue to kick the can.

Tue, 10/06/2015 - 22:50 | 6638381 ThroxxOfVron
ThroxxOfVron's picture

"It's just control. It's consensus building because those in control agree that you should kick the can so they can remain in control. That's all a bailout amount to. 

Otherwise you have a liquidation. And that means another person is in control. "

 

That isn't 'consensus building' amongst theives aka Organized Crime.

When the Cronies go broke the money is counterfeited or stolen or expropriated via .GOV, or the accounting and property and criminal laws are revoked, or all of the above.

When NON-Cronies go broke they are liquidated, their assets seized, their 'credit rating' and 'good name' are ruined.

We have a system where liquidation is not based upon viability but upon exertion of political power and exorcise of violence.

When the Central Bank and the Congress are usurped by the MOB it isn't a Republic or even a Democracy any more: it's an Oligarchy or a Kleptocracy.

An alternative to the entire political system has to be devised, not merely an alternative to the dollar.

Our problem is not that the Dollar is doomed: the Republic is dead.

Tue, 10/06/2015 - 20:54 | 6638054 Grandad Grumps
Grandad Grumps's picture

Bullshit. People do NOT act that way and that is one of the ways the bank got it wrong.

Wed, 10/07/2015 - 05:25 | 6638720 TrumanShow
TrumanShow's picture

No, you don't get it, the credit expansion and easy money will never end, due to the reasons you give, until it implodes under the weight of its own bullshit and then we all pay the price.

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