On January 29, 1845, the New York Evening Mirror published a poem that would go on to be one of the most celebrated narrative poems ever penned. It depicted a tragic romantic's desperate descent into madness over the loss of his love; and it made its author, Edgar Allan Poe, one of the most feted poets of his time.
The poem was entitled "The Raven," and its star was an ominous black bird that visits an unnamed narrator who is lamenting the loss of his true love...
So, with the vision firmly planted in your mind's eye of a man completely out of touch with reality, seeking wisdom from a mysterious talking bird — knowing that there is only one response, no matter the question — Dear Reader, allow me to present to you a chart. It is one I have used before, but its importance is enormous, and it will form the foundation of this week's discussion (alongside a few others that break it down into its constituent parts).
Ladies and gentlemen, I give you (drumroll please) total outstanding credit versus GDP in the United States from 1929 to 2012:
This one chart shows exactly WHY we are where we are, folks.
From the moment Richard Nixon toppled the US dollar from its golden foundation and ushered in the era of pure fiat money (oxymoron though that may be) on August 15, 1971, there has been a ubiquitous and dangerous synonym for "growth": credit.
The world embarked upon a multi-decade credit-fueled binge and claimed the results as growth.
Floated ever higher on a cushion of credit that has expanded exponentially, as you can see. (The expansion of true growth would have been largely linear — though one can only speculate as to the trajectory of that GDP line had so much credit NOT been extended.) The world has congratulated itself on its "outperformance," when the truth is that bills have been run up relentlessly, with only the occasional hiccup along the way (each of which has manifested itself as a violent reaction to the over-extension of cheap money).
Folks, rates WILL have to go up again. They cannot stay at zero forever. We all know that. When they DO, because of all the additional debt that has been ladled atop the existing pile, the whole thing will come tumbling down.
All of it.
There is simply no way out, I am afraid. But that is clearly a problem for another day. Right now, everything is fine, so we can all go on pretending it will continue that way.
So now, if you'll indulge me in a little poetic license (not to mention there being not one but four mysterious strangers in my offering), I give you, "The Maven" (abridged version):
Once upon a midnight dreary, while I pondered, weak and weary,
Over many a quaint and curious volume of financial lore
While I nodded, nearly napping, suddenly there came a tapping,
As of some one gently rapping, rapping at my chamber door.
"'Tis some visiter," I muttered, "tapping at my chamber door
Only this and nothing more."
Ah, distinctly I remember it was in the bleak December;
And each separate dying ember wrought its ghost upon the floor.
Eagerly I wished the morrow; — for the world had sought to borrow
From both friend and foe and neighbour — borrow, borrow, borrow more
For the cheap and easy money which the bankers forth did pour
Shall be paid back nevermore.
Deep into that darkness peering, long I stood there wondering, fearing,
Doubting, dreaming dreams no mortal ever dared to dream before;
But the silence was unbroken, and the stillness gave no token,
And the only word there spoken was the whispered words, "Some More?"
This I whispered, and an echo murmured back the words, "Some More"
Merely this and nothing more.
Open here I flung the shutter, when, with many a flirt and flutter,
In there stepped four stately Mavens from the Central Banks of yore;
Not the least obeisance made they; not a minute stopped or stayed they;
But, with air of lord or lady, stood inside my chamber door —
Standing by a mug from Dallas just inside my chamber door —
Stood, and stared, and nothing more.
Then these tired-looking men beguiling my sad fancy into smiling,
By the grave and stern decorum of the countenance they wore,
"Though thy faces look unshaven, thou," I said, "art sure enslaven'd,
Ghastly grim and ancient Mavens wandering from the Nightly shore —
To free money ever after lest the markets pitch and yaw."
Quoth the Mavens, "Evermore."
While I marvelled this ungainly bearded man explained so plainly,
Though his answer little meaning — little relevancy bore;
For he cannot help a-printing, brand new currency a-minting
Ever yet was blessed with seeing nothing wrong in doing more
Mortgage bonds upon his balance sheet he'll place, then markets jaw
With the promise "Evermore."
"You there" said I, "standing muted — what is there to do aboot it?"
In a heavy accent quoth he — that by God he was quite sure
That more money being printed and, new measures being hinted
At would quell all fear of meltdown and the markets all would soar
Would this mean the printing presses would forever roar?
Quoth the Maven, "Evermore."
Lastly to the fore there strode a small and bookish man, Kuroda,
Who with glint of eye did warn that he was happy to explore
Measures once thought so outrageous as to never mark the pages
In the history of finance — but those times were days of yore
Drastic printing was required, this was tantamount to war
Quoth the Maven, "Evermore."
And the Mavens, never blinking, only sitting, only thinking
By the Cowboys mug from Dallas just inside my chamber door;
Really do believe their action has created decent traction,
And that freshly printed money can spew forth for evermore;
But the truth about the ending shall be seen when markets, bending
Shall be lifted — nevermore!
The full must-read Grant Williams letter is below: