can be summarized in two sentences:
continuously fed with new credit, the global financial system will implode.
And when confronted with this possibility, governments will always respond
with new credit.
This has been
true at least since the Long Term Capital Management collapse in 1998, and in
the ensuing 14 years the global financial markets and the world's governments
have been partners in a dance in which crisis elicits monetary ease, which
ignites an asset bubble, which bursts and elicits a new flood of credit.
After each sequence the total amount of debt -- and the system's fragility --
is even higher than before.
all a few brave souls like Ron Paul have tried to stop the music and
liquidate the debt, while other -- far more numerous -- authorities like New
York Times columnist Paul
Krugman have called for even more debt to
produce higher inflation in order to liquidate the old debt. These worldviews
-- sound money to which the world must adapt versus flexible money that
adapts to the needs of the economy -- are mutually exclusive. Only one can
With all due
respect to sound money advocates, there was never any doubt about the
outcome. When voters suffer, governments armed with a printing press will
always respond with easy money.
debate ended. France has elected a
socialist leader who will demand an end to austerity. The head of the
European Central Bank has accepted that growth should henceforth take
precedence over balanced budgets, and Fed chairman Ben Bernanke has made it
clear that he's ready to step in with more easing if necessary. Elections in Greece,
Ireland and elsewhere will solidify this consensus.
So now begins
the next, purely-inflationary stage of the process, in which governments and
central banks abandon whatever restraints they once recognized and vow to do
whatever it takes to put people back to work in the here-and-now. That means
tax cuts, even bigger deficits, continued low interest rates and aggressive
asset purchase programs.
"works", i.e. whether the coming round of global devaluation
produces higher employment with a minimum of instability, is an open question
because we've never been here before.
No society in
history has owed this much money, and the forces of global debt liquidation
have never lost. Kondratieff Winter has never been bypassed and converted to
Spring. But the world has never been armed with an unlimited printing press
either. See The
Long Wave Versus The Printing Press.
that's certain is that today's tentative policies with one eye on deficits
will soon be replaced by single-minded money printing, with a Krugman-esque goal of sustained 4% inflation. So now we
know exactly what the world's governments want. The question is, can they get it?