2012: THE TIPPING POINT
THE RESULTS ARE IN
The bankers’ bet that sufficient credit can reverse an economic
contraction is no longer on the table. This does not mean central bank credit
will tighten. Just the opposite will happen. Monetary easing will continue
until the very end. Central bankers are trapped. The end game is now underway.
It is highly unlikely the Mayan predictions of the
end of the world referred to the bankers’ world of credit and debt.
Nonetheless, with only one month remaining until December 21, 2012—the
end date of the Mayan 5,125 year Mesoamerican calendar—the concomitant
end of the bankers’ 300 year ponzi-scheme of
credit and debt should not be dismissed as mere coincidence.
The world has entered a paradigm shift of immense
proportions; and the collapse of the bankers’ economic world is a part
of that shift. The bankers’ credit fueled a 300-year global expansion
which transformed the world. The bankers’ credit, however, has now
become debt which increasingly cannot be repaid.
Economics is not rocket science although the arcane
algorithms used by Wall Street banks to predict capital markets imply that
intended conclusion. Modern economics, i.e. capitalism, is merely the current
iteration of the supply and demand dynamic distorted by 300 years of credit
and debt—a distortion that’s now about to end.
Prior to capitalism, the underlying economic dynamic
was supply and demand. However, in economies fueled by the bankers’
debt-based banknotes, the relationship between credit and debt becomes
equally, if not more, important than supply and demand.
GOLD, MONEY AND CREDIT
After gold was removed from the global monetary
system in 1971 and after initial inflationary concerns were addressed in
1980, embedded constraints on monetary and credit growth no longer existed.
The attendant rise in debt is noteworthy—as will be the consequences.
What central bankers did not anticipate from the
explosive growth of credit was the resultant levels of massive debt. Fixated
on growth, central bankers miscalculated the inevitable effects of the
unrestrained increase in monetary and credit aggregates on their heretofore
successful ponzi-scheme of credit and debt.
Credit is the zygote of debt; and since debts
constantly compound in capitalist economies, unless controlled, credit will
inevitably lead to fatal levels of debt. This is not rocket science. This is
Prior to the 1980s, central bankers controlled
credit growth with central bank credit. After the 1980s, however, the
markets, not central bankers, controlled the growth of credit—and
markets love credit.
After 1980, credit growth was similar to pouring
sugar into petri-dishes where glucose conversion had been previously
carefully observed and stabilized. Now, three decades later, the alcoholic
fumes from the petri-dishes are obvious to all, even to the central bankers
who realized too late what the investment bankers had done with their credit.
The subtext to all central bank maneuverings since
2008 has been the attempts of central bankers to avoid the now inevitable
deflationary collapse in demand that will bring their 300-year economic fraud
to an end.
In the first edition of my book, Time of the Vulture; How to Survive the Crisis and Profit in the
Process (2007), I predicted a deflationary collapse was
going to happen. Six years later, that predicted depression is about to make
its appearance on the world stage; and, it will be an economic collapse, a
depression so deep, that another completely new economic paradigm will take
CAPITALISM FOR DUMMIES
EUPHORIC BUBBLES AND DEPRESSING DEPRESSIONS
economically moribund state where credit can no longer induce growth
Depressions are caused when uncontrolled credit
growth results in speculative bubbles and runaway markets, e.g. stocks, real
estate, etc. When this happens, capitalism’s usual cycles of expansion
and contraction are replaced by deflationary depressions where collapsing
bubbles result in excessive levels of supply and crippling levels of
RICHARD KOO’S BALANCE SHEET RECESSION, aka THE
Richard Koo, currently chief economist at Nomura
Research Institute, has deservedly carved out a reputation analyzing the
current economic malaise. Koo’s term for the downturn is a
‘balance sheet recession’; a term drawing attention to the fact
that monetary solutions, i.e. lower interest rates, will not solve the
problem; that the problem and solution are found, instead, in the balance
sheets of affected nations.
A presentation Koo gave at a gathering of The
Institute for New Economic Thinking showed that although Australia, the UK,
the EU, the US and Japan have all significantly cut interest rates, the
global economy still has not recovered.
Koo’s solution, the substitution of
borrowing-based government spending to make up for the loss of private
demand, is drawn from the considerable experience of Japan after the
spectacular collapse of the Nikkei in 1990.
However, Richard Koo is wrong that Japan’s
strategy will also work for the US, the UK, and the EU, etc. Japan’s remarkable
record in holding a deflationary depression at bay for over 20 years is not
just because of record levels of government borrowing (Japan’s ratio of
public debt to GDP is now 204 %, the highest among industrialized nations);
but, more importantly, Japan’s struggle against deflation occurred as
the largest surge of credit-driven consumer demand in history was in progress
Japan’s struggle against deflation began when
the US credit-driven 25-year consumer bubble was just getting underway.
Japan’s now prolonged 22-year survival is as much the result of
bubble-driven US and global demand which directly benefited Japan as it is
due to the ability and tenacity of Japan to draw down and deplete its record
levels of domestic savings.
Koo’s solution to survive today’s
deflationary crisis will neither work for the US, the UK, or the EU in the
future as it did for Japan in the past—and it won’t work for
Japan in the future as well; for, today, there is no bubble of excessive
global demand to prolong Japan’s now record survival.
The opposite is, in fact, true. Aggregate global
demand today is falling and for the first time in decades, Japan’s
exports are exceeded by its imports. Today, Japan, as well as the rest of the
industrialized, i.e. over-indebted, world stands naked and exposed to
deflation’s now imminent assault.
As 2012 ends, all major economic zones are drinking
deeply at the well of Richard Koo’s solution, i.e. central bank-based
government borrowing. But, in the end, Richard Koo’s proffered well
water will be little different than the cyanide-laced kool-aid
that Jim Jones offered his ill-fated followers in Jonestown in 1978.
DRINKING POISON TO QUENCH THIRST
poison to quench thirst is a
Chinese saying that describes the eventual consequences of the continued
monetary easing of central banks and historic levels of government spending;
and, although continued government borrowing and spending may hold deflation
at bay, as Koo maintains, it will only do so temporarily and at the potential
cost of a someday fatal monetary debasement.
There are only two
possibilities left in the bankers’ end game. Either deflation’s growing
momentum will pull today’s faltering economies into the ever-growing
maw of a deflationary collapse or the continued printing of money to stave
off such a collapse will end with the complete debasement of paper currencies
in a hyperinflationary blowoff.
I advanced the deflationary
scenario in Time of the Vulture; and
believe both scenarios are not mutually exclusive. It is indeed possible that
a more extreme version of 1970s stagflation is coming; that, in the end game,
a deflationary depression and a hyperinflationary crisis could occur
We are in uncharted territory;
and, unlike most, I view the collapse of the current economic paradigm as a
necessary and ultimately beneficial rite of passage, a prerequisite for the
better and more highly evolved paradigm that will follow.
Richard Koo presented his
‘balance sheet recession’ findings at a gathering of the
Institute for New Economic Thinking; and while there has been some discussion
at the Institute about paradigm change, most of its ‘new economic
thinking’ still focuses on the current paradigm, what ails it and what
can be done to save it.
As 2012 began, there was still
hope that the worst of the 2008/2009 downturn had been averted; that a slow
but protracted recovery was underway. There is no such hope today. All
central banks are printing money and easing credit; but are no longer doing
so in the certainty that such actions will reverse what previous actions did
As 2012 ends, there is an
underlying acceptance, a resignation that what is being done is being done in
the abeyance of any real solution; and that although today’s actions
may not be a viable answer, in the end such actions are better than no action
Maybe so, maybe not.
In my current youtube, Fake Gold, Fake Coins, Ralph T.
Foster, author of Fiat Paper Money: the History of our Currency
discusses fake gold coins and fake gold bars and how customers can protect
The end game draws near.
Buy gold, buy silver, have faith.
Darryl Robert Schoon