This report marks the end of a series of three big trains of thought. The
first explained how we’re living through the Mother Of All Financial Bubbles. The next detailed the Great Wealth Transfer that is now underway, siphoning our
wealth into the pockets of an elite few.
This concluding report predicts how these deleterious and unsustainable
trends will inevitably ‘resolve’ (which is a pleasant way of saying ‘blow
up’.)
The Ka-POOM Theory
In terms how this will all end, we favor the scenario put forth by Eric
Janszen in 1998 called the Ka-POOM theory.
This theory rests on the belief that the Federal Reserve along with the
other world central banks looked at Japan's several decades of economic
stagnation and decided that deflationary recessions are to be avoided at all
costs -- even if that means blowing asset bubbles and then cleaning up the
destruction left behind in their aftermath.
Because the Fed, et al. have a limited playbook (which is: print, and then
print some more), the Ka-POOM model calls for limited periods of
disinflation, followed by massive money printing sprees that then produce
high inflation.
Despite the trillions and trillions in thin-air money printed by the
world's central banks over the past 8 years, a common rebuttal we hear is
“But there’s been no inflation so far!” To which I reply, “Yes, that’s
what we're being told. But that's not actually true.”
Remember: inflation is simply “too much money chasing too few
goods.” We can detect today's excess of money in the rising prices in
our cost of living -- but those higher prices are symptoms, not causes.
Inflation is not "higher prices". Inflation is "too much
money".
Next, inflation is not an evenly-distributed event. It’s not like the
price of everything rises 10% at the same time. The inflation rate is an
average, which contains some prices going up, while others stay flat or
even go down going down. It’s always a lumpy experience. The reason why
is that money is not evenly distributed across the economy, and it doesn't
always chase (or desire) the same things.
So the Fed and other central banks have printed up trillions and trillions
of dollars, euros and yen, which they then essentially handed over to the
financial markets and the very few people who work within them (as well as
their biggest clients). As a direct consequence, we’ve seen enormous
inflation in the prices of things that relate to that tiny universe of people
– stocks, bonds, trophy city apartments, Gulfstream 5 jets, fine art, and
rare gems.
These items have all gotten massively more expensive over the past decade.
Just as would have happened if the Fed had printed up a trillion dollars and
given them everyone living in a trailer park in the American South, with the
restriction that the money could only be used to buy other trailers in the
region. Do you have any doubt that the price of trailers in the South
wouldn't explode upwards?
Well, that’s exactly analogous to what has happened to financial and
trophy assets. The amount of money created and poured into the financial
markets by that central banks has been incredibly enormous. As a first-order
event, it raised the prices of nearly all financial assets. And then, as a
second-order derivative, it then flowed into the properties and cherished
possessions of the financial industry insiders.
The summary is that we’ve already had lots of inflation – but it has (so
far) been mostly contained to the areas where the freshly-printed money was
first directed. No surprise there.
But it's certainly not only been limited to the rarified items the rich
enjoy. Anyone who is currently looking to purchase a home, car or college
education has a pretty good idea how prices have jumped substantially over
the past decade.
Here’s the thing about the attempts by central banks to circumvent the
workings of the actual economy by simply printing up money: It is doomed
to fail. It always does; one cannot simply 'print up' prosperity.
Printing up money merely creates the illusion of free wealth for those
with first access to it. In reality, what happens is that it secretly
transfers the wealth from everyone else to those lucky few.
The Fed and the rest of the central banking cartel are consciously and
very pointedly picking winners and losers.
It’s not in their power to make everyone a winner. So they have
decided to throwing granny (and savers and pensions) under the bus while
financial elites and well-connected speculators (e.g. JP Morgan and other
large banks) extremely wealthy in the process. Wealth is being
transferred from Parties B-Z to Party A – from the many to the few.
What the Fed promised would happen along with all of this money printing
has not materialized. There has been no return to rapid economic growth. And
there won't be, because we have massive structural problems in our economy
that can't be papered over forever.
This stark fact makes the Fed's entire money printing misadventure not
just pointless, but dangerously destabilizing from a social and political
perspective. The world's central banks, especially the Fed, have done an
enormous amount of damage. These institutions, as well as the decision-makers
within them, are going to have a heck of lot to answer for when the
inevitable crack-up comes.
A Quick Re-Cap
And so here we find ourselves, at the final torturous, grinding part where
the final bubble top is formed. The über-bubble. The Greatest Of Them All.
A bubble this spectacular requires a top worthy of its size. A long,
massive top, full of increasing exuberance -- until the very last investor is
sucked in.
Where I’ve noted humans’ remarkably silly behavior during bubble episodes in the past – tulip bulbs, railroads,
swampland - I still struggle to understand or even explain this one.
It’s so obvious at this point. And yet, like its brethren bubbles of the
past, a lot of otherwise thoughtful and careful people are getting sucked in
by its siren song.
I guess the best economic description of it might be “a credit bubble”
with sub-components like sovereign and household debt, and sub-sub-components
like Toronto real estate and the IPO price for SNAP shares (that’s Snapchat,
which soon after its launch, had a valuation of $40 billion. This mind you,
is a company that has no identifiable revenue model).
A credit bubble occurs when the issuance of credit grows faster than
income supporting it. Here’s what that looks like on a national scale for the
US. The bottom red line is income (GDP) and the top blue line is Total Debt.
We can see that debt has been growing at twice the rate of GDP since 1970:
You have to be quite delusional to think that debt can be compound at
twice the rate of income forever. Unfortunately, there are more than a few of
those ungrounded optimists working in central banks and governments the world
over. Their thinking is simply, The sky’s the limit!
Those of us living in reality find this mindset puerile and insulting.
And, of course, dangerously reckless. And it’s also maddening to hear the
media cheerleaders for Wall Street selling us this bunk as if it were somehow
sensible. It is not.
Look, millions -- likely billions -- of people are at risk of getting
badly hurt. When this bubble blows, it’s going to be enormously destructive
and take out a lot of wealth along the way. Millions of jobs will be destroyed.
What people think of as wealth will evaporate as though it never existed in
the first place (it didn’t). Political dynasties and major financial
institutions will be ruined.
As I wrote recently, this will be widely and popularly referred to a period
of wealth destruction. It will feel that way to must, but it will be actually
be a period of wealth transfer:
The summary here is this: We are still printing and borrowing
enormous amounts of money and credit, but the world is not growing any larger
in response. The pressure is building. Nobody knows when all
of that money and credit will have to be 'trued up' against the amount of
real stuff out there. But it will. History shows us that it always does.
And that moment will be referred to by most as a period of wealth
destruction. 401ks will be shredded, bonds will become worthless,
defaults will spike, institutions and entire countries will fail - but the
truth is that all of that paper 'wealth' was an illusion. People's faith in
it had been betrayed long before, when those in power started abusing the
system by creating too many tertiary claims.
After the dust settles, there will be winners and losers, and those with
the proper framework will understand that what actually happened was that all
of the wealth was transferred from those who thought they owned it, to those
who actually did.
The biggest remaining question is whether the wealth transfer comes about
in the form of an inflationary destruction, like in Venezuela today, or as a
deflationary bust more in the fashion of Greece.
(Source)
The only thing that capable of preventing this coming carnage would a
resumption of rapid economic growth. And I mean growth that exceeds
the rate of debt creation.
But that's simply not going to happen.
The Problem With Growth
We can dispense with the idea of “solving” our too-much-debt problem by a
resumption of rapid economic growth either by deduction or observation.
Both work just as well on their own, but each tells a similar story in this
case.
The deductive route notes that economic growth stimulated by ever-higher
amounts of borrowing simply requires greater and greater debt loads to
accomplish. Eventually debt levels simply become too high, and pinch
off growth.
We can also deduce that because economic growth is tightly linked to
energy consumption, lower amounts of usable energy flowing through an economy
will cause that economy to stall out as well. Because we know that both the
quantity as well as the net yield we get from our
energy-producing activities are flattening, this explains why GDP growth is
flattening too.
Thus, from a deductive standpoint, combining what we know about high
levels of debt and flattening energy returns energy there’s really no more
room for confusion about why GDP growth is, and will remain, anemic (at
best).
Observationally, we now have more than a full decade of sub-par (i.e.,
‘too low’) world GDP growth:
(Source)
Notice that the last year of data, 2016, is coming in at the lowest
reading since the Great Recession, while the next two years are estimated to
also come in at less than 3%. The world hasn’t averaged 3% GDP growth
in a decade. Even the mighty US has gone more than ten straight years without
breaking into the 3% range.
We have to ask: How many years does it take to finally admit that
there’s something seriously wrong with our hopeful story line that robust
growth is going to save our debt-ridden bacon?
Just for the record, things are not shaping up any better here in 2017
either…
Atlanta Fed GDPNow model predicts 1.2% 1Q17 growth
And, just for kicks, we might also note that the GDP forecasting agencies
of the world have consistent in over-estimating future growth. Of
course, this doesn't deter them from continuing to predicting higher future growth
each year. As a case in point, here are the IMF's predictions for world
growth over the past 6 years:
(Source)
Each of those colored lines is a forecast. Each of them foresaw
growth going notably higher in the near future. Not only was every one
of them utterly wrong in direction, each failed at getting even the next quarter
anywhere close to right. See how none of those lines ever dips below
3%? See in the prior chart how global growth never breached 3% in any
of these same plotted years?
For a variety of reasons, with aging demographics being a huge factor,
future growth in the OECD countries must slow:
(Source)
My ‘prediction’ is that these projections will turn out to be far too
high. Mainly because I include declining net energy in my views and no
mainstream economist ever does. But the track records of these outfits
shows that taking the ‘under’ side of the over/under bet offers incredibly
safe odds.
At any rate, the main story here is that the only way we
can begin to justify the astronomical levels of debt currently on the books,
let alone slathering on new tranches just to keep the whole thing form
imploding, is to have a story of endless, rapid future economic growth. Which
is, we've already shown, a delusional fantasy.
Stagnating growth, ever more trillions of debt, and a finite amount of
depleting net energy all adds up to an unsustainable mess. With asset
price bubbles everywhere and wealth transfer mechanisms already in place, the
end-game involves a very few winners and a lot of losers.
Anything that is this unsustainable will someday end. But how? And how
should we position ourselves for it?
In Part 2: The Ka-POOM! Survival Guide, we detail in
depth the most likely progression predicted by the Ka-POOM! model. First, a
punishing crash in prices as natural market forces eventually overwhelm the
Fed's doomed efforts to print the world to prosperity. Think of the 2008
crash, but on steroids.
Then will come the inevitable response from the central banking cartel: Set
the printing machines on maximum speed! While this may seem to work
for a brief while, it will soon collapse the world's currencies in a
hyperinflationary deluge.
This will be a very tricky time for preserving wealth as things swing
violently from disinflation to inflation. Understanding the mechanics and
knowing what to expect will be critical -- not just for safeguarding your
money, but for taking advantage of what will surely be some of the best
bargains of our lifetime.
Click here to read the report (free executive
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