Thursday, October 8, 2015



The US and world economies are drifting inexorably into the next recession owing to the deflationary collapse of commodities, capital spending and world trade. These are the inevitable "morning after" consequence of the 20-year global credit binge which has now reached its apogee. The apparent global boom during that period was actually a central bank driven excursion into the false economics of household borrowing to inflate consumption in the DM economies; and frenzied, uneconomic investing to inflate GDP in China and the EM. The common denominator was falsification of financial prices. By destroying honest price discovery in the financial markets, the world's convoy of money-printing central banks led by the Fed elicited a huge excess of financialization relative to economic output.

The central manifestation of that was $185 trillion of debt growth during the past two decades——a stupendous explosion of credit which amounted to 3.7X the expansion of global GDP.

And even that ratio is an understatement. That's because measured GDP has been artificially bloated by the monumental worldwide malinvestment and excess capacity arising from the credit bubble. That is, phony "growth" which under the laws of economics will be liquidated in due course.

That Goldman Sachs is peddling the lunacy of potentially 100 straight months of zero money market rates is not surprising. There is no greater gift to the gamblers who comprise its clientele than free money for their carry-trades—-and especially when accompanied by the absolute certainty that there will be months of forewarning through Goldman's house organ before the Fed permits even a 25 bps change in the cost of speculation.

Oddly enough, however, the Goldman bull-hug on the Fed is exactly why the casino has become a clear and present danger to the main street economy. To wit, under the Hatzius-Dudley-Wall Street mantra of perpetual ease the Fed has become a serial bubble machine, but the retrograde academics and career apparatchik's who nominally run it do not have a clue about this destructive modus operandi.

The great financial bubble of the last two decades is global because all of the central banks have been doing the same thing. To wit, radically expanding their balance sheets, thereby systematically falsifying the cap rate for long-term investment and fueling a crack-up boom that is just now beginning to visibly fracture.

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