Tuesday, January 19, 2016

Why The Coming Crisis Will Be Far Worse Than 2008.......

Why The Coming Crisis Will Be Far Worse Than 2008

The world's grand experiment with debt has come to an end. And it's now unraveling. !!!!!

If you watched stock prices over the past two weeks you likely had flashbacks to the financial crisis of 2008. At one point the Dow was down over 500 points, the S&P cracked below key support at 1,900, and the price of oil dropped below $30/barrel. Scared investors are wondering: What the heck is happening? Many are also fearfully asking: Are we re-entering another crisis?

While there may be a market rescue that provides some relief in the near term, looking out at the next few years, what we will experience is a time of unprecedented financial market turmoil, political upheaval and social unrest. The losses will be staggering. Markets are going to crash, wealth will be transferred from the unwary to the well-connected, and life for most people will get much harder as measured against the recent past. Probably worse than most can imagine.  !!!!!

This is simply the way things go when a prolonged series of very bad decisions have been made; it's just math. Most of the bad decisions that will haunt our future were made by the Federal Reserve in its ridiculous attempts to sustain the unsustainable.

The even larger backdrop to all of this is that the developed world, most recently China, have been stoking growth with massive amounts of debt, and have been doing so for a very long time. Debt is a ticking time bomb at this point.

Using the US as a proxy for other countries, this is what the lunacy looks like:



Increasing your debts at 2x the rate of your income eventually puts you in the poor house; it's just math.

Somehow, this math escaped the Fed's "brilliant" researchers and policy makers as a problem. Well, turns out it is. And it's now knocking loudly on the world's door. The deflation monster has arrived.

The only possible way to rationalize such an increase in debt is to convince oneself that economic growth will come roaring back, and make it all okay. But the world is now ten years into an era of structurally weak GDP and there are no signs that high growth is coming back any time soon, if ever. !!!!!

So the entire edifice of debt-funded growth is now being called into question -- at least by those who are paying attention or who aren't hopelessly blinkered by a belief system rooted in the high net energy growth paradigms of the past. !!!!!

The chart above starts in 1970 because it was in 1971 that the US broke the dollar's linkage to gold. The rest of the world complained for a bit at the time, but politicians everywhere quickly realized that the loss of the golden tether also allowed them to spend with wild abandon and rack up huge deficits. So it was wildly popular.

As long as everybody played along, this game of borrowing and then borrowing some more was fun. In one of the greatest circular backrubs of all time, the central banks and banking systems of the developed world all bought each other's debt, pretending as if it all made sense somehow:



The above chart shows how hopelessly entangled the worldwide web of debt has become. Yes, it's all made possible by the delusion that somehow being owed money by an insolvent entity will endlessly prevent your own insolvency from being revealed. 

How much longer can that delusion last?

All of this is really just the terminal sign of a major credit bubble -- a credit era, if you will -- drawing to a very painful, nasty close.

" There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

                                                                                                          Ludwig Von Mises

Well, the central banks of the world could not bring themselves to voluntarily end the credit expansion – that would have taken real courage.

So now we are facing something far worse, far more destructive over a much a much longer period of time.

Why The Next Crisis Will Be Far Worse Than 2008....

This won't be just another run of the mill bear market for equities, it will be the unwinding of the largest and most ill-conceived credit bubble in all of history. Equities are a side story to a much larger, much more dangerous reality. 

It's global and it's huge. This deflationary monster has no equal in all of history.

Faced with the prospect of watching the entire financial world burn to the figurative ground (if not literal in some locations), or doing something, the central banks will opt for doing something.

Given that their efforts have not yielded the desired or necessary results, what can they realistically do that they haven't already?

That's a very important question going forward. Who knows what they will do, can afford to do. One thing is for sure, it is very doubtful they will do the right thing.


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