What makes stocks rise? What makes steady Employment? What makes home prices increase? Social mood is what drives the markets, the economy, politics and the culture:
Early in the game when debt levels are down, as the social mood improves in capitalist economies, people start borrowing to create a good future for themselves. They work hard, educate themselves, hopefully innovate and invent. Discoveries lead to new markets and new ways of life. This is a phase when there is room for improvement.
Due to herding, everybody looks at each other and borrows more. Because of fractional reserve banking, this borrowing inflates the money supply as banks create money out of thin air:
This early growth becomes the inflationary boom. As total debt expands, it requires more and more borrowing to service existing debt. With the recent memory of the past, people keep borrowing and investing even though science and technology may start lagging behind. Instead of true growth, a financial mania based on hope and greed takes hold. Everybody wants to get rich. But nobody wants to pay the price:
Instead of creating scientists, engineers, workers, the population rides the wave of hope and optimism with more and more real estate agents, mortgage brokers, investment bankers. The new economy is hailed as the service economy. It is a new way of life.
People make money giving haircuts to each other. They then marvel at the GDP increase they create doing that. In the darkness, a little secret looms. Everyday more of their income goes to service existing debt.
When the entire money supply is borrowed from the banks, it has principal and interest to pay back. In order to pay interest, borrowing must increase exponentially. If borrowing stops, economy stops:
If deflation is allowed, the house of cards will crash. Thus the dream must continue at all costs. To achieve this the FED lowers interest rates to attract more borrowers. The government turns a blind eye on sub-prime. No 20% down. The more you borrow, the better it is. Liar loans are ok as long as you are a home buyer (aka good citizen). Credit card companies make 0% offers to any breathing soul just so that you can write a balance transfer check and inflate the money supply. Or deflation will start.
At the end, all futile efforts give way to the simple fact: We run out of borrowers. As the expansion of money supply stops, it becomes impossible to pay existing debt (which is the money supply), with interest. Principal exists, but interest portion is not created yet.
Weakest borrowers fail to earn enough to pay the interest. They foreclose, or go bankrupt. The money to earn to pay the total debt does not exist!
FED still claims it is goldilocks economy. As the crisis gets worse, the shortage of money becomes obvious. Some banks fail. Banks who now hold toxic consumer debt are bankrupt and are kept alive by accounting rule changes. FED prints money and gives it to the banks so that they remain solvent. FED keeps printing as deflation keeps showing it’s ugly head.
Foreign creditors are disgusted at the FED’s printing press. Eventually they refuse to lend money in US dollars. This causes market rates to increase for US treasuries. FED follows with higher rates. Credit dependent industries such as housing take another hit and practically become cash down markets.
Salaries stagnate even though consumer prices may go higher due to expensive imports. Unemployment exceeds Great Depression levels. Tax rates go higher to service existing public debt. Consumer economy is wiped out. People can only afford basic necessities. Service sector suffers. As the value of the money supply falls, US becomes poorer and poorer. As the debt is wiped out first via deflation, and then via printing press, we hit the bottom.
At the bottom people see no choice but to educate themselves to create real value again. If investment in science and technology starts to match other nations, then we start the cycle all over again. If not, then we stay at the bottom with a miserable life.
What is the solution? There is no solution. This is not about what we are going to do. This is about what we have already done. An entire nation cannot borrow from the future for decades and then hope that all will be fine when the future arrives. You can only save yourself if you were lucky enough to stay out of debt. At the bottom of the kondratieff cycle, it will be the time to borrow again. We are not there yet. How do we know? Stock market tells us:
Kondratieff Winter has started. Buckle up!
Signs of deflation are visible but the public will be fooled
Deflation requires a precondition: a major societal buildup in the extension of credit (and its flip side, the assumption of debt).
— Conquer the Crash, 2nd edition (p. 88)
Has the United States met that precondition?
Well, consider that total credit market debt as a percent of U.S. gross domestic product was
- 280 percent in 1929 at the start of the Great Depression
- 380 percent in 2008
The current build-up of credit goes far beyond major — it’s unprecedented.
It’s been rising steadily for 60 years. The slope literally looks like the side of a steep mountain.
Bank credit and Elliott wave expert Hamilton Bolton studied every major depression in the U.S. In 1957, he made this observation:
All were set off by a deflation of excess credit. This was the one factor in common…the signs were visible many months, and in some cases years, in advance. None was ever quite like the last, so that the public was always fooled thereby.
Let’s read again from the second edition of Conquer the Crash (p.92):
A deflationary crash is characterized in part by a persistent, sustained, deep, general decline in people’s desire and ability to lend and borrow…
The U.S. has experienced two major deflationary depressions, which lasted from 1835 to 1842 and from 1929 to 1932 respectively. Each one followed a period of substantial credit expansion. Credit expansion schemes have always ended in bust. The credit expansion scheme fostered by worldwide central banking…is the greatest ever…If my outlook is correct, the deflationary crash that lies ahead will be even bigger than the two largest such episodes of the past 200 years.
Is there evidence now that a deflationary trend is underway? Dear reader, the evidence is abundant and growing by the day.
To begin with, just a casual observation of our national economic life reveals a deep general decline in people’s desire and ability to lend and borrow.
But there are many specific signs pointing to bankruptcy, default and a deflationary spiral.
Yet they’re not grabbing the headlines. The “good” economic reports and levitating stock market are. The public will likely be fooled again. But make no mistake, the signs are there.
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