Saturday, August 17, 2013

After The Coming Crash

Today I was mulling around in my mind how people will look back and reflect on this mess if the predictions of the doomsayers prove correct. As you know many of us the are far from optimistic. While the future is hard to predict, as in politics the people who watch and study the economy are becoming more polarized as to the direction of the economy. Many of us are slipping into one of the two distinct camps, one that sees this as an economy slowly on the mend with the worse behind us and the other who clearly takes the position that things are not working. Not only have things gotten worse but the distorted economy and manipulated markets only mask the fact that a day of reckoning is fast approaching and we are facing a bigger and meaner economic set back then any the world has witnessed in modern times.

On the "blue skies" side of this argument are those talking their book and the truly optimistic. They see more jobs being created and are certain that as the economy picks up the deficit will come back into a more manageable range. These upbeat legions broadcast the message that we have learned from past mistakes and things are now on a much stronger foundation and problems are being dealt with. As they spin a scenario of higher corporate profits ahead they remind us how those claiming the "Sky is falling" have always been with us and yet even in the worse days we tend to muddle through. They declare that those who worry that the debt, currency games, and massive reliance on records created and sent off into the clouds will someday come back to haunt us are daft!

In a BBC interview that aired in October of 2012 the governor of the Bank of England, Mervyn King commented that the last few years have given him a deeper understanding of some of Keynes' writing about the 1930s. I have always had my doubts about the long term "benefits" of QE. And the thought of government indulging in "off balance sheet" transactions brings back bad memories of all the too-clever-by-half banking practices that got us in the present mess. As a simple accountant wedded to the sanctity of double entry bookkeeping, every debit must have a corresponding credit and vice versa. So if in creating this money as a cash asset, there must be a liability to balance it out somewhere. Unless my simple accountant's mind has this wrong, government has merely created more debt and has merely kicked the can a few years down the road.

Before the financial crisis of 2008, Sir Mervyn says, he had struggled to comprehend how policymakers had allowed the economic disaster. My thoughts are if indeed we do have the blow off many of us see coming it will be big, it will be deep, it will shake society to its roots, and it will most likely last for years. We could possibly witness a watershed event in the economic history of the world. We could see people lose all confidence in paper money and those that run both the Reserve Banks and Government. With the recent creation of billions of documents and a massive amount of records being held on computers, this includes complex derivatives, the courts will be overwhelmed and the tangled mess may never be set right. 

Currently many traders and investors claim to be playing this close to the vest and riding the markets higher as they are pushed up by a wave of easy money, they intend to rush to the exit before it all collapses into rubble. As usual the masses will be shocked and wonder why the "light never came on", how they, their leaders and fine public servants could have mucked things up and have let this happen. Even while entitlement programs are being shredded, reduced, rewritten, and promises broken, they will look towards government to do more. As they do it will become clear that those in power do not have as much power as many think. Yes, even the powerful will be tossed about by events rather then in control of shaping them.

The majority of people will look back and say, it happened so fast and with so little warning that they could only go along on the ride. We do indeed live in interesting times. In my book Advancing Time I focus on how change is occurring at an increasingly faster rate. One of the biggest changes over the last few decades is in the speed and way we communicate, this will have a massive bearing on the effect and speed of a great unraveling. To many of us, as with the occurrence of other unseemly events that take place in history it is merely a question of when and not if. While we have learned much during the last two hundred years about economics and how to manage our economy we should not be so arrogant as to think we can control greed or change the nature of bankers and politicians.

Footnote;  Your comments are welcome and encouraged. If you have time check out the archives for other post that may be of interest to you. 


  1. Hi Bruce, always enjoy reading your post, the world goes on, most people are oblivious to what could happen, I like you feel the glass is less than half full and doesn't look like it is going to get better, makes it difficult to invest in this inflated market.

  2. Everything is being borrowed and stolen from the future, eventually the future will want it's wealth back.

  3. do not see my comments here??? is your software working?

  4. It is pathetic that the global economy is driven by a small adjustment in interest rates. To understand, you need to take into account that some in the financial industry understand the nature of the house of cards that is being built, but they assume that they have the “HOSBA” like they say Yiddish to survive the next bursting bubble.

    Stan here is like Stockman seems to believe that we have a free, fair and rational global system of finance and investment. You need to read the modern history of European economies to see how the Finance establishments “bond underwriters” supported and ran governments, and resolved their economic cycles with wars.

    Forget all the nationalist crap. It has always been a one way policy to transfer wealth. We may have reached an unsustainable stage of massive economic cycles, so it seems, but the financial mafias are, way-way, more informed and powerful than any thing this planet has ever seen, and will create the financial global machination to suit their needs.

  5. Congress stated over and over that it is just kicking the can further down the road, but that didn't stop them from doing it. When the efforts of recovery began after the crashes that left us in a Great Recession, I said they all amount to snow plows pushing the snow straight ahead. The plow is built to push the snow off to the side, but if you set the blade to just push the snow ahead, you will build up such a mountain of snow in front of the plow that eventually it loses traction and can no longer push the load ahead.

    I'm afraid we are at that point. Congress was foolishly ready to believe the Fed could engineer recovery. The Fed sometimes warned it could not and that fiscal policy must be put in place to create a more sound economy, but those warnings were faint ... I suspect because the Fed's head was inflated by the idea that people thought it could save the world and it came to believe that itself.

    The truth is that the Fed gave us anesthesia. Had we diligently used that time to restructure our economy away from debt, it could have saved us a painful transition. Instead, we let the anesthesia numb us to the work that needed to be done and left the injuries untreated, since they were not causing much pain. Now the anesthesia has run out, and we still have all the corrections to make ... AND we have piled up mountains of debt so that we have no strength left. We have squandered our opportunity for change by just trying to maintain the status quo by financing everything with debt, continuing with adjustable-rate mortgage traps, continuing some of our sloppy terms of credit, continuing to allow deregulated banks to speculate in the stock market, not allowing people with 401k's to operate outside of the services of fund managers by letting them buy and own actual bonds with the same tax advantages, discouraging savings as if it were plague, trying to re-inflate the housing market with zero interest base rates, instead of letting it deflate back to a level where people can afford a home without ridiculous terms of credit, extending the sloppiness of auto financing into lengths that exceed the collateral value of the automobile.

    It's almost unbelievable how dumb we are in our greed to have everything right now in the cheapest way possible and how willing we are to force the debts of our consumption upon our grandchildren. I think there has never been a more selfish society on earth that is so willing to let future generations make payment for our lavish lifestyles. We even let the next generation pay the bill for our generosity by creating welfare programs that we finance far into the future so that we can feel like WE take care of the pour, while we hand the actual burden of paying for that off to our children!

    --Knave Dave
    The Great Recession Blog

  6. Yes....speaking of your generous welfare programs, tell me about it. Was that suppose to be the payment for the poor souls of those who were held captive for 250 years of free labor and heinous atrocities and were never paid a dime by this so called great country. Don't flatter yourself. The resulting psychological damages was and still is stupendous.