Like an old vinyl record with a well-worn groove, the needle skipping merrily back to the same track over and over again, we repeat: Today’s markets are dangerously overpriced.
Being market fundamentalists who don’t believe it’s possible to simply print prosperity out of thin air, we’ve been deeply skeptical of the financial markets ever since the central banks began their highly interventionist policies. Since 2009, they have unleashed over $12 Trillion in new money into the world, concentrating wealth into the hands of an elite few, while blowing asset price bubbles everywhere in the process (see our recent report The Mother Of All Financial Bubbles).
Our consistent view is that price bubbles always burst. Which is why we predict the world’s financial markets will implode spectacularly from today’s heights — destroying jobs, dreams, hopes, economies and political careers alike.
When this happens, it will frighten the central bankers enough (or merely embarrass them enough, being the egotists that they are) that they will respond with even more aggressive money printing — and that will then cause the entire money system to blow up. Ka-Poom! First inwards in a compressed ball of deflation, then exploding outwards in a final hyperinflationary fireball (see our recent report When This All Blows Up…).
It really cannot end any other way. Money is not wealth; it is merely a claim on wealth. Debt is a claim on future money. The only way to have faith in our current monetary policies is if one believes that we can always grow our debts at roughly twice the rate of GDP — forever. That is, compound the claims at twice the rate of income year after year from here on out.
This would be like having your credit card balance rolled over every month as the balance grows at 10% each year, while your income advances at only 5% per year. Eventually you simply have a math problem: your income becomes swamped by your debt service payment. First you are insolvent, then bankruptcy eventually follows.
At the national level, the US is already insolvent, meaning liabilities exceed assets. The US has been spending far above our means for decades and decades, amassing a tremendous amount of public and private debt (as well as entitlement promises) along the way. And, yes, even nations can go bankrupt.
But bankruptcy is a legal process, and it’s not possible for an entire economy to enter a legal process, so what do we mean when by talking of a looming bankruptcy? Simply put, all those the claims represented by all the debt and excess printed currency have to be destroyed, or reduced, to bring things back into balance.
The Austrian economist Ludwig von Mises said it best: “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 voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
Sadly, there’s been absolutely no demonstrated willingness on behalf of our national leadership for “voluntary abandonment of further credit expansion”. In fact, it’s been the exact opposite. With the Federal Reserve leading the way, the ‘plan’ has been the voluntary, increasingly desperate, attempt to expand credit even more aggressively than before.
To understand just how dangerous this has become, we need look no further than this chart:
Our current debts and other national liabilities now total more than 1,000%(!) of the nation’s annual income, a.k.a GDP.
US economic growth began slowing due to its accelerating ‘too much debt’ problem back around 2000. Instead of allowing natural market forces to clear out the excessive debts, the Federal Reserve chose to go into overdrive to ‘remedy’ the problem. It’s remedy? Drive interest rates to 0% to reduce the service burden of those debts, and print trillions of fresh dollars that in turn can fund new borrowing.
Of course, no true ‘solution’ for having too much debt involves piling up even more of it. That’s like treating cancer with more cancer. Or alcoholism with more alcohol. But such has been the twisted logic of our central bankers.
The only path that history has shown works involves fiscal austerity and reducing debt. Or, as von Mises put it, “a voluntary abandonment of the credit expansion”. But, that requires real political courage and a willingness from society to endure actual ‘pain’ in the form of living below its means to make up for the prior periods of living too lavishly. Don’t expect that to happen anytime soon? Nether do we…
Returning to the chart above, it’s sufficient to know that no country, ever, in all of history, has ever dug out from such a mountain of excess claims. Never. Not once.
The only possible way we’re avoiding crisis is if the economy suddenly returns to extremely rapid economic growth for an extremely long time. And that’s if AND ONLY IF during such a period of rapid growth, we use that windfall to pay down the debts and other associated IOU’s — rather than as an excuse to once again look the other way because, hey, everything’s awesome now!
At any rate, what we can divine from all of this is that there’s been zero effort towards ‘voluntary abandonment’ of the credit cycle. And there’s been every effort made towards extending it farther. We’re simply climbing ever higher up an extension ladder from which we will someday fall. We passed the ‘moderately painful’ height a long time ago; now we’re up at the ‘quite possibly lethal’ altitude.
But make no mistake, pushing us further up this credit ladder is exactly what 0% interest rates were meant to do. The openly-stated intent of the central banks in treading into the never-before-tried ZIRP and NIRP waters was to spark more borrowing (and spending).
The fact that savers and pension plans have been utterly decimated by these low (even negative rates in some parts of the world) is not even a passing concern to the Federal Reserve. Their only goal has been to get credit expanding again as fast as possible. Ditto for the European Central Bank, The Bank of England, and the Bank of Japan, as well as The People’s Bank of China.
All of them have the same plan: Expand!
But this ‘plan’ does not pencil out. It fails basic math both here in the short term, as evidenced by more than a decade of sub-par GDP growth, but especially later over the long term. Why? Because there’s no such thing as perpetual exponential expansion of anything. Even the universe itself is expected to one day stop expanding and eventually implode in a “big crunch“.
Regrettably, though, that’s the ‘plan’ of every major central bank around the world right now.
Because it’s mathematically guaranteed to fail, our only job as private individuals is to understand the situation accurately and to then take actions that are in alignment with the reality of living within such a broken system. If we can’t stop the lunatics, at least we can foresee the consequences of their actions and begin to unhitch ourselves as best