This report marks the end of a series of three big trains of thought. The first explained how we’re living through the Mother Of All Financial Bubbles. The next detailed the Great Wealth Transfer that is now underway, siphoning our wealth into the pockets of an elite few.
This concluding report predicts how these deleterious and unsustainable trends will inevitably ‘resolve’ (which is a pleasant way of saying ‘blow up’.)
The Ka-POOM Theory
In terms how this will all end, we favor the scenario put forth by Eric Janszen in 1998 called the Ka-POOM theory.
This theory rests on the belief that the Federal Reserve along with the other world central banks looked at Japan’s several decades of economic stagnation and decided that deflationary recessions are to be avoided at all costs — even if that means blowing asset bubbles and then cleaning up the destruction left behind in their aftermath.
Because the Fed, et al. have a limited playbook (which is: print, and then print some more), the Ka-POOM model calls for limited periods of disinflation, followed by massive money printing sprees that then produce high inflation.
Despite the trillions and trillions in thin-air money printed by the world’s central banks over the past 8 years, a common rebuttal we hear is “But there’s been no inflation so far!” To which I reply, “Yes, that’s what we’re being told. But that’s not actually true.”
Remember: inflation is simply “too much money chasing too few goods.” We can detect today’s excess of money in the rising prices in our cost of living — but those higher prices are symptoms, not causes. Inflation is not “higher prices”. Inflation is “too much money”.
Next, inflation is not an evenly-distributed event. It’s not like the price of everything rises 10% at the same time. The inflation rate is an average, which contains some prices going up, while others stay flat or even go down going down. It’s always a lumpy experience. The reason why is that money is not evenly distributed across the economy, and it doesn’t always chase (or desire) the same things.
So the Fed and other central banks have printed up trillions and trillions of dollars, euros and yen, which they then essentially handed over to the financial markets and the very few people who work within them (as well as their biggest clients). As a direct consequence, we’ve seen enormous inflation in the prices of things that relate to that tiny universe of people – stocks, bonds, trophy city apartments, Gulfstream 5 jets, fine art, and rare gems.
These items have all gotten massively more expensive over the past decade. Just as would have happened if the Fed had printed up a trillion dollars and given them everyone living in a trailer park in the American South, with the restriction that the money could only be used to buy other trailers in the region. Do you have any doubt that the price of trailers in the South wouldn’t explode upwards?
Well, that’s exactly analogous to what has happened to financial and trophy assets. The amount of money created and poured into the financial markets by that central banks has been incredibly enormous. As a first-order event, it raised the prices of nearly all financial assets. And then, as a second-order derivative, it then flowed into the properties and cherished possessions of the financial industry insiders.
The summary is that we’ve already had lots of inflation – but it has (so far) been mostly contained to the areas where the freshly-printed money was first directed. No surprise there.
But it’s certainly not only been limited to the rarified items the rich enjoy. Anyone who is currently looking to purchase a home, car or college education has a pretty good idea how prices have jumped substantially over the past decade.
Here’s the thing about the attempts by central banks to circumvent the workings of the actual economy by simply printing up money: It is doomed to fail. It always does; one cannot simply ‘print up’ prosperity. Printing up money merely creates the illusion of free wealth for those with first access to it. In reality, what happens is that it secretly transfers the wealth from everyone else to those lucky few.
The Fed and the rest of the central banking cartel are consciously and very pointedly picking winners and losers.
It’s not in their power to make everyone a winner. So they have decided to throwing granny (and savers and pensions) under the bus while financial elites and well-connected speculators (e.g. JP Morgan and other large banks) extremely wealthy in the process. Wealth is being transferred from Parties B-Z to Party A – from the many to the few.
What the Fed promised would happen along with all of this money printing has not materialized. There has been no return to rapid economic growth. And there won’t be, because we have massive structural problems in our economy that can’t be papered over forever.
This stark fact makes the Fed’s entire money printing misadventure not just pointless, but dangerously destabilizing from a social and political perspective. The world’s central banks, especially the Fed, have done an enormous amount of damage. These institutions, as well as the decision-makers within them, are going to have a heck of lot to answer for when the inevitable crack-up comes.
A Quick Re-Cap
And so here we find ourselves, at the final torturous, grinding part where the final bubble top is formed. The über-bubble. The Greatest Of Them All.
A bubble this spectacular requires a top worthy of its size. A long, massive top, full of increasing exuberance — until the very last investor is sucked in.
Where I’ve noted humans’ remarkably silly behavior during bubble episodes in the past – tulip bulbs, railroads, swampland – I still struggle to understand or even explain this one.
It’s so obvious at this point. And yet, like its brethren bubbles of the past, a lot of otherwise thoughtful and careful people are getting sucked in by its siren song.
I guess the best economic description of it might be “a credit bubble” with sub-components like sovereign and household debt, and sub-sub-components like Toronto real estate and the IPO price for SNAP shares (that’s Snapchat, which soon after its launch, had a valuation of $40 billion. This mind you, is a company that has no identifiable revenue model).
A credit bubble occurs when the issuance of credit grows faster than income supporting it. Here’s what that looks like on a national scale for the US. The bottom red line is income (GDP) and the top blue line is Total Debt. We can see that debt has been growing at twice the rate of GDP since 1970:
You have to be quite delusional to think that debt can be compound at twice the rate of income forever. Unfortunately, there are more than a few of those ungrounded optimists working in central banks and governments the world over. Their thinking is simply, The sky’s the limit!
Those of us living in reality find this mindset puerile and insulting. And, of course, dangerously reckless. And it’s also maddening to hear the media cheerleaders for Wall Street selling us this bunk as if it were somehow sensible. It