I Bring Bad Tidings

Recently, I was involved, in a limited basis, with a bankruptcy. The company that went belly up had over a million dollars in debts and no assets. Most of their debt was in the form of accounts receivable, but they had some loans and leases as well. Up until the point they filed for bankruptcy protection, they had paid all of their bills on time. In fact, they paid most vendors in ten days, something that is just about unheard of these days. This prompt payment is what led their vendors to be so generous with them.

This story reminded me of something that happened years ago. There was a house party at a mansion (are there mansion parties?) and many party goers were out on a balcony of some sort that extended over the pool area. The balcony was large enough to hold dozens of people, but it started to give way due to the mass of people. Panic set in and that made things worse as the frightened party goers scrambled to get off the balcony. The whole thing collapsed and took a bunch of people down in the process.

The connection here is that it is human nature to observe the actions of others, trust those actions and to infer things from them. The vendors extended terms to that business saw that they paid in ten days and that others were more than happy to extend credit, so they did the same. The party goers saw everyone else out on the balcony and just assumed it must be safe. They never stopped to think that maybe it was not built to hold a hundred people. In both cases, when reality came rushing in, there was a rush to the exit.

That’s something I think about when I read stories like this regarding the global economy. The entirety of the world economy is built on one thing. That is the rock solid belief that the US government will never miss a debt payment and never devalue the dollar to arrest its debt. The entire global economy is built on the asset value of US Treasuries. If there ever comes a time when people begin to doubt the security of that debt, the panic will plunge the world into a new dark age or possible something worse.

The people in charge of the Federal Reserve understand this. The people running the ECB know this. The PBOC knows this. The masters of the universe all agree on one thing and that is they have to protect the foundation stone of the world economy. Guarding the underlying stability of the financial system is their overriding concern. That means they are willing to risk recession and maybe worse in order to protect the asset system. It’s not unreasonable from their perspective, but it does reveal the bigger problem.

That bigger problem is we have reached the logical end point of the credit economy. If the US economy does lurch into recession, the world economy will follow. The central banks will not have many options as they have used all of their big tools to prop up the asset base over the last decade. The Fed can lower rates a bit and maybe restart their Quantitative Easing program, but they will have little or no success in blunting a recession. The world will just have to wait it out and hope for the best.

That is not how the world ever works. A 2017 recession will cause the new US president to propose “solutions” and new governments in Europe will demand relief from Brussels. Bad economics always leads to worse politics and the politics of the West are already fairly rotten. The rise of nationalist and populist parties in Europe will only complicate an already fragile set of arrangements. Imagine if something like a Syriza were to take over the Italian government just as the world is headed to recession. Fun times.

The fact is, there’s a limit to how much the world can borrow from the future. We are probably near that limit. With recession looming, the ability of central bankers to blunt it with credit issuance is limited. That means it becomes a political problem. The record of politicians coming up with useful reforms in times of crisis is not good. What’s needed is a sustained and organized retreat from a money system that has outlived its usefulness, but that is probably impossible. Instead it means a disorganized and haphazard retreat.

As Evans-Pritchard concludes in his story, the possible outcomes are mostly grim with some of them very grim. If the central bankers get it wrong and plunge the economy into a deep recession, the politicians will most likely respond with massive spending of money that does not exist. That could unleash price inflation and a collapse of asset values. It’s not guaranteed, but the fact that it is one possible outcome is grim news in itself. The future is grim and things will mostly likely be worse than we expect.

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There is no spoon.

Karl Hungus
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Karl Hungus

Does this mean my robot butler is going on hold?!

Time for a debt jubilee I think!

Member

At least theoretically, interest rates go through the roof after a debt jubilee since no creditor can be sure that there isn’t another one right around the corner.

Karl Hungus
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Karl Hungus

Maybe 🙂 But I notice that when various countries (e.g. Argentina) renege on their debt (an auto jubilee?) they get new credit at only a few point higher interest. The lenders are kind of stymied; if they don’t lend they don’t make any profits. So borrowers can wait them out…

Fuel Filter
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Fuel Filter

Brandon Smith has some great essays on precicely this. He does on about once a week and is always well worth the read.

http://alt-market.com/

Karl Hungus
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Karl Hungus

Seriously, the amount of debt in the world is unpayable. And that is before you get into unfunded entitlements and unvoted on government pensions. None of it is going to be paid for or out, so what happens then? War happens. You can already see the various players getting ready to go at it. And like a fire in the forrest, the survivors will have a nice bunch of nutrients (so to speak) to grow in. Man I would love to be the person that plugs ole Soros when the SHTF 🙂

Dutch
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Dutch

The system is built on growth. We have had no real growth for at least 15 years, so it gets papered over with credit creation for the masses, while real assets flow to the top 1% over time. The resolution is a debt jubilee, either planned and structured, or unplanned and chaotic. The ancients knew that too much debt is destructive, so the debt jubilees were planned and put on the calendar for all to see. That way both borrowers and lenders knew what they were getting into, and structured their transactions accordingly. The evil of Washington and the Federal… Read more »

DMW
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DMW

Very good! You’re only the second person I’ve ever heard that mentioned a debt jubilee. The first was Ray Dalio, who I think is the one of the smartest investors I’ve ever met. One other issue about growth. It used to be that growth brought jobs but technological growth is creating a surplus of unemployed who have to be fed and warehoused. So technology not only has the potential to drive down wages but it also may serve to increase taxes so we can feed the “forgotten brigade.”

Dutch
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Dutch

One theory that has always been floating around is that war is the elite’s way to reduce the population of poor but fierce young males. Economic progress always seems to create untethered, underemployed hormonally active boys that can be sent off as “cannon fodder”. Tech is a modern version of the same old story. I am not sure how the theory can ever be proven or disproven.

MSO
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MSO

Technology does change the career landscape and will have an effect on job availability but the most of those changes will be limited to large employers. Small bakeries, one and two man software development shops, the convenience store on the corner, the dentist’s office, the insurance agents and beauty shops may gain some efficiencies, they will all still need accountants to manage taxes, secretaries to handle the mail and file forms, answer the phones and lawyers to handle legal issues. Only the very large firms will have the stability and wealth necessary to allow for the very expensive development of… Read more »

Pastafarian
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Pastafarian

You couldn’t be more wrong. CNC machining is automation. It allows manufacturers large and small to run multiple machines with one man, and to produce parts complete that decades ago would have required secondary operations and more man-hours. CNC machining is approachable even for small companies. A used piece of equipment can be had for $30,000 or less. A very good turning center with live tooling, just a few years old, for $100,000. And of course this doesn’t even factor in the enormous benefits to all companies from things like the internet and affordable computing power — these things mainly… Read more »

Drake
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Drake

I’ll file this one in the “buy a small farm far away from urban areas” folder. That folder keeps getting fatter.

Roy
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Roy

The problem is what “far away from urban area’s” actually means. There is very little tillable land in this country that is far away from at least some urban area.

Al from da Nort
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Al from da Nort

There is the small detail of being able to ‘maintain title’ if the SHTF against the local broke-but-charismatic ‘entrepreneurs’ (aka local warlords) that are bound to arise if only to ward off raiding parties from the urbs. As a non-local non-resident you are an obvious first target. So you must either must become that warlord or be quick to identify and ally with him. You will have an opportunity to divert the disposed against the local corporately owned hi-tech, hi-capital ag holdings. But after plundering likely comes hunger since high tech farming requires a vast business ecosystem that is unlikely… Read more »

Christopher S. Johns
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Christopher S. Johns

Since at least 2008, the byword of our elites has been “what’s good for Goldman Sachs is good for the USA.” The bailout of 2008 was largely orchestrated for the purpose of making sure that Goldman Sachs did not collapse like Bear Stearns and Lehman. This was eagerly done because it was widely understood that if Goldman collapsed it would take a hefty chunk of the DC-Wall street elite nexus with it – and so it was done, with a massive amount of fiat money and Fed manipulations, and called wise and good. This “solution” has distorted central bank policies… Read more »

james wilson
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james wilson

Universal suffrage is a one way street. No reform is possible. A pause is possible, or once was. Reagan was a pause. But that type of possibility by now seems to be, well, impausible. As we see in the real world there is only one solution to exponential bullshit–and it is a solution–and that is bankruptcy. All pretext stops. What is left is real. Why couldn’t we see that before, when it was so obvious? That will solve financial equations. No fiat money. No omnibus spending. On and on. What small fraction of today’s wealth did depression era Americans need… Read more »

Richard Ong
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Richard Ong

Excellent comment. Iirc, there was a US senator from Kansas or Oklahoma who voiced principled objections to New Deal programs. He was defeated in the next election, an object lesson in what the electorate valued even then.

It’s a wonder the man’s face isn’t on Mt. Rushmore to teach that lesson through all eternity for politicians in democratic polities.

Guest
Guest
Guest

You’re not thinking creatively enough. There’s $25 trillion in 401k accounts just waiting to be confiscated. Any good Democrat can tell you that prudence requires investors to move increasing percentages of their IRA assets into safe investments, e.g., Treasuries, as they age in order to avoid risks due to market fluctuation. And hey, if Treasuries bear a negative interest rate it’s still better to lose 2% or 3% every year than to risk a wholesale loss in a market collapse. This requirement can probably be imposed administratively and doesn’t ever require an act of Congress. See how easy that is?… Read more »

Guest
Guest
Guest

Apparently I’m not the only one who reads the Fed’s motives this way:

http://www.zerohedge.com/news/2016-10-20/federal-reserve-hillary-clintons-secret-weapon

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[…] Much more to read at the SOURCE […]

thor47
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thor47

If the central bankers get it wrong and plunge the economy into a deep recession, the politicians will most likely respond . . .

Well I certainly feel better already! Cinnamon rolls and coffee in the morning until the world ends, or my ammo runs out.

MSO
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MSO

“The connection here is that it is human nature to observe the actions of others, trust those actions and to infer things from them.”

You just connected the dots for me concerning the usage of polls in election campaigns. Campaigns not only use polls to determine the effectiveness of their advertisements and messaging, but to also to offer self confidence to questioning voters. I’ve long speculated that many voters care more about voting for the winners than they do about candidates. You observation fits the truth better than my speculations.

Dutch
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Dutch

The media’s job this time around is to thwart a preference cascade for Trump. They are (probably correctly) afraid that the Trump bandwagon could be “yuge” if he showed some real momentum in the polls.

Lorenzo
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Lorenzo

This popped out at me while reading the Bloomberg article.

“That scenario underscores what may be the biggest risk of the nationalist groundswell: increasingly fragmented parliaments that will be unable or unwilling to tackle the problems hobbling their economies.”

Wait a minute. Aren’t we in this fix because unfragmented parliaments have been unable or unwilling to tackle the problems hobbling our economies?

Karl Hungus
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Karl Hungus

It’s the way they tackled them that caused the problems

thor47
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thor47

Yes. Do you have another question? 🙂

King George III
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King George III

War abroad seems to be the preferred way to juice the economy and distract the masses from bad economics at home. Perhaps that’s why they’ve been poking the bear. Woo! Team Amurica! Git dem filthy russkies!

Well, if they try to conscript me for something other than deportation forces, I’m gone. Dust in the wind. I’d gladly fight for my grandfather’s America. This America, no thanks. I’ve no interest in dying for a country of Blacks, Mexicans, and White sluts.

But I’d love to join the deportation forces.

God, I hope we get deportation forces.

Karl Hungus
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Karl Hungus

Maybe there will be catapults involved!

R Daneel
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R Daneel

Sorry, YRH, war is coming to these shores. The Globalists have done really po’ed the rest of the world and they are tired of our crap.

Prepare accordingly.

Jack
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Jack

The IMF has a clean balance sheet. The Jim Rickards scenario is what will unfold.
More debt will be issued under the auspices of the new global central bank, the IMF.
Ought to be good for extend and pretend for at least another decade, though the US will have to do with much less.

notsothoreau
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notsothoreau

I’ve always been interested in the Great Depression. Maybe it’s because of the impact on my grandparents. I think the major thing that people don’t realize is that those people did not expect to get hit with a major depression. It was good times in the late 20s. People had jobs and could buy nice stuff. And just like that, it went bust. There is nothing special about us, that prevents the good times from going away. There are Hoovervilles even now, but we don’t talk about them because Obama is in office. If Trump wins, it will be all… Read more »

Member

Denationalisation of the currency. Unilateral abolition of the legal tender acts. Allow currencies to compete with each other in domestic markets. You don’t have to do anything with the Fed.

Member

Thanks, I was going to get another cup of coffee but now I’m just going back to bed.

t c p
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t c p

Evans-Pritchard is just as weak an analyst as possible. If he stays on the doom/gloom loop eventually he’ll be right. A broken clock kinda right. Cue Albert Edwards.

Al from da Nort
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Al from da Nort

The other source of plunder for the connected grifters and grafters is the endowments of NGO world, private universities most definitely included. Plus, unlike 401k’s they have the easy possibility of being effectively demonized by the Dirt People. So an inviting target for the aspiring pseudo-populist political entrepreneur.

Perhaps the few actually smart Cloud People realize this, hence the visceral fear of Trump.

rjl
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rjl

Accounts Receivables are an asset, not a debt

Sam J.
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Sam J.

“…The fact is, there’s a limit to how much the world can borrow from the future. We are probably near that limit…Instead it means a disorganized and haphazard retreat…” They’ve already got this figured out. They’re going to Special Drawing Rights SDR’s. There will be a big financial crisis and SDR’s will come in to save the day. It will of course be the same rip off but on a bigger scale. See below. They explain it all. http://philosophyofmetrics.com/ http://redefininggod.com/ Our money supply system is stupid. A child can see it’s stupid. All money is created as debt so to… Read more »