The Price Of Everything And The Value Of Nothing

“There is a current set of delusions that is powerful and dangerous: that monetary debasement can be infinitely pursued without consequences; that the financial system is now solid and sound; that the low volatility and high prices of stocks, high-end real estate and bonds are real; that bonds are a safe haven; and that large financial institutions which get into trouble in the future can be unwound in a much safer way than they could be in 2008.”
-Paul Singer

We had the “not necessarily” storm of the century in San Francisco. The following day, I went to the local gas station to top off the fuel for one of our vehicles. I noticed that the credit card system was down. The attendant said it was a ‘satellite thing’.

Suddenly, it became clear to me. A small glimpse of how quickly things can and probably will spiral out of control. Once one realizes the incredible lack of redundancy that supports payment systems and the flow of credit – the shock of just in time modern society sets in.

Whether imposed by authority or by accident, a true banking holiday would make the value of necessities skyrocket in price relative to the sudden supply shortage.

If people don’t have cash, no fuel gets pumped. No fuel deliveries crash the pumping stations. One by one – in a real life daisy chain – thousands of low margin cash-or-credit churning businesses shut down; each one a small domino in a closely knit system of distribution.

There is no use predicting when these nodes will break down. The warning signs are all around us.

According to the Boston Consulting Group, between household, corporate and government debt, the developed world has $20 trillion in debt over and above the sustainable threshold by the definition of “stable” debt to GDP of 180%.

$20 trillion is more than the world’s largest economy. And no, that does not include ongoing and future social obligations to the tune of many many more trillions.

There is no way to eliminate the excess.

All attempts have failed thus far. All of them will. We are living through the mother of all poisonous interventions — a truly barbarous and destructive implementation of policy – and in a supposedly civilized society.

And where is collective policy? Call it a “Global Coordinated Debt Restructuring”.

In other words, a self-imposed jubilee is being crafted. Self imposed by the banks and for the banks – in the name of the people.

Because this big write down is going to cost something. It’s going to need some sort of collateral to save the banks and to prevent ‘collapse’.

For the moment, we are paralyzed by analysis. We are caught up in the interpretation of the toxic entrails of modern finance while reality smolders below.

Constant analysis of a false reality is like the wake of a boat that is driving the boat. Mesmerized by the wake, but headed for an ice berg. Just a temporary impression — soon to fade if you look back far enough. Unaware of the direction we are headed.

We can’t do anything to stop it — only prepare for the likely outcome.

One of the chief consultants of the BCG author, Daniel Stetler put it this way recently:

“You have to think about a huge tower of debt on shaky foundations where central banks pump concrete in the foundations in an emergency effort to avoid the building from collapsing and at the same time builders are adding additional floors on top“.

“Today central banks give money to institutions, which are not solvent, against doubtful collateral for zero interest. This is not capitalism.”

“It is the explicit goal of central banks to avoid the tower of debt to crash. Therefore, they do everything to make money cheap and allow more speculation and even higher asset values. It is consistent with their thinking of the past 30 years. Unfortunately, the debt levels are too high now and their instruments do not work anymore as good. They might bring up financial assets but they cannot revive the real economy.”

“In my view [Piketty] overlook the fact that only growing debt levels make it possible to have such a growth in measured wealth. Summing up, Piketty looks at symptoms – wealth – and not on causes – debt.”

“We need to limit credit growth and make it tax-attractive to invest in the real economy not in financial speculation. This will happen automatically if we return to normal interest rates. The key point is that we as societies should reduce consumption which includes social welfare and rather invest more in the future.”

“We all are in a Ponzi world right now. Hoping to be bailed out by the next person. The problem is that demographics alone have to tell us that there are fewer people entering the scheme then leaving. More people get out than in. Which means, by definition, that the scheme is at an end. The Minsky moment is the crash. Like all crashes it is easier to explain it afterwards than to time it before. But I think it is obvious that the endgame is near.”

More than three years ago the BCG suggested that a one-time 30% ‘tax’ on financial assets would be needed to put banks back into ‘solvency’. The low hanging fruit will be picked first.

Because rather than go door to door looking for actual physical items, of which very few actually exist, they will make it easy by handling the transfer gently, electronically.

The initial sound will probably be muffled. But the effect will be destructive on a geometric scale as it unfolds and infiltrates every crevice of civilization.

“Nowadays people know the price of everything and the value of nothing.”
― Oscar Wilde, The Picture of Dorian Gray

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