The Facade Crumbles, by Robert Gore

That governments and central banks can “manage” economies and financial markets is a delusion that only receives widespread acceptance when financial markets rise in tandem with activist measures. Just because two things happen at the same time, or one after the other, does not mean one causes the other. However, that’s how superstitions are born, and the “potent directors” superstition refuses to die.

Governments’ two macroeconomic “tools” are issuing debt and taking money out of some pockets to put in other, more politically favored pockets. Central banks monetize debt, print money, and suppress interest rates. It is a mystery why anyone thinks that debt, coercion, entries on a computer screen, counterfeit fiat scrip, and price controls can dictate economic outcomes. The course of economies and financial markets are ultimately determined by the decentralized production, consumption, saving, and investment decisions and actions of millions of people, and those decisions and actions are affected by powerful waves of crowd psychology.

During the 2007-2009 financial crises, governments and central banks around the world frantically announced measures and promulgated jerry-built programs to arrest falling markets. The measures and programs produced sharp but brief rallies that were quickly reversed, overwhelmed by panic and unraveling debt. One of the wonders of the six years since US equity markets reached bottom in 2009 is how quickly the disillusionment faded and the potent directors superstition again seized the public imagination.

The foundation of the so-called recovery since 2009 has been quicksand: huge increases in public debt; moving private debt onto public balance sheets; central bank monetization of that debt, and artificially low interest rates—to mask the true cost to governments of their debt and promote economic activity and rising asset markets. Now the whole ugly edifice is sinking, but the belief persists that it can be stopped by pouring in more quicksand! If that belief was delusional before, to retain it after the events of the last few months is psychosis unhinged from reality.

In “Oil Ushers in the Depression” (SLL, 12/1/14), SLL said the oil glut and its precipitous fall in price were a harbinger of things to come, a prelude to falling prices and contracting economic activity. This occurred not despite years of quicksand policies, but because of them. The biggest global debt monetization and central bank balance sheet expansion in history did not stop the deflation in oil and other commodities. The article’s predictions rested on the analysis from two other SLL articles: “A Skyscraper of Cards,” 10/19/14, and “The Economics of Debt, Deterioration, Deflation, Depression, and Disorder,” 11/17/14. That analysis will not be repeated here (interested readers are referred to those articles). What is important is that the measures taken the last six years will, now that debt is unraveling and euphoria and greed are giving way to despair and fear, make the coming crash much worse.

If the steep fall in the prices of oil and other industrial commodities hasn’t been enough of a wake up call about the burgeoning debt disaster and government and central bank inability to stop it, then Greece and Puerto Rico should be a croquet mallet applied hard upside the head. When Greece first ran into problems in 2010, it had about €110 billion in debt. After two “rescues” it has €340 billion in debt and is bankrupt. The Greek referendum served welcome notice of a simple but often overlooked truth: the ability of any government to pay its debts rests on the willingness of its constituents to pay (see “Oxi! Greece’s 9.0 Earthquake,” SLL, 7/5/15). Greece’s politicians may knuckle under to pressure from the European Union and the US government, accepting proposals their voters so recently rejected, but now it is apparent to all: promises by governments can be repudiated by the people who are expected to pay for them.

Governments may not allow any more debt referendums in the future, but people vote with their feet, or stay where they are and work only hard enough to provide for themselves. Which is what has happened in Puerto Rico, whose governor recently announced that it could not pay all its debts. Any Puerto Rican with ambition and a willingness to work has already left or is planning to. Why hang around for perpetual depression and debt serfdom? Meanwhile, many of the individuals and mutual fund managers in the US who own Puerto Rico’s debt have seen the value of their bonds plummet, but are still hoping that someone, somewhere (i.e., the US government) will be stupid enough to bail them out. Keep hoping.

If anybody could manage an economy and financial markets, it would be the Chinese government, which can seemingly do what it wants. Belief in that government runs deep in the financial markets. It has rested on the Chinese economic “miracle,” and was reinforced by a massive expansion of credit expansion during the depths of the financial crisis in 2008 and 2009 that appeared to miraculously prolong the miracle. It is disturbing that even in supposed bastions of capitalism more participants believe in the Chinese government’s totalitarian command and control than believe in capitalism and unfettered markets.

However, whether it gets repaid or not, there is always a pay back with debt. The slowing Chinese economy and the crack up of Chinese stock markets the past few weeks after a huge margin-fueled and government-promoted run up, despite emergency measure after emergency measure, demonstrates that Chinese leaders and bureaucrats are just as ineffectual as the US’s were in 2008. While SLL believes the future belongs to Asia (see “Buy Asia; Short the US and Europe,” SLL, 2/3/15, and “Trading Places,” SLL, 6/27/15) markets and more importantly, crowd psychology, are bigger than governments. Panic will eventually exhaust itself and markets will find their own level, as US markets did in March, 2009, but in the interim, the Chinese government’s measures will make matters worse, just as the US government’s did. Some things never change.

The acceleration point of the debt and deflation crisis has been reached (see “Crisis Progress Report (8): Acceleration,” SLL, 7/2/15, and “Acceleration Confirmed,” SLL, 7/13/15). Things will happen much quicker now, which means the time to prepare was yesterday. If unprepared, you’ll probably not get everything done you should get done, but that does not mean the effects of the looming disaster cannot be mitigated. Greeks who took most of their money out of banks and stocked up on supplies are much better off than those now reduced to €60 daily withdrawals and scouring near-empty stores. Chinese investors and owners of Puerto Rico bonds who “panicked” and sold “too early” are breathing much easier than those who are stuck and pondering selling into illiquid markets. Or not being able to sell at all either because selling of their particular security has been banned or markets have been suspended.

We no longer have the illusory luxuries of time, delusion, or hope in governments, central banks, and mainstream propaganda. The facade is crumbling. Are you ready? For ideas, strategies, and common sense, check out preparedness websites. Survival Blog and the Western Rifle Shooters Association’s articles and blog rolls are good places to start. For separating financial fact from mainstream fiction—and cogent analyses—see SLL David Stockman’s Contra Corner, and Zero Hedge, and their blog rolls, and Elliott Wave International. The latest edition of Robert Prechter’s book Conquer The Crash is a must read. Get to know your neighbors and seek out the like-minded. When the wheels fall off, there will be much that is ignoble and heinous. However, there are many great people out there, and they will perpetuate a proud American tradition: helping each other out.

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