Crisis Progress Report (10): Bust, by Robert Gore

Ideas and actions have consequences, fortunately. Debt booms bust. SLL is back in action after a week-long trip. Nothing that happened over that week, culminating in yesterday’s worst equity market drops in months, followed by today’s so-far hefty drop (never dismiss the possibility of an end-of-day “save” to make people feel a little better over the weekend) is surprising. SLL has been warning of exactly this outcome since last fall. Even the rally in oversold precious metals has been predictable (see “Buy Gold and Silver,” SLL, 7/20/15). The surprise has been how long the equity collapse was in coming. SLL was a little early, but a little early informed by competent analysis is better than a little late informed by complete cluelessness.

SLL has not been the only one making this call, but the competent camp has been far outnumbered by the clueless. Such was the case during the 2007-2009 crisis, too. That the lessons from that crisis went unlearned is inexcusable. It was a busting debt bubble, of which housing, mortgages, and mortgage securities and derivatives were at the leading edge.

The beliefs both within and outside the economics profession in the magic beans of expanding government spending and debt, transferring private debt to public balance sheets, debt monetization, and interest rate suppression betrays stupidity, cupidity, and statist proclivities. A bursting debt bubble cannot be stopped by encouraging and incurring more debt; Jack had a better chance with his beans.

How then have so many missed what was so obviously coming? In both government and on Wall Street, analysts and economists are paid not to look, to explain why common sense is fallacious and the plainly evident is not what is really happening. There is no constituency for the truth, which is why unvarnished utterances by Donald Trump and Bernie Sanders are propelling their candidacies. Outside the 1 percent, there is a constituency for reality, logic, and consequences. (If there is not, SLL will have to close up shop.) Inside the 1 percent, such considerations are ignored until they cannot be.

The two most subscribed-to economic fantasies—Keynesianism and monetarism—give the government primacy of place in economic affairs. According to Keynes, markets and the price mechanism are insufficient, only the government can bring aggregate supply and demand into alignment, by going into debt or raising taxes as necessary. According to the monetarists, the economy dances to a tune called by the central bank’s manipulations of bank reserves and interest rates.

Pick your poison: both schools believe in magic beans because they fit their statist predilections. You would think that the global economy sliding into depression after six years of unprecedented application of Keynesian and monetarist nostrums would give their adherents pause, but it won’t. The mainstream branches of economics are religions, and at core their faith is a reflection of faith in government.

As SLL has said repeatedly, governments cannot control multiple variables, and the multiple variables they cannot control have been multiplying daily. China—where the government is trying to control the economy, margin debt, corporate debt, bad debt reserves, shadow banks, state-controlled banks, interest rates, equity prices, pollution, the price of pork, and whatever else it believes needs controlling—has become the poster child for the futility of such efforts. The futility, as predicted, is rippling out across the globe, where other governments are now frantically engaging in their own futile efforts to control multiple variables.

Now that debt expansion has become debt contraction, coming to intellectual grips with the future is straightforward. Regular readers of SLL should be intellectually prepared, hopefully they are prepared appropriately in other aspects of their lives as well. Debt contractions are inherently deflationary, especially in a global economy based on debt. Contraction and deflation are accompanied by depression, which will not be acknowledged for several years and from which innumerable “recoveries” will be hailed. Everything that governments and central banks do will make the situation worse, as they attempt to prevent or forestall the market (reality)-based consequences—repriced assets, reduced production and consumption, unemployment, insolvency, and bankruptcy—that will be the only road to recovery.

The next decade, and perhaps longer, will be incredibly stressful, even for the well-prepared. At this point, the best advice is relax: stay calm, focused, and rational. Remember, there will be some silver linings. Brutal and at times as indiscriminate as the crisis will be, there will be a measure of justice. Many fantasies, especially those of government as manna from heaven and central banks as guarantors of ever-rising markets, will be demolished. Rendezvous with reality are never bad things.

Sovereign debt and unfunded promises will be the locus of this crisis. Although governments will undoubtedly increase their repression and control as financial stress deepens, after multiple crashes they will be dead broke, unable to obtain credit at anything but ruinous interest rates. This means that they will be unable to do even a fraction of what they try to do now. Anarchy, chaos, civil disobedience, and revolution are far more likely than police state totalitarianism (which is quite expensive). You’ll have a better chance of being killed by criminals than police (although in many instances the two will be indistinguishable). However, from the disorder may emerge enclaves devoted to strictly limited government, the protection of individual rights and freedoms, and capitalism. Such enclaves will probably not correspond to existing political boundaries.

When markets make their final lows, there are going to be once-in-a-lifetime bargains in all sorts of financial and real assets. The daunting problem, of course, will be preserving liquidity in the interim, especially with rapacious governments on the prowl. Preparation will be a journey, not a destination; you’ll never be “done” and perfect solutions will be in short supply. However, just knowing what’s coming will put you ahead of most, and may very well be the difference between surviving for a better day or succumbing to the general panic and chaos.

A CLASSIC YOU’LL ACTUALLY ENJOY!

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