A Reckoning of Economic Excess, by Bill Bonner

An inflationary rescue by the world’s central banks will not prevent the financial asset and economic meltdown that’s coming. From Bill Bonner at rogueeconomics.com:

He who takes what isn’t his’n
Pays it back or goes to prison

– 19th century American businessman Daniel Drew

BALTIMORE, MARYLAND – What we were looking for in the Evergrande story was a hint… a clue… an advance warning of things to come.

What happens when you can’t pay your debts? How does it end?

With a bang of inflation? Or a whimper of deflation?

Our prediction: Both.

Every bubble blows up. Every excess has to be resolved. And every debt gets settled – one way or another.

Typically, a bubble brings on a case of “irrational exuberance.”

The irrationally exuberant investor pays too much for his assets. The irrationally exuberant businessman stretches too far… borrows too much… and over-extends himself. The irrationally exuberant empire invades Afghanistan.

But no one and nothing is ever evergrande, of course. It is only occasionally grand.

And when the occasion passes… so does the grandeur.

Too Much Excess

“And then what?” is our question today.

We have the answer, too: the end of the world as we have known it.

An excess of private investment usually produces an excess of capacity… and excess output. Too much, in other words.

Then, when the Bubble Epoch passes… the excess is usually reckoned with in a DEFLATION. Prices fall… until demand picks up enough to clear the market.

The investors and producers, who misjudged the situation, and their suppliers and employees, suffer the losses.

That’s what happened in America after the crash of 1929.

Private industry had expanded in the Roaring Twenties… By the 1930s, it produced far more autos and electrical appliances than the market could absorb.

Prices – for stocks, as well as consumer items – collapsed. The price of milk, for example, fell so low that dairy farmers dumped it on the ground rather than sell it.

Stock prices dropped for nearly three years, from 377 Dow points in October, 1929, to only 44 in July of 1932.

Then, it took 25 more years, a Great Depression, and World War II for prices to recover.

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