“Something has raised concerns at the FOMC. Could it be European debt markets, with ECB stimulus to be significantly reduced in the months ahead. Or perhaps it’s China and their officials determined to rein in some financial excess. EM and all their dollar-denominated debt? Maybe a dysfunctional Washington has supplanted international developments on the worry list – or, understandably, it could be a combination of things.
I’m convinced five years of “whatever it takes” took the global government finance Bubble deeper into perilous uncharted territory. Certainly, markets are more complacent than ever, believing central bankers are fully committed to prolonging indefinitely the securities bull market. Meanwhile, leverage, speculative excess and trend-following flows have had an additional five years to accumulate. Market distortions – including valuations, deeply embedded complacency, and Trillions of perceived safe securities – have become only further detached from reality. And the longer all this unstable finance flows freely into the real economy, the deeper the structural maladjustment.” – Credit Bubble Bulletin
“Structural maladjustment” – there is a term we should all learn.
I am assuming that folks who read Insurgent Tribe have read “The Emperors New Clothes” by Hans Christian Andersen. “The Emperors New Clothes” is what we have become as a society. The quote from the Credit Bubble Bulletin is referring to the neo-Keynesian model that the United States Federal Reserve and United States Federal government has decided to pursue. The basic notion is to use a combination of artificially low interest rates and the provision of an extraordinary volume of credit in order to propel certain asset classes ever higher week after week. There are adherents to this neo-Keynesian doctrine who genuinely believe that this is a permanent state, i.e. ‘the new normal.’ Unless everything we know about economics, history and math is incorrect this cannot be a permanent state.
The current result of these neo-Keynesian policies is the largest credit bubble the world has ever known. The future result of these neo-Keynesian policies is the largest credit bubble the world has ever known will pop. That may happen next week, next year, next decade – I cannot tell you when it will pop. However I am quite sure that it will pop.
In addition to the largest credit bubble in history we have the debt of the United States Federal government. Many of you are accustomed to hearing the number ‘twenty trillion dollars’ tossed around in regard to the Federal debt. That is not the actual debt – according to the Congressional Budget Office the actual Federal debt is $210 trillion. I am continually amazed at how many people desire to defer to the CBO in regard to how many people may lose health insurance if Obamacare were repealed and the very same people dismiss the CBO debt number because it mathematically torpedo’s any notion of government healthcare what so ever – more evidence of our societal and political disfunction.
How did we end up with a $190 trillion difference in what Presidents, senators and congressmen proclaim the debt to be and what the budget office calculates the debt to be? It goes back to LBJ who was attempting to fund the Viet Nam war and the Great Society simultaneously – this effort was fiscally devastating. Hence LBJ removed the United States Federal government from calculating such matters via Generally Accepted Accounting Principles and simply ordered the Federal government to count debt and deficits that were politically convenient to count and ignore and cease reporting what was politically inconvenient.
No post-LBJ President has seen fit to return the Federal government to Generally Accepted Accounting Principles (GAAP). Why is that? Primarily due to entitlements the ‘off the record’ debt has grown beyond all imagination. The amount of additional debt accumulating each year that the Feds are not counting exceeds the entire Federal budget. As long as no one mentions that the emperor actually has no clothes then the game can continue. If GAAP were to be officially applied and the Federal debt were to skyrocket to $210 trillion overnight – dominos would start to fall and it is entirely possible that those dominos would lead to something akin to guillotines.
Just what it is – ever further detached from reality. This credit bubble and the real Federal debt are joined at the hip. Grasp that.
As a culture and society we have truly and genuinely confused wealth and debt. By and large individual Americans cannot longer differentiate between the two. The net effect of society not being able to differentiate between wealth and debt is the election of politicians at all levels who have no interest in differentiating between wealth and debt. The other net effect is people who do understand the difference and are in a position to act on that understanding are accumulating great wealth from the ignorance of Americans while that ignorance drives the masses into ever greater net poverty – in fact many Americans are arguing vehemently, stridently, arrogantly and sometimes violently in favor of policies that will further impoverish them.
I suppose that is yet another strike against public schools – or perhaps sometimes societies just collectively go insane.