Change Is In The Air
“This time is different are the four most dangerous words any economist or money manager can utter.” – John Mauldin
Yesterday in regard to China I mentioned that change is in the air. China is not the only place that change is in the air – and it is not just North Korea and Islam and the other world crisis. History does not repeat but it does rhyme. The major nations of the world have been on a debt binge. Worldwide debt is now 327% of worldwide GDP. China and the United States have led this credit orgy. This debt has primarily inflated a few asset classes such as equities and real estate. It has not translated into wage growth, job growth or business growth in most places on the globe.
The United States and the world have been down this road before – though never to this extent. This is the greatest credit bubble in history. Ben Bernanke and now Janet Yellen assure us all that ‘this time is different’ though both admitted under oath that they did not see the 2007-2008 crisis coming and did not even recognize it as a crisis until it was well underway. That is not reassuring.
It is rather interesting that Trump, at least publicly, shows no concern while Xi in China and Putin in Russia have expressed a great deal of concern. Make of that what you will. It is akin to one of those ‘If you see this as green or blue will tell us your personality’ tests on Facebook.
Credit bubbles must continue to expand or they will pop. This is the source of Quantitative Easing (QE) and zero interest rates (ZIRP) and negative interest rates (NIRP) and liars loans and student loans and the continued lowering of credit standards required to borrow and endless gimmicks in order that the bubble continue to expand. These policies inevitably contain the seeds of disaster that will sprout forth and pop the bubble. No, it is never different.
On top of that we now have political change in the form of Trump. What ever you think of Trump’s attitude toward trade, if he were to act on his words it would certainly move us closer to popping the credit bubble. Given the social climate in the United States an economic event that will probably scale somewhere between Lehman Brothers in 2008 and Creditanstalt in 1931 would likely result in significant political change again. What that political change would look like could depend on Xi in China more than anyone else – if China drops the dollar and the credit train comes to a quick halt – watch out below. The people of the United States would have no idea how to function in a climate where the government could not simply borrow all it wished to. It is not merely that the government would have to scale back but that if the credit train comes to a stop all the Federal government would be left with would be some defense functions, the patent office and the post office – all greatly reduced.
Pensions, home values, government social spending, jobs, retirements would all get savaged and some would never come back.
With these stakes on the table people are playing for keeps – China, Russia, the United States, Europe.
This is not to say it will be Mad Max but it will be a change in that the United States would have to redevelop an actual economy. We would no longer have what the former President of France Giscard d’Estaing once called the ‘exorbitant privilege’ of being America. For decades now the United States has possessed the ability to create dollars out of thin air and send those dollars to other countries in exchange for tangible goods. Something for nothing – the dollar as the reserve currency in this petrodollar system requires these other countries to possess those dollars in order to conduct international business – especially when purchasing energy.
In a lot of ways this system has made us fat, lazy and stupid – and given to fantasies. At some point – tomorrow, next year, ten years from now – that will inevitably come to an end.
Get ready because it is not any different this time that has been the previous times the world decided to do this – despite what Yellen, Bernanke, Krugman and Modern Monetary Theory claim.