Gold News

The Way the World Ends

Well, this particular stage in its farce, at least – the debt bubble...
We PROMISED to explain how it ends, writes Bill Bonner in his Diary of a Rogue Economist.
The world, that is. The world we live in now. The one in the middle of a rapidly inflating central bank bubble.
First, we need to understand that this is a very different world from the world of the 19th and early 20th centuries. It is a world where central bankers play a role somewhere between con artists, mad scientists and God Himself.
They deceive and cheat. They conduct their experiments without any real idea how they will affect people. And they move almost every price in the world – sending investors, householders and business people all running in one direction.
Their experiments change not only prices quoted on the Big Board and the supermarket. They also change the physical world. Jobs are lost to machines that – without such low interest rates – would not have been built.
Those in the 1% are only as rich as they are today thanks to the Fed's manipulations. America's super-sized houses also are largely the result of the Fed's 2002-07 real estate bubble. And many a mansion has been built in Aspen or the Hamptons with money from Wall Street bonuses, which wouldn't have been possible without central bankers' grand designs.
And China is the way it is today – with its gleaming towers, its mega-factories, its empty cities and clogged roads – largely because US officials made it easy for Americans to buy things they didn't need with money they didn't have.
Central bankers – along with central governments – have created a kind of monetary fantasy...which depends on ever increasing amounts of credit.
But where can all this new money go? Real output can't keep up with it. So prices must adjust. In the event, they bubble up...first one market, then another...first one sector, then another...
And after the bubble, what?
The bust!
That's what we're waiting for. A bust in the biggest debt bubble of all time.
When the credit inflation ball bounces off the ceiling, it produces an equal and opposite reaction in the other direction. Asset prices fall. This is deflation. It begins with asset prices...and then makes its way into consumer prices.
Most investors think they need to protect themselves from this kind of volatility.
Academic studies show that more volatile stocks under-perform less volatile stocks – they call it the "volatility anomaly." And it is obvious that if your stock goes down 50% you need 100% on the upside to get back to where you started. Losses and gains have "asymmetric" effects on your portfolio.
But at our small family wealth advisory, Bonner & Partners Family Office, one of our principles is that you need to "make volatility your friend." Because volatility is not the problem. The real problem is risk. There is risk that you will buy the wrong investment at the wrong price. Then you'll get whacked.
EZ money policies – low rates, QE, paper money – produce an apparent stability. As long as the money flows freely, even some of the worst businesses and the worst speculators can borrow to cover their losses.
Stocks go up and up and up. It looks good. But it masks real risk. As the bubble in credit increases the risk of a major blow-up increases...until it becomes a certainty.
This is where volatility can be your enemy and your friend. Just as Fed policies have made stocks too expensive...the equal and opposite reaction of the financial markets will be to make them too cheap. (Stay tuned.)
So, there you have it. The first stage of "the end" will be a major selloff of stocks. At present prices, of course, they've got it coming anyway.
But the implosion of the debt bubble and the collapse of asset prices are not likely to be the end of the story. Not as long as we have delusional activists running central banks and central governments.
The end of the world comes when the debt bubble pops. But before we get there, we will see more attempts by central banks to keep the debt bubble expanding. From Richard Duncan, author of The New Depression: The Breakdown of the Paper Money System:
"Given that the Fed has been driving the economic recovery by inflating the price of stocks and property, it is unlikely to allow falling asset prices to drag the economy back down any time soon. To prevent that from happening, it looks as though the Fed will have to extend QE into 2015 and perhaps significantly beyond."
So far, so predictable. But there is a "sooner or later" for QE, too. There will come a time when the world can take no more debt...and at that point, the debt bubble will finally blow up.
Then we get the equal and opposite reaction. Asset prices that have been inflated by debt will be deflated by debt de-leveraging. A depression will most likely follow.
This is not a bad thing...not at all. Contrary to popular opinion, crashes and depressions do not destroy wealth. They merely tell you that the wealth you thought you had really didn't exist.
As long as the EZ money flows freely, mistakes remain invisible. Rotten companies are kept alive. Bad speculations seem to pay off. Debts that can never be paid are still serviced. Stocks with little or no earnings shoot up.
Then when the bubble explodes the mistakes become painfully obvious. Phony gains return from whence they came. Investors reprice assets at more realistic levels. (After first going to unrealistically low levels and presenting opportunities for patient investors with plenty of cash onboard).
Only then, when the economy has been thoroughly thrashed can it get up, dust itself off and get back to work.
But central bankers are not likely to let it happen. They've made their careers by pretending to improve the economy. When the bust comes they will swing into action with more quack cures.
That is when we arrive at the second stage of the coming debt deflation. It is when we will wish we had bought more gold...more real estate...more old cars and new potatoes.
Most likely (but this is not guaranteed) central banks will find new and bolder ways to get money into consumers' hands. (Remember Ben Bernanke's "helicopter" speech?) This will be followed by a crisis of a different sort: high levels of consumer price inflation.
Put on your seat belt. It's gonna be one helluva ride.

New York Times best-selling finance author Bill Bonner founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group exposed and predicted some of the world's biggest shifts since, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and the election of President Trump (2016). Sharing his personal thoughts and opinions each day from 1999 in the globally successful Daily Reckoning and then his Diary of a Rogue Economist, Bonner now makes his views and ideas available alongside analysis from a small hand-picked team of specialists through Bonner Private Research.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals