Friday, November 27, 2020

Econ 101: The Virtual Simulation Of Prosperity

When global capitalism failed to create real prosperity, global central banks were called in to create the virtual form. After 2008, the gap between the rich and poor widened inexorably. When Trump took office the wealth gap further exploded. Now, under COVID, the gap is full Banana Republican, featuring an entirely virtual economy and a starving workforce. Ponzi capitalist utopia...

It took twelve years to round-trip back to the same manic reach for risk that attended the Lehman meltdown/TARP bailout. Clearly today's well-conditioned bailout junkies assume that they will get bailed out all over again if their depressionary bets go awry. That is the lethal assumption.

mor·al haz·ard
"lack of incentive to guard against risk where one is protected from its consequences"

The battle rages between the Peter Schiff acolyte inflationists/gold lover cabal, versus the de facto paradigm of deflation. Deflation has been the dominant paradigm since 1980 and yet STILL the majority expect inflation. One might ask, what is the difference between these two regimes if both paradigms imply that the vast majority of people are experiencing a declining standard of living? 

Good question. The difference between deflation and inflation is that deflation is a glut of goods attended by falling incomes, whereas inflation is a shortage of goods attended by rising incomes. Deflation is too little money chasing too many goods and inflation is too much money chasing too few goods. When consumers are going to stores and hoarding merchandise because they know it will be more expensive next week, we will be in an inflationary paradigm. In the meantime, the glut will grow exponentially and the store closures will continue to accelerate at an epic pace.

The only hyper-inflation we are seeing right now is in asset prices. Central banks have decided that instead of allowing the economic money supply to increase, they have increased the financial money supply instead. These Ponzi schemers are of the mind that it's much better to create an ever-larger asset bubble attended by a collapsing economy, than the other way around. They have made the conscious choice to bail out the wealthy at the expense of everyone else. 

Which is why we are not waiting for the traditional crack up boom and bust caused by end-of-cycle inflationary pressures and sky-rocketing interest rates. We are waiting for the asset supernova to burst, attended by collapsed interest rates, and mass defaults.

Something we've never seen before in U.S. history, which is why no one expects it right now:

"No one saw it coming"

The vast majority of pundits are now convinced that this asset supernova can continue forever. They believe that 0% interest rates justify infinite asset valuations. They also believe that the monetization of public debt implies the end of economic recessions, even as unemployment increases inexorably. In other words, the recession is "over", the depression is growing worse by the day. For these ubiquitous pundits, their utopia is a vertical stock market and no one working. 

But what makes me of all unknown pundits believe that having successfully printed over recession and created the largest bubble in history, these people will be wrong now? After all, rampant idiocy has been amply rewarded to date, does that not imply that it will work ad infinitum? 

As I've pointed out, Japan was the first country to take this path of inexorable deflation and at first it all worked swimmingly. But then their mega asset bubble popped thirty years ago, and since then they've been unable to get it back to its former glory. Notwithstanding the largest money printing program in human history.

And if you think this current asset bubble was large consider these facts that attended Japan's mega bubble circa 1985-1990:

"For many people, it was one big, expensive party"

Japan’s inflated land prices made global headlines.

The Imperial Palace was reported to be worth more than France. A ¥10,000 ($1,000) note dropped in Tokyo’s Ginza district was worth less than the tiny amount of ground it covered"

It took this vaccine mega rally and record money printing to get the Nikkei back to half of its peak from thirty years ago:

Japan is the best performing global stock market of 2020:

What global central banks have sponsored more than anything else is mass insanity, which is clearly contagious.

The changeover from a deflationary paradigm to an inflationary paradigm will be initiated by the collapse of the asset bubble followed by mass deleveraging, followed by political paradigm shift among the majority populace who are still of the Idiocratic belief that bailing out working people is socialism and bailing out rich people is capitalism.

Suffice to say this impending revelation will fully disabuse them of that belief. And every other belief. 

In the meantime, the death of the dollar has been greatly exaggerated. When gold becomes a buy - and it will - most people won't want to own it. The same goes for Bitcoin.

Since the pandemic, the dollar has been highly correlated with volatility and inversely correlated to rampant complacency: