Monday, 8 August 2011

Reality strikes back [update 2]

Malinvestment is always the result of the inability of human beings to foresee
future conditions correctly. However, such human errors and the resulting
malinvestments are most frequently compounded by the illusions
created by undetected inflation or credit expansion.”
- Ludwig Von Mises, Human Action

The cause of the ‘bust’ is the same as the cause of the previous ‘boom’ – the
willy-nilly creation of credit out of thin air…  To understand the root cause of
this crisis you need to understand the root cause of ‘boom and bust.’”
– David McGregor, ‘The global financial/economic crisis: causes & solutions

For decades, economies have been built.on a formula of fractional reserve banking and counterfeit capital—money created by banks out of thin air—debt, organised into currency.

This was the "new economy" proclaimed the fakers, an economic model in which production of real things was replaced with production of bank-created credit. Credit created out of thin air propping up prosperity created by illusion.

That unstable gallimaufry collapsed in the malinvestments of 2007 and 2008. And ever since, the fakers have tried to prop up their collapsing model of bank-created credit with trillions of dollars of government paper.

Such fakery can only last so long. Reality will out. All that "stimulus" flooded into the markets served only to resuscitate bad positions that should have been extinguished, and to inflate a (paper-based) "recovery" which allowed the gullible to think that reality had been faked once again.

But it hasn't been.

It looks like this morning, with markets ready to open again, that reality will reassert itself again.

The economic chickens are coming home to roost. Watch out for the fallout therefrom.

UPDATES  from around the traps:

UPDATE 2:  More reaction":

  • Don’t worry about US Government debt says the man who blew up the US housing bubble. “This is not an issue of credit rating,” says Alan Greenspan, “the United States can pay any debt it has because we can always print money to do that. So, there is zero probability of default."
    Yes, folks, this man was Chairman of the US Government’s money-printing wing for nearly twenty years. And you wonder why we’re all now in the mess we’re in!
  • Meanwhile, there are alleged economists out there saying that even though the US Government’s debt situation was “abysmal,” even though they’re now struggling to pay for all the government paper they wasted,  they should have gone for way more than the multi-trillion-dollar stimulus they did.
    “What I want is more now," Christine Romer said about a bigger and better stimulus.
    Yes folks, this woman was Chairman of the Council of Economic Advisers under President Obama and chief architect of his stimulus bill. And you wonder, etc…


  1. how long will it be before the Chinese start pricing their sales in gold?

  2. Fortunately we are protected from the worst of it, mainly because of the rebuild in Christchurch (in the world according to Key)

  3. Sean Fitzpatrick9 Aug 2011, 11:44:00

    Did anyone see Mr Forbes (yes, THAT Forbes) on BBC this morning saying that very thing? That the US can pay its debts easily as it only has to print more money?? Moron.

  4. Since the USA pays its debts in US$ which it defines itself, they can indeed pay any interest owing. The creditors just need to worry about the dilution of their purchasing power which has been part of the deal since gold was abandoned as the standard of value a century ago. Good riddance to gold, an atavistic anachronism.

    The problem is not fractional reserve banking, it's people thinking they could get rich by borrowing excessively to "buy" a property at twice its reasonable value. The problem for the creditors is that they made those loans. The problem for the taxpayers is that the politicians think they need to save shareholders of banks instead of leaving them for new shareholders to take over and run the place more sensibly.

    The financial industry is real, not imaginary, the same as imaginary numbers are real and not fake in electronics design. The financial industry is abstract, and has fakery hanging on to the side, but it's real and of vast value.

    Visit Canary Wharf and see the seething energy as $trillions slosh around the world looking for safe and profitable places to park.

    The problems are due to governments and electorates wanting to take over the money and do it themselves via socialist ideals and regulatory MADness [as in mutual assured destruction].

    The owners of the money [the Federal Reserve] like to dilute it by 3% or 5% per year, or more. Think of it as a royalty, or toll, like Microsoft selling software and Qualcomm collecting a royalty on mobile Cyberspace DeVices.

    And yes, John Key is right, Christchurch involves huge payments from overseas insurers to NZ construction companies. That's good for the local economy.


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