Peeking over the edge at how the next few months play out.
This is getting ugly, and not just for the people who boarded a Carnival Cruise last weekend – what were they thinking?
A depression seems certain (though I hope to be wrong and laughed at later). The bowling ball sent fast down the lane is Covid-19, but the pins were lined up to get blown to bits regardless.
As we wrote (June 2019)-
The Great Crash of 2020
Here’s an ugly stock tip: The current boom will end in colossal bust. The Federal Reserve engineered massive asset inflation with 0% interest rates to repair the big banks and grow the economy after the 2008 crisis. Low interest rates cause misallocation of capital (“malinvestment”), and now, after 10 years, the Fed is trapped and can’t get out. They either forgot how capitalism works, or don’t care. We need bankruptcies to clear out the malinvestment. It’s creative destruction. Small fires are needed to burn out the dead wood. If you prevent them, dead wood piles up, and the whole system burns.
This is the wildfire to end all others.
As much as we knew it was an eventuality, it’s still surreal. The pins that make up our global, national, and local economies don’t stand a chance.
Today, you’ll get emails from your favorite businesses about their policies around handwashing and disinfecting (Please come and buy from us, our revenues have been cut in half).
By Wednesday, they’ll send an update. They’re closing “for two weeks” to prevent community spread.
How many will ever open their doors again?
Fewer than you realize. It’ll be two months, if we’re lucky.
No matter the new laws around paid leave, these companies don’t have the capital to pay employees, lenders, and suppliers without revenue. Such begins a cascade of failures.
It’s called debt deflation, and in a paper money system leveraged to the hilt, it’s the boogeyman.
What to expect
The Fed just cut rates to zero, and fired up the printing press. It wasn’t enough, and essentially signaled panic. They yelled fire in a crowded theatre, and everyone is running for the exits.
In the short term, we’re going to see more closures, failures, and crashing of markets. Your kids are not going back to school before next Fall.
Next will come waves of layoffs, and Congressional bailouts, from proceedings held remotely. Bureaucrats will pick winners and losers, favoring their best donors.
Big corporations – banks, insurers, airlines, and automakers – will be called “too big to fail”. Money will be printed by the trillion and sprayed into markets to cushion the fall for the well-connected.
This won’t put people back to work, or products on shelves. It will only cause prices to rise, and expose the fraud, revealing the feckless wizards behind the curtain.
The shell game is up.
Small businesses – your favorite Yoga studio, the local pizza place with the best garlic knots, the Tumbling Gym where you take the tots, the real America – will begin to suffocate. Food stamps – the SNAP program – will expand dramatically. Hopefully it can keep up with demand.
The big question: Will this be the end of the paper money system? I think it could, though it may take years to play out.
For half a century, governments around the world have assumed that they can engineer prosperity through credit expansion, forcing interest rates down, encouraging borrowing, and printing money.
This is mere bubble-blowing. Hubris at best, and empty, soulless chicanery at worst, choking families and businesses, goading them into poor decisions to take on ever more debt.
Each time nature tries to deflate, they turn on the money cannons to spike the punch for yet another party. More booze is needed each time to get the drunk off the floor.
The bigger the bubble, the bigger the bust. This backwards, boneheaded policy meme will finally get exposed and slaughtered by the coronavirus.
It’s a hell of a pin, fit for the mother of all bubbles.
Confidence is a funny thing among herd animals. It changes on a dime, like a school of fish suddenly veering left. Once it’s gone, it’s gone forever. Markets will be cut in half. At some point they’ll turn up at the ferocity of the money cannons. The problem is that consumer prices will rise with them.
An increase in money without production can only result in price increases. Ultimately, faith in the system and the wizards pulling the strings will be lost.
The good news? Once it gets away from them, people in power will have no choice but to return us to a gold standard. That will be the dawn of a new spring.
Good riddance to the paper dollar, and its ugly offspring, endless war, endless debt, and a crony, StarPower system for the well-connected.
That is, unless they convince you one last time that the problem was only a virus, that no one saw it coming, and they just need more power the next time around.
Then you’ve got one more round, so bend over and assume the position.
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