By Charles Hugh Smith on 10 July 2012 for Of Two Minds - (http://charleshughsmith.blogspot.co.uk/2012/07/global-economy-its-all-about-increasing.html)
Image above: Oil painting of "The Roundabouts" by Mark Bryan, 2003. From (http://www.artofmarkbryan.com/the%20roundabouts.html).
If we look at the global economy with unclouded eyes, we reach this conclusion: "This whole thing is about leverage." If leverage doesn't increase, the system implodes. But since collateral is disappearing from the global economy like sand castles in a rising tide, and disposable income has stagnated, there is no foundation for more leverage.
- Allow banks to claim phantom assets as capital/reserves
- Lower interest rates so stagnant income can leverage ever greater quantities of debt
Much has been made over the Fed's efforts to "stimulate", however, IMHO the Fed's efforts are more concerned with preventing the sudden death of the monetary and banking systems. With private sector balance sheets hobbled, some entity must step in and create enough debt so that debts can be paid and, therefore, maintain the illusion that there is money (debt) in the system.
At first this must seem contradictory. Remember there is no collateral, there is no asset. Therefore, the debt, which people will claim as an asset (at par (to what?)), is in reality an illusion. It must be understood that leverage is such that even if there were no defaults, just normal everyday retirement of debt occurring at a rate faster than debt creation would cause the complete monetary base to disappear in short order.
With $600 trillion or more in derivatives alone, that must be settled in the reserve currency with a monetary base of $2 trillion, there is 300,000 to 1 leverage. The fact is, leverage must continue to increase exponentially to avoid sudden death. Phase and jitter cannot be tolerated. The idea of stimulating the economy at this point poses certain problems. One of my neighbors, a family of six, noted that their food bill had increased 50%. This presents the choices of consume less or save less.
Cutting back on food is usually not the first thing people will resort to. So, as costs rise, they are consuming less, which is the opposite of stimulative. Further, this creates trends that will likely be insurmountable in the future. The amount saved by this generation and the returns they must achieve to reach the goal of an independent retirement become more negatively skewed with each passing month of currency/labor debasement (notice I did not use the term "stagflation").
If there was no price inflation there would be no problem but prices are rising relative to wages, meaning dollars/labor is losing value, which, regardless of definitions, has the same effect as inflation. Since time can not be manipulated, people must save more (which the Fed is fighting) or they must receive higher returns, which usually means assuming greater risk. Frankly, the situation works out that this generation would need the performance of the top money managers today to achieve a non-subsidized retirement.
Having allowed themselves to be misled about the true nature of housing as an investment, and with most throwing their money in some vehicle resembling a 401K while hoping for something good to happen, Boomers will have their challenges but the next generation, saddled with significant student loan debt and the debts of the previous generation, also facing, "
The End of Work" will be even more challenged to retire with any semblance of simple dignity. Of course, I don't think it gets this far. As I have stated, the system is now terminal. It is only a matter of time before, even without any defaults, the two factors of amplitude and frequency overwhelm system capacity in terms of money printing.
I differentiate because productive capacity, which is the only reason for an exchange medium (the existence of money), has already been overwhelmed by the exponential phenomenon. Money now exists for the sake of itself, which is to say that it is worthless. As Einstein pointed out, "reality is merely an illusion, albeit a very persistent one."