America's Credit Supercycle: The End is Near

No credit-based system in the modern world has survived an entire credit cycle. Daily Reckoning co-founder Bill Bonner explains why he believes the United States’ credit-based monetary system is nearing collapse. 

[Note: This is an excerpt from Bill Bonner’s speech at the 2013 Agora Financial Investment Symposium]

The important thing to remember is that, in a credit-based system the amount of credit is infinitely expandable. And the other thing is that in the credit-based system – the credit is manageable.  Somebody is always managing the value of that credit; especially in these hybrid systems we’ve had lately where somebody can manage it; where, in a bouillon system, you can’t manage the value of gold.  It’s what it is.

What we have today, by the way, is a credit-based system, but it’s a hybrid credit-based system that has many of the bad elements of a credit-based system, and it allows – and it is, essentially, a Paleolithic or Bronze Age system, which is being tried again.  And, when you have these systems, then you get these elaborate confections of credit, just as they did in the old days with the cows, and the chickens, and everything.  Now, you owe a mortgage.  You owe a mortgage.  The mortgage itself is then put into a derivative contract.  Derivative contract is bought by a hedge fund, which has borrowed money from a back at a preferential rate because it’s a bank favored by the Fed.  And all of this is quantified in these IOUs by the biggest debtor on the planet, and you wonder, “What are these things worth?  Does anybody know?  Does anybody know whether – who’s solvent and who’s not solvent?  Does anybody know what the credits are worth?  Does anybody know when this thing will blow up?”

No.  Nobody knows, but there’s no record in all of the historical record of any credit-based system in the modern world that has survived an entire credit cycle.  And now, we’re getting the turn in the credit cycle, so I think we’re getting close to the time when we’re going to find out whether this is something really, really  new, or whether this is a repeat experiment.

The Daily Reckoning