The Dam Is Finally Cracking

We all sense the global order has cracked. The existing order is breaking down on multiple fronts.

Those who have benefited from this arrangement are doing everything in their power to patch the cracks, while those who chafed under the old order’s chains seek a new order that suits their interests.

The task now is to make sense of this complex inflection point in history. Two statements summarize the transition from the existing global order to the next iteration:

1. Finance dominated resources in the old order. Now the roles will reverse and real-world resources will dominate finance. We can’t “print our way” out of scarcities.

2. Reshuffling currencies and credit will not stop the breakdown of the global order’s “waste is growth” Landfill Economy Model.

Playing financial tricks has extended the life of an unsustainable economic model that glorified “growth” from wasting resources. By expanding credit “money,” the current global order fueled unsustainable consumption driven by unsustainable speculation.

Stop expanding “money” and credit and the global order of “growth” implodes.

The Dam Is Finally Cracking

Unfortunately for all those who benefited from soaring wealth and income inequality, the trick of expanding “money” and credit has reached systemic limits. The dam holding all the toxic debt, leverage and fraud is finally cracking.

The dominance of resources over finance leads to a multipolar global order, an order that has the potential to be far more stable and sustainable than the unsustainable, destabilizing “waste is growth” model that depends on financial fraud to maintain the illusion of “growth.”

As I explain in my book Global Crisis, National Renewal, scarcity leads to either social disorder or rationing. This article explains how government’s role will shift from boosting demand (the Keynesian Cargo Cult) to limiting demand in ways that maintain the social contract.

Nations that fail to adapt to the end of financialization and globalization will unravel. Every nation has a choice which path it takes:

Cling on to the doomed existing order of financialization, globalization and the “waste is growth” Landfill Economy or embrace a multipolar world and a degrowth model of doing more with less and incentivizing efficiency and durability rather than the shoddy planned obsolescence of the debt-dependent Landfill Economy.

Free Money Is the Solution

Under various guises, labels and rationalizations, “free money” has now been established as the default policy fix for any problem. Stock market falters? The solution: free money! Economy falters? The solution: free money! Bankers face collapse from ruinously risky bets? The solution: free money! Infrastructure crumbling?

The solution: free money!

Inflation raging? The solution: free money! Ruh-roh. We have a problem free money won’t fix. Instead, free money accelerates the conflagration. Dang, this is inconvenient; the solution to every problem makes this problem worse. Now what do we do?

Despite the apparent surprise of the policy-makers, pundits and apologists, this was common sense. Create trillions of dollars out of thin air and spread the money around indiscriminately (fraudsters and scammers getting more than the honest, of course) after global supply chains were disrupted and shelves were bare, then open the floodgates of speculative gambling in stocks, cryptos, housing, used cars, bat guano, quatloos, etc., and what do you think will happen?

Supply can’t catch up with free-money-boosted demand, prices rise, people instinctively over-order and over-buy, and “don’t fight the Fed” speculative betting begets more betting: the inflation rocket booster ignites, wages soar as workers try to keep pace with rising expenses, speculative bubbles inflate to unprecedented extremes, and all this “wealth without work or productivity” gooses spending and gross domestic product (GDP).

“Once the Bubbles Pop, GDP Crashes and the Ratio Blows Out”

Forty years ago, the total debt-to-GDP ratio was 1.6: debt was $4.8 trillion and GDP was $3 trillion. Then the policy solutions of fiscal “borrow and spend” and Federal Reserve “balance sheet expansion.” a.k.a. free money, became the policy default.

The ratio rose to 2.76 in 2000 and has wobbled around 3.7 for the past decade, a decade that just so happened to see the stock market quadruple and the housing bubble reinflate to new heights as the Federal Reserve kept interest rates near zero as part of the “free money” policy:

If we’re going to borrow tens of trillions of dollars to squander, we need near-zero interest rates to keep costs of borrowing down.

Though no one in a position of power or influence dares admit it, the ratio of debt to GDP hasn’t blown out for one reason: speculative bubbles have pushed GDP higher in a massive, sustained distortion of “wealth effect” and winner take most gains for those who knew how to extract the majority of gains from the bubbles.

Once the bubbles pop, GDP crashes and the ratio blows out. The belief that adding trillions in debt magically adds GDP will be revealed as delusional fantasy.

Two Paths

Completely forgotten in the era of Free money as the solution to all problems is the discipline of frugality, which can best be defined as discipline over spending as a means of building long-term financial stability and general well-being.

Financial discipline (frugality) has been set aside as a needless discomfort: why make difficult tradeoffs and sacrifices when the solution is just to borrow/create more free money? Indeed. Along the same lines, why bother with all the hassles of healthy food and fitness? Just pig out and swallow a couple handfuls of “free” (heh) meds.

Discipline isn’t just about limiting waste. It’s about investing capital and labor wisely to secure future gains in productivity which is the only real source of income and wealth. Creating “money” out of thin air and spreading it around to satisfy every constituency doesn’t increase productivity. It destroys productivity by incentivizing waste – the waste is growth Landfill Economy – and speculative bets on bubbles never popping.

Alas, all bubbles pop, and now that creating free money only makes costs rise faster, there is no solution other than – oh, dear, dear, dear – the unforgiving discipline of frugality and investing for productivity gains rather than for speculative bubble “wealth.”

Which path leads to doom? Free money. Which path leads to revival? Frugality and discipline.

That’s not what everyone wants to hear, but clinging to delusional fantasies of “free wealth” won’t lead to positive outcomes, any more than swallowing handfuls of meds leads to “free health.”


Charles Hugh Smith
for The Daily Reckoning

The Daily Reckoning