Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Thanks to the Fed We Live in a Crystal Meth Economy

Economics / Fiat Currency Dec 11, 2009 - 03:49 AM GMT

By: David_Calderwood

Economics

Best Financial Markets Analysis ArticleAs I see it, booms and busts are a natural part of human social behavior. Cycles appear throughout history and are part of the dynamism of humanity of which Butler Shaffer so eloquently writes. If this is so, then what role do central banks play in the modern world?


The magic of central and fractional reserve banking, fiat money and deposit insurance artificially enables improvident rationalizations about credit and debt, and generates false price signals throughout an economy.

By definition, in a fractional reserve system a small amount of debt is pyramided into vast purchasing power, driving up prices for goods and services and/or assets. When it flows into assets it is not generally recognized as inflation and is initially applauded as people feel wealthier, until optimism peaks, only after which is the bubble recognized.

Some have likened the Fed to supplying the punchbowl at the party, but this is the wrong analogy. The party and hangover would occur with or without the Fed; the Fed’s role is to supply methamphetamines whenever the revelers appear to be running out of energy, staving off the hangover and near-term sobriety. This prevents periodic economic readjustments and creates the illusion of "full employment" and "economic stability" over longer periods of time.

Is it not obvious where this leads?

Without the pyramiding of nominal values, waves of "irrational exuberance" would be limited in scope. Asset values would reach apogee earlier and the establishment of entire industries to serve irrational consumption would be limited. Economic activity would grow organically, visibly connected to prior production, and economic activity would hew closer to a balance between serving immediate consumption and the maintenance and growth of capital for future production.

Instead, after a century of central bank dominance and 70-plus years without a deflationary bleeding of the excess gas in the bubble, we have had more than enough time for entire industries to flourish under false assumptions. Huge industries employing tens of millions now cater to the welfare/warfare state on the "guns" side, and to consumers’ vice of living beyond their means on the "butter" side. Optimism was given free rein to establish an entire hallucination economy, one based on ever-rising asset values pushed higher by ever-rising credit availability, itself a product of pyramiding values on spiraling government debt, laundered through a public treasury that strip-mined the savings of three generations.

If the USA was a single small town and the local bank had pyramided the extension of credit on previous borrowing in collusion with the town’s selectmen, how might things appear after a few decades?

The town would be drowning in municipal debt, with ornate street lamps lining picturesque boulevards in every selectman’s district; masses of municipal police, firefighters, road crews and administrative officials would clog street intersections, and a host of businesses would arise to cater to the one buyer larger than all others combined: the town’s political establishment.

The bank would sit on a big chunk of this municipal debt, exhorting everyone to borrow and spend because 70% of the town’s businesses (and jobs) now depend on consumption.

Retailers would hawk luxuries on every street corner, and each business would offer its own special credit card in partnership with the bank. Every third business would serve the swimming pool industry and every family be encouraged to buy a newly-constructed home and every home, new and old, be offered a new swimming pool, no money down, no interest for two years, no payments for six months. Once everyone had a house, they would be encouraged to buy another!

Think about it. How many jobs in this little town would exist only because of the willingness of most people to indenture themselves to the bank while the few thrifty citizens loaned ever more money to the selectmen? Once the optimism finally peaked and receded, could the bank induce more borrowing to sustain things?

No.

Once the contraction begins in earnest, a fact revealed by asset devaluation, the social psychology that sustained the entire mania is over. Instead of a small, painful economic readjustment from a short-lived boom, the little town’s industries are slaughtered as waves of default, unemployment, and credit contraction drown each neighborhood and industrial park. Half the townspeople are expert at tasks for which there is almost zero demand, with enough extra swimming pools and luxury goods to last years, even decades.

This is exactly where the USA (and much of the world) stands today. Half the white collar middle class is highly skilled in occupations for which there’s about to be almost no demand, because the credit pushers running the U.S. government and the central bank gave the public what it wanted…crystal meth credit. Now the economy it created teeters on the brink of exhaustion and their single ability is to cook up more drugs, lowering the price to zero. It won’t work, though; the addicts know they can’t take another hit.

Withdrawal is going to be ugly. Getting clean will take a generation (or much more, if our society has periodic relapses into credit intoxication as we might expect).

For now, residual optimism still generates flashback hallucinations of hope that we can return to the bubble years. Belief in the twin central planners of government and banking has yet to erode significantly, but cracks are appearing in the faith. The first indication that faith is collapsing will be a resumption of significant declines in the major U.S. stock indexes.

When that time comes, look out. Bank runs can’t be far behind.

The debt pyramid will crumble, as will faith, one brick at a time. Ironically, the last stone to fall is likely to be treasury debt, for its collapse will signal an end to the worship of the myth of American Exceptionalism, at least for a time. Since this is the one religion nearly all Americans share, it will be the last vestige of national identity to succumb.

In the meantime, try listing all of the crystal meth–addicted occupations that depend on central bank–induced "private" credit availability and on government debt–supported spending. Start with jobs in the military-industrial-complex, jobs in "public works," jobs in the sciences supported by research grants, jobs in education supported by government grants, and jobs providing medical services and in industries supported by Medicare and Medicaid spending. Don’t forget jobs sustained by credit-based over-consumption like those in the restaurant and leisure industries, and jobs providing myriad middle-class status symbols such as fancy cars, tony fashions and McMansions.

It’s a long list. I recognized years ago that my job was on it.

Is yours?

David Calderwood [send him mail] a businessman, artist, and author of the novel Revolutionary Language, selected January 2000 Freedom Book of the Month at Free-market.net.

    http://www.lewrockwell.com

    © 2009 Copyright David C. Calderwood / LewRockwell.com - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Jerry
11 Dec 09, 18:10
Thanks to the Fed We Live in a Crystal Meth Economy

It's time to start a new political party as the demons and the rats no longer represent the interests of the American public. Maybe we can get Wisconsin Feingold to lead a People's Progressive Party???


Post Comment

Only logged in users are allowed to post comments. Register/ Log in