From a brilliant observer writing from Javea, Spain. An essay from someone well worth listening to. I strongly recommend reading it, carefully. The November electons are coming, and they might be the last exit off the road we’re traveling.
“Summer Holiday? I wish it were…”, Raoul Pal, GMI, August 2008 — Excerpt:
The World’s biggest mess
Firstly, the assumption is that the US is going into a nasty recession followed by the UK, Australia, New Zealand, Spain, Germany and most of Europe. We are also going to see big dents to growth in Asia, but will probably be avoiding stall speed.
It’s the Magic Cycle
And let’s be clear why we are in this mess. The business cycle is heading towards its lows. This “Magic Cycle” moves all asset prices and uncovers the excesses of the preceding upcycle. It is a “magic” cycle because it has been going on for thousands of years in one form or another, and it alone allows for the long-term functioning of the economic system. (Trust me, recessions do a much better job of managing the economy than central banks do!)
The Fed thinks they look good… hmmm
However in recent years, overly rapid and aggressive use of interest rates by the Federal Reserve to cushion the economic blow of the downside of the business cycle, has led to an avoided recession in 1987, a mild recession in 1990, an avoided recession in 1996, another avoided one in 1998 and a very mild one in 2002. It looks on paper that it has been a very successful policy for the USA and economic commentators; the Fed themselves and investors have been high-fiving.
But it’s appalling economic mismanagement
The dark side of the policy, whilst blindingly obvious to many, seems to be a complete surprise to the Fed, the US Government and households in general. Essentially the Fed has underwritten the risk in the financial system and not allowed the system to purge itself of excessive borrowing/lending. It is a system that rewards risk-taking through the use of leverage.
Leading to the biggest credit bubble in World history
Cut to the biggest equity bubble in US history, then the biggest housing bubble in US history… all financed by the biggest credit bubble in global history. Borrow money and invest it to get rich! Who needs to save money when I can make capital gains so easily to fund my retirement? That was the plan, anyway.
My god, it’s going horribly, horrifically wrong. Equities in the US, in real terms have now produced zero returns since July 1997. Eleven years. And there is no end in sight. We are into the second lost decade.
Broken.
The system has been so abused that it stretched to breaking point. It has now broken. Forever. Banks are falling by the wayside on a daily basis. As I have written previously, I have never seen anything like this in history.
The total stupidity of the US getting to the point where they are 100% of World GDP in debt is unfathomable and shameful. It is economic mismanagement on an incomprehensible scale. Essentially they have borrowed one year’s income from every man, woman, government and corporation on earth to fund this lunacy.
I’ll say it again… debt is the inverse of wealth… it’s all false ego-flattering. And for what? To pretend that its economy grows faster than it does? To pretend to be richer than it is? To paper over the cracks that it is not globally competitive or productive enough to sell any product that the world actually wants to buy, except maybe the iPod?
Blind arrogance in their system
It should never have been allowed to happen and they have sown the seeds of their own demise through blind arrogance. The system has now been pushed so far beyond its limits that it is completely broken as a model. Well done the USA. Total genius.
This is going to take decades to sort out
Arguably no developed country has ever made such an economic error of this scale. It is so large that the ramifications are going to take multiple decades to sort out. People in corporations get jailed for running companies like this. In a nutshell, it is the beginning of the long decline of the Anglo-Saxon debt-based, central bank-managed, economic model.
Game Over. {end excerpt}
Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
Other posts in this series about America, how we got here and how we can recover it
- Forecast: Death of the American Constitution, 4 July 2006
- Diagnosing the Eagle, Chapter III – reclaiming the Constitution, 3 January 2008
- A report card for the Republic: are we still capable of self-government?, 3 July 2008
- Americans, now a subservient people (listen to the Founders sigh in disappointment), 20 July 2008
- de Tocqueville warns us not to become weak and servile, 21 July 2008
- A soft despotism for America?, 22 July 2008
- The American spirit speaks: “Baa, Baa, Baa”, 5 August 2008
- We’re Americans, hear us yell: “baa, baa, baa”, 6 August 2008
- Obama describes the first step to America’s renewal, 8 August 2008
- Let’s look at America in the mirror, the first step to reform, 14 August 2008
- Fixing America: elections, revolt, or passivity?, 16 August 2008
- Fixing American: taking responsibility is the first step, 17 August 2008
- Fixing America: solutions — elections, revolt, passivity, 18 August 2008
- The intelligentsia takes easy steps to abandoning America, 19 August 2008
For all posts on this subject see America – how can we reform it?.
