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Something is seriously wrong pretty much everywhere. We are at the end of generations of solving one bubble collapsing by inflating another one. There is a lo

by btilly 8y ago

Something is seriously wrong pretty much everywhere. We are at the end of generations of solving one bubble collapsing by inflating another one. There is a lot of money on paper. But in reality there are three main places where money can go. 1. The USA, which has been effectively printing money like crazy with low interest rates since 2008. This has been transferring wealth from the real economy to the paper economy. 2. Europe, whose common currency is unsustainable without political integration. There is no general support for political integration, and no reasonable way to untangle the common currency. (Plus Brexit will be a disaster.) 3. China, which has the largest asset bubble in history. When it pops they are likely to wind up in a deflationary spiral, like the one that Japan has been struggling with for decades since its real estate market collapsed in the early 90s. Our last deflationary spiral was during the Great Depression. Of those options, investors see the USA as the least bad.

bsaul 8y ago
And add to the confusion the fact that inflation remained quite low. So this money really went straight from central banks to financial assets, without ever reaching the pocket of general consumers. At which point does all this madness stops ? Whenever a new economy emerges that provides more sanity and so drains the inflated assets, i suppose ?
- btilly 8y ago
  Everyone is playing kick the can. A more sane economy is unlikely to outgrow the existing (at least one paper), so that isn't a viable route out. What's left is that some day, one of the financial disasters turns into a real collapse. We're talking a sufficient run on the banks that people stop believing that banks really have money. The last time this happened was 1933, and it was resolved by FDR closing all banks, auditing their books, deciding which to save, and then opening them up again. Given our tighter electronic integration these days, the complications are likely to be greater. Think credit cards being refused, ATMs not working, and general chaos. For values of chaos that include people not knowing if their employers can pay, or how to buy food in supermarkets. The possibility of that happening was the nightmare scenario that was used to convince lawmakers to pass TARP a decade ago. And it is a nightmare with a low but non-zero probability of happening each crisis. Unfortunately every time we face that threat and successfully get rescued the markets become more convinced that big players will be rescued the next time as well. Which encourages more extreme financial brinksmanship and makes the next crisis more likely. That phenomena is called "moral hazard". See also "too big to fail".

by btilly 8y ago

bsaul 8y ago

And add to the confusion the fact that inflation remained quite low. So this money really went straight from central banks to financial assets, without ever reaching the pocket of general consumers. At which point does all this madness stops ? Whenever a new economy emerges that provides more sanity and so drains the inflated assets, i suppose ?

btilly 8y ago
Everyone is playing kick the can. A more sane economy is unlikely to outgrow the existing (at least one paper), so that isn't a viable route out. What's left is that some day, one of the financial disasters turns into a real collapse. We're talking a sufficient run on the banks that people stop believing that banks really have money. The last time this happened was 1933, and it was resolved by FDR closing all banks, auditing their books, deciding which to save, and then opening them up again. Given our tighter electronic integration these days, the complications are likely to be greater. Think credit cards being refused, ATMs not working, and general chaos. For values of chaos that include people not knowing if their employers can pay, or how to buy food in supermarkets. The possibility of that happening was the nightmare scenario that was used to convince lawmakers to pass TARP a decade ago. And it is a nightmare with a low but non-zero probability of happening each crisis. Unfortunately every time we face that threat and successfully get rescued the markets become more convinced that big players will be rescued the next time as well. Which encourages more extreme financial brinksmanship and makes the next crisis more likely. That phenomena is called "moral hazard". See also "too big to fail".