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Credit deflation and the reflation cycle to come (part 2)


spunko

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2 hours ago, Knickerless Turgid said:

This is real. Empty shelves across supermarket chains and DIY stores, doubtless elsewhere when general retail re-opens. Majestic Wine is out of many ranges, due to a major wine importer going down, I am told due to shipping costs.

Get used to fewer choices at higher prices, people (no bad thing, in my view). The consumer has no idea how good he/she/they have had it over the last 25+ years, at least in terms of the availability of tat. An entire generation (in fact, two generations) are about to discover the true cost of "stuff".

Exactly right,thats whats happening.Its the reason i and others urged people to focus on de-complex areas.The oil and mobile company dont care if there are 3 lots of rice instead of 15.Iv been stocking up on as much as i can 2nd hand from Marketplace etc,just got a lovely £10 bag of clothes for grandson,i reckon £100s worth.My daughter is actually selling on after use now for a profit,so free use and profits.

Iv just got my daughter in law a nice Peugeot 207 1.6 diesel 11 plate this week,the Allure top range version.Keep that on the road for her for a decade and should see her depreciation and fix costs be around £20 a week.Fixed a freezer i got for £20 so filling with reduced items etc,thats 4 freezers now xD got a chicken in Tesco for 62p tonight @Yellow_Reduced_Sticker and a few packs of King Prawns for 65p a pack among other things.Shouldnt mention prawns as @nirvana sometimes talks to them xD 

I must say i should really learn how to make wine.Loads of Elderberries along the old railways lines near me,that would make superb wine.

Its all coming along as expected isnt it.Amazing how we predicted they would fear unemployment more than inflation and @Barnsey showing above that is the Fed thinking now.

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25 minutes ago, DurhamBorn said:

Telefonica SA Brazil ADR and TIM SA ADR are the two to concentrate on ,not buying advice etc.Tickers VIV and TIMB

Thanks for sharing that mate, appreciated

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6 minutes ago, Cattle Prod said:

doesn't it make you immediately think "shit I need to go and buy xyz pronto".

Yup. Tools for me, and plenty others on here i bet

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Chewing Grass
4 hours ago, Innkeeper said:

If you need a new car there’s at least 10,000 in Avonmouth Docks parked up next to the M5.  I’m sure most of them haven’t moved for months....

I've just had a look its beyond comprehension, two snapshots and that's not all of them.

1815886435_Screenshotfrom2021-04-0822-20-05.thumb.jpg.56cceee0aa2922e03836cab8f0065559.jpg

2005301196_Screenshotfrom2021-04-0822-15-26.thumb.jpg.0b7c68e140f89f9255df508eba698d1c.jpg

 

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1 minute ago, Chewing Grass said:

I've just had a look its beyond comprehension, two snapshots and that's not all of them.

1815886435_Screenshotfrom2021-04-0822-20-05.thumb.jpg.56cceee0aa2922e03836cab8f0065559.jpg

2005301196_Screenshotfrom2021-04-0822-15-26.thumb.jpg.0b7c68e140f89f9255df508eba698d1c.jpg

 

Imagine the size of the bowl for the keys

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59 minutes ago, Cattle Prod said:

Great inflation anecdotals there all, very useful. But reading them, doesn't it make you immediately think "shit I need to go and buy xyz pronto". It's like fomo, I have thousands of pounds of timber to buy. I've just been stung at least 25% not doing it sooner. Just like getting into your favourite stock too late.

Which is the behavioural component of inflation refd by Erik on macrovoices recently. What happens when we all decide to exchange our depreciating money for appreciating goods? Collective society has been shown again and again to subconsciously act en masse, like birthrates dropping before recessions.

Bring it on, I'm hedged. 

True inflation is exactly this.

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8 hours ago, DurhamBorn said:

Harley do you have a list of worldwide withholding tax.I think Brazil is 0%

Doesn't look like there is a WHT on dividendshttps://uk.practicallaw.thomsonreuters.com/0-518-9826?contextData=(sc.Default)&transitionType=Default&firstPage=true.  The UK does not seem to have a comprehensive Double Tax Treaty with Brazil, except for a few specialist things like Aircrew, etc.

 

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1 hour ago, Cattle Prod said:

We are within 10% of his 4500 spy call, and for macro, thats as good as. Just stunning, and I didn't believe it myself given how inflated stocks were a thousand points ago. Then I was reading Stanley Druckenmillers Lost Tree Club speech: exactly same message as DH and DB: its the Fed and liquidity, the rest is noise. I want to know what these guys know. I suspect a guy with $5bn can't be bribed, but maybe I can tempt DB with spare parts for his Ferrari (oven)?

The cost of money,the amount of claims on it,the amount being issued.Roadmap out from that.

Cross market first the likely political needs and situation.

Cross market the affects

Work out the leads and lags.

The market nearly always looks the wrong way.

If people take anything,remember how western style economies work.The CBs push liquidity into the economy through the capital markets.The only difference this time is they are also monetising fiscal spending.

Notice the DXY today,looks like we got the better of Goldman again xD,their dollar models are fucking crap.

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6 hours ago, Loki said:

Yes I can understand collectable and classics going up.  I thought I heard somewhere what the whole used car market was doing well but that's harder to understand with the electric push.   Unless it's because people are putting off buying a brand new petrol or diesel I guess.

Well 2 years of no holidays no pubs no meals out no nothing and even I could see how even those earning say 80k a year has a couple could have money to waste on a classic car .fuck overpaying the mortgage spunk it on a car 

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9 hours ago, DurhamBorn said:

Shouldnt mention prawns as @nirvana sometimes talks to them

not as much as I talk to my bikes! Got a beauty for 50€. She's called Rita and she's in the hareem now xD

Gonna stick an electric motor on her and I'll be bombing it for the baguette even when it's -4 outside

Cars, pah! :P

And bollocks to the speed limits :Jumping:

48V 750W Bafang Mid Drive Motor

Feature:

1.It's the newest version has two plugs for gear shift sensor and 6V light.

 2. 25 amp upgraded IRFB3077 mosfets controller (up to 1300 watt with 52 volt battery)

  

IMG_20210408_160339 (copy 1).jpg

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JimmyTheBruce
9 hours ago, Chewing Grass said:

I've just had a look its beyond comprehension, two snapshots and that's not all of them.

1815886435_Screenshotfrom2021-04-0822-20-05.thumb.jpg.56cceee0aa2922e03836cab8f0065559.jpg

2005301196_Screenshotfrom2021-04-0822-15-26.thumb.jpg.0b7c68e140f89f9255df508eba698d1c.jpg

 

This is the bit I don't understand.  Whilst I'm aware there's a shortage of chips which is affecting the supply of new cars, there's obviously still a few cars available.  In the same vein, whilst some areas have been disrupted by lockdown etc, others have carried on regardless.  So, for example, with regards to the comments on timber prices, I assume we've still been merrily chopping trees down, masks or not.

So what is driving prices up across the board so quickly?  Is it physical shortage, excess demand (FOMO), or pent up demand (free cash from the magic money tree)?  Or are suppliers seeing the amount of money being printed and raising prices accordingly?  Or does it come back to the common theme on this thread about energy inputs; the guy chopping the trees down still needs fuel in his chainsaw.  Or is it just a perfect storm of all of those things?

Given what I've just been quoted for a kitchen floor, I'm certainly not denying it's happening, just pontificating really.

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Talking Monkey
9 hours ago, Cattle Prod said:

We are within 10% of his 4500 spy call, and for macro, thats as good as. Just stunning, and I didn't believe it myself given how inflated stocks were a thousand points ago. Then I was reading Stanley Druckenmillers Lost Tree Club speech: exactly same message as DH and DB: its the Fed and liquidity, the rest is noise. I want to know what these guys know. I suspect a guy with $5bn can't be bribed, but maybe I can tempt DB with spare parts for his Ferrari (oven)?

I was thinking the same last night CP how close to his original 4500 call we now are, it's nuts. One hell of a call when you think he was sticking with it even in the capitulation days the markets saw in March last year.

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1 hour ago, JimmyTheBruce said:

This is the bit I don't understand.  Whilst I'm aware there's a shortage of chips which is affecting the supply of new cars, there's obviously still a few cars available.  In the same vein, whilst some areas have been disrupted by lockdown etc, others have carried on regardless.  So, for example, with regards to the comments on timber prices, I assume we've still been merrily chopping trees down, masks or not.

So what is driving prices up across the board so quickly?  Is it physical shortage, excess demand (FOMO), or pent up demand (free cash from the magic money tree)?  Or are suppliers seeing the amount of money being printed and raising prices accordingly?  Or does it come back to the common theme on this thread about energy inputs; the guy chopping the trees down still needs fuel in his chainsaw.  Or is it just a perfect storm of all of those things?

Given what I've just been quoted for a kitchen floor, I'm certainly not denying it's happening, just pontificating really.

1. Certainly demand is a key factor.

I am seeing huge demand for home renovation, building projects, home and garden furnishings etc. 
A simple tour around the local residents reveals work van after work van everywhere doing home and garden builds etc.

Certainly in the U.K. you have a huge amount of people sat at home getting paid 80-100% of salary and their overheads have fallen dramatically. Spend spend spend is what they want to do with all this ‘spare cash’.

2. Speculation: as commodity prices have gone up more people have speculated on this rise and ergo it continues. Feeding back on itself.

As demand has risen and cost prices have risen the price rise inflation phenomenon feeds itself. 
 

The BIG question is: “When is the bust coming?”. This year.... next .... or not for many years....? 

 

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11 hours ago, Loki said:

Yup. Tools for me, and plenty others on here i bet

I don't think I can fit any more in! Already had to build more stores!  Plus we've got most of what we prepped for back in Feb20 food, etc wise in steel cupboards we bought back then and three small freezers (one back up warm store) to keep the mice out, all in a refurbished out house with a backup petrol/lpg genny.  Boy, have we been busy this last year! Then there's the pile of stuff for the dump I'm slowly repurposing just like Scrapheap Challenge.  Five more large outdoor stores to build, a specialist trailer to weld up from scrap metal and spare wheels, more electronics to strip down and reuse, and things I haven't even thought of yet.  TBH, I'm a p*g in sh*t atm!

PS:  Home brew a must!

PPS:  Currently buying loads of £12 bins with secure lids for outdoor storage.

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geordie_lurch

The following image from this Zerohedge article about a $1 display chip is causing supply chain chaos is a good overview of what the world is apparently short of even if it is USA focussed as it's from Goldman Sachs...

 

https://cms.zerohedge.com/s3/files/inline-images/shortage%20everyhthing_1.jpg?itok=frv0RLDb

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3 hours ago, nirvana said:

not as much as I talk to my bikes! Got a beauty for 50€. She's called Rita and she's in the hareem now xD

Gonna stick an electric motor on her and I'll be bombing it for the baguette even when it's -4 outside

Cars, pah! :P

And bollocks to the speed limits :Jumping:

48V 750W Bafang Mid Drive Motor

Feature:

1.It's the newest version has two plugs for gear shift sensor and 6V light.

 2. 25 amp upgraded IRFB3077 mosfets controller (up to 1300 watt with 52 volt battery)

  

IMG_20210408_160339 (copy 1).jpg

Recently bought a hydraulic work stand for my Harley.  Time to do some serious work.  Gonna be worth something soon when me body finally gives up.  Loads of parts to sell (for the bike and loads of other stuff).  Best place for the best prices?  Or should I wait some more?   

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2 hours ago, JimmyTheBruce said:

Given what I've just been quoted for a kitchen floor, I'm certainly not denying it's happening, just pontificating really.

Revenge of the white van man! :)

Sellers market if you're a tradesman.  There's also been a move to higher material prices but better discounts if you ask, etc.  Customer never sees these when times are good.  Me, I'll only do places flying the Union Jack.  If you remember that Labour polo a few years back.  Revenge is a dish best served cold!

:P

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9 hours ago, Barnsey said:

 

Natural gas starts to really move around 2023/4 on my roadmap.Its fighting it out with silver as the best performing asset of the decade for me.I wish there were more ways to play it for multi bag potential,but its mainly the big integrated LNG players.

One of the reasons i think the UK is in a great position is because we actually will be able to do very well from renewables as gas rockets,we are lucky once again in geography.Most places arent.

Once the world wakes up to the fact we arent stopping gas and oil nature based climate solutions will be the big story and investment.Planting trees,expanding wetlands,protecting forests etc.Hard to invest in though.Landed gentry will make out like bandits as usual planting the uplands.

 

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12 hours ago, DurhamBorn said:

Exactly right,thats whats happening.Its the reason i and others urged people to focus on de-complex areas.The oil and mobile company dont care if there are 3 lots of rice instead of 15.Iv been stocking up on as much as i can 2nd hand from Marketplace etc,just got a lovely £10 bag of clothes for grandson,i reckon £100s worth.My daughter is actually selling on after use now for a profit,so free use and profits.

Iv just got my daughter in law a nice Peugeot 207 1.6 diesel 11 plate this week,the Allure top range version.Keep that on the road for her for a decade and should see her depreciation and fix costs be around £20 a week.Fixed a freezer i got for £20 so filling with reduced items etc,thats 4 freezers now xD got a chicken in Tesco for 62p tonight @Yellow_Reduced_Sticker and a few packs of King Prawns for 65p a pack among other things.Shouldnt mention prawns as @nirvana sometimes talks to them xD 

I must say i should really learn how to make wine.Loads of Elderberries along the old railways lines near me,that would make superb wine.

Its all coming along as expected isnt it.Amazing how we predicted they would fear unemployment more than inflation and @Barnsey showing above that is the Fed thinking now.

One issue I don't have in Portugal is availability of cheap wine. The supermarkets here run hefty discounts of 70 or even 80% off single bottles, so I only drink €10 plus bottles for only €2 or €3. 

The discounts seem genuine as often the same bottles will be back at their normal price, but there are always discounts.

I have been trying to work out why. Demand must still be high as people have been drinking more through lockdowns. Portugal doesn't seem to export much wine though, nothing like Spain or other European countries.

I am seeing inflation though. Cherry tomatoes could always be had for €0.99 but now €1.29 across the supermarkets, including Lidl and Aldi.

Seeing a lot of shrinkflation too but I am offsetting this by buying €s with £s - just transferred a whole bunch at €1.18. Means I can keep in mini tomatoes for now!

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sancho panza
1 hour ago, Talking Monkey said:

I was thinking the same last night CP how close to his original 4500 call we now are, it's nuts. One hell of a call when you think he was sticking with it even in the capitulation days the markets saw in March last year.

There's been a few on here who've given DH a bit of a metaphorical kicking for some of his daily calls.Given he admits his timing is lousy and -on the recent video psoted claims he'll have done well to call the top a few months either side of  it-then you have to step back and admire that call you refer to especially in the capitulation mood of last year.Alongside our resident thread leader DB as well it msut be added who stuck to his guns too.That was an epic time last year,even the hardened contrarian cellar dwellers on here were flapping.

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Talking Monkey
9 minutes ago, sancho panza said:

There's been a few on here who've given DH a bit of a metaphorical kicking for some of his daily calls.Given he admits his timing is lousy and -on the recent video psoted claims he'll have done well to call the top a few months either side of  it-then you have to step back and admire that call you refer to especially in the capitulation mood of last year.Alongside our resident thread leader DB as well it msut be added who stuck to his guns too.That was an epic time last year,even the hardened contrarian cellar dwellers on here were flapping.

It was quite something those few days, seeing the price action on tlt was educational. In terms of our thesis here I've always been comfortable with the fact that the portfolio may be underwater for a period of time say in a BK, and even down 20 to 30% is no big thing.

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sancho panza

Another epic from Dr Tim.My thanks as ever to @Democorruptcy for bringing him to my attention.

Highlights are mine for skim readers.The fact that so much is in bold says it all.

Includes-

soft default via inflation inbound,

the time for monetary reform was 08-too late now,

Big Kahuna inescapable.

Next crisis will question the validity of money.

Since 2000,each $1 of GDP growth has been funded by $3 of debt

Worlds average person is getting poorer

 

https://surplusenergyeconomics.wordpress.com/2021/03/24/193-nothing-for-money/

#193. Nothing for money

Posted on March 24, 2021

THE LOOMING FINANCIAL CRASH IN FOUR PICTURES

In the light of recent events, it’s hardly surprising that financial collapse has become an increasingly popular subject of debate.

There seems to be a dawning awareness that the economic crisis caused by the coronavirus pandemic has loaded the system for inflation, because the support given to incomes has boosted demand at a time when the supply of goods and services has slumped. Meanwhile, markets in general – and Wall Street in particular – have taken on some truly bizarre characteristics, suggestive, perhaps, of the frenzied dying days of a bull market.

Those of us who understand the economy as an energy system have long known that an event far larger than the global financial crisis (GFC) is inescapable. Indeed, ‘GFC II’ was hard-wired into the system from the moment when the authorities decided to prevent market forces working through to their logical conclusions.  

If markets had been left to their own devices back in 2008-09, what would – and arguably should – have happened was that those who had taken on excessive risk would have paid the price in widespread defaults, whilst asset prices would have corrected back to levels preceding the debt binge which had started a decade before the GFC.

It’s ironic that we hear so much talk of “re-set” nowadays, even though the only real opportunity for resetting the financial system came – and went – more than ten years ago. Promises of a post-pandemic reset are proof – if proof were needed – that ‘hype springs eternal’.  

Properly understood, all that covid-19 has really done is to accelerate our advance along a pre-determined road to crisis.

There are two big differences between the coming crisis and its predecessor.  First, whilst 2008-09 was caused by reckless credit expansion, the coming crash will be a product of far more dangerous monetary adventurism. Second, a crisis previously confined largely to the banking sector will this time extend to the validity of money itself.

The best way to understand the looming crisis is to recognise that the financial system, and the economy itself, are distinct (though related) entities. The ‘real’ or material economy of goods and services is a product of the use of energy. The financial system acts as a proxy for the energy economy, and consists of monetary ‘claims’ on the economic output of today and tomorrow.

If finance and the economy diverge, so that a gap is created between the two, the restoration of equilibrium must involve the destruction of the ‘value’ represented by ‘excess claims’.

Our current predicament is that there now exists, not so much a gap, as a chasm between the material economy and the financial system. The emergence and scale of this chasm can best be depicted as a series of “wedges” that have been inserted between financial claims and underlying economic prosperity.

The debt wedge

The best place to start is with debt, which customarily – though mistakenly – is measured by reference to GDP.

Between 1999 and 2019, world GDP increased by 95%. Expressed in constant international dollars (converted from other currencies on the PPP – purchasing power parity – convention), this means that GDP grew by $66 trillion.

Over the same period, though, debt expanded by 177%, or $197tn. Put another way, this means that each dollar of reported “growth” was accompanied by $3 of net new borrowing.   

As the first set of charts illustrates, what happened was that a “wedge” was inserted between debt and GDP.

wedge-01.png?w=1024

 

This was a product of deliberate policy. The predominant belief, back in the 1990s, was that economic growth could be furthered by “de-regulation”, which included relaxing rules that, hitherto, had limited the rate at which debt could expand.

At the same time, the process of globalisation created its own pressures for credit expansion. Essentially, the aim was to out-source production to lower-cost EM (emerging market) economies whilst maintaining (and preferably increasing) Western consumption.

This divergence between production and consumption created a gap that could only be bridged by making credit ever easier to obtain.  

An even more important factor then in play was an economic deceleration known as “secular stagnation”. The real reason for this deceleration was a relentless rise in the Energy Cost of Energy (ECoE). But this causation wasn’t understood. Instead, policymakers thought that the hard-to-explain deterioration in economic growth could be ‘fixed’ by making credit easier to obtain.

This in turn meant that monetary stimulus, hitherto used for the perfectly reasonable purpose of smoothing out economic cycles, would now become a permanent feature of economic policy.

It seems to have been assumed that excessive debt was something that the economy could somehow “grow out of”, much as youngsters grow out of childhood ailments.     

Financialization – the second wedge

Debt is only one component of financial commitments. There are many other forms of monetary obligation, even without moving into the realms of assumed (rather than formal) commitments such as pensions expectations.

A broader measure, that of financial assets, gives us a better grasp of the extent to which the economy has been financialized. For the most part, these “assets” are the counterparts of liabilities elsewhere in the system, much as banking sector “assets” correspond to the liabilities of borrowers.

Financial assets data isn’t available for all economies, but the right-hand chart below shows the aggregates for twenty-three countries which, between them, account for three-quarters of the world economy. 

What this illustrates is that the “wedge” inserted between debt and GDP is part of a much bigger wedge that has been driven between the financial system itself and the economy.

wedge-02.png?w=1024

 

Comparing 2019 with 2002 (the earliest year for which the data is available), the financial assets of these 23 countries increased by 158%, or $275tn, whilst their aggregated GDPs grew by only $44tn, or 77%.

On this basis, financial assets increased by $6.20 for each dollar of reported “growth”.

It’s a simplification, but a reasonable one, to say that, for these economies, each dollar of growth between 2002 and 2019 was accompanied, not just by net new debt of $2.70, but by a further $3.50 of additional financial commitments. 

What this really means, in layman’s terms, is that debt escalation has been accompanied by a broader – and faster – financialization of the economy. Essentially, ever more of the activity recorded as economic ‘output’ is really nothing more than moving money around.

This is represented in the aggregates by relentless increases in the scale of interconnected assets and liabilities.

The risk, of course, is that failure in one part of the financialised system triggers a cascade of failures throughout the structure.    

The third wedge – the ‘let’s pretend’ economy

By convention, both debt and broader financial commitments are measured against GDP. This would be reasonable if GDP was an accurate representation of the ability of the economy to carry these burdens.

Unfortunately, it is not.

Over the period between 1999 and 2019, trend GDP “growth” of 3.2% was a function of annual borrowing which averaged 9.6% of GDP. The mechanism is that we pour credit into the economy, count the spending of this money as economic “activity”, and tell ourselves that we can ‘grow out of’ our escalating debt burden.

As well as funding purchases of goods and services which could not have been afforded without it, relentless credit expansion also inflates the prices of assets, and this in turn inflates the apparent ‘value’ of all asset-related activities.

The SEEDS economic model strips out this credit effect, a process which reveals that underlying growth in the world economy averaged just 1.4% – rather than 3.2% – between 1999 and 2019. Accordingly, underlying or ‘clean’ output – which SEEDS calls ‘C-GDP’- is now very far below reported GDP. If net credit expansion were to cease, rates of “growth” would fall to barely 1%, and even that baseline rate is eroding. If we were, for any reason, to try to reduce aggregate debt, GDP would fall back towards the much lower level of C-GDP.

Neither is credit-injection the only major distortion in the story that we tell ourselves about economic output. More important still, ECoE – in its role as a prior call on output – is continuing to rise. Incorporating ECoE into the equation reveals that prosperity has stopped growing, whilst the number of people between whom aggregate prosperity is shared is continuing to increase.

In essence, this means that the world’s average person is getting poorer. This happened in most Western countries well before the GFC, and the EM economies have now reached their equivalent point of deterioration.

What began as “secular stagnation” has now become involuntary de-growth.  

We can’t make this hard reality go away by pouring ever more and ever cheaper liquidity into the system. All that monetary loosening really does is to create financial ‘claims’ that the economy cannot meet.

The combined effects of credit manipulation and rising ECoEs form the third wedge – the one that divides economic reality from comforting self-delusion.    

wedge-03.png?w=1024

 

 

The fourth wedge – the quantum of instability

With the reality of flat-lining output and deteriorating prosperity understood, all that remains is to use this knowledge to recalibrate the relationship between a faltering economy and an escalating burden of financial obligations.

Even the ‘fourth wedge’, pictured below, excludes assumed (though not guaranteed) commitments, of which by far the largest is the provision of pensions.

The final set of charts compares debt and broader financial commitments with underlying prosperity. These charts reveal the drastic widening of the chasm between prosperity and the forward promises that the prosperity of the future is supposed to be able to meet. In SEEDS parlance, we are confronted by a massive crisis of ‘excess claims’ on the economy.

With these equations laid bare, we are entitled to wonder whether decision-makers are in blissful ignorance of this reality, or whether they have at least an inkling of what’s really happening and are simply nursing Micawber-like hopes that ‘something will turn up’. Based on the 2008-09 precedent, we can be pretty sure that the “soft default’ of inflation will play a starring role in the coming drama.  

The question of ‘how much do they know?’ must be left to readers to decide. The same applies to quite how soon you think this situation is going to unravel, and whether you want to label what’s coming as a ‘crisis’ or a ‘collapse’.  

wedge-04.png?w=1024

 

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9 minutes ago, sancho panza said:

Next crisis will question the validity of money.

Ta for the edit.  Spot on.  That's the other roadmap.  Re. the above, I was posting this quite a while back - before covid.  Best I keep my remaining roadmap to myself as a matter of public health!

PS:  Maybe Celente will give me a job!

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