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You can’t go back and you can’t stand still…
Speed is a 1994 American action-thriller movie directed by Jan de Bont. The film stars Keanu Reeves, Dennis Hopper, Sandra Bullock and Jeff Daniels. The movie hinges on a bus rigged with explosives that will be armed if the bus exceeds 50 miles per hour. The explosives will detonate if the bus falls below that speed or if an attempt is made to offload the passengers.
In many ways, this is a parallel to the financial system.
Absent real or natural (non-inflationary) growth, the financial elite are following a bastardized form of Keynesian economics, in which stimulus (more debt) can lead to growth. What we’ve actually seen is very little growth in the wake of unprecedented balance sheet expansion or outright money printing.
While the mechanisms (quantitative easing) seem complex, we should never mistake complexity for confidence or a euphemism for reality (or in this case, money printing).
If they listened to the loudest cheerleaders, we would have careened out of control or triggered the inflationary bomb sooner.
Whether it came from Chinese dumping or higher interest rates pushing banks back into the private lending market does not matter. They are tied together anyway.
More and more debt-based fiat is needed to keep the system alive. Any slowing will crash markets while increasing the current rate of stimulus, which will very likely trigger the confidence end-game.
Lehman 2.0
It is important to separate the economy from the financial system. Nonetheless, they are fatally intertwined. Academia and most modern economic analysis are unable to perceive this flaw, given the massive expansion of finance and credit over the last few decades.
Solvency now depends largely on the stock and flow of credit and good collateral underlying. Without the fuel from collateral (a promise) rates rise, credit slows, and the risk of derivative melt-down increases.
However, if the fuel is removed too quickly, detonation occurs among artificially inflated assets. This situation potentially further distorts growth and chokes off any remaining tax revenue. At this point, the Fed would be called in with fire hoses to keep the government running; thereby blow up all asset prices as a result.
Non-linear system
Unfortunately, it is even more precarious because the systems that depend on the flow of free money are exponentially tied once triggered in either direction.
As the Fed continues to compete for REPO market collateral through its ongoing bond-buying spree, short-terms rates will rise. This will result in a significant slowdown in credit.
A credit freeze would trigger defaults along a daisy chain of over-the-counter, unregulated derivative transactions that break the back of whatever confidence is left in the system.
Economies are living systems
However distorted by finance, the basic foundation of commerce is a natural phenomenon which makes it nearly impossible to control.
If you are not growing or evolving, you are dying.
The time to prepare is not only now, but always. Same applies.
Preparation is accumulation, and while you cannot “eat” precious metals, the basic premise is easy enough to understand. Those lucky enough to experience the physical weight of wealth and its responsibility understand the broader, more abstract implications.
