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Saturday, October 27, 2018

The myth of the eternal market bubble and why it is dead wrong



By Brandon Smith

Economic collapse is not an event — it is a process. I've been saying this since the 2008 crash, and I suppose I will keep saying until it burns into people's minds because I don't think that it is a widely understood concept. When alternative analysts talk about financial collapse, we are not talking about something that suddenly happens out of the blue, we are talking about an ongoing decline that occurs in stages. This decline is happening today in the U.S. and around the world, and it has been accelerating since the chaos of 2008. When we bring up the reality of collapse, we are referring to something that is happening now, not something waiting on the distant horizon.

The reason why some analysts can see it and others cannot is most likely due to the delusions surrounding market bubbles. These fiscal fantasy worlds are artificially created by central bank intervention and represent and attempt to mislead the populace on the true health of the system — for a limited time. Analysts with foresight see beyond the false data of the bubble to the core economic reality; other people see only the bubble and nothing else.
When it comes to stock markets, bond markets, forex markets and the general casino economy, much of the public has a terrible inability to look beyond the next month let alone the next year. If the markets look good now, the assumption is that they will always be good. If the central banks have intervened for the past 10 years, the assumption is they will intervene for the next 10 years.
There is no accounting for why the bubble exists in the first place. That is to say, most people including most economists do not consider that these bubbles serve a particular purpose for the banking elites and that this purpose has an expiration date. All bubbles collapse, and the reasons why they collapse are observable and predictable.
Still, the delusion persists that all this talk of "collapse" is simply "doom and gloom," an event that might happen many years or decades from now, but it's certainly not a threat taking place right in front of our faces. I attribute this fallacy to several popular misconceptions and propaganda arguments, and here they are in no particular order...

Fallacy #1: Central banks will continue to prop up markets indefinitely

The newest generation of market traders and economists were still in high school and college when the 2008 crash hit equities. For the entirety of their careers, they have seen nothing but an artificial economy supported by ongoing stimulus from central banks. They know nothing else and know little of history and thus they cannot fathom the possibility that central banks will one day pull the plug on their fiat life support.
The problem is that 10 years of stimulus is nothing more than a mild pause in the process of fiscal collapse of a civilization. In fact, the economic decline of nations could be represented as a series of imploding bubbles; each one lasting perhaps a decade, leading to more power and control for central banks and less prosperity for everyone else.
Recession history
Anyone examining the history of recessions and depressions in the U.S. since the inception of the Federal Reserve in 1913 can easily see a steady pattern of artificially inflated asset values followed by pervasive downturns that siphon wealth from the middle class. This wealth never returns in full. Each new downturn cripples the financial independence of the citizenry a little more, while international banks absorb more and more hard assets.
What mainstream economists don't seem to grasp is that central banks and international banks are always positioned to benefit from the crash of the bubbles they create. It is the reason why they inflated the bubbles from the very beginning. Central banks are not afraid to allow markets to plummet, they want markets to plummet. The banks simply want to be sure they are set up for optimum benefit when they do crash.

Fallacy #2: Central banks will never stop stimulus measures

I'm not sure why this fantasy persists despite all evidence to the contrary, but it does. Even today, I still receive letters from people arguing that the Fed will "never" end stimulus, never raise interest rates and never cut their balance sheet. Yet, this is exactly what is happening.
I heard the same arguments years ago in 2013 when I predicted that the Fed would in fact taper QE. I heard them in 2015 when I predicted that the Fed would raise interest rates. And I have heard them for the past year after I predicted the Fed would continue cutting assets from their balance sheet.
There are some people that might claim that there is no way for us to know if the Fed is actually cutting off stimulus to the economy because we have no way to audit their activities. While it is true that we do not have access to their legitimate records, only those they release to the public, we can see the affects that their policies produce. Meaning, it is obvious that the Fed is in fact cutting support to the markets given the behavior of those markets the past year.
Emerging market stocks are crashing as the Fed announces continuing balance sheet cuts. Treasury yields are spiking at historic rates and interest costs are rising on everything from car loans to mortgage loans as the Fed increases interest rates. Foreign investment in U.S. Treasurys (or lack of investment) has become a major point of concern because QE support for T-bonds is gone. Massive corporate debt loads not seen since 2007/2008 are becoming more expensive as interest rates expand.
This month Fed Chairman Jerome Powell ended all speculation on the matter when he indicated that the Fed would not only continue raising rates up to the neutral rate (where interest meets inflation), but that they could continue raising rates well beyond that. The blind faith based market is truly over.
All evidence suggests that fiscal tightening is indeed happening. Some people refuse to see it because their biases prevent them from doing so. Perhaps they are heavily invested in U.S. stocks and don't want to believe that the party is over. Perhaps they are incapable of admitting when they are wrong. It is hard to say. They argued for years that the Fed would never take the punch bowl away and they have been proven incorrect, but until they suffer direct consequences to their pocketbooks, they will not accept reality.

Fallacy #3: The Fed will return to stimulus Japanese-style

This is a very common claim designed to build false hope in markets. Bull rally hucksters and their followers has become so used to the easy life of "BTFD!" (Buy The F#$&ing Dip!) that they will apply any rationalization no matter how absurd in order to keep the fantasy going.
The claim is that because Japan's stimulus measures have been "successful" in keeping their markets afloat for at least two decades, this is the most likely strategy for the Fed and other central banks as well. What these people have not considered, though, is the speed at which Japan's central bank bought up assets versus the speed that the Fed bought up assets.
The Bank of Japan's balance sheet reached around $4.7 trillion (U.S.) at its peak, and as mentioned, this took decades of accumulation. The Fed's balance sheet hit $4.5 trillion in the span of only eight-10 years.
There is a point at which asset purchases and stimulus simply do not have the same effect on markets as they did when those purchases began. Debt starts to weigh heavily on further market gains over time. There is a reason why the Fed is choosing to implode the bubble now — time is running out and they want a controlled demolition rather that a crash with a mind of its own.
The printing press is not magical; the basic rules of economics and mathematics still apply.
I've also heard the argument that because US GDP is so much larger than Japan's, comparing their central bank balance sheets is "not practical." Meaning, the U.S. has a larger GDP, therefore the Fed should be able to increase its balance sheet much further than Japan has. This claim obviously relies on the notion that "GDP" as it is calculated today is an accurate measure of how much debt burden a nation can carry.
If you consider Japan's manufacturing capability alone, the U.S. with all it's outsourcing pales in comparison in terms of economic resiliency. If you also consider that every time the government spends tax dollars these programs are often added to GDP as a form of "production" (this includes Obamacare), then the idea of GDP becomes a joke. The point being, it does not matter how healthy a nation's GDP appears to be, their central bank can only create so much debt before it begins to drag down the core economy. The Fed has reached that limit.

Fallacy #4: The Fed Can Hyperinflate Markets Perpetually

This is the last-ditch delusion used by stock market addicts and disinformation peddlers to assert that the current bubble can and will be propped up for many years to come, even after the rest of the economy is in dire regression. It is based partially on historic examples of fiscal collapses that led to inflation. Sometimes this inflation flows directly into stock markets while the rest of the system sinks, due to investors looking for a safe haven and also due to central banks manipulating asset prices. This occurred in Weimar Germany during the hyperinflationary route of the 1920s, however, people who make this argument do not know the actual history of that collapse.
Germany did indeed see a considerable stock market rally just at the peak of the hyperinflationary crisis, but this period only lasted from 1924 to 1927. In 1927, the Federal Reserve, France and the German central bank intervened to deliberately crash the bubble. While central bankers today still assert the lie that the cause of this downturn was the gold standard, the truth is that it was central bank tightening of monetary policy into an already unstable economic environment that caused the crash.
An interesting article on this issue for those that would like a better historical reference is 'With a Bang, Not a Whimper: Pricking Germany's "Stock Market Bubble" in 1927 and the Slide into Depression' by Hans-Joachim Voth.
Does any of this sound familiar? It should. This is exactly what the Fed is doing today.
In the U.S. for the past decade we have already witnessed our period of inflation in stock prices. Now, the central bank is collapsing the bubble, just as they did in Weimar Germany, just as they did here in the U.S. during the Great Depression as Ben Bernanke admitted in 2002, just as they have done in every market bubble for the past century.
There is no eternal market bubble. There never will be. If not for the reason that economic fundamentals make it impossible, then for the reason that crashing these bubbles benefits globalists and banking elitists.
The goal? I believe the goal is to consolidate total power over production and labor using the deliberate institution of a poverty-based civilization. Beyond that, the goal is to make the populace perpetually desperate to the point that they are socially malleable. In order for the bankers to establish what they call their "New World Order," they need chaos to tenderize the masses, but they also have to be seen as saviors that deserve to be in a position of authority over the global economy. The need to create disasters so they can then ride in on their white horse and save us from those disasters.
Why would central banks continue to perpetuate market bubbles when the destruction of those bubbles gives them opportunities for greater power?

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