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Collapse Something or Other …

Collapse Something or Other … thumbnail

Discuss this article at the Economics Table inside the Diner


The Christmas present nobody wants sits under the tree: a worldwide finance crisis along with an establishment that appears to be coming apart at the seams.

The status quo is unraveling from all sides, at the top especially, where managers cannot conceal their panic:




“Every banker knows that if he must prove he is worthy of credit, however good might be his arguments, in fact his credit is gone.”

— Walter Bagehot


The government marshals its forces of borrowing in order to prop up the lenders as per usual. Yet, the lenders have been propped up for years. The bosses demand lower lending rates even as these same rates are at- or below historical lows. What more can be done and to what end? The rates and props deployed during and after prior crises have contributed to the immediate peril as well as everything that has led up to it. There is no cure to be had in additional doses of the same poison that currently looks to kill us.

By questioning whether lenders are worthy of credit the Secretary sinks his own battleship: “Every banker knows …” well, perhaps not. He inadvertently reveals truths: that lenders are vital but are also vulnerable. Vital in that our economy does not pay its own way, it cannot. The industrial economy is reductive rather than productive: its primary ‘good’ is entropy. Business relies on the continuing increase of bank money to draw future resource capital toward the present. Without the lenders and the credit they provide the modern, industrial economy stalls then comes undone. If our economy could meet its own expenses out of cash flow it would do so. What the Secretary admits without doing so directly is our economy cannot afford itself.

That we cannot afford our economy is its immediate vulnerability. Asymmetries within the lending regime such as maturity mismatches make it fragile. The regime depends on a marginal agent or class of agents that sets conditions for all the others. Keynes notwithstanding, a certain level of borrowing restraint, something short of universal borrowing has little affect on the system as a whole. But, some percentage of economic agents must borrow with a fraction of that borrowing deployed to service and retire existing debts. Small leaks- or water over the top of a dike will not damage it but one small leak too many will wash the dike away. In the same way, a small percentage of non-performing loans or defaults is tolerable to the system, a portion of lender reserves and equity is set aside to resolve these as they appear. Then, there is one default too many for whatever reason … this is disaster! The ‘capital’ structure of the lender is upset; this calls into scrutiny the capitalization of all other lenders that are similarly situated. Uncertainty is rapid and corrosive, given time it widens into a self-amplifying spiral of insolvency. This is what occurred in 1929 and 2008 and what looks to be underway right this minute.

Compounding the problem, the marginal borrower is impossible to identify or for immediate institutional convenience is disregarded. The tiny leak with the potential to destroy the dike can be one of any (very large) number. Globalization has rendered the marginal agent opaque; official denial and central bank happy talk permits known problems to fester. The marginal borrower can be an individual or a firm, or a class like Chinese peer-to-peer lenders, Italian footwear manufacturers or Spanish residential real estate speculators and the banks that supply these with funds. Eventually, all of them together become marginal. Structured finance operates outside the reach of policy makers at the same time are tightly bound to all the others by way of swaps, corresponding- and exchange lenders, counterparty agreements, derivatives-based hedges and money markets. Like a flood, marginality propagates outward, with the ‘new’ marginal borrowers becoming major banks, dark money pools, bond- and derivatives market makers, national governments and foreign exchange. In any event, agents cannot be compelled to borrow and in a crisis refuse to do so. Insolvent, zombie-like walking dead firms which continue to borrow/lend in the aggregate are lethal to the regime: they can only offer the (fraudulent) appearance of a cure while delaying the inevitable reckoning. Accounts cannot be overdrawn indefinitely, it is impossible to borrow out of debt. “If something cannot go on forever, it will stop,” says economist Herbert Stein. No amount of marginal borrowers can rescue a system that is foundationally bankrupt.

… this is after hundreds of trillion$ have been borrowed around the world already. The simple fact of the trillions suggests the managers are inept and perhaps insane. Our debts have grown beyond human scale, even the billionaires all together cannot hope to retire them, in fact their borrowings have contributed significantly to the total. Along with their managers, these stupendous debts fade to irrelevance in the practical sense; they can never be repaid. They are empty claims against resources that have long since been converted into useless waste. Machines that are dependent upon credit for their very existence cannot repay, certainly not labor which is feeble; which is otherwise depreciated, subordinated and oversupplied.

This is all part of the current crisis, it may indeed be its entirety. Whether the markets are repricing (in)competence, (in)solvency, systemic bankruptcy or perhaps all of the above; it is too soon to tell.

Figure 1: What is our over-extracted world worth? The underlying problem is resource stripping and its consequences. If that is being priced in right now we are in big trouble. Chart by TFC Charts (click on for big). The current crisis could not be predicted as was the oil price plunge in 2014, but it was inevitable nevertheless. Our economy requires cheap oil to run but the cheaper oil is exhausted, what remains is unaffordable. Low cost credit has offered the (fraudulent) appearance of a cure … but it has only delayed the inevitable reckoning.

A few years ago, the oil price that triggered crises was over $100 per barrel. We have been creeping toward a crisis for the past several months at $80 per barrel. Time and waste leave us less wealthy than we pretend to be …

Figure 2: Compare the likely crisis price suggested a few months ago. We clearly cannot afford $75 oil, higher prices are out of reach. At the same time, the drillers cannot stay in business selling their product below cost. What is common = access to credit which turns out to be the means by which resources are allocated. The customers are broke.

“Take an online survey and answer all your own questions!”

Doomstead Diner

17 Comments on "Collapse Something or Other …"

  1. makati1 on Tue, 8th Jan 2019 5:49 pm 

    DEBT! DEBT! DEBT! The collapse is ongoing. We are going to slide down the slippery slope faster and faster with bumps and drops until it hits bottom. That is what TPTB want. Buckle Up!

  2. JuanP on Tue, 8th Jan 2019 6:29 pm 

    Of course most of today’s debt will not be repaid in full.

    So many things that we consider essential and important today, and most people assume will continue forever, will be gone before this century is over. Maybe we, as a species, will be gone, too. The basics will rule the day. Life will be all about regulating body temperature, hydration, nutrition, and safety. Everything else will be clearly recognized as not a need.

  3. makati1 on Tue, 8th Jan 2019 6:40 pm 

    JuanP, I agree although I think you are optimistic on your timeline.

    “…things that we consider essential and important today…” will be gone before 2050 and maybe 2030. We shall see. Meanwhile, We are on the roller coaster and cannot get off so enjoy the ride. I am.

  4. Cloggie on Tue, 8th Jan 2019 10:51 pm 

    Perfect storm brewing in Britain where both major parties both for themselves are split in the middle about Brexit.

    Like in the US, Remainer Tories are threatening a government shutdown in order to sabotage preparations for a no-deal Brexit:

    The deadlock is now complete. Solutions…
    – Tories breaking apart
    – Scotland seceding
    – Civil war
    – Britain crashing out of the EU and at the same time doesn’t
    – London declaring itself an EU town
    – Remainer backbenchers in Tory and Labour party plotting for national government

    The position of May is getting weaker and weaker.

    It is political drama of the highest order. Kevin Stacey loves it.

  5. Here we go again on Wed, 9th Jan 2019 6:30 am 

    You mean a double click on the computer mouse can’t fix it all? Must need an update.

  6. Antius on Wed, 9th Jan 2019 6:49 am 

    A good article referenced below that shows just how untrustworthy the BBC really is.

    Nobody should trust these people for news on anything. They fabricate information to push an undisguised Marxist and anti-white political agenda. To make matters worse, British people face compulsory licence fees to pay for this garbage.

  7. Antius on Wed, 9th Jan 2019 6:53 am 

    Two articles that indicate how difficult it will be for any yellow nationalist revolution to occur in Europe.

    Nationalists face an uphill struggle trying to convince the electorate of the need for change, when even discussing the matter could land them in prison.

    The left will happily burn the last traces of human liberty in order to hang onto power. Sadly, we are close to the point where the only way to achieve political change is with guns and bullets.

  8. Sissyfuss on Wed, 9th Jan 2019 8:52 am 

    You’re going full on Orwell now, Antius. The power brokers have their agenda set and only a complete repudiation by the largest of majorities will be able to move it a centimeter. The US will gladly arm the populace for a price. Sticks and stones will not get the job done.

  9. JuanP on Wed, 9th Jan 2019 9:32 am 

    My position on Brexit has always been that a no deal Brexit is the most likely outcome, and it has not changed. The reason why I believe this is that the political institutions involved in negotiating a deal are extremely corrupt and inefficient, and will not be capable of negotiating a reasonable deal. I believe in localization so I support Brexit. The Brits are very lucky that they have their own currency. The whole world is facing hard times. Brexit is just another baby step in this process. If I lived in the UK or Ireland I would pay more attention to this issue, but it doesn’t affect me personally in any way so I have mostly ignored it. Some light prepping might be in order for people living there. Good luck to everyone affected! Remember you are not alone, we are all in the same boat; every single one of us. We are living the end of the beginning and facing the beginning of the end.

  10. Antius on Wed, 9th Jan 2019 11:31 am 

    Holy crap! JuanP said something that I agree with! He even wrote it under his own name. Today is a day of days.

  11. roccman on Wed, 9th Jan 2019 1:41 pm 

    When the kings and potentates of Bronze Age Mesopotamia realized that interest-bearing debt was a cancer that would inevitably destroy first the lower classes and then the entire kingdom (or empire, or whatever form of government they were using at the time) they reacted, forcefully and logically. They cancelled all debts, periodically.

    Not merely once every 49 years, as the Bible would later recommend, but every once in a while — when a new king took the throne, on an anniversary of the empire, or because it was Thursday (the seven-day week was first defined by the Babylonians). Every esoteric language used in the region for more than 2,000 years has a term for the practice, as Dr. Michael Hudson explains in his new book And Forgive Them Their Debts: Lending, Foreclosure, and Redemption from Bronze Age Finance to the Jubilee Year(ISLET 2018). As Dr. Hudson translates it, the term is “Clean Slate Amnesty.”

    A Clean Slate Amnesty proclamation (of which many examples survive — one of which is reproduced in triplicate on the Rosetta Stone) cancelled all outstanding interest-bearing loans; freed from bondage all those who had been enslaved because of debt; and restored to the original owner land that had been foreclosed upon. They did this often, they did it in different times and in many different countries, whenever the cancer of debt began destroying the health of their economy. As a result, writes Dr. Hudson:

    “By liberating distressed individuals who had fallen into debt bondage, and returning to cultivators the lands they had forfeited for debt or sold under economic duress, these royal acts maintained a free peasantry willing to fight for its land and work on public building projects and canals…. By clearing away the buildup of personal debts, rulers saved society from the social chaos that would have resulted from personal insolvency, debt bondage, and military defection”

    The mere idea makes all of western civilization go rigid with moral indignation. It is, we have all been taught for centuries, immoral to fail to pay one’s debts, in fact it is the very definition of immorality. Which is not surprising when you realize that in many languages, the word for “debt” and the word for “sin” is the same word.

    The rulers of Mesopotamia, on the other hand, regarded it as immoral to allow people who preyed upon the least fortunate of the people to destroy not only the poor people but the country. They apparently thought it immoral to make a loan that the borrower clearly would not be able to repay, so that the lender could foreclose on him and his land and his family. It was immoral, they thought, to allow an ever-widening wedge to be driven between the wealthy lenders and the poor borrowers, until the deprived borrowers had nothing left to do but emigrate, revolt or die.

    The wisdom of the Bronze Age in Mesopotamia was to treat debt as if it were a tumor, to be surgically removed whenever it got too big, for the good of the body politic. It is a point of view, and a course of action, so utterly at odds with the conventional wisdom of many generations, that we almost can’t conceive of it. The practice was unknown to the foundational philosophers of our time, from Karl Marx to Adam Smith to the founders of the American Republic. (As far as I can tell, the seldom observed Jubilee discussed in the Bible (Leviticus) and in Hebrew tradition is not the same thing as Clean Slate Amnesties.) It never occurred to them as an option, and so it never occurs to us.

    For the same reason, it seems, that we can’t conceive of butter being better for us than margarine: because we are victims of a long and successful PR campaign by greedy, ruthless people. By about 1,000 BCE, wealthy lenders had apparently learned how to reach out and touch political decision-makers, with the result that by the time of the rise of the Greek city-states and the Roman Empire, after 800 BCE, Clean-Slate proclamations were ever more rare, interest-bearing loans became more permanent, and their repayment became a sacred obligation not to be forgiven by anybody.

  12. I AM THE MOB on Wed, 9th Jan 2019 2:39 pm 

    Hey Antius remember zerohedge duped you into thinking the cons were going to win back the house..I tried to reason with you but you are too fucking stupid..

    Only guns your kind will be using is on yourself when the oil and gasoline shortages hit..

  13. Cloggie on Wed, 9th Jan 2019 4:03 pm

    “Italy and Poland discuss UNITING to form an anti-EU alliance and lead a ‘European spring’ to replace the ‘French-German axis'”

    The headline is misleading, what Italy and Poland really want is not ending the EU, let alone European cooperation, but ending multicult and aim at a European Europe rather than letting Merkel invite the entire world.

    Brexit saga… I’m already looking forward at watching BBC’s Newsnight in 30 minutes, what a spectacle it is. Far more interesting than House of Cards season 5, I have standing by, has to wait for the real deal.

    The Dutch 20:00 news opened with Dutch hospitals beginning to fear a no-deal Brexit. Of 6.5 billion euro worth of medicines, 2 billion comes from the UK. Now what.

    BA will remain to be seen as British and little tricks will not enable BA to fly between continental European cities in case of a no-deal Brexit.

    The Brexit vote is next week and even Tess May has hinted that even she finds it unlikely her deal will pass the house. Pressure is mounting for a April 4 mountain snap election:

    Note, that election would be after the 29 March departure date.

    Remainers demand a plan B from May, 3 days after the likely defeat of the Brexit vote:

  14. makati1 on Wed, 9th Jan 2019 5:47 pm 

    Sissyfuss, JuanP and Antius, I totally agree.

    “The left will happily burn the last traces of human liberty in order to hang onto power.”

    “The US will gladly arm the populace for a price.”

    “We are … facing the beginning of the end.”

    Well said.

  15. makati1 on Wed, 9th Jan 2019 5:56 pm 

    Again, worth your time…”You repel the attack, the guys run leaving behind trails of blood and stuff. You still have to live THERE. Perhaps with women, elders, children, perhaps someone ill, injured or disabled – and now there are a good number of “neighbors” (the bad kind) all p***ed off and humiliated.

    Because that is how the criminal thinks: if someone stops them, they FEEL humiliation. This makes them angry. This makes them even more dangerous. They have plenty of time to plan another attack, though.

    What you can do to avoid it, is something that everyone has to resolve on their own. I would leave some stuff in their path, something enough for them to consider a success. Next time, they would find something less…with a note. Perhaps some crossed long bones that mimic human ones or something creative.”

    BTW: A Crossbow, or more, is a good idea. I have several and know how to use them. Deadly and silent.

  16. makati1 on Thu, 10th Jan 2019 12:09 am 

    “America, meet your new dictator-in-chief: imperial, unaccountable and unconstitutional.”

    “Anytime you have an entire nation so mesmerized by the antics of the political ruling class that they are oblivious to all else, you’d better beware.

    Anytime you have a government that operates in the shadows, speaks in a language of force, and rules by fiat, you’d better beware.

    And anytime you have a government so far removed from its people as to ensure that they are never seen, heard or heeded by those elected to represent them, you’d better beware.”

    Slip slidin’…

  17. Dredd on Thu, 10th Jan 2019 11:19 am 

    Collapse or not is a matter of accurate calculation (The Ghost Plumes – 7).

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