Things Work Until They Don’t
By: Tom Chatham
As the world begins its next adventure in financial chaos and rolls over to expose its soft underbelly of lies and deceit that have been perpetrated on the public, those that see the truth have been warning the people once again. You can give people the truth but you cannot make them believe it. That is for them to come to grips with.
Trade wars are usually bad for all parties in the end but between the beginning and the end there can be some surprising developments. Human actions and delusions on the part of the public can produce strange results at times. All of our systems are based on trust. When that trust is lost, everything will come crashing down. Until then, things will go on.
If trade tariffs with China have the short term effect of creating American jobs, that could have a wealth effect by creating more disposable income in American pockets. That in turn can have a positive effect on the stock market and consumer confidence. Also, commodities are set to soar in price soon and this could carry the stock market up with it for a while.
Richard Russell once said he believed we would have a third leg in the current bull market before the bears take charge. He was right in the past and could be right again, only time will tell. This situation can not last long due to the enormous mal-investment built up in the system over many decades. A house of cards will eventually fall and the taller the house the longer and harder the fall will be.
One thing that could destroy the temporary high could be the destruction of the financial system due to loss of the reserve currency status and the replacement of the petrodollar system. If and when that happens things will not be looking good for America for a very long time. China is taking actions that could result in just that type of outcome. Their new silk road initiative and oil trading system utilizing Yuan to gold will eventually have serious consequences for Americas standard of living.
Total debts and derivatives in the world amount to 30-50 times of world GDP. The bulk of this is derivatives and when they fail they will become worthless. The 250 trillion or so in global debt will default when asset prices implode and interest rates explode. When the debt bubble explodes stocks could decline by as much as 95%. Interest rates could exceed the 20% rates we saw in the 1970’s.
In the last 100 years the value of major currencies have declined by 97-99 % relative to purchasing power in gold. The last 1-3% will follow very soon. When the financial system collapses due to losses from derivatives and stocks it will erase all of the savings, and retirement funds people were expecting to get at some future date. This will instantly impoverish the bulk of the population.
As the system collapses the banks will likely try to re-inflate assets by massive money printing which will only cause hyperinflation at some point. As hyperinflation kicks in the price of many assets like stocks, bonds, investment properties and art will likely collapse in real terms. Items like gold, silver and productive farmland will likely fare better.
Eventually deflation will carry all asset prices down as the world falls into a global depression, possibly for decades. All of these things will likely result in social unrest and wars as people become hungry and angry at a system they took for granted for so many years. The trust will be broken and people will look for something else to believe in.
One thing is for certain. People today believe anything but reality and that will catch up to them all very soon in a very painful way. Things work until they don’t. Our economy has been rolling along for decades on the stored wealth of previous generations but that is about to run out of steam very soon. When it does it will be a shock to all but a few. You can ignore reality but you cannot ignore the consequences of ignoring reality.