Wednesday, June 10, 2020

Unstoppable: The Greatest Depression and the Reverse Wealth Effect

We are entering The Greatest Depression because there is no exit.
I've endeavored to explain why The Greatest Depression is unstoppable in recent posts:
Why Assets Will Crash May 4, 2020
I'll try to summarize all this as simply as possible:
1. The global economy's cost structure has been fatally distorted by central bank policies of inflating asset bubbles and reducing interest rates to near-zero.
2. Earnings from labor have stagnated or eroded since the era of globalization / financialization took off around 2000.
3. Everything costs too much, i.e. is no longer affordable from earnings alone, so the only way to maintain the current costly lifestyle is to borrow money and use it to pay current expenses. This is true for every sector: household, corporate and government.
4. As a result, everyone now needs every dollar of income just to pay their expenses, including interest and principal on their rising debts. There is no slack (buffers) in the system at all.
5. This can be visualized as a row of dominoes. Once the first domino falls, every domino will be toppled.
For example: a worker is laid off and can no longer afford to go to a favorite restaurant. The restaurant's expenses are so high it can't survive on reduced customer traffic, so it closes. The commercial landlord's expenses are so high that he can't afford to lower rents, but since no business can afford high rents, the space is empty and the landlord goes bust. The bank holding the mortgage then has to absorb a staggering loss because the property is no longer worth much because a building without tenants is just a money-pit of expenses and no income.
The once-valuable restaurant business is now worth zero. The once-valuable commercial property is also worth zero because the owner must continue to pay property taxes, local fees and maintenance even if there are no tenants.
The dominoes falling trigger a reverse wealth effect, a topic Gordon Long and I discuss in a new podcast A Reverse Wealth Effect? (41:52). This is important because the wealth effect--the psychological state of euphoria created when one's assets steadily rise in value-- has been a core driver of consumption since the Federal Reserve transformed the economy into a Bubble-Based Economy in the late 1990s.
When we feel wealthier because our assets are rising, we're increasingly likely to tap that newfound wealth by borrowing money to fulfill our desires for inessential goods and services. Since the Fed has suppressed interest rates, the cost of borrowing against one's house or buying a new car seemed remarkably affordable, especially compared to the big increases in wealth generated by rising assets.
Unfortunately, while the wealth effect can reverse, debts have to be paid regardless. Debt payments are forever while the wealth effect is fleeting.
The current mass delusion is that the Fed can bail everyone out with cost-free cash. But we have to keep in mind what the Fed can't do:
1. It can't reverse the unprecedented wealth inequality its policies have pushed to the point of civil breakdown.
2. It can't make people take on the risks and heartaches of starting new businesses.
3. It can't force employers to hire more employees.
4. It can't make unprofitable businesses profitable.
5. It can't force people to buy assets at prices that no longer make financial sense.
6. It can't make insolvent businesses and local governments solvent.
7. It can't force people who now realize their priority is to save money to spend their cash, even if the Fed forces negative interest rates so it costs money to have savings.
8. It can't lower the unaffordable cost structure of the entire economy.
9. It can't de-link all the financial dependencies in the financial system that make it so vulnerable to the first domino falling.
10. It can't stop people from selling their assets.
In summary, it can't stop the reverse wealth effect. We are entering The Greatest Depression because there is no exit. Either the phantom wealth of asset bubbles completely vanishes, or the phantom purchasing power of fiat currency vanishes. Both paths lead to the same destination: systemic collapse.
Recent Podcasts:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, Donald B. ($100), for your outrageously generous contribution to this site -- I am greatly honored by your steadfast support and readership.
 
Thank you, Creedon M. ($50), for your superbly generous contribution to this site -- I am greatly honored by your support and readership.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


Our Privacy Policy:


Correspondents' email is strictly confidential. This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative). If you have other privacy concerns relating to advertisements, please contact advertisers directly. Websites and blog links on the site's blog roll are posted at my discretion.


PRIVACY NOTICE FOR EEA INDIVIDUALS


This section covers disclosures on the General Data Protection Regulation (GDPR) for users residing within EEA only. GDPR replaces the existing Directive 95/46/ec, and aims at harmonizing data protection laws in the EU that are fit for purpose in the digital age. The primary objective of the GDPR is to give citizens back control of their personal data. Please follow the link below to access InvestingChannel’s General Data Protection Notice. https://stg.media.investingchannel.com/gdpr-notice/


Notice of Compliance with The California Consumer Protection Act


This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising. If you do not want any personal information that may be collected by third-party advertising to be sold, please follow the instructions on this page: Do Not Sell My Personal Information


Regarding Cookies:


This site does not collect digital data from visitors or distribute cookies. Advertisements served by third-party advertising networks such as Investing Channel may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative) If you have other privacy concerns relating to advertisements, please contact advertisers directly.


Our Commission Policy:

As an Amazon Associate I earn from qualifying purchases. I also earn a commission on purchases of precious metals via BullionVault. I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP