Debt Rattle Apr 28 2014: Why A Market Collapse Would Be A Good Thing

By The Automatic Earth


Russell Lee Love Shack, South Side Chicago April 1941
I’m not going to argue here that a market collapse would be a positive thing no matter what, because the implications of a true collapse would be so deep and widespread that they’re too hard for anyone to oversee. But having said that, truth finding and price discovery are crucial for a functioning economy, and there is not a shred of truth left in the markets nor is it possible to discover anything about any price as a free market would have set it. And that means there’s no trust or confidence left in markets, there’s only a shaky trust in authorities propping them up. Neither of which can last forever.

What are stocks truly worth, what is a fair prices for a home, or a plot of land, an hour’s work, or a year’s crop? Is it what they were valued at in 2006, pre-crash, or in 2010, post-crash, or today in 2014? We can’t really answer that question (which is bad enough), but we can surmise that valuations have been distorted to an extensive degree by all sorts of government measures to stimulate economies and by central banks inserting freshly not-even-minted amounts of what some insist is money and others insist absolutely isn’t, into essentially broke banks, pretending they expect it to trickle down.

And that’s not all. The biggest banks in Japan, the US and Europe (and don’t get me started on China) have been declared “systemic” or too-big-to-fail, a status which absolves them from having to expose their debts to daylight. That means the shares in these banks are of necessity overvalued, and potentially by a lot, because if there were no such losses fermenting away in their vaults, they would be very eager to prove they have no foul smelling debt, since that would greatly boost their – perceived – trustworthiness. We know, therefore, that those bad debts, gambling losses, still exist, in all likelihood a lot of them, and all over the place. We’re talking many trillions of dollars.

And that’s not all either. Since stimulus measures on the one side and the refusal to uncover debts on the other have propped up asset prices to the extent they have, it’s not just the banks’ assets, but everybody else’s assets that are overvalued too. Yes, that includes yours. Not only the shares you may own in a bank or some other company, but also your home, and potentially even your job, it’s all overvalued. In other words, the perceived value of your assets is as distorted by government interference, executed with credit that uses your children’s labor as collateral, as a too-big-to-fail bank’s assets are.

The obvious reaction to realizing that your assets are overvalued, and possibly by a lot, is to think: let them keep going as they are, or I would risk losing my investments, the home my kids grow up in, and maybe my job. However, while running an economy on credit can be useful up to a point, when that credit becomes really zombie money, everyone starts paying a price, and the more there is of it, the higher that price becomes. The difference between credit and zombie money, as thin as the line between them may seem at times, is actually quite easy to discern: the former, if limited to productive purposes, allows for price discovery, while the latter makes it impossible.

Perverted markets give birth to perverted asset valuations. So who wants perversion? Well, the people who own the assets. People like Jamie Dimon, and you. Those who don’t like them – or shouldn’t if they were aware of what’s going on – are the young who can’t get a decent paying job, who can’t find a home to buy or even rent, who have a fortune in student debt hanging around their necks, and who therefore can’t start a family. Plus of course the weak, the needy and the old who rely on fixed income.

Governments and central banks shouldn’t interfere in markets in ways that make it impossible to know what anything is really worth. They should let banks that have too many debts go bankrupt and be restructured; that’s actually a very fine task for a government: to make sure that things are handled fairly, and with no negative impact on their people. But what we see is that this picture has been put upside down: governments seek to make sure that there’s no negative impact on their banks, and use their people’s present and future wealth to achieve that.

But why protect banks? What’s so important about them? Is it that they hold people’s money? That’s easy to get out first in case of a default, before anything else, and to guarantee. Granted, that might also lead to some price distortion, but not anywhere near what we see now. The secret ingredient here is of course that banks create credit/money every time they write a loan, but there’s no real reason why banks should do that, not governments, that set-up has no benefits for society, only for bankers and their shareholders.

I can write and think and philosophize about this for a very long time, and I do find it interesting, but eventually I always wind up at the same point, and that does sort of take the fun out. That is, the road we’re on now is not infinite, and there’s a cliff at the end of it. It always leads back to the value of real things that real people have produced with real work, and the fact that in today’s economy, that sounds almost like a – perhaps cruel – joke. The value of what you and I can produce with our own hands, guided by our own brains, is diminished to a huge extent by the zombie money that can place higher values on things that are achieved by flicking a switch, stroking a keyboard, or just let machines to the whole thing.

It’s one thing to make our work lighter, easier, or enhance our productivity. It’s another to replace it with something else altogether. And then pump central bank zombie money into raising the value of what has just replaced us. Even if we would all have access to all new technologies, you would have to seriously question their value, but once there’s only a select group that has that access, and on top of that it’s got access to public coffers, the only way for society itself is down. And the only way to restore a society’s core values, not as they are perceived today but as they truly are, is to cleanse the economy and the financial system of what distorts and perverts the ability to assess asset values. Which happens to be our own government and central bank’s interference in the financial system.

A collapse of the markets is going to come no matter what. They won’t be able to live forever on a diet of bad debt propped up by central bank zombie money, laid out on a bed of bad faith. And when it happens, sure, it’s going to hurt you, and probably a lot. But then, the sooner it happens, the less it will hurt your children. Isn’t that worth trying to understand why a market collape would be a good thing?

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