The Illusion Of Stability, The Inevitability Of Collapse

Imagine being at a party celebrating the vast wealth generated in the last ten months in stocks, cryptocurrencies, real estate, and just about every other asset class. The lights flicker briefly but the host assures the crowd the generator powering the party is working perfectly.

Being a skeptic, you slip out on the excuse of bringing in more champagne and pay a visit to the generator room. To your horror, you find the entire arrangement held together with duct tape and rotted 2X4s, the electrical panel is an acrid-smelling mess of haphazard frayed wire and the generator is over-heated and vibrating off its foundation bolts. Whatever governor the engine once had is gone, it clearly won't last the night.

The party is the U.S. economy, and the generator room is the Federal Reserve, its proxies, and the U.S. Treasury, all running to failure. What we're experiencing in real-time is the illusion of stability and the inevitability of collapse. I've prepared a few charts to illuminate this reality graphically.

Here's the illusion of stability in a nutshell: while the broadest measure of the economy, gross domestic product (GDP) has continued marching higher (in both nominal and real/inflation-adjusted terms), the amount of Federal Reserve stimulus and Federal debt required to keep pushing GDP up at the same rate has exploded higher and is tracking a parabolic blow-off.

Let's start with a chart of GDP, which I've divided into four eras. Era #1 was the period of broad-based prosperity, defined as productivity gains that increased wages faster than inflation, i.e. the purchasing power of wages rose so each hour of labor bought more goods and services. Note that the GDP was not skyrocketing in this period, as the gains in productivity and prosperity were real and not based on financial trickery, debt, leverage, or Fed stimulus. This era lasted from the 1950s through the mid-1970s, at which point stagflation put an end to the era of rising purchasing power of labor/wages.

Era #2 began around 1981 and lasted until 1999: this was the era of financialization when debt and leverage replaced productivity as the source of profits and as a result speculation, leveraged buy-outs, and other financial gimmicks proved far more profitable than actually producing goods and services. A key element of financialization is globalization, as the big profits only flow when a debt, risk, income streams, and phantom financial instruments can be commoditized (i.e. produced, packaged, and sold as commodities) and sold globally.

Era #3 was the logical extension of financialization and speculation: the U.S. economy became dependent on debt-asset bubbles for its "growth" and expansion of phantom wealth. Bubble #1, the dot-com speculative frenzy, imploded in 2000, and Bubble #2, the debt-housing speculative frenzy, imploded in 2008.

Era #4 is the logical extension of the bubbles popping: a permanent Fed-fueled speculative frenzy that requires ever greater quantities of Fed stimulus and federal and private debt, and ever-larger extremes of speculative frenzy to keep from imploding.

Here's nominal GDP: it looks great until we look beneath the surface.

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Disclosures: None.

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James Hanshaw 2 weeks ago Contributor's comment

Excellent article. 

William K. 2 weeks ago Member's comment

Rather a more detailed statement of what I have been saying for quite a while.  We really need to force the federal reserve bankers to tell the truth about their actual agenda, and then reward them appropriately.