by Charles Hugh Smith, Of Two Minds:
As the inverted pyramid collapses, the effects will be non-linear.
Round about late March, we entered a Financial FantasyLand in which all the sins and excesses of rampant financialization were going to be painlessly washed away. Mever mind the entire U.S. economy is an inverted pyramid of balance-sheet “value” and debt resting on a shrinking foundation of collateral; everyone would be made whole in the Federal Reserve’s Financial FantasyLand.
You are now leaving FantasyLand: trillions of dollars of phantom value have already vanished, and these catastrophic losses will be taken by somebody. The question is: who will get the concrete overshoes? Whose balance sheets will collapse to negative numbers, erasing all their phantom wealth?
Everyone was delighted to suspend reality and entertain the fantasy that there was a cost-free way to bail out financialization’s greed-soaked sinners: The Fed will simply print as many trillions as needed to make everyone whole. Since it doesn’t cost the Fed anything to digitally print endless trillions, this “solution” is completely, totally free.
What an amazing moment of grace: all our sins washed away in a rising river of Fed-printed money. With endless trillions available, everyone can get bailed out forever. Collateral, actual earnings and profits, none of that matters. The Fed’s grace is godlike in its infinite expansion.
This escape from karma, consequence and divine retribution was as temporal as the ride through FantasyLand. The wheel of karma has turned, The Tao is reversing, the banquet of asymmetric, non-linear consequences has been served and the Fed’s godlike powers will be revealed to be as delusional as the “value” and “wealth” that’s piled up in the balance sheets of the top 0.1%.
For there actually is a cost to digitally printing trillions to bail out all the predatory parasites of financialization. Put simply, every dollar that’s digitally printed that isn’t matched by an increase in the productive capacity of the economy, i.e. the means to generate goods and services with less capital and fewer hours of labor, is nothing but a hidden reduction in the purchasing power of every existing dollar.
The idea that the Fed or Treasury can print endless trillions and there will never be any consequence of this fraud is nothing more than a compelling Cargo Cult superstition. Just as South Pacific Cargo Cults painted radio dials on rocks to communicate their desire for the return of Uncle Sam’s shiploads of freebies, the “we can print our way out of any problem” cargo cult paints low inflation numbers and arcane equations on rocks and declares the magic will work: the Fed/Treasury can print as many trillions as we need to bail out every greed-soaked sinner, and there will never be any consequences–never ever, because the painted rocks have magical powers.
Now that we’re leaving Financial FantasyLand, a very hard lesson about non-linearity is about to be learned. In addition to the “we can wash away every sin with endless trillions” fantasy, there’s the fantasy of linearity in non-linear, fragile systems.
The fantasy of linearity holds that a 10% decline in revenues, profits, rents collected, etc. will only cause a 10% decline in isolated parts of the economy. The believers in the fantasy acknowledge that the 10% decline will hurt, but only a bit, and soon Mommy and Daddy (Treasury and Fed) will apply the Band-Aid and it will all go away.
As the inverted pyramid collapses, the effects will be non-linear: a 10% decline may trigger dominoes that end up generating an 90% decline in “value” and “wealth” because the collapse of collateral to a non-fantasy valuation will implode all the phantom valuations piled on steadily more fragile and fantastic layers of phantom “capital.”
The fantasy of the Neofeudal Aristocracy is that the losses can be painlessly transferred to the debt-serfs and taxpaying peasantry. Mommy and Daddy (Treasury and Fed) will load future generations of debt-serfs and taxpaying peasantry with the losses and the political-financial Nobility will have their fortunes preserved. Gee, thanks, Mommy and Daddy! You’re swell!
The Neofeudal Aristocracy overlooks one terribly inconvenient fact: the debt-serfs and peasantry own next to nothing. The non-linear collapse of phantom capital will have asymmetric consequences: all the “assets” most likely to go to zero are owned not by the peasantry but by the Neofeudal Aristocracy.