Saturday, January 19, 2013

Uncontrolled credit expansion – the lit fuse.

Mr. Hugo Salinas Price takes Ambrose Evans-Pritchard to task by distinguishing between a system and a process, the gold standard being a system, and President Nixon's reneging on the U.S. promise to redeem gold at $35 an ounce initiating a process.

The distinction between a system and a process is critical. A system is like a billiard table without side pockets, to use Mr. Salinas's example. The balls on the table cannot travel past the sides of the table. A process, however, has a beginning and an end. Again, to use his example, a firecracker begins with a lit fuse, proceeds to a detonation of the powder, is followed by a rapid expansion of gas, and ends with a rapid collapse of the gas envelope.

If you believe that gold imposed the basic restrictions of a system, you can only believe that Nixon's delinking of the dollar left the world without a monetary system, unless you are able to identify a replacement system that was put in place and that imposes limits on credit expansion now. Failing the imposition, creation, or choice of such a new system, we are left with a situation in which credit expansion takes place with no boundaries, no limits, and no fail-safe barrier.

And it's not just a national problem:

What we have had since 1971 is an explosive process of credit creation in the world. Total world debt is calculated to be 350% of world GNP.

The explosion – like the explosion of a fire-cracker – is now entering its collapse phase. There is no way to avoid the collapse: world debt of 350% of world GNP is unsustainable. There is absolutely no way out of this. . . . The pain of the coming collapse will be ghastly.

It will be educational to see how those responsible for the present disaster explain away the cause: unlimited world credit expansion.[1]

The graph in Mr. Salinas's article illustrates the dramatic expansion of world credit. The right side of the graph (current situation) disappears into Jack in the Beanstalk territory. Isn't there a Wiley Coyote moment when we find we can't remain suspended in the air and our temporary exemption from the laws of financial gravity comes to an end? Answer: yes, there is.

Moreover, is there any phenomenon that graphs in this way that has the curve descend gracefully down the other side of the peak as the result of wise policy and a general awakening?

Funny I should mention wise policy and a general awakening. The essence of the Obama approximation of "wise policy" is "tax the rich" and "stimulate yet more [with QEx and near-zero interest rates, i.e., credit expansion]."

And as far as general awakening goes, the electorate that twice elected the constitutionally unqualified man with the forged birth certificate and Social Security number of a dead man -- plus the stink of communism and Islam on him -- can hardly be said to be awake in any meaningful sense.

Mr. Salinas's graph is a warning flag like no other, but it yet fails to resonate. At a time of fiscal conflagration, Americans by the millions voted for the man with the thimbleful of water who may or may not know that there's a fire. Or care, odd as it may seem to entertain the possibility of a national leader actively hoping for a comeuppance for his own people. "Own" being the operative misnomer here.

And the trajectory, the course, the direction of the process continues unabated and undebated . . . .

Take away points: a process is what we are witnessing, debt has accumulated immensely, processes come to an end, and geometric expansion almost certainly contracts geometrically.

[1] "Ambrose Evans–Pritchard beats about the bush." Hugo Salinas Price, Moneda de Plata para México, 1/18/13.

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