(This is Part 10 in a series. Go back to Part 9.)
Readers of this series are aware that the world is now sitting atop the greatest financial bubble in history, a great global credit bubble that dwarfs all other financial bubbles that ever existed.
Further, readers are aware that all financial bubbles in history have eventually collapsed, because they reach a point where they can only be sustained by greater and greater injections of money or credit, a self-reinforcing process that eventually breaks down.
During the early and middle stages of a financial bubble, increases of money and credit act as a stimulus to the economy. It is a false stimulus that creates distortions, but a stimulus nonetheless.
However, during the later stages of a financial bubble increases in money and credit actually begin to act as a drag upon the economy as debtors of all kinds find debt payments increasingly difficult or impossible.
This latter stage can now be seen in countless emerging market countries across the globe that are staggering under unsustainable debt loads. It can be seen in virtually every statehouse in the U.S. as states and cities struggle with historic deficits.
It can be seen in the fact that it now takes $5 in new debt to create $1 in new GNP, a record. It can be seen in the highest debt-to-income ratios in history as consumers wobble under almost $10 trillion in debt.
It can be observed in the U.S. government's twin deficits —budgetary and foreign—which now total over a trillion dollars per year. And this, of course, during the lowest interest rates in 45 years. What happens to this mountain of debt when interest rates rise? The government appears headed towards a crisis.
And despite government statistics, which appear designed to lull everyone to sleep, a trip to the grocery store, the insurance agent, the hospital or the gas station is sufficient to acquaint us that inflation is seriously picking up steam. The dramatic increases in M3 only stoke this progression towards hyperinflation.
And war, in which we are only getting started, is always inherently inflationary. Money is added to the economy through the purchase of bombs, bullets, tanks, etc., but no new goods and services are added to the economy. Instead the goods are expended "elsewhere." More money, no new goods in the economy—that's inflationary.
(This is the end of Part 10. Go to Part 11.)
—jim sloman, 6.3.04 for May 16
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