Mitigating a Liquidity Crunch
by Nicole Foss
Despite the media talking up optimism and recovery, people are not seeing
the supposed good news playing out in their own lives. As we have discussed
here many times before, the squeeze continues on Main Street, while QE has
generated asset bubbles at the top of the financial food chain. Complacency
reigns, but this is the endgame. Increasingly delusional collective optimism,
based on illusory wealth for the few, has been the driving force for 2013, even
as the smart money has been selling everything not nailed down for most of the
year – cheerfully handing the empty bag to a public that demands it. It’s been
a five year long party, where, demonstrably, no lessons were learned from the
excesses preceding the previous peak, and the consequences that followed from
it.
Now, as a result of throwing caution to the wind again (mostly with other
people’s money of course), we face another set of consequences, but this time
the hangover will be worse. Timely warnings are rarely credible, as they
contradict the prevailing wisdom of the time, but it is exactly at this time
that warnings are most needed – when we are collectively irrationally exuberant
on a grand scale. We need to understand the situation we are facing, in order
to see why this period of global excess will resolve itself as a global credit
implosion, what this means for ourselves and our societies, and what we can
hope to do about it, both in terms of preparing in advance and mitigating the
impact once we are confronted with a new, sobering, reality.
We are facing an acute liquidity crunch, not the warning shot across the
bow that was the financial crisis of 2008/2009, but a full-blown implosion of
the house of cards that is the global credit pyramid. Not that it’s likely to
disappear all at once, but over the next few years, credit will undergo a
relentless contraction, punctuated by periods of both rapid collapse and sharp
counter-trend rallies, in a period of exceptionally high volatility. The
primary impact will stem from the collapse of the money supply, the vast
majority of which is credit – a mountain of IOUs constituting the virtual
wealth of the world.
This has happened before, albeit not on this scale. Since humanity reached
civilizational scale we have lived through cycles of expansion and contraction.
We tend to associate these with the rise and fall of empire, but they typically
have a monetary component and often involve a credit boom. Bust follows boom as
the credit ponzi scheme collapses. Mark Twain commented on one such episode in
1873:
“Beautiful credit! The foundation of modern society.
Who shall say that this is not the golden age of mutual trust, of unlimited
reliance upon human promises? That is a peculiar condition of society which
enables a whole nation to instantly recognize point and meaning in the familiar
newspaper anecdote, which puts into the mouth of the speculator in lands and
mines this remark:
— ”I wasn’t worth a cent two years ago, and now I owe two million dollars.””
Few recognized at the time that the ensuing financial panic of 1873, at the
culmination of a period of speculative excess, was going to lead to a long and
grinding depression. The signs were
there, as they are today, but few connected the dots in advance and understood
what was about to unfold and why. Few ever do at comparable points in time.
Unfortunately, humans are not good at remembering, let alone learning from,
and applying, the lessons of history. The information is available for those
who care to look – far more information than people had access to at previous
junctures – but not in the mainstream media. The media’s role is to reflect and
amplify the mood of the time, spinning events in accordance with it in a
self-reinforcing feedback loop. Real information – the kind we need if we are
to face a future more challenging than anything most of us have ever
experienced – is found elsewhere, with independent voices contradicting
received wisdom when it most needs to be contradicted. That has been our task
at The Automatic Earth for the last six years. We cover the events of the day,
placing them in the context of the bigger picture we have developed since
January 2008.
We aim to make complexity comprehensible, so that people can identify the
most immediate and most significant threats and prepare themselves to face
them. At the present time, the threat people most need to appreciate is a
liquidity crunch, hence this is a major focus of our most recent Video Download
release – Facing
the Future. It is well underway in some parts of the world
already and many more countries will find themselves affected in the not too
distant future.
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