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Complexity, Correction, Collapse, and then Reconstruction!

June 28, 2011

The evolution of change seems to be progressing as stated above!

Our society is now in a state of complexity and confusion which is obvious if you listen or watch the experts expound on their reasons and solutions for dealing with our economic problems. Personally, I listen to and watch numerous media programs on a daily basis and listen to hundreds of experts expound on each economic issue which confronts our global society. Some of my favorite programs to watch are:  CNBC Market Watch, Bloomberg TV, Fox Business News, Korelin Economics, Money and Markets, King World News, McAlvaney Reports, Financial Sense, and numerous economic blogs. What I have deduced from listening to and watching all these programs is that we live in a complex economic environment where no one person actually understands the full details and consequences of the events that are transpiring.

Why all this confusion and complexity? My take on this situation is based on what has evolved within our monetary system these past 40 years. Our original monetary system was quite basic and simple when our money was mostly physical paper notes and metal coins. Prices of products were low (29 cents for a gallon of gas in 1961, for example) and a $20 dollar note could purchase gas, milk, and food for a day and often much longer. We also earned our money from mostly the production of real goods within all our manufacturing plants and widget shops. If we played a game of sports or an activity that did not result in some productive product…we usually did this activity for ‘free’.

Life was much more basic and simple and problem solving was much easier. Experts would generally agree on a solution and progress would move forward via consensus. All this has changed over the past 40 years and we now have an economic system which is mostly based on services, amusements, mass communications, digital electronics, imaginary monetary units, government stimulus projects, and real-time decision-making within a casino type environment.

Since the closing of the gold window in 1971, new financial schemes and risk hedging instruments have emerged to protect investors, lenders, and debtors from losses and from major risk changes over time in the marketplace. The biggest change since 1971 has been all the derivative instruments which have been invented (all to deal with risk and risk aversion). Credit Default Swaps were unknown back in 1971. Collateralized Debt Obligations (CDO’s) and similar instruments were unknown back in 1971. Money flows moved mostly from customer to banks and then back into the marketplace at a much slower pace and with much more understanding of what was happening.

Today, we have funds moving electronically (at near the speed of light) from customer to merchant, from bank to bank, and from investor to the global marketplace. Lenders, investors, merchants, and customers can transact business and exchanges with the click of a mouse or the swipe of a credit card. The age of slow-moving paper notes and metal coins has been replaced with digital money, high frequency computers, mathematical algorithms, and real-time currency (fx) transactions. Back in 1971, we would think in terms of thousands and millions when we purchased real estate or lent funds for developments and business projects. Today, we think in terms of billions and even trillions. The newest concepts in trading are words like ‘pips’, ‘colocation’, ‘quants’, ‘latency’, ‘algorithims’ and ‘real time’. Why all this complexity and change since 1971?

The real cause of all this change and complexity, in my opinion, has been the change in our money unit. Back in 1971, our money unit was viewed as a physical thing (paper checks, notes, or metal coins). Money was created as paper notes via a printing press (mostly in Washington D.C.) and coins were created at various mints (Philadelphia, Denver, San Francisco, etc.). This process was slow and efficient and this kept prices low and business transactions moving more slowly. Inflation and bubbles were minimized and people borrowed money with stable underlying values and real collateral that supported the lending which was occurring.

Gradually, however, the marketplace changed and evolved into a computerization of our money units and this allowed electronic transactions and much speedier outcomes. Our Central Bank (the Fed) allowed banks to make loans with easier terms and conditions. This process encouraged borrowers to finance all their projects, homes, and businesses with newly created and borrowed money units. Easy financing terms and conditions allowed practically everyone to borrow and spend in the now for what they desired. The process of bidding for a limited supply of products and goods created a continuing inflation of prices over time. But all this was reasonable and sound as long as ‘values’ were increasing with the continual borrowing and spending.

The economic system which evolved during the 70′s, 80′s, 90′s, and up until the crash of 2008…allowed more borrowing, spending, and increasing values to occur. The hidden ‘canary in the coal mine’ (debt) was ignored by everyone as ‘values’ and ‘incomes’ continued to grow and increase over time. The politicians, economic advisors, real estate investors, stock investors, and business tycoons…all felt that this trend and process could and would continue indefinitely. No one suspected the crash of 2008 (except a few realists who were hidden and unknown to the mass psychology that had intoxicated the public mind).

We are now living in a new age where most of us are becoming AWARE of what has transpired over the past 40 years. We now witness the overwhelming complexity and confusion which has evolved from the ‘big bang’ monetary expansion and debt which is now our reality in the marketplace. How can we now deal with this overwhelming change which has affected and infected our markets? How do we eliminate all this debt (which has already been spent on growing our prosperity from 1971 to 2011)? We have lived ‘high on the hog’ since 1971 and we now must deal with these consequences of our prior behavior. What must now happen in the next few years to ‘correct’ our system and then re-establish a new path to growth and prosperity?

The real cause of our economic situation has been the Keynesian Model which we have all followed since 1971. This model is based on a ‘one-way’ street of debt, spending, and value increases. As long as debt can be serviced and collateralized with sound underlying values, this model is viable. But the crash of 2008 exposed the flaws in this debt based model. When a threshold of debt is reached, then this model breaks down…and confusion and collapse emerges over time. We are now at the point of a cyclical correction (downward) with a major collapse (of values and sustainability) emerging in a few years (say 2012-2015). All this is psychological and based on human nature and economic behavior.

Our real problem is unsustainable debt in the USA and the entire global marketplace. We witness this as we read about the financial situation with Greece, Portugal, Ireland, Spain, Italy and the unsustainable debt and deficits in the United States of America. Debt is the ‘canary in the coal mine’ which has now reached a threshold level. Most of this debt can not be repaid…so defaults and bankruptcies will grow over time to create more complexity, confusion, and collapse. We all need to recognize that the model of Keynesianism is now defunct and bankrupt. We need a new model going forward! Witness the consequences of this model here:

What is now needed is for everyone to get knowledgable and current about the causes of our situation. Once we understand the causes of our situation and problem…which are now manifesting  in the marketplace…we can think about a NEW MODEL for our FUTURE. Before we propose any new model, however, we all need to understand the real PROBLEM and the underlying causes of our problem. Also, our problem is now global and planet wide. The entire global economic system has become inter-dependent and inter-connected. Any new model will need to encompass a global solution as all 200 plus countries are now merged into one global village where all natural resources need to be shared. To stay current on what is happening in the global marketplace, stay tuned to this website and blog: Enjoy and pass this missive on to others who might want to grow in their economic thinking!

4 Comments leave one →
  1. June 29, 2011 2:48 pm

    The fear of inflation and its negative impacts is forcing us into a deflationary state. When home values decline from $300,000 to $100,000 isn’t it “deflationary?” You can bet it is, but if the homes were to go back to $200,000 even at a devalued dollar (inflation) we’d find our debts easier to pay off. Hyper inflation is the only real fear and 5 to 10% a year is not hyper inflationary.

    We have locked (US) ourselves into “no more taxes” and why not? Our government is wrought with waste. It is almost impossible to justify a tax increase today. Still tax increases could help us if they are used in the right way. For 20 years politicians have said “energy independence” and for 20 years nothing has happened. We are still 20 years away.

    What better way then to march into energy independence now, create meaningful jobs now, and keep our costs of energy low in the future by doing so? It would not take a lot – a $1 a gallon might do it.

    • June 29, 2011 6:54 pm

      Home values and also commercial real estate is now entering a deflationary phase. I don’t think this situation will change in the next 3-5 years as we have to much excess inventory. The other problem is debt that can not be paid back as incomes are not increasing sufficiently. We now have 45 million on ‘food stamps’ (really governement credit cards) and some 24 million unemployed. This situation leads to less tax revenues and more deficits for our government. The vicious cycle of deflation is here and growing over the next few years. Also, our dollar is in trouble and our Fed is corrupt.

  2. therooster permalink
    June 29, 2011 2:51 pm

    The current problem in the USA is unsustainable debt, I agree, but what you have not uncovered as yet, IMO, Don, is the real reason for the development of the free floating USD in the first place. Before I go on, let me first state that I’m a 21st century gold bug who was born on the 4th of July and I’ve studied this stuff going back a longgggg time. I’m 54.

    The economy is a real-time event. I consciously realise this and I suspect that the elite do as well. Most of us rarely give it a thought.

    A society’s monetary system should ideally reflect real-time fundamentals in terms of supply & demand and resulting trade values. If you agree, then I’m sure you also appreciate the pitfalls of gold-as-money if the trade value is pegged, such as it was during BW. Gold is a very finite resource.

    The USD is a free floating debt currency …. but ….. it is only a currency within the fiat currency paradigm. Within the real-time gold money paradigm (here & now, but still invisible to most), the USD is very valuable, not as a currency, however, but as a real-time measure that allows a purchaser of goods and services to measure out an appropriate amount of gold (by weight, in real-time) in order to purchase something that is almost inevitably priced in a fiat currency. The tool is the real-time price of gold ($/oz), borrowed from the fiat gold price paradigm.

    Without the advent of the free-floating USD, real-time gold payments would not be possible. Yes, the market is free to evolve to weighted pricing, but that is also part of the market evolution that allows for slow paced, smooth , organic change. This is exactly why 21st century gold-as-money is a market responsibility and will not be officially supported by the powers-that-be. It’s not their role. They simply cannot for a very good reason —> whenever migrating from a legacy system to a new system (dollars to gold), it’s imperative that neither system crashes. The dollar would crash with any top-down proclamation of gold support. Keep in mind that the dollar is the current reserve currency. Rate of change is critical.

    Does that explain the insanity for you ? All the ole boys can do is “carry the stick”. A lousy job and a necessary evil …….. just follow the script ….. they are, afterall. They’re doing a fine job too . The grass roots have to awake to their own market responsibility by monetising personally owned gold. Real-time gold payment processors have been around since the mid 90′s. We don’t have a monetary design problem …. simply a marketing challenge. we are quite capable of adding debt-free liquidity as people.

    • June 29, 2011 6:33 pm

      The free floating dollar emerged after President Nixon closed the gold window on August 15, 1971. The free floating dollar was not designed from scratch…but emerged by default. Prior to 1971, foreigners and central banks could exchange our dollars for gold ($35 for one ounce). After 1973, the dollar became merely a ‘number’…also called a fiat dollar. Central banks could (after 1973) create new dollars with no option of convertibility. This situation allowed inflation and money creation to flourish with no discipline or restrictions on the amounts being created. What a difference when money can be created with no reference point that is grounded to physical reality.

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