The Crash Course - Chris Martenson [50]
Figure 11.6 Chart of 30-Year Bonds over Past 30 Years
Source: Yahoo! Finance.
This practice of lowering interest rates to keep the game alive for awhile longer has a natural limit: Rates cannot go below zero. In 2010, we saw the Federal Reserve set interest rates for overnight money2 to between zero percent and 0.25 percent, and we saw the interest rates on two-year Treasury notes go below 0.50 percent. There’s really nowhere else for them to go; they are already at zero. In short, interest rates hit bottom in 2010 and were placed there in an effort to keep the credit bubble expanding for a while longer. In my opinion this was an enormously misguided effort, but it happened, and now we need to consider how we’re going to manage the outcome(s) that will result.
All good things must come to an end, and if such low interest rates fail to keep the credit bubble on its “double every decade” trajectory, it is unclear what other remedies are available to the Fed that could cover the gap. The only ones I can think of are so “out-of-the-box” that how they might impact our future is impossible to determine. Some of these alternative measures might include complete Fed ownership of all productive assets (bought with thin-air money), a massive repudiation of all debt (just hit the reset button), and/or the Fed purchasing all government debt in an effort to keep things flowing, which has already partly been done with the first rounds of Quantitative Easing (QE).
The alternative would be to admit to ourselves that perhaps doubling debt every decade (far faster than income growth) isn’t a sustainable practice and willingly terminate our efforts to continue on that path. If we do, then the economy will have to grow well below its potential for a period, to offset the time when the steroid injections of debt unnaturally swelled its growth.
The Austrian school of economics has a very crisp and historically accurate definition of how a credit bubble ends. According to Ludwig von Mises:
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.10
In plain language, either we willingly end our efforts to continue doubling our debt faster than income, or we risk seeing the dollar collapse. While growing a bit slower than the hectic pace to which we have become accustomed will be slightly painful, a currency collapse would be enormously painful, not just to the United States but to the world. As a nation, the United States has undertaken desperate measures to avoid abandoning the continuation of its credit expansion, leaving a final catastrophe of its currency as the most likely outcome.
As for the timing? It could hardly be worse. Dealing with a bursting credit bubble is hardly the sort of challenge we need at this particular moment in history, where energy and environmental issues loom large. But here we are. The stewardship and vision displayed by the Federal Reserve and Washington, DC, in shepherding us to this position leaves a lot to be desired.
So, what can we expect from a collapsing credit bubble? Simply put, everything that fed upon and grew as a consequence of too much easy credit will collapse back to its baseline position. Where we lived beyond our means for too long, we will have to live below our means until the excesses are worked off. Living standards will fall, debts will default, and times will be hard. Those are the lessons of history.
But there’s more to this story than the simple accumulation of debt, even as serious as that is all by itself. We’ll explore more of the story later when we discuss the role of energy in supporting economic