“Straight Talk” features thinking from notable minds that the ChrisMartenson.com audience has indicated it wants to learn more about. Readers submit the questions they want addressed and our guests take their best crack at answering. The comments and opinions expressed by our guests are their own.
This week’s Straight Talk contributor is Tyler Durden, founder and chief demagogue of the popular econoblog Zero Hedge. Zero Hedge’s mission is to bring back a more critical, rigorous, and informed style of commentary and synthesis for the professional investing public. The blog has experienced explosive growth in it’s two-year existence, due in part to its prolific coverage of financial events as well as its unapologetic (some say controversial) editorial approach, which is often highly critical of today’s economic and political leaders.
Having written so much about what’s wrong with our current economic/financial/political system, what specific actions do you think need to be undertaken to fix things? Is an all-out collapse avoidable?
This is a question that we ask ourselves every day, and no matter how we spin it, we fail to see how an unwind to a previous “restore point” to borrow a computer analogy, is possible at this very late stage in the global Ponzi scheme. We tend to simplify the world: When everything else is stripped, the only two things that matter are a) where is the money coming from? and b) where is it going? And never in the history of the world have so many assets created so little cash flow. To a big extent, this is due to the fact that a bulk of asset purchases in the past three decades have been due not to asset turnover, but as a result of cheap credit resulting from an explosion of credit money through the quadrillion dollar derivative boom. As a result, most incremental dollars go not to organic business growth and economic output, but to satisfying what has become the biggest debt burden in the history of the world, whereby the labour and intellectual output of most goes to fund the living standards of a very few.
Indicatively, when looking at total exchange and OTC traded derivatives, which eventually are converted into some form of credit money, the total tally at last check is just over $1.3 quadrillion. This is about 20 times the total economic output in the world each year. It becomes very clear why the current status quo is unsustainable absent a major global corporate and sovereign liability restructuring: In the bankruptcy business, this process is known as “growing into your balance sheet.” Yet the main reason why the kleptocratic elite has been so opposed to this act is because no debt impairment is possible without eliminating the equity tranche below it. And in an ironic twist in which the Fed supports both the debt and equity markets, there is now about $13 trillion in equity capitalisation in the US, which is backed by debt that for all intents and purposes needs to be impaired.
As a result, unless stakeholders in the liabilities of corporate America realise that the assets that collateralize these liabilities are woefully insufficient and come to a compromise in which either they alone or in combination with the creditors come to a consensual “restructuring” of the underlying claims, there is no other possible outcome than a free-fall bankruptcy. However, this will not be some Chapter 7 filed in the bankruptcy court of Southern District of New York. This will be the end of the current financial system. This is also what some consider a “deflationary death spiral.” And yes, no matter how much paper the Fed prints, this outcome is inevitable: All the Fed does through money printing is dilute the claims on both sides of the ledger. The best the Fed could then hope for to counteract the deflationary outcome is to generate hyperinflation through a collapse in the reserve currency (i.e., the Zimbabwe outcome). And since this is far more palatable to the Fed, we believe that one way or another, whether by fire or ice (to paraphrase Robert Frost), the existing, very unstable financial system will reach a point when the global systematic reset is inevitable.
What are your views on Peak Oil? Assuming you think its arrival is relevant to people alive today, when do you forecast the market will recognise its significance? If we have to cut our use of oil, will we also have to cut our addiction to economic growth in conjunction?
The rate of global consumption of oil is certainly rising. While the debate over Peak Oil has numerous proponents and opponents on both sides, we tend to not have so much a view on Peak Oil per se, as much as marginal consumption and production at any given moment. What is without doubt is that like any natural resource, the accelerating extraction of oil will deplete the resource, once again based on increasing marginal rates of utilization. While we certainly would wish that the G20 countries were investing capital in alternative energy infrastructures, this will come sooner or later, voluntarily or otherwise. The longer the delay, the greater the ultimate incurred cost. In the meantime, should oil and other commodity prices surge, well-known higher priced alternatives (solar, geothermal, wind) will suddenly become equitable, and as more and more energy production shifts to less efficient modes of energy creation, increasingly more R&D spending will occur in those alternative fields, which in turn will result in a decline of the energy equivalent costs as efficiencies improve. Ultimately, and probably after a violent cyclical shift, there will be a new pricing equilibrium, but one which will nonetheless see an increasing need to shift away to renewable energy sources. We can only hope that in addition to the trillions of dollars spent to fund bank-sector capital deficiencies, the government will find it in its heart to invest a few hundred billion in this venture earlier rather than later. Of course, as we know far too well how the game is played, we are very sceptical than anything like that will happen until it is far too late.
What is your advice to concerned individuals looking to position/protect themselves from the likely economic turmoil ahead of us? What strategies and tactics should they consider?
We always recommend looking at the opportunity costs of behaviour that is an alternative to prevailing modes. In other words, look at potential outcomes the way an investment manager evaluates an investing opportunity: in terms of upside/downside and associated probabilities. While currently the probability of a truly dire outcome is very, very minor, the cost of insurance is very small. One can buy a year’s worth of provisions, medicine, and other forms of protection for a very cheap price. Should the worst happen, and such items be required, they would be unprocurable, period. This is probably our first advice to those who, like Paolo Pellegrini, wish to insure themselves, very cheaply, to the equivalent of a collapse in the subprime market back in 2006. While many laughed in his face at the time, his obstinacy and persistence is what made both him and John Paulson billions. It is always better to be early on a trade that has even very small chances of success, then too late on a sure trade. And aside from such unpleasant “survivalist” thoughts, we can only recommend, as we have been doing on Zero Hedge for nearly two years, that readers purchase as many hard assets as they can. Anything that Ben Bernanke will dilute by printing, he will; this we are certain of. Which is why purchasing precious metals, hard assets, non-perishable supplies, arable land, and means to protect the above four, is probably the best advice we can give to anyone.
If you have not yet seen the other articles in this series, you can find them here:
- Straight Talk with Tyler Durden: The U.S. Is Free-Falling Into Bankruptcy – 12.15.10
- Straight Talk with Charles Hugh Smith: Why The Status Quo is Unsustainable – 12.05.10
- Straight Talk with G. Edward Griffin: What’s Coming Next Isn’t Pretty – 11.29.10
- Straight Talk with James Howard Kunstler: The World is Going to Get Rounder and Bigger Again – 11.17.10
- Straight Talk with Steve Keen: It’s All About the Debt – 11.09.10
- Straight Talk with Mike Shedlock (aka “Mish”) – 10.26.10
Readers can submit their preferences for future Straight Talk participants, as well as questions to ask them, via the Straight Talk forum.
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