We all like to listen to people who agree with us. I am no different. Charles Hugh Smith said a lot of things I agree with in his article ‘The Inescapable Reason Why the Financial System Will Fail’:
“In response to the Global Financial Crisis (GFC) of 2008, central banks lowered interest rates to near-zero to boost private-sector lending, and increased liquidity to enable private-sector lenders and borrowers to refinance existing debt and generate new credit.
They also bought assets: government bonds, corporate bonds and in some cases, stocks via ETFs (exchange traded funds).
The goal here was to prop up the collateral underpinning all the debt. If liquidity dried up, consumers and enterprises would default, handing lenders catastrophic losses, as the crisis had crushed the market value of the collateral that lenders would have to sell to recoup their losses.
And so central banks pursued heretofore unprecedented policies aimed at goosing private-sector lending and borrowing while boosting the markets for stocks, bonds and real estate — the collateral that supported all the debt that was at risk of default.
All this low-cost and easily available credit, coupled with the central banks’ public messages that they would “do whatever it takes” to restore credit mechanisms and reflate the private-sector markets for stocks, bonds and real estate, worked: credit expanded and markets recovered, and then soared to new highs.
While these policies accomplished the intended goals, boosting both new credit and asset valuations, they also generated less salutary consequences.
By lowering interest rates and bond yields to near-zero, central banks deprived institutional owners who rely on stable, high-yielding safe investment income — insurers, pension funds, individual retirement accounts, and so on — of exactly what they need: safe, stable, high-yield returns.
In this “do whatever it takes” environment, the only way to earn a high return is to buy risk assets — assets such as stocks and junk bonds that are intrinsically riskier than Treasury bonds and other low-risk investments.”
For over 20 years I have been saying that the financial system and economy built upon endless borrowing, both government and private, backed by nothing was UNSUSTAINABLE. Year after year people like me have been pointing out how UNSUSTAINABLE the system is. And year after year we have been made to look foolish. In the immortal words of Inigo Montoya (from the Princess Bride): “You keep using that word. I do not think it means what you think it means.”
Can this circus of economic manipulation and tinkering continue endlessly, or are we just delaying the inevitable collapse and increasing the harmful and inevitable consequences?
Honestly, I no longer know what to believe.