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Page added on May 4, 2013
If The Economy Is So Fragile That Government Can’t Allow Failure Then We Are Indeed Close To Collapse
Following today’s flashback to the most euphoric and irrationally exuberant days of market peaks (and bubbles) gone by, driven entirely by the now constant central-planner dilution of current and future wealth, these selected excerpts from Seth Klarman’s latest letter to investors is just the cold water of common sense everyone needs:
From Seth Klarman of Baupost:
Is it possible that the average citizen understands our country’s fiscal situation better than many of our politicians or prominent economists?
Most people seem to viscerally recognize that the absence of an immediate crisis does not mean we will not eventually face one. They are wary of believing promises by those who failed to predict previous crises in housing and in highly leveraged financial institutions.
They regard with skepticism those who don’t accept that we have a debt problem, or insist that inflation will remain under control. (Indeed, they know inflation is not well under control, for they know how far the purchasing power of a dollar has dropped when they go to the supermarket or service station.)
They are pretty sure they are not getting reasonable value from the taxes they pay.
When an economist tells them that growing the nation’s debt over the past 12 years from $6 trillion to $16 trillion is not a problem, and that doubling it again will still not be a problem, this simply does not compute. They know the trajectory we are on.
When politicians claim that this tax increase or that spending cut will generate trillions over the next decade, they are properly skeptical over whether anyone can truly know what will happen next year, let alone a decade or more from now.
They are wary of grand bargains that kick in years down the road, knowing that the failure to make hard decisions is how we got into today’s mess. They remember that one of the basic principles of economics is scarcity, which is a powerful force in their own lives.
They know that a society’s wealth is not unlimited, and that if the economy is so fragile that the government cannot allow failure, then we are indeed close to collapse. For if you must rescue everything, then ultimately you will be able to rescue nothing.
They also know that the only reason paper money, backed not by anything tangible but only a promise, has any value at all is because it is scarce. With all the printing, the credibility of our entire trust-based monetary system will be increasingly called into question.
And when you tell the populace that we can all enjoy a free lunch of extremely low interest rates, massive Fed purchases of mounting treasury issuance, trillions of dollars of expansion in the Fed’s balance sheet, and huge deficits far into the future, they are highly skeptical not because they know precisely what will happen but because they are sure that no one else–even, or perhaps especially, the policymakers—does either.
9 Comments on "If The Economy Is So Fragile That Government Can’t Allow Failure Then We Are Indeed Close To Collapse"
BillT on Sat, 4th May 2013 4:01 am
BINGO! Not ‘IF’ but ‘WHEN’. The Western world is going down and it will cripple what is left of the other countries outside.
Norm on Sat, 4th May 2013 5:38 am
Why does it include a picture, so distorted and weird, that its unrecognizeable? I thought words and pictures and websites were supposed to mean something? So therefore the photo should be recognizeable? Naaah.
GregT on Sat, 4th May 2013 6:38 am
“Is it possible that the average citizen understands our country’s fiscal situation better than many of our politicians or prominent economists?”
The ‘average’ citizens have absolutely no clue whatsoever, of how close we are to collapse. If they did, they would be moving out of the cities in droves to prepare themselves for what is coming. Instead, we are witnessing the largest migration of people into the cities that mankind has ever seen.
moli on Sat, 4th May 2013 7:20 am
on what grounds would it collapse? if the axis have established a secure route for oil imports and security in the provision of food for its sheeple even if it is from a soup kitchen . . furthermore heaps of futility in the form of crass entertainment and a dumbdown education media music dance system to wollow ones youth and idealistic years away. soon each member is left weak and disorientated unemployed or suffering some mediocre job in some megacontrol institute and is attached with a number to the system so he cannot escape it. the oil/economic contraction will be slow and contained so that the next generation will never have known the prosperity of the former to miss it. it is simply a winding down . . . the surprise element which may bring collapse is external to the system not internal to it. . and that maybe the volatility in the middle east. . . there the sheeple are undergoing transformation and with intervention from the unseen . .there isnt a shadow of doubt they will prevail despite much bloodshed which they will suffer and are suffering.a new worldview will overcome this old outdated sheeple worshipping anything glittering bs worldview.and the lost vicigerant may find his true freedom and dignity again.
Stephen on Sat, 4th May 2013 8:23 am
I think collapse will happen but it may not be all inflationary. My prediction is that basic needs may increase and everything else will decrease, to the level in which bank liens on items will not be worth foreclosing on (i.e. suburban buildings, houses, cars, etc). I do not beleive Peak Oil will cause an inflationary currency collapse, either.
I think Nicole Foss is right when she mentioned that it will likely cause massive hyper-deflation. The reason being is if unemployment were to skyrocket as the result of transportation failing, or the electric grid permanently collapsing, many of the debts would become UNPAYABLE, and acceleration clauses, debt collectors, etc would have trouble functioning due to reduced electrical power [which has the potential to stop their computer system]. If cars stop running due to fuel shortages, rounding up tow trucks to send them to auction companies would become a low priority item for society. The same would apply to sheriffs for locking people out of their homes due to not paying debts, as much of the remaining fuel would be used for farming and emergency use. This would essentially make most of the debts end up being written off as non-collectable, and this would make REAL CASH the only currency left in circulation. With the money supply reduced by what is physically in circulation, this would lead to people having far less of it, due to partial reserve banking and the fact that most “cashless” systems require the electric grid to function. After runs on the banks, and physical cash is the only currency left in the country to trade, and the public has far less of it due to the banks closing, this will force prices lower on many non-essential items and raise food and other essential item prices. I think the possibility of a barter or gift economy emerging would be very high, too or people would stop using money as a gatekeeper to everything. A collapse of the grid or transportation will likely lead to a collapse of mass scale marketing too, and force people to consume local food, and goods made close to home in smaller numbers.
J-Gav on Sat, 4th May 2013 8:59 am
GregT – Exactly!
Stephen – It was a couple of years ago already that Nicole Foss said she thought we had a few more years of deflation coming. To my knowledge though, she’s never ruled out inflation at some time in the future.
BillT on Sat, 4th May 2013 11:52 am
The only problem I see with Moli and Stephen’ comments (beyond the difficulty in reading/following them) was that a true world financial/systems collapse means that billions will die in a few weeks or months as the food and water supplies fail all over the world. It does not mean that we regress to barter. Barter of what for what? The local grocery store is good for 3 days max, if the trucks stop rolling. The city water may not last that long if electric goes out. If it happens during the non-harvest season (most of the year) then there will be nothing to barter, or eat.
Collapse is not just inconvenience. It is death to many. Paper money will be worthless. Charmin will have more value. Drinkable water will be worth more than gold.
Then again, the collapse may just be slower and the world will regress into a one world government and death of the unneeded billions will happen swiftly. What would the sudden end of all of the government doles around the world cause? Think about that. Few in the Western world would survive for very long without that government teat.
GregT on Sat, 4th May 2013 2:46 pm
Interesting read, for those that may be interested:
Deflation Precedes Hyperinflation
https://www.kitcomm.com/showthread.php?t=93752
Stephen on Sun, 5th May 2013 5:25 am
I think the “one world government” scenario would not happen either, likely because large governments require large amounts of energy to spread a wide area. What is more likely scenario is a bunch of small town governments in which they can manage with little or no fossil fuels. If the boat, train, car, or airline system fails, central management from other continents likely won’t happen on a day to day basis. What I see is more likely is a central government breakdown, followed by a period of anarchy, and then forming new city lines that establish small city governments.
As to the lack of food scenario, I see that it could happen. But since peak oil is a slow decline curve, I see this happening in some regions first rather than others (and this may not be a rich vs poor distribution as to where it happens but more likely based on the close proximity to resources as opposed to regions where supplies of food and water have to be brought in by boat, airplane, train, or truck) . Hopefully people start planting local farms before this happens. If they don’t it is likely a population die-off could occur.