The Credit Money System’s ‘Doomsday Device’

We arrived at the family ranch in northern Argentina last night…

This morning, we rub the sleep from our eyes and look out the window.

Whoa…it’s greener than we expected. We were in the second year of a disastrous drought.

What happened?

We’ll find out…


Win-lose marriages

You know, your description of win-lose deals applies to individuals in their personal, private lives as well as to the economy,’ explained a close friend.

Some people think life is a struggle with other people…and they only get ahead by getting the best of someone else. They feel good about themselves only if they make you feel bad.

I guess they think happiness is a zero-sum game…that there’s only so much of it in the world so that you can only get it by taking it away from someone else.

They think it’s a win-lose world…and that they have to be tough to win. So they are always trying to make the other guy lose.

I’ve even seen it in marriages. A husband (or the wife) feels he is in competition with his spouse. He criticises her… He complains about her. He tries to bring her down. It’s a way to elevate himself, I guess.

I know one guy who even pressured his girlfriend into marrying him. He was sure that’s what he wanted. When she hesitated…he nagged and bullied until she went along.

It didn’t work out very well. They divorced after a few years. It turned out that she didn’t really want to marry him in the first place.

Some people are political. They get ahead by manipulating other people…by making others look bad…backstabbing…intriguing…always driving hard bargains.

They need to dominate conversations. They try to control other people to get them to do what they want. In business, they think they have to beat the other guy. In private life, they are always trying to prove that they are smarter, faster, better looking.

Psychologists probably have a word for it.

They go to work for the TSA…or go into the government — anywhere they can get a little power over other people.

Disappearing credit

Back in the world of economics…

All across the banking world — from commercial loans to leases and real estate — credit is collapsing.

Ambrose Evans-Pritchard writing for British newspaper The Telegraph:

Credit strategists are increasingly disturbed by a sudden and rare contraction of U.S. bank lending, fearing a synchronized slowdown in the U.S. and China this year that could catch euphoric markets badly off guard…

Data from the U.S. Federal Reserve shows that the $2 trillion market for commercial and industrial loans peaked in December.

The sector has weakened abruptly as lenders tighten credit, especially for non-residential property. Over the last three months it has dropped at a rate of 5.4% on annual basis, a pace of decline not seen since December 2008.

If new loans aren’t made, the supply of credit money will contract. That’s the ‘doomsday device’ embedded in our credit money system: It is subject to sharp and disastrous drawdowns in the money supply.

When loans are paid or written off, the outstanding credit (money) ceases to exist. This reduces the money supply…and triggers corrections, recessions, or market crashes.

Real money doesn’t disappear in a credit contraction. But our fake ‘credit money’ does. This makes the entire system vulnerable to the credit cycle. Credit increases. Then it decreases.

And as credit money vanishes, the recession deepens…causing the credit market to tighten further…and causing more money to disappear.

That’s why a credit contraction is so dangerous in today’s world. With more than $200 trillion in outstanding debt, even a soft contraction could lead to a worldwide depression.

That’s why the Fed will not risk jacking up interest rates too far, too fast.

Instead, it will follow inflation…and then do an immediate about-face when the credit cycle turns around.

Stay tuned…


Bill Bonner,
For The Daily Reckoning

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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