Why have we not yet experienced AfterShock Economy?


Why have we not yet experienced the AfterShock economy?  Our debt is exploding.  Real wealth creation is weak, except for a glimmer of hope from a new developing but not yet proven energy boom – see https://economics501.wordpress.com/2013/02/10/energy-boom-a-wild-card-for-upcoming-wiedemer-aftershock-economy/.  Prospects of us paying back or reducing our debt are also weak.  The Fed continues printing $85 billion per month and may do so for 2 or more years with questionable at best economic growth prospects over next few years, to accommodate our massive fiscal and monetary expansion.  This has been occurring since late 2008.  

 

Answers

Recall AfterShock Economy author/investor Rob Wiedemer stated there would be a lag before inflation would kick in following major monetary expansion.  It is also very difficult to judge foreign creditor patience in the $.  Some major unforeseen event can precipitate a rapid change in this patience.  A Middle East event can be such a catalyst.  Or declining GDP growth occurring at same time BO scrambles the KeyStone project and reinforces his commitment to practically eliminate new oil and gas drilling on public land.

 

Other factors are in play.  Europe is in extreme financial mess hence this incites $ holding.  Japan is printing yen rapidly debasing their currency.  This is another plus for holding $.  Finally, multiple developed nations are following an easy money approach which then is another reason to hold $.

 

Perhaps significant global inflation is within a year or two away.  Instead of an extreme U.S. AfterShock economy collapse due to a severe $ dive, our global economy may contract more moderately but still very painfully for a long time in response to easy monetary policy and debt growth globally.  It may then take at least 5 years to readjust from this bloated debt.  

 

 In order for inflation to kick in though, banks may need to lend more money.  Printing currency where banks hold much of this new currency tends to delay inflation.  Will this loosen up?  And if it does, will we then start accelerating real wealth creation? That is the only way an economy grows long term – wealth creation.  That is very questionable at best given the anti private sector policies of Obama.  Will the energy boom jump start our economy by itself boosting GDP by at least 1% within 2 years?  Let’s insist on oil and gas drilling on public land!

 

More to consider … Taken largely from a great analysis by Fred Kingery in http://www.realclearmarkets.com/articles/2013/02/14/global_debt_accumulation_reaches_record_levels_100147.html.  Part of his analysis follows below in italics and quotes.

 

“Today, the U.S. federal government borrows 40 cents out of every dollar it spends and the Federal Reserve directly or indirectly prints money to fund 80 cents out of every dollar of that government debt. So far this financial arrangement has produced rising financial asset prices and no significant “officially measured” consumer price inflation and no real wealth creation.

 

The question that begs an answer is: How long can such an arrangement last? Why hasn’t debt-financed consumption, coupled with Federal Reserve money printing, coupled with lagging wealth creation, resulted in massive price inflation?

 

Is the Fed simply “pushing on a string?” Did the financial collapse of 2008 convert bankers into prudent lenders who are unwilling to extend credit to needy borrowers? Has the private sector decided to pay down debt and simply forego borrowing because of government-created uncertainty or a lack of desirable investment opportunities? Or, is it something else altogether?

 

The truth is no one knows. Another truth is that it may not matter. What is perhaps most important is to recognize that there is no historical precedent to act as a contextual reference for what is happening. We are in uncharted territory.

 

In the current fiat central-banking world, there is massive money printing going on that is now approaching the initial phase of even the most egregious hyperinflationary episodes of the past. This printing supports consumption and the “markup” in many real asset prices, such as stocks and bonds. It all feels painless so far as we appear to have entered a steady state of range-bounded volatility, inflation, consumption, production, and unemployment.

 

However, something very important is missing. There is no real wealth creation of the kind required to support such massive debt. The Fed’s asset “markup” program and the lack of real wealth creation simply cannot support the long-term debt accumulation enabled by Fed money printing. The Federal Reserve governors must know this, yet they continue to massively print anyway.

 

Absent a war, this nice little fantasy may last for a while. Debt will continue to accumulate to support consumption and the “markup” in financial asset prices. Real wealth creation will lag far behind the level necessary to support such huge piles of debt. Officially measured inflation will probably remain subdued.

 

All will seem sustainable, until it is not.

 

The bell will ring when some event shocks people into the recognition that: (a) the lack of real wealth creation accompanied by continuous, massive debt accumulation can never be reconciled; and (b) the political will does not exist-and may never exist-to call a halt to the debt accumulation and/or do what is necessary to enable an acceleration of real wealth creation. ” 

 

This line of thought is 100% consistent with Wiedemer’s prognosis of US weak political will. 

 

More Kingery comments:

 

“It seems that a majority of people now believe that the redistribution of existing wealth is more important than the creation of new real wealth. They apparently believe, in violation of common sense and all accepted laws of physical science, that you can get something for nothing. That view has now become entrenched in every branch of the media, academia, politics, and-shockingly-many parts of the financial world.

 

At some point soon, we will cross the Rubicon. The financial adjustments will be breathtakingly swift. Then, the world as we know it will never be the same.”

 

However this is the point where Wiedemer predicts we will adapt and adjust; and likely after at least several years of pain, reach new heights of economic prosperity.  What should we do in the interim?  Educate as many people as you know about this, especially our elected officials.  Tweet repeatedly on Twitter and call them out when their policies extend or accelerate our debt.

 

Twitter @Economics501

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About economics501

1 - free market Capitalist; 2 - Fitness Entrepreneur; 56 years old, VP at an Investment Bank in NYC, ex Venture Capitalist, happily married with 2 girls. Education: Rutgers and NYU. I allow Ted Hruzd, my friend to blog at will here. He has many posts here. I have known Ted since we were both students at NYU. Ted also works for an Investment Bank as a VP in Equity Global Markets. ------------------------- I was very very Socialist leaning as a 22 year old. I then strongly believed in Gov role in helping the poor. However, as a USDA Child Nutrition Programs, I personally accounted for millions of fraud, abuse, and waste of tax payer money. I came to believe that the poor would be best served with less Gov programs and more with direct aid via tax system. Then after 5 years I became a free market capitalist, was a venture capitalist in 2007 and helped start 2 high tech companies. I dedicate this site to champion free market capitalism as the best road to Prosperity. Please join in. If you disagree, fine, but please post with dignity and class and be civil. Argue with facts always.
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One Response to Why have we not yet experienced AfterShock Economy?

  1. Joe M says:

    You can talk business talk until you’r eblue in the face. But the meltdown to come has never been hard to predict. Whether it happens this year or in 10 years. It’ll come. Why? Because of what has happened to people. Recklessness. Lack of responsibility. Greed. Materialism. The foundation of a society is flawed. Regardless of what you build on top of it, it WILL come crashing down because the foundation is flawed. Americans are (put lightly) STUPID. I am one. But I am NOT stupid because I am no conformist. The way people live these days is crazy. Kids are getting raised wrong. The accumulated wisdom handed down from many generations is being forsaken for modern thinking. You know “modern thinking” is nothing more than “dumbing down”. People are becoming dumb. But in their own minds they are smart. Why? because they are dumb enough to have been told that IQ, academic achievement, and monetary wealth defines wisdom.

    Tell that to the truly self sufficient people of pre-1900s era that had no electricity! Wisdom comes through hardship. We are now living amongst a future IMPLOSION that was heavily promised by many races outside America for many years! You should have listened to your forefathers who said to keep all non-patriotic Americans OUT.

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