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2014-03-11 14:31 by Karl Denninger
in Editorial , 138 references Ignore this thread
An Interesting Read

Here's a piece you may like; it was cited in a previous Ticker and I decided to bring it front-and-center because I believe it deserves wider attention.

The author has one basic premise -- we have been living in a "credit supercycle" where virtually everyone has been abusing credit to simply pull forward demand into today instead of working first to earn and then "having" tomorrow, and that this cannot continue on a permanent forward basis.

I've been saying that for quite some time myself.

He adds an interesting other dimension to it, which is energy.  If you have read Leverage you will remember that one of my founding principles is that economies act quite a lot like thermodynamic (that is, energy) systems.

Mr. Morgan goes through many of the principles that I've talked about repeatedly; that "globalization" is not a "path to permanent prosperity" but is simply a means of trying to squeeze out yet more from a bankrupt system, in that it offshores the skilled labor earnings to other lands and destroys their value at home, ultimately rendering it impossible for people to buy the products being produced.  

Bad (intentionally distorted) data is also featured, specifically the CPI.

But what I find refreshing is the fact that he noticed that economies are essentially a thermodynamic equation -- that is, they're a matter of producing enough to cover needs, leaving something for wants.  This then drives recognition that behind every unit of GDP is a unit of energy, and we have effectively used that as a leverage tool to "crank" the ability of people (and governments) to take on more and more debt.

About the only thing I can disagree with is the idea that the energy cycle problems we are running into -- and will continue to -- are hyperinflationary in impact.  I don't think so.  I see those as deflationary although there certainly might be attempts to play (yet more) inflation games with currencies.  Such games are doomed to failure as the balance sheet aspect of all economic activity guarantees that there is no such thing as a free lunch, and when you destroy purchasing power you inevitably lower the real (not nominal) economic capacity that can be purchased with the funds available along with diluting the capital base that is necessary for new investment and progress.

This is a 70+ page tome and will take some time to go through, but IMHO it's worth it.

Kick back with a good glass of Scotch and have at it.