The Great China Ponzi—-An Economic And Financial Trainwreck Which Will Rattle The World | David Stockman's Contra Corner

The Great China Ponzi—-An Economic And Financial Trainwreck Which Will Rattle The World | David Stockman's Contra Corner: "Re: "the Zillion dollar question is always - how much longer can the Fed keep infusing trillions into the US and world economy to prop up the Ponzi scheme?"

I'm no expert, but my guess is "quite a while".  I think the 2008 experience convinced the Fed that it must act early and often when signs of trouble "bubble" to the surface.  As long as labor can be arbitraged freely around the world, consumer inflation will be under little pressure because wages will remain low.  And as long as bad debts can be shuffled off to central banks, they can be papered over with freshly-minted cash.

The difficulty lies in the method used to pump the freshly minted cash into the economy.  At the moment, it's done via deficit spending by the federal government, with the large banks skimming off the top by playing the spread between the near-zero interest rate at the Fed, and the 1% - 3% interest rate of the treasury bonds.  Everyone on Washington and New York becomes incredibly rich while the rest of the country gets bupkas.  The incredibly rich -- both financial institutions and individuals -- bid up asset prices since only a very small portion of their income is needed for even lavish consumption and there is no point in investing in productive enterprises when workers don't have any money to buy stuff.  Thus they will use their wealth to either speculate or seek rents.

The endpoint arrives in one of four ways:

1)  The financial runaway train scenario:  the cost of servicing the Federal debt exceeds government revenues.

2)  The runaway inflation scenario: The federal deficit becomes so large that a significant amount of the freshly-minted money trickles out into the real economy via government salaries and purchases which sparks inflation.

3)  The bond vigilante scenario: For whatever reason, buyers of bonds get spooked and refuse to buy government bonds.  This could happen if the Fed plays its hand poorly, or some event causes investors to head for the sidelines.

4) Currency destruction scenario: Foreign countries lose faith in the value of the dollars they're getting in return for their products and begin to demand more of them.  This is equivalent to a devaluation of the US dollar.  At this point, jobs would begin to stream back to the US, likely causing a spike in inflation and subsequent rise in interest rates demanded for US bonds, leading to scenario #1.

5)  One must also consider the case where a large scale market manipulation was put into play that internally caused a market dislocation for profit.  Allowing large banks to gorge on profits from the spread between the Fed and Treasury interest rates increases the chance that a large player will amass sufficient capital to succeed in such a manipulation.

Barring this last scenario, however, it seems to me that any of the other possibilities are still quite a ways off, so I think the current Ponzi scheme could conceivably go on for quite a long time, with the rich getting richer and everyone else just treading water."



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