I recently received a brief but powerful summary of the global financial system's intrinsic instability and unsustainability from correspondent Ray W., author of A Change in the Weather.

One key point is that spreading insolvency (debts that will never be paid back, debt based on totally phantom assets) over a populace does not somehow conjure up a solvent financial system or State. Distributing insolvency only destroys the last remaining islands of solvency in a bankrupt world.

The entire global financial "recovery" engineered by central banks and Central Planning is based on the absurd notion that if we spread unpayable debt over the entire body politic (be it a nation or regional entity such as the European Union) then that distribution will somehow make the debt payable and the phantom assets real.

The debt remains unpayable and the assets (collateral) remain stubbornly phantom. As for adding more debt (selling Eurobonds, Treasury bonds, etc.), please note the diminishing return on additional debt: it is now negative.

Here is Ray's commentary:

Not only the US Federal Reserve, but the EU collectively and its members individually are blowing another bubble with artificially suppressed interest rates inducing a flight to equities. It may not look like a bubble because values are climbing so slowly and uncertainly, but that is just an indicator of the structural weakness and exhaustion of petrocapitalism. In terms of thermodynamics, the engine is just too big to run on the same fuel without serious retooling.

The debt from the past three decades of bubbles--finance, dot-com, real estate--is still largely unrepaid, and won’t be. Whether nefariously intended are not, the current payback scheme, focused as it is on sanctity of contract, is to keep the bond holders from absorbing any of the losses (the Greek haircut notwithstanding). Modern economics is all about trust, so if contracts are no longer reliable, then the whole system--which depends 100% on credit--functions much less efficiently and much more expensively. It begins to look medieval.

The hope is that the states can titrate these losses into the general population, where they will be diluted and absorbed like pollution. But like climate change, we’ve simply reached the saturation point. The world can no longer be a sump, economic or atmospheric.

Thank you, Ray. Diminishing returns define the flailing financial system: the return on petrocapitalism is declining (how many barrels of oil or equivalent does it take to extract and process one barrel of shale-derived oil?), the return on more debt has turned negative, the yield on "saving" bankrupt States is marginal, and so on: spreading insolvency to the taxpayers does not magically create solvency, it only distributes insolvency to every nook and cranny of the economy.

All the debt remains painfully real; it is only the collateral that is illusory.

Read the Introduction (2,600 words) and Chapter One (7,600 words) for free.

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.

We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.

The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.

Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

If this recession strikes you as different from previous downturns, you might be interested in my book An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One. The solution in one word: Localism.


Readers forum: DailyJava.net.



Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

---

"This guy is THE leading visionary on reality. He routinely discusses things which no one else has talked about, yet, turn out to be quite relevant months later."
--Walt Howard, commenting about CHS on another blog.

---

NOTE: gifts/contributions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Cudick A. ($50), for your stupendously generous contribution to this site-- I am greatly honored by your steadfast support and readership.

---

Or send him coins, stamps or quatloos via mail--please request P.O. Box address.

Subscribers ($5/mo) and contributors of $50 or more this year will receive a weekly email of exclusive (though not necessarily coherent) musings and amusings.

At readers' request, there is also a $10/month option.

What subscribers are saying about the Musings (Musings samples here):

The "unsubscribe" link is for when you find the usual drivel here insufferable.

Your readership is greatly appreciated with or without a donation.

---

For more on this subject and a wide array of other topics, please visit my weblog.

                                                           

All content, HTML coding, format design, design elements and images copyright © 2012 Charles Hugh Smith, All rights reserved in all media, unless otherwise credited or noted.

I would be honored if you linked this essay to your site, or printed a copy for your own use.

Terms of Service:
All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.