03 April 2009

The Credit Bubble Was a Ponzi Scheme Enabled by the US Dollar

They say a picture is worth a thousand words.

Here is a picture of the US credit bubble, with the deleveraging which has just begun.

It is/was a Ponzi scheme, enabled by the advantages of controlling the reserve currency of the world, pure and simple.

It was the US dollar that was monetized, or more specifically US debt obligations, which are now substantially worthless and will have to take a significant haircut in real terms. This is similar to the Japanese experience in which they monetized their real estate.

Ironically, those expecting this deleveraging to result in a stronger dollar could not be more mistaken. The Obama Administration is scrambling to obtain relief from Europe and Asia, getting them to inflate their own currencies through 'stimulus,' in order to continue to hide the unalterable truth - the US must partially default on its debt as expressed in the dollar and the Bond.

This is the inevitable outcome of all Ponzi schemes. Several smaller, private schemes already have collapsed. The big one is yet to come down. And when it does, the foundations of democracy will shake, several governments will fall, and we will once again experience the kind of uncertainty more familiar to those who lived in the first half of the twentieth century.

The sad truth is that the Obama Administration has barely begun the real work of rebuilding the economy. Everything to date is simple looting, paper-hanging, and the rewriting of history.

Until the median wage improves significantly in real terms, and the economy is put back on a productive basis without relying on the unsupported expansion of credit, there will be no recovery, merely sound byte opportunities for the smoke and mirror crowd.

This is the reality.