Things Are Unraveling At An Accelerating Rate

Does anyone else have the feeling that things are not just unraveling, but that the unraveling is gathering speed?

Though quantifying this perception is more interpretative than statistical, I think we can look at the ongoing debt crisis in Greece as an example of this acceleration of events.

The Greek debt crisis began in 2011 and reached a peak in 2012. The crisis was quelled by new Eurozone/IMF loans to Greece, and European Central Bank chief Mario Draghi’s famous “whatever it takes speech” in late July, 2012.

The Greek debt crisis quickly went from “boil” to “simmer,” where it stayed for almost two-and-a-half years. But no one with any knowledge of the gravity and precariousness of the situation expects the latest “extend and pretend” deal to patch everything together for another two years.  Current deals are more likely to last a matter of months, not years.

We can discern the same diminishing returns in Federal Reserve/central bank interventions, as the initial rounds of quantitative easing pushed stock and bond markets higher for years at a time, while the following interventions generated lower returns.

What factors are reducing the positive effects of intervention and causing increased volatility? Let’s start with the engine behind every central bank/state intervention and every “save” of the status quo: debt.

Debt Brings Forward Consumption & Income

Debt has one primary dynamic: borrowing money to consume something in the present brings forward consumption and income.  Economists describe trading future income for consumption today as bringing consumption forward. And since debt must be repaid with interest, bringing consumption forward also brings income forward.

Let’s say we want to buy a vehicle with cash, and it will take five years to save up the lump-sum purchase cost.  We forego current consumption to save for future consumption.

If we get a 100% auto loan now, we get the use of the vehicle (present-day consumption) and in exchange, we sacrifice some of our income over the next five years to pay back the auto loan. We brought consumption forward, and in essence took future income and brought it forward to pay for the consumption we’re enjoying today.

We can best understand the eventual consequence of this dynamic with a simplified household example. Let’s say a household has $2,000 a month in net income, i.e. after taxes, healthcare insurance deductions, etc., and rent (or mortgage payments), basic groceries and utilities consume $1,000 of this net income. That leaves the household with $1,000 in disposable income.

At the risk of boring finance-savvy readers, let’s briefly cover the difference between net income and disposable income. Net income can be earned (wages, salaries, net income from a sole proprietor enterprise, etc.) or unearned (dividends, interest income, rents, etc.) Net income can only rise by making more money or reducing taxes. There are limits to our control of these factors. In a stagnant economy, it’s tough to find better-paying jobs and harder to demand higher wages from employers.  Since governments’ expenditures are rising, taxes are also going up; it’s difficult for most wage-earners to cut their total tax load by much.

Disposable income is more within our control, as it is fundamentally a series of trade-offs between current consumption and future income/savings: if we choose to consume now, we have less income to save for future consumption or investments.  If we sacrifice consumption today, we have more money in the future for consumption or investing. If we borrow money to consume today, we’ll have less future income because a slice of our future income must be devoted to pay down the debt we took on to consume today.

If our household borrows money to buy a vehicle and the payment is $500 per month, the household’s disposable income drops from $1,000 to $500. If the household takes on other debt (credit cards, student loans, etc.) with payments of $500 per month, the household’s disposable income is zero: there is no money left to dine out, go to movies, pay for lessons, etc.

In effect, all of the future income for years to come has been spent.

The Only Trick To Expand Debt: Lower Interest Rates

There are only two ways to support additional debt: either increase net income, or lower the rate of interest on new and existing loans to free up disposable income.  Suppose our household refinances its auto loan to a much lower rate of interest and transfers its credit card debt to a lower-interest rate card.  Huzzah, each monthly payment drops by $100, and the household has $200 of disposable income to spend on current consumption or on more loans. Let’s say the household chooses to buy new furniture on credit with the windfall. This new consumption brought forward pushes the monthly debt payments back up to $1,000.

This additional debt-based consumption profits two critical players in the economy: the state (i.e. all levels of government) and the financial sector. The state benefits from the higher taxes generated by the sales, and the financial sector profits from transaction fees and the interest earned on the new loans.

The household’s consumption and debt rose as a result of lower interest rates, but there is a limit on this dynamic: lenders have to charge enough interest to service the loan, reap a profit and compensate shareholders for the risk of default. 

If lenders fail to properly assess the risk of default. They will be unprepared to absorb the losses incurred as marginal borrowers default en masse. This places the lender’s own solvency at risk.

Using this trick to enable further expansion of debt thus creates a systemic risk that borrowers will over-borrow and lenders will not have sufficient reserves to absorb the inevitable losses as marginal borrowers default and other borrowers suffer declines in disposable income that trigger further defaults.

In other words, the trick of lowering interest rates yields diminishing returns: the more debt that is enabled,  the thinner the margins of safety and thus the greater the systemic risks rise in direct correlation with rising debt loads.

The Trick To Increase Consumption: Punish Savers

While lowering interest rates increases disposable income and enables an expansion of debt, it also generates a disincentive for households to forego current consumption by saving disposable income rather than spending it.  Near-zero interest rates actively punish savers by reducing the interest income earned on low-risk savings accounts and certificates of deposit (CDs) to near-zero. Savers are pushed into either investing in high-risk markets that benefit the financial sector or by spending rather than saving—a choice that benefits the state, as more spending generates taxes for the state.

The Global Expansion Of Debt Has Increased Systemic Risks

These are the basic dynamics of the entire global economy: interest rates have been pushed to near-zero to punish savers and encourage expansion of debt-based consumption. But this inevitably leads to a reduction in disposable income and current consumption, as debt brings forward both consumption and income.

Once the borrowers have maxed out their borrowing power, there is no more expansion of debt or additional debt-based consumption.  This is known as debt saturation: flooding the financial sector with more credit no longer boosts borrowing or brings consumption forward.

Those who brought their consumption forward can no longer add to present consumption, as their future income is already spoken for.

That’s where the global economy finds itself today.

This vast expansion of debt on the backs of marginal borrowers and the expansion of risky investments has greatly increased the systemic risk of losses from defaults arising from over-extended borrowers.

No wonder every attempt to further expand debt-based consumption is yielding diminishing returns: net income is stagnant virtually everywhere in the bottom 95% of the populace, and further declines in interest rates are increasingly marginal as rates are near-zero everywhere that isn’t suffering a collapse in its currency.

The diminishing returns manifest in three ways: the gains from each round of central-bank tricks are declining, the periods of stability following the latest “save” are shrinking and the amplitude of each episode of debt crisis is expanding. 

That things are speeding up is not just perception—it’s reality.

In Part 2: The Coming Age Of Confiscation, we’ll look at the threat of the other fundamental driver of rising instability: the broken-logic TINA (there is no alternative) mind trap our global leaders are mired in. As the trajectory of the status quo worsens for all the reasons discussed above, government will become increasingly heavy-handed in appropriating the remaining wealth in order to keep things stumbling on just a little bit longer -- justifying its actions by claiming it "has no other choice".

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

This is a companion discussion topic for the original entry at

97% of money in circulation is created as debt.  Your savings are someone else's debt. Got that ?  Worth repeating. Your savings are someone else's debt. Hard to get your head around.
The consequences of this is that If they can't repay their debt then they will come after your savings.  Hard to take, I know, but the system is what it is.  They will do this through inflation, negative interest rates, confiscation of money in your account, taxes etc.


ps the only way that the system can avoid this happening is to maintain infinite growth on our finite planet !!

That is a really well put.  Thanks Ed.

Excellent point, Ed. And we can add the second half of that: our debt is somebody else's asset. So when we talk about Debt Jubilee, we're talking about wiping out trillions of dollars in assets held by pension funds, insurers, 401K retirement accounts, etc.
TANSTAAFL–there ain't no such thing as a free lunch.

If your savings are in "the system," (banks, etc), then your savings ARE someone else's debt.  But if your cash savings are in physical currency then much of that is avoided.  Cold, hard cash is still the debt of the Federal Reserve in the US, even though it isn't redeemable for anything.  I don't have to worry about the bank  being unable to honor my check or savings withdrawal slip. I only have to be concerned about whether the whole currency system will implode.
OTOH, if your savings are in tangible assets held in one's actual possession (gold, silver, land, etc.) then those savings are not someone else's debt.  I'm not holding my breath hoping someone will repay me my savings when I need them.

"OTOH, if your savings are in tangible assets held in one's actual possession (gold, silver, land, etc.) then those savings are not someone else's debt.  I'm not holding my breath hoping someone will repay me my savings when I need them."

Looks like you have prudently concluded your own wealth transfer prior to the impending crash deadline. Let us all replicate this fine example as best we can!

Please bear in mind that the rapacious nature of the state can legally confiscate or force us to dispose of any property that we protected from the debt ridden financial system. It might do this in a desperate attempt  to survive. Let us hope that it does not come to that.

Anybody can make predictions, but I became a little more interested in Mr. Smith's writings and points of view after his prediction last year that the dollar would actually strengthen.  At the time many of us were wondering when the ravages of inflation would take hold, especially with QE3 still alive at the back then.   I thought it was interesting he was calling for strength in the dollar at a time when a lot of us were thinking weakness would be the "obvious" outcome.
So I read the first part of this report with interest, and am intrigued by the title to Part II.  I immediately started to think of ways where TPTB would start to confiscate things of value…and some of the most logical paths would seem to be movement on a couple of "legal" fronts.  Raising the retirement age for social security benefits and asking pensioners to contribute more to current pensions will probably be two "quick fix" suggestions if the next crisis doesn't happen too quickly or if it is not too large.

Beyond that, I would expect further bailouts from taxpayers at the national level (unfortunately we are already on the hook for some risky bank endeavors) or even the discussion about bail ins starting to surface.  I believe bail ins fit the bill of the conversation happening in the above posts.

Sad to think we are about to enter an "Age of Confiscation".

An inflection point may be just round the corner.
"Energy ascent" = "Age of Accumulation"

"Energy descent" = "Age of Confiscation"

The circle completes.  Humans started out as a wood burning society, reaches to the moon, returns to a wood burning society.  (Unless we follow the Easter Island business model)


Land ownership always seemed an oxymoron to me if you consider the land tax as a form of rent payment.  The worst part is there are no 'rent' controls on these taxes…
ps I wonder how many years the planet's forests would last if wood burning became our primary fuel source?  Has anyone done a calc to see how many BTU's of wood exist in North America vs annual BTU consumption we use for heating?

I'm open to correction on the front end (unlike Brian Williams), but if my memory serves me correctly, the Irish very quickly burned through their trees and so the king(s) instituted capital punishment for the second offense of cutting one of the kings trees–all trees belonged to the king(s).  I think I will go for a black roof and water tank sun collector for heating–the government will have a hard time claiming the sunshine.

If Adair Turner (H/T Naked Capitalism) is correct inflation is some way off as it seems Japan is on its way to successfully monetizing its much of it debt without consequence apart from some currency weakness.
I seem to recall Ambrose Evans-Pritchard musing that the BoE should be able to get away with doing the same.

So far, so bad or so good depending on one's perspective. For Japan and the UK good. For PM investors not so much.

It would seem, though, that this genius monetization scheme will break down eventually with the catalyst and timing unknowable.

Wait for the snow to melt and grow vegetables in the meantime, I suppose.

I agree with the other posters, that's an awesome summary.  All forms of currency are someone else's liability at the same time they are your asset.  And as best I can tell, they all are backed up by some amount of debt.  However, there are some important distinctions to be made.

Currency, as Tom pointed out, is a liability of the Federal Reserve itself - probably the last domino to fall in our monetary system.

Bank credit, on the other hand, is a liability of a normal bank.  Banks die all the time, and if FDIC insurance turns out to be not enough, the difference between a liability of the Fed itself and a liability of one of its member banks might end up being very, very significant.

So in a real SHTF scenario, bank deposits and FRNs may end up acting quite differently.  Its easy to seize (bail-in) your deposits.  It is much less easy to seize your FRNs.

Currency, it turns out, is about 10% of M2 - total bank credit in the system.  (Note: M2 includes retail money market accounts, which often are comprised of short term bonds, and are thus not strictly bank credit.  But that's just a note for the geeks.)

Our energy consumption pyramid:  buildings are number 1 for energy consumption,  animal agriculture is  number 2 for energy consumption, and transportation is number 3 for energy consumption.
Building passive solar homes and offices would manage a large part of our energy predicament.  With a passive-solar design, there is no need for an AC/Heating unit.  The temperature of the building stays the same throughout the year no matter where you live. 

If we built new and retrofitted existing buildings for maximum energy efficiency, we could take a big bite out of energy consumption, and create jobs!  If we all switched to a vegan diet, then the number two energy consumptive activity would be routed.  Finally, developing walkable communities would take another big bite out of our third most energy consumptive activity.


…to appear to slam the Rich with higher taxes and give free cash to the Middle Class. The Rich will get no Social Security, etc…Additionally Gold will get slammed by all and every means necessary. Lastly, some of us tried to show Chris the errors of his ways in thinking Inflation and not Deflation first. He punished all (LOL!) with his little sissie replies, showed or rather led his minions in showing us his discontent and banished those who use their freedom as he pushed them away. His site was his excuse. Chris is a Hypocrite, and all he does is get his minions future earnings in his bank account every mouth. What is so hilarious is I re-up every month! Why? Charles H.Smith and information from guest that actual produce a jewel or two. See, I'm an information junkie and it has paid me back big time. Chris is what is known as knowledgeable in everything but master of nothing. Tell me where he has been right the last 7 years. Inflation, gold, wheat, war, just name anything. I digress though, he says I would rather be a year early than a day late. Well, the most chicken shit answer out there is m take. Anyone can predict a broken clock is right twice a day.

A really good description of how our money system works and a possible alternative here:


I learning things from it.

The mechanism of money creation described in your link would work just fine.  And it avoids the whole issue of the government having to pay interest on money that (more or less) it could create itself.  Why governments pay interest on money they can just print themselves is beyond me.

The thorny issue would be primarily one of which entity controls the rate of money printing in the society.  It is a simple matter to create a boom if you have control over the rate of printing.  If you are the government in power, changing that magical rate of printing will make everyone feel really good - assets go up, everyone gets more money, etc, and you will stay in power.  No need to have budget limitations.  Everyone gets everything they want!  And for all the best reasons!  Yay!

Here's my suggestion.  To leash the dragon of "government currying favor with citizens by endless print-fests" (gee, do u imagine they'd do that to stay in power), I would propose adding three things:

  1. demand deposit accounts can either be denominated in gold (stored by the government or elsewhere, convertible on demand.  The gold in storage must be audited yearly, and must be fully reserved/allocated) or in currency.  Transfer between gold and currency is a tax-free event.

  2. full transparency on the amount of money printed each month vs the money in circulation.

  3. A properly run futures market with position size limitations to discover actual price for gold, operating 24/7.

Once I can protect myself from government shenanigans of too much money printing, I don't care if the government prints like crazy.  Money will slosh right into gold and out of currency, removing currency from circulation.  It allows savers to easily execute a vote of "no confidence" in the government if they get too crazy.

Make it part of the consitution - and its all one package deal - and I'm fine.

However, without easily available protection for savers, we end up with Zimbabwe.

I really like the "fully reserved" demand deposit accounts.  I'd love to have one right now.  I've often thought  of opening "The Fed Bank" which simply took all its deposits and dropped them off at the Fed.  No possible way this bank could ever go under.  It would have to charge monthly fees for managing the deposits, but - talk about safety!  No need for FDIC.

People try to invent new monetary systems all the time.  I have no idea if your suggestion would work or not.  None.  
At the end of the day "money" is a human construct that is claim on energy.  The value of this "money" depends on how much of it is circulating in relation to energy (past and present) in circulation.  Past energy, by the way, is energy used in extracting resources and embedded in objects like houses, cars and iPhones etc.

The important thing is energy.


Climber, Money is a human construct. It is many things, including a claim on future energy. But the bedrock of all currency is trust, which is based in collective human emotion. If the majority of the population distrusts the currency it has no chance of success. It doesn't matter if it's backed by gold, silver, wheat, dirt, or nothing/everything. I've been reading the "Wealth of Nations" again, and the thread that runs through all of Smith's writing on money is that trust is the ultimate foundation.
It all comes full circle in our ability to build community where individuals trust each other. As PP says "trust yourself," but ultimately we have to trust each other. We don't trust the FED, we don't trust the government, we don't trust TPTB, we don't trust people outside our circle, etc… Switching monetary systems in this case will not solve anything, because the foundation will be the same. We already have the answers, but our hearts are not open to them.