When This Ends, Everybody Gets Hurt

Central banks around the globe have taken us all into uncharted territory, where the possible paths boil down to a binary outcome: either it all works out or it doesn’t.

Unfortunately, the ‘it all works out’ outcome has a very low probability of actually happening; so the binary outcome isn't equally weighted like a coin toss.  By ‘working out’, here’s what the central banks all striving (praying?) for:

  • Inflation of 2% to 3% per year
  • Economic growth of at least 6% per year (nominal) and a real (inflation adjusted) rate of 3% per year.

The reason that the central banks want all of this growth and inflation isn't because it's good for you, me, or anybody we know. Instead, the bankers need it because that’s what our exponential money system requires.

Slaves To The System

It bears repeating, inflation is not rising prices -- those are symptoms of inflation -- but instead is the expansion of the existing stock of money and credit.  If we observe the symptom of 'rising prices', then that means the underlying mechanism of expansion of credit (mainly) and money (less important because the money supply is a only fraction of the volume of credit) is functioning.

Think of it this way: it’s like the central banks want a slightly feverish patient and so they track the patient's temperature. They tell everyone that 100 degrees, perhaps 101, is the perfect termpurature...slightly elevated, but not too much.  But the patient's temperature is merely a symptom.  The underlying reason for having an elevated temperature is having too many foreign bodies living within the patient, like having too much money and credit in an economic arena.

With increasing levels of credit in our monetary system, the system functions reasonably well and enough new loans are being made to service both the principal balances of prior loans plus their interest payments.  But with stagnant or falling levels of credit, the exact opposite is true and the entire financial system slips into collapse mode.

We are now in service to our system of money, not the other way around. That is, we have a money system to which we are now slaves. It's either expanding or collapsing, but has no stable state; no easy equilibrium that it can inhabit. 

The tragedy in all this is that we can easily have a different system of money that does not make such unreasonable demands of us. But virtually nobody in power is (yet) discussing this idea.

The Folly Of Endless Growth

Getting back to the central bank wish list, nominal GDP of at least 6% with real growth of 3% allows governments to expand their debt loads by 3% per year without them ever getting larger in proportion to the underlying economy. That way, they never have to be paid back. They only grow larger, and this means more borrowing/credit in the system which is part of requirement #1, above.

So the entire central bank playbook, in slavish devoted service to an obviously dysfunctional system of money, boils down to endless credit growth coupled to endless economic growth.

Endless growth. When you hear of how central bankers are ‘battling deflation’ or ‘seeking price stability of at least 2% inflation’, just think to yourself What they really want is endless growth.

The next thought you should have is Hey, is that even possible? Or even, advisable?

The answers, clearly, are No and NO!

Every day, we have further confirmation of the idea that the world has limits and that economic growth requires more resources. Water, soil, fisheries, forests, ore bodies, and energy sources are all being overtaxed and rapidly depleted at even today’s level of economic activity.

If resources are finite but economic growth has to be endless (again, to support our chosen system of money, and for no other reason), then there’s a gigantic conflict brewing. And that's the subtext to the entire confusing array of political and monetary actions and reactions of late. 

A Simple Example

The idea that endless growth isn't realistic needs to be explored as often as possible simply to counteract the huge volume of spoken and written words that profess it’s exactly what we both want and need.

For most people indoctrinated with the endless growth narrative, we have to engage in a bit of deprogramming before we can have a proper conversation.

So let’s start with a simple example that lays this all bare.

China has been on a very impressive program of economic expansion. Of late, that’s slowed down just a tiny bit and it’s causing quite a bit of worry among the Chinese leadership, which believes that fast economic expansion supports social stability:

Chinese economy posts lowest growth rate since 1990

Jan 20, 2015

BEIJING — China’s economy last year slumped to its lowest rate of growth in 24 years, the government announced Tuesday.

China’s gross domestic product grew 7.3% in the last quarter of 2014, and 7.4% over the whole year, the slowest rate since 1990 and below the official target of 7.5%.


Now, let’s examine that 7.4% rate of growth using the handy ‘rule of 72’, which will answer the question: How long will it take, in years, for something expanding annually at 7.4% to double?

The answer is simply 72/7.4 which equals 9.7 years.  That is, if China continues to expand at 7.4%, its economy will be fully twice are large as it currently is in just under ten years.

Twice. As. Large.

Think about that for a minute. That means (roughly speaking) twice as much energy consumed, twice as many cars on the road, twice as many factories churning out twice as much stuff. Twice as much economic activity in less than a single decade from now. That’s what a GDP growth rate of 7.4% means.

Of course, you won't encounter any such dot-connecting in any of the articles you will read about China’s growth -- desired or actual -- because the implications of being ‘twice as large’ are not yet part of the global dialog about economic growth. Yet.

So let’s explore just one of those implications by looking at China’s coal consumption. Energy and economic activity are very tightly linked. If you want to have more economic activity, you're going to use more energy. Coal is heavily used in China to generate electricity, which is a critical form of energy for economic expansion.

In fact, when we look at China’s energy consumption over these past few decades, we note one period between 2002 and 2009 where its energy use fully doubled, with coal being, by far, the largest component of that doubling:


In just 7 years, energy use doubled!  Again returning to our handy ‘rule of 72,’ but in an opposite direction, we can divide 72 by 7 years and calculate that China’s energy use was growing by 10.3% per year during this period.

How does this compare to China’s reported GDP growth during the same period?  Well, according to The World Bank, between the years 2002 and 2009 China sported an average rate of GDP growth of 11%.

As expected, the growth rates for energy consumption (10.3%) and economic expansion (11%) were very tightly coupled.

Now let’s take note that, in 2012, China consumed 49% of all the coal consumed in the world. How much of the world’s coal will China consume if it doubles in the next 10 years?

Well, a doubling is a doubling: China’s current 7.4% GDP growth rate implies that in just 10 years, give or take a little, China will consume as much coal by itself as the entire world does today.

But then what? What about the next 10 years after that?  Eventually, we all have to come to the same conclusion: it's just not possible for China to double its coal consumption forever. Sooner or later, real physical and environmental limits apply.

It's Already 'Later'

My argument is that it’s already ‘later’. We're living through the period of time when that dawning recognition of limits will finally burst over the horizon, shining a very bright spotlight on a frightening number of our global society's unsustainable practices.

The most urgent of them all, as far as everyone reading this is concerned, is the very uncomfortable fact that it is our system of money that is most likely to break first and hardest because its very design demands endless growth, without which collapse ensues.

As the China example illustrates, the prospect of endless economic growth is simply not a workable plan because resources are not infinite. Our global obsession with growth is the very definition of unsustainable. Someday reality is going to intrude and ruin the party and very few are actually prepared for that future.

A very big problem we all share is that the world’s central banks have been vigorously defending the status quo (of endless growth) and that means we all face a very bad period of adjustment when their efforts finally fail.

That moment of failure is coming closer and closer. Recent actions by central banks have exposed their increasingly desperate mindset and have even called into question the one thing that absolutely cannot ever be questioned: the ability of the central banks to deliver on the promise of endless growth.

Central bank credibility (as fictitious as that may be) is essential to maintaining the current narrative, BUT central banks are rapidly losing their credibility (which should have happened simply via deductive reasoning a long time ago) and the strains are showing. Their actions are increasingly wild and extreme (SNB, anyone?), and it's our view that 2015- 2016 will mark the end of this long run of overly-ambitious central bankers and over-complacent markets.

When credibility in central bank omnipotence snaps, buckle up. Risk will get re-priced, markets will fall apart, losses will mount, and politicians will seek someone (anyone, dear God, but them) to blame.

In Part 2: The Consequences Playbook we spell out what will happen next and how you should be preparing today for what might happen tomorrow. Suffice it to say, a tremendous amount of wealth will be lost if (really, when) the central banks lose control. And standards of living for many will be impacted.

A little preparation today can make a huge difference in your future.

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

This is a companion discussion topic for the original entry at https://peakprosperity.com/when-this-ends-everybody-gets-hurt/

In the MSM interviews with Movers and Shakers from Davos this week, the biggies are all exuding lots of confidence and solutions to any and all problems.  Mario (not the video game) is slyly promising QE (i.e., RobinHoodism) for Club Med, but (because of Germany et al.'s resistance) in a rather contorted way that will only buy a little time.
In other words:  more of the same.  Kick the can down the road as long as you can and maybe a fairy godmother will appear and make all the darkening clouds disappear so that BAU run on forever.


A timely post for me, Chris.  Just this week I was discussing how finance and financing has been so prevalent in our personal lives, that it seems as though the concept Debt has become omnipresent and acceptable.  But just like Voldemort, its name is never spoken outright.  What saddens me in this discourse is that government is setting the wrong example.  When the state attempts to finance itself as a corporation, well the private & public sector economics clash and make a big mess of things.
As I am, in Adam's (Taggart) words, in the "fallow" period of finding authentic work, and currently a step "out of the money system", it is very very clear to me how the pressure to earn, the pressure to spend and specifically to consume is omnipresent.  But there seems to be a change in the air. 

In my social circles, I'm noticing that I'm not the only one and that there are more folks in my age group (mid 40s) who are taking a "time out" from the rat race.   My gentle words to them is that being a jack-of-a-trades might serve better in the long run, than a specialist in an energy demanding industry.

There's just a lot of nonsense out there in the economy these days…  And we need to get back to basics.

'That's only ever happened' sly look at the camera 'in the past' absolutely brilliant!!!

what you say, in fact I would simplify it further by stating that the issuers of the currency (promises to pay) have a complete monopoly on the people of this planet and all the resources. as long as they have citizens that are willing to work for the debt, forced through legal shenanigans basic needs or otherwise, that evil monopoly will prevail until the ultimate demise of humanity. 

I have to say, there are few people who can tie the threads together in as simple, yet satisfying a way as Chris.
A few simple examples that are directly on point serve to remind us what the conclusion must be, then point out where we are on the timeline, and what the next steps are likely to be.


Market so far - reaction to ECB QE is pretty creepy, flat and trending down.

This is my post to FB. Am I missing anything big?
Economic- So, the global currency wars enter a new phase with the European Central Bank's decision to buy sovereign bonds to the tune of 60 billion Euros a month. For those who know about such things, "buying bonds" happens when a central bank creates money and uses that newly created money to buy the bonds issued by governments in order to raise money to cover budget deficits/shortfalls. So, in essence, the central bank buys up government debts. This has the double effect of injecting cash into the market and enabling governments to carry larger debts than might otherwise be possible or feasible.
As I understand it, there are three problems with this approach:
1) Debt is debt. It is a claim on the future, because when you borrow money now you are implicitly saying the future will pay those debts back. The larger the debt you incur now, the more prosperous you expect the future to be later. You also hobble the future prosperity more by saddling the future's income with debt payments. Anyone who does their own family finances understands this concept, and it isn't any different for governments than it is for us. Enabling the government of a nation to carry larger debt doesn't create prosperity...it just shifts prosperity from the future into today. At the expense of the future.
2) The newly created money ultimately creates more supply of fiat currency in the market, which lowers the value of each piece of money. The declining value of money usually manifests when prices rise; this is what we term "inflation." The reason why we haven't seen inflation from these rounds of money-printing is because the money is being injected into the bond and stock markets, where most average people don't hold assets, and where it has far less impact on "Main street" than it does on "Wall Street." THIS is why the economy hasn't gotten substantially better for average people but HAS been a windfall for the wealthier classes (who ARE substantial players in bond and stock markets). This is also explains why the stock market has reached such lofty heights, while the bond market has seen such historic low yields: inflation has hit the stock and bond markets, and prices have risen.
3) When a nation's central bank prints money, it also has the effect of lowering the value of that nation's currency against OTHER currencies. This makes exports from the nation that is printing money *cheaper* vis-a-vis other countries, which in theory makes a nation's exports more attractive and causes other nation's exports to become more expensive. Dropping the value of one's currency, then, is a boon to YOUR exporting companies and a threat to OTHER nation's exporters. Thus, printing money is an economic weapon. That is why many economists call programs like "Quantitative Easing" a currency war. It's been going on since 2007, and it's getting ugly.
In any case, with the European Central Bank now printing money, the circle is now complete. Japan is printing money, the United States has printed money, China is printing money, and the European Union is printing money. 
And the global economy is still declining, and falling into recession (as evidenced by declining GDP's, falling oil prices, falling copper prices, etc). So, the laughable thing is that printing money is NOT creating prosperity, and is in fact causing more volatility and bigger "bubbles" of assets that become way, way over-valued. I'm having real trouble seeing how this ends well.

to this site, otherwise perfect.

What is going on in the ME?  Bebe siding with Senators in pushing more Iran sanctions, while Mossad is telling Obama to scuttle the sanction bills because they would screw up nuclear negotiations with Iran.

[quote]The Israeli intelligence agency Mossad has broken ranks with Prime Minister Benjamin Netanyahu, telling U.S. officials and lawmakers that a new Iran sanctions bill in the U.S. Congress would tank the Iran nuclear negotiations.[/quote]

Huh, how do you read this split in Israel?  Certainly sews confusion in the already fractious ME.




Oh, I've linked PP many times on Facebook! Probably why so many friends and family treat me as a black sheep these days.

Why Europe's €60b monthly bond-buying plan will save their economy

Thanks, Snydeman, for the clarity of your explanation. For me too, it's perfect, and I think it nicely complements Chris's work. I may well use it with others as an intro to the latter (giving credit to you, of course, for your thoughts).
Terry L

Thanks, Terry! No worries on giving me credit: At best all I have done is synthesize what Chris and others have been saying, and trying to translate it to "everyday speak" for my friends, family, and students (something I regularly do as a teacher anyway). Chris exceeds at doing this already, and all I wanted to do was find a way to explain the ECB situation in a way they would be likely to read it, should they actually give enough craps to bother. I can't really affect the latter, mind you. In any case, the research and hard work is theirs, not mine. I'm just a layman trying to understand things that are being said here and on sites like Zerohedge, Truthdig, etc.


Either way I'm glad my synopsis helped!

With rates at historic lows, my vote is: QE will end up doing nothing meaningful to get the Eurozone out of its difficulty.  Except driving the Euro lower (currently trading with a 113 handle, prices last seen in 2003) and gold higher - much higher in Euro terms - I think Euro QE will only demonstrate just how powerless the ECB is to address the primary issue: too much debt.
Debt hasn't been on the table for a long time now.  However in three days,  debt will once again become the elephant in the room.

The ECB will have put an ill-fitting bandage on a minor wound, while the patient is just about to have a heart attack.

I will say this much.  The principle of money printing and buying bonds on a pari-passu basis having been established might be very important for the debt resolution step.  I just wonder just how much fuss and bother we all need to go to before the debt issue finally gets addressed.

 …and everyone seems to be racing for a chair.
 I've been trying to connect the dots on all the financial and geopolitical chaos of the last few years and I'm coming to the conclusion that it appears that the US is doing everything in it's power to preserve dollar hegemony even though that probably isn't possible. Jim Rickards last two books on the subject call it a currency war, but now it seems like he's actually dancing around the next logical step. I'm beginning to think it's actually much larger than that. I think it's actually going to require a global monetary reset and a shift to a supra-national SDR.

 I recently found JC Collin's website philosophyofmetrics.com. His main premise is that most of what we're seeing in the world today are ripples on the surface of the international monetary system as it shifts from dollar hegemony to an SDR based multipolar world. All of the real action is going on behind closed doors, beneath the surface as it were, as the worlds governments and central banks jockey for position ahead of the next systemic shock that precipitates the next Bretton Woods. He appears to have been writing for a years now but I just stumbled on to him a few weeks ago. I've been lurking here, and other places like it, for years and never heard of him. Anyone else familiar with his work and had the time to digest what he's saying?


I've not read it, but will visit the site later today and start reading! I have a hard time imagining a scenario where the vast majority of the world - especially all of the "big players" - accept a global currency. The financial losses from a shift away from today's currencies to an entirely new model would be catastrophic at best, and the conditions that might lead us to accept such a thing would have to be worse than they were in the 1930s and 40s, right? Those kinds of conditions coming again, but on an exponential scale relative to the Great Depression, would most certainly lead to conflict - a conflict I can't see us walking away from. Then again, I doubt anyone in the 1920s could have foreseen the great Capitalist nations working hand in hand with the Communist Devil (USSR) either, so I suppose anything is possible.

The other problem is that even IF there somehow becomes a global currency that is accepted worldwide, that's only one of the many crises we are facing in the 20-teens (as Chris likes to call them); energy won't suddenly appear if we adopt SDCs, and the environment sure doesn't care either way…it will still shift in ways that will put us under major stress.

Aloha! Been writing on this subject many years and back in the 2008 era, that almost destroyed the world, I used to equate the EU to that tv show The Weakest Link. With every "union", whether it is a marriage or a trade union or the EU the union is only as strong as its weakest link.
With that in mind I raise the "growth" and call with … THE WEAKEST LINK!