Why the World Is Financially Doomed in Four Charts

Why the World Is Financially Doomed in Four Charts (January 6, 2011)
Charles Hugh Smith

The global economy is doomed to implosion, and here are four charts which explain why.

Though the complexities may appear endless, the global economy's coming implosion is really fairly easy to understand: here are four charts which do the heavy lifting. It boils down to these basics:

1. When money is dear and difficult to borrow, then productivity and capital accumulation are encouraged, speculation, malinvestment and debt-based consumption are discouraged.

2. When money is "free" (zero-interest rate policy) and liquidity is unlimited, then the opposite conditions hold: speculation in risk assets, malinvestment and debt-based consumption are all encouraged, and productivity and capital accumulation are heavily discouraged.

3. When debts exceed the value of the underlying assets, the only way out of the Tyranny of Debt is to write off the debt on both the borrower and lender's balance sheets, wiping out their capital via liquidation and bankruptcy.

4. The "extend and pretend" policy pursued by all major nations is simply transferring the impaired debt from private hands to the taxpayers (public debt), crippling the economy with higher taxes and higher debt service.

5. The Central State's "extend and pretend" policy requires heavy borrowing every year to prop up the status quo, pushing the Central State (or equivalent, i.e. the Eurozone) into an inescapable double-bind: either continue increasing public debt and cripple the economy with high taxes and high public-debt servicing costs, or let the financial status quo of "profits are private, losses are public" implode.

The first path leads to default, as the Tyranny of Debt cannot be masked for long, while the second path wipes out the Financial Power Elite which feeds the politicians.

Here are the charts. Note how the speculative economy created the illusion of rising wealth for the bottom 90%, an illusion stripped away by the Default Economy.

In essence, the Financial Power Elites profited immensely from creating this illusory wealth which gave the bottom 90% the false sensation that their declining earnings and purchasing power were being offset by the "magic" of asset bubbles.

Then, when the bubble popped, the Financial Power Elites transferred the impaired assets to the taxpayers, a process which is still underway. The politicos of both parties are complicit; behind the simulacra of toothless "reforms," this process proceeds in myriad ways (Bank of America transferring toxic debt to Fannie/Freddie, etc.) Behind the smokescreen of conjuring a "wealth effect" to foster more consumption, the Fed's purchase of Treasuries (QE2) serves this transfer-of-debt-to-the-public process.

This same process is playing out throughout the global economy: Greece, Ireland, the U.S., and eventually, in China when its monumental property bubble pops.