Crazy Extend and Pretend Economic World – Cyprus Was the Warning

Wednesday, June 5, 2013
By Paul Martin

By: DeviantInvestor
Market Oracle
Jun 05, 2013

In no particular order the following is a list of what many people think are contemporary insanities. Since most of these have been widely discussed, links have not been provided. The information is easily available via Internet searches.

Paper Pushers & Money
Nixon temporarily closed the “gold window” in 1971. It is still closed. How long is “temporarily”?

The Japanese government spends 24% of its annual revenues on interest expense, but only because the average interest rate is quite low. If interest rates rise to 2.2%, their interest expense will consume 80% of the government revenues. Japan has been described as “a bug in search of a windshield.” Since their economy has a huge impact on the rest of the world, the inevitable disaster that results from crazy economics will not be pleasant for Japan or the rest of the world.

Abenomics (Japan) wants a 2% inflation rate but expects long-term (JGB) government bonds to yield only 1%. This seems like a disconnect in thinking that happens in a crazy world.

Unbacked paper money has always, throughout history, failed to maintain its value and eventually failed as a currency. Yet all modern countries use unbacked paper money. That is indeed crazy for all except bankers and politicians!

The Federal Reserve is annually creating “out of thin air” about $1,000,000,000,000 to purchase US Treasury debt and to buy toxic assets from bankers. If it sounds crazy, it probably is crazy.

Because the US dollar is the world’s reserve currency, the US can import large amounts of crude oil and consumer items and pay for them with newly created dollars and Treasury debt paper. For many years this has allowed the US to “live beyond its means,” but it has also encouraged other countries to find ways to bypass the dollar in international transactions. By abusing the privilege of the reserve currency status, the US has created the conditions whereby the dollar will be dethroned from that status and our standard of living must decline. What would happen if Americans actually had to pay for imports with either our own exports or physical gold bars?

We know that most sovereign governments are insolvent and will never repay all the debt they have issued. If this is so, why do individuals and corporations purchase the debt of insolvent countries knowing that it probably will not be repaid if “the music stops”? Crazy, delusional, or few other choices?

Quantitative Easing (printing money – monetizing debt) seems crazy. But, the US, Europe, and Japan all print money because it is “necessary” to buy sovereign debt and to purchase “toxic waste” from bankers. Why did so many people do so many stupid things such that QE is now supposedly necessary? If QE 1 & QE 2 had worked, why would QE 4, 5, & 6 be necessary? If QE 1 & 2 did NOT work, why promote the same failed policy? Unfortunately, the answer is that it works for bankers and politicians in a crazy world.

Social & Political

The Rest…HERE

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