- Understanding the details of the Ka-POOM! theory
- The end game: hyperinflation
- Transitioning to tangible (vs paper) assets
- The critical importance of timing as things switch from deflation to runaway inflation
If you have not yet read Part 1: When This All Blows Up, available free to all readers, please click here to read it first.
Now it’s time to revisit the Ka-POOM theory which posits that bubbles will be blown, then they will deflate (or threaten to, more precisely), and that will then be met with more money printing. Our view is that this cycle will continue until the entire system is utterly ruined, the underlying currencies destroyed.
What the 2008 financial crisis made clear is that when natural market forces work to purge the oversupply of poor-quality debt from the system. The bad mortgages (think subprime), the bad sovereign debts (think Greece), and the loan portfolios of over-extended financial institutions (think Citibank) represented ‘poor quality debt.’ When the market (finally) figured out that those debts would never be repaid at face value, or perhaps at all, turmoil erupted.
During times like these a vicious sequence begins: the market demands higher interest rates for the increased risks it sees. This makes debts harder to service, ultimately triggering defaults, which only compounds the difficulties as interest costs and defaults spiral ever upwards until the system is purged. Think of it as nature’s way of removing bad credit from the world, the way a lion chases the lamest antelope first.
Because in our fiat currency system ‘all money is loaned into existence’ (see chapters 7 and 8 of The Crash Course on-line video series), during periods of high debt default, the money supply shrinks. Money is created when a loan is made and, conversely, money disappears when a debt defaults (or is paid back). This is the textbook definition of deflation—a common symptom of which is falling prices the cause of which is that there’s just less money (and/or credit) available to chase goods and services.
As a reminder, money is a claim on real wealth and debt is a claim on future money. All that happens when we borrow more and more is that we push our problems of paying for what we want out into the future. Which means that…
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