When the real problems are masked with fake “solutions,” the chickens eventually come home to roost, and we wake up to the reality that the fake “solutions” have only made things much worse.
The reality that the global Status Quo has fixed absolutely nothing in four years is finally coming to roost in the global economy.Though there is an endless array of complexity to snare the unwary, the source of instability is both visible and easily understood: too much debt that will never be paid back. Making matters much worse, much of the money that was borrowed–by sovereign governments, local governments, households and private enterprises–was squandered on consumption or malinvestments, and so there are precious few assets or collateral underlying the debt.
Even when there is an asset–for example, a vacant house in a vacant development in Spain, or a Greek bond–the market value is considerably lower than the purchase price.
The reality is that trillions of dollars, euros, yen and renminbi in phantom wealth will disappear when the losses that have already taken place are finally recognized.Everyone in the world with exposure to the global economy will become poorer in terms of abundant money floating around buying goods and services as credit dries up and deleveraging wipes out trillions of dollars, euros, yen and renminbi of phantom wealth.
Deleveraging is the process of the market discovering the true value of the asset underlying the debt and the difference between the debt and the proceeds of the asset sale being absorbed as a loss.If an entity needs to liquidate liabilities and/or raise cash to pay bills and interest, then assets will have to be sold. If the market value is less than the debt, then a loss must be booked. If a house carrying a $200,000 mortgage is sold for $100,000, the lender has to absorb a $100,000 loss.
Credit will dry up for a number of reasons, but the basic dynamic is that lenders no longer have enough collateral to generate new loans (except for those guaranteed by Central States) and in a world where assets are being sold to raise cash to stay solvent (the mighty engines of deleveraging), then prudent lenders are wary of loaning money to purchase assets that are declining in market value.