How This Will All End

How This Will All End

Wednesday, January 12, 2011

Executive Summary

• The inevitable market correction will be triggered by a forcing event, and which one is most likely
• The US has too much debt
• State bailouts signaled by Fed’s denials?
• “Not enough oil to repay the debt”
• Why the cost of debt service will drown us, even if interest rates remain low
• Bond market will lead the way
• The key signs to watch for that will signal the endgame is playing out
• Recommended investment classes for preserving wealth

Part I

If you have not yet read Part I of this report, please click here to read it first.

Part II – How This Will All End

In Part I of this report, I laid out my reasoning for why the game has managed to continue on as long as it has. Where a massive financial dislocation should have happened by now, in practice the impacts have been relatively minor compared to what many people had expected to happen.

But we cannot escape the fact that entirely too many debts and liabilities exist to pay off in current dollars. Either those debts will have to be defaulted upon, or they will have to be inflated away.

Even more important than the question of which one it will be is the question of when. That’s what we will explore here.

Why This Will Require a Forcing Event

In a recent podcast, I explored the world of Behavioral Economics with a leading practitioner, Dan Ariely. In this podcast, we learned that humans are wired to select an uncertain future pain over an immediate and certain pain. Whether the pain happens to someone you know or can see, or to someone you can’t see and will never know, actually matters a lot. If it happens to you or someone you know or can see, it leads to strong, behavior-modifying emotions, but if you don’t know or see the affected individuals, much less so.

Within this framework, we might say that deflation represents certain and immediate pain that happens to people you know (including yourself), while inflation is an uncertain future pain that will be spread out over a faceless many.