Executive Summary

• Why the debt market is the powder keg that will blow things sky-high
• The most dangerous asset bubbles to watch and avoid
• The implications of a collapse in the bond market
• Where will money then go?

If you have not yet read Part 1: Hell To Pay available free to all readers, please click here to read it first.

Economic Deformations

The big problem with central bank policies, besides driving the largest wealth and income gaps in all of recorded history, is that they’ve massively deformed the financial and economic landscape. 

Too-cheap money has distorted just about everything, and has badly warped corporate incentives.  As one money manager put it so eloquently:

The backlash is coming – which might explain why governments are discovering that even with QE Infinity, their control of markets is more limited than they think.

I rather suspect the horrible truth will soon be out. The last 7 years of extreme monetary experimentation has created a mutant economy… where the only beneficiaries have been holders of financial assets.

Investors have been loath to invest in real plant, infrastructure or jobs because the returns look so limited by artificially low rates. Instead they invest in financial assets because these returns are being inflated by monetary policy. Doh.. 

QE and ZIRP has the effect of sucking all the financial momentum out of economies – corporates borrow billions; not to invest in creating jobs and wealth, but to buy back their stock – further fuelling financial asset-inflation. 

Eventually the economy sinks into an entropy-minus state where the only game is financial assets fuelled by increasingly pointless further monetary injections…

(Source)

There’s a lot packed in there and it’s all spot on.  There’s literally no place one can look and not find an economic or financial distortion.  “Gains” (such as they are) have gone to holders of financial assets, and corporations have opted to buy back their own shares and to not re-invest in property, plant, equipment or people. 

All of this works until the day it doesn’t, and then there will be hell to pay.