THE GLOBALIZED PONZI SCHEME IS OVER
When Boomers were growing up, I am told that everything was made in the U.S.A. But by the time I was growing up in the 1980s, everything was made in Japan. By the late '80s, Japan was reaching the apex of its global manufacturing dominance. Their infamous asset super bubble was in a late stage parabolic blow-off top. It was said that at the peak of insanity the Emperor's Palace was worth more than all of the real estate in France. That the square footage of a $100 bill was worth more than the $100 bill. And then it all imploded into a 30+ year deflationary stagnation. Since that time, monetary policy has been weaponized on an ever larger scale in order to paper over the cracks in their disappearing economy. Most of that money found its way into overseas asset markets and helped fuel the global asset super bubble via the infamous "Yen carry trade". The arbitrage of borrowing cheap money in Japan and using it to buy financial assets in other currencies. Predicated on the belief that interest rates in Japan would never rise.
Then along came China in the early 1990s displacing Japan as a much lower cost supplier of global manufactured goods. China wanted what Japan had created - a prosperous fully employed middle class. However, their task at hand was much more difficult for China with 10x the population. Nevertheless, by the late 2000s with their accession to the WTO China had became the dominant global manufacturer. Now, everything is made in China.
The China bubble peaked in 2008 and subsequently the economy has fallen into Japan-style deflation. Now China's interest rates are collapsing to the zero bound. Whereas Japan was the greatest fear of U.S. politicians in the late '80s, now China is the greatest fear of U.S. politicians. Despite the fact that their economy is already imploding.
Note the divergence between global stocks and China's 10 year yield. We've never seen that before:
Which leaves the U.S. and Europe and the remaining OECD (wealthy) nations the last man standing in the global monetary Ponzi bubble. Since 2009, across the OECD nations monetary policy has been weaponized on an ever greater scale against the middle class. On the short-term end of the rate structure we had over a decade of 0% interest rate "free money" to help the middle class "borrow" their way out of a debt crisis. On the long-term end of the interest rate structure the Fed used "Quantitative Easing" (bond buying) to artificially elevate asset prices. So now not only do we have a middle class levered to the maximum, we have asset prices that are far beyond historical extremes in price. Which means that as this Ponzi scheme explodes, we will see record asset prices falling to new lows while debts remain at all time highs. In other words, since the Global Financial Crisis, central banks have buried a generation under a mountain of debt. All because the "system" was deemed too big to fail.
It was all going well until last week because despite being in deflation for 30 years, Japan's economy had ironically been suffering inflation this past year due to the inevitable collapse in their currency caused by the rest of the world raising interest rates without Japan. Through the collapsed exchange rate Japan has been importing inflation from the rest of the world. Which meant the BOJ had no choice but to raise interest rates or become a Third World country via collapsed currency. In other words, many pundits who did not (want) to see this day coming were just assuming Japan would implode quietly. Or, they don't understand basic economics. Regardless, Japan put up a fight for their currency last week and in the event a miniscule .25% interest rate hike inadvertently exploded the globalized Yen carry trade. Six trillion dollars of global stock market cap was wiped out in ONE day. That's how much leverage has accumulated globally over these past years and decades.
Therefore, it's ironic that this clueless populace is too busy watching the Olympics while on vacation in August to notice that this entire Ponzi scheme is imploding in real-time. They have not even the slightest clue that their aspirations for the future are a figment of their imagination. They have unknowingly fallen prey to self-delusion while enjoying human history's largest monetary asset bubble.
Anyways, that's what history will say.
