Financialization’s Self-Destruct Sequence
We are in the latter stages of financialization’s self-destruct sequence.
Like all systems that follow an S-curve of growth and decay, financialization cannot return to its growth phase. I addressed the impossibility of reflating asset and credit bubbles in Let’s Pretend Financialization Hasn’t Killed the Economy (March 8, 2012).
But there is another dynamic at play: a self-destruct sequence triggered by central bank and Central State efforts to reflate asset and credit/leverage bubbles. All central bank and State policies aimed at driving capital into risk assets boil down to reflating phantom assets purchased with debt by issuing more debt that is based on newly issued phantom assets.Phantom assets purchased with debt cannot be reflated by issuing more debt that is based on newly issued phantom assets. Piling more debt/leverage on a sandpile of phantom assets (CDS, bonds that cannot possibly be paid back, empty condos in the middle of nowhere, etc.) only heightens the probability that the unstable pile will collapse.
The implicit Central Planning campaign to trigger “mild” inflation is part of the self-destruct sequence. Central planners metaphorically fight the last war, or at best the last two wars, and so they remain blind to any dynamics that did not exist in their case studies.
In the 1970s, central bank easing and Central State stimulus sparked a nasty bout of accelerating inflation. This reduced the weight of debt because wages inflated along with goods and services.
Now that labor is in surplus globally, wages are not keeping pace with inflation.