Hi, SevenSamurai,

Hier ist Nicole's Antwort (etwas laenger):

As you say, the larger trend has been upwards, in the direction of global economic expansion and greater risk taking, since the financial liberalisation of 1982 which ushered in the era of globalisation. The setbacks within that overall expansion have been cyclical phenomena at a lower degree of trend. However, we are now nearing a major trend change. The financial crisis of 2008 was a warning shot across the bow, but the main credit crunch still lies ahead. The expansionary years represented a tremendous increase in credit and debt, as money was continually created out of thin air. In doing so we created a situation of excess claims to underlying real wealth, or a crisis of under-collateralisation if you like. In the bust to follow our 30 year boom, these excess claims will be rapidly and messily eliminated, crashing the value of credit instruments and thus the money supply.

The returns to speculation (gambling on asset price appreciation through over-financialization) so far outweighed the returns in the real economy during the boom, that the parasitic speculative economy had come to be the dominant form of 'investment'. The real economy has been starved as a result. We have now reached the point where all the income streams of the diminished productive economy can no longer service the debt created. The marginal productivity of debt has gone negative, hence we borrow to generate negative added value. This is a leading indicator of a major trend change, as is the reversal of a historic high in margin debt. The markets are extremely vulnerable to a very substantial reversal as a result. Quantitative easing cannot generate willing borrowers and lenders, and cannot overcome the pace and power of a deflationary wave of debt default.

The deflationary tide emanating from China is similarly a leading indicator of contraction in the global economy. China's so-called economic miracle is actually a gigantic Ponzi scheme based on a mountain of bad debt. Without China's enormous demand for commodities, we will see many knock-on effects, particularly in countries whose business model is a leveraged bet on China. The impact on the derivatives market, through interest rates (a risk premium) and currency disruptions, stands to reveal the extent of counterparty risk, and the fatal flaw of lack of capital adequacy regulation. The risks are systemic.

Conventional economics, which neglects the role of credit entirely, is incapable of predicting such trend changes. Instead of analysis it merely extrapolates current trends forward, as if they would continue indefinitely. Credit may be demand neutral over a complete cycle of many decades, but it is not at all neutral within a cycle, and as such cannot be neglected in any realistic model. Credit acts to stimulate artificial demand during the expansion phase, effectively borrowing demand from the future. When boom turns to bust, that additional demand must be 'repaid'. This is why we experience a period of economic depression following a major credit bubble. We replace artificially high demand with a demand undershoot lasting many years.

Demand is not what one wants, but what one can pay for, hence in an era of powerful monetary contraction, there is an insufficient money supply in circulation to support the previous level of economic activity. As both the money supply and the velocity of money fall substantially, a liquidity crunch sets in, and deflation and economic depression become mutually reinforcing for a period of time. The virtuous circle of economic expansion becomes a vicious circle of contraction. Given that the bust is typically proportionate to the preceding boom, and that the boom of the last 30 years was one for the record books, we can expect a record period of contraction to follow. It should easily be on a par with the Great Depression of the 1930s, and likely larger.

If anyone is interested, all these topics have been covered in great detail in the primers section of my website The Automatic Earth. I would be happy to provide links on specific issues. Unfortunately they are in English. I can read German, to a point, but I cannot write it. Apologies for that.
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Wenn Bedarf besteht, kann ich auch ein paar Artikel von TAE uebersetzen.

Ciao!
SF