The Boundaries and Future of Solution Space – Part 1

Published on The Automatic Earth, by Raúl Ilargi Meijer, Aug 15, 2015.

We’re going to try something a little different. Nicole wrote another very long article and I suggested publishing it in chapters; this time she said yes. So in the next five days we will post five different chapters of the article, one on each day, and then on day six the whole thing. That way, you will have some time left over to spend with your families.
Just so there’s no confusion: the article, all five chapters of it, was written by Nicole Foss. Not by Ilargi.

INTRO: … //

… Global Financial Crisis – Liquidity Crunch and Economic Depression:

As we have maintained since the Automatic Earth’s launch in early 2008, we have lived through a gigantic monetary expansion over the last 30 years or so – the largest financial departure from reality in human history. In doing so we have created a crisis of under-collateralization. This period was highly inflationary, as we saw a vast increase in the supply of money and credit versus available goods and services. Both currency printing and credit hyper-expansion constitute inflation, but the outcome, and therefore prescription, for each is very different. While currency printing cuts the real wealth pie into many more pieces, each of which will be very small, credit expansions such as this one create multiple and mutually exclusive claims to the same pieces of pie, hence we have generated a vast quantity of excess claims to underlying real wealth.

In other words, we have created a bubble of virtual wealth, with no substance to back up the pile of promises to repay that it rests upon. As we have said before, this amounts to playing a giant game of musical chairs where there is perhaps one chair for every hundred people playing the game. When the music stops, those best positioned to understand the rules of the game will grab a chair as quickly as possible. Everyone else will be out of the game. The endgame of credit expansion is always a credit implosion, where the excess claims are rapidly and messily extinguished. This is, of course, deflation by definition – a contraction in the supply of money and credit relative to available goods and services – through the collapse of the credit supply, where credit is of the order of 99% of the effective money supply.

A credit implosion crashes both the money supply and the velocity of money – the rate at which money circulates in the economy. Together these factors determine how much economic activity can be sustained. With both the money supply and the velocity of money very low, a state of liquidity crunch exists, where there is insufficient liquidity in the economy to connect buyers and sellers, or producers and consumers. Nothing moves, so there is little or no economic activity. Note that demand is not what one wants, but what one can pay for, so with little purchasing power available, demand will be very low under such circumstances … //

… We will be looking at a period of acute liquidity crunch followed by a long period of chronic financial instability. The initial contraction will be driven by fear and that fear will persist for a long time. This will result in little credit being made available, and only at high cost. In other words, interest rates, which are a risk premium, will be very high as we move beyond the initial phase of contraction and fear is in the drivers seat. Deflation and economic depression are mutually reinforcing, hence once that downward spiral, or vicious circle, dynamic has taken hold, we will remain in its grip for many years.

Given that the cost of capital will be very high, and there will be little purchasing power, proposed solutions which are capital-intensive will lie outside solution space.

(full text).


NATO, the IMF, divisions, Grexit… Looking out to 2020: the return of European wars? on GEAB’s Newsletter, Aug 13, 2015;

British Government Racism, Europe’s Shame? The Plight of Refugees and Migrants, on Global, by Felicity Arbuthnot, Aug 13, 2015;

A pragmatic approach to external debt, the write-down of Germany’s debts in 1953, on VOX – CEPR’s Political Portal, by Timothy W. Guinnane, Aug 13, 2015: The Greek debt crisis (/2010-2014), (/2015), (/See also) – (Timeline) has prompted a surprising number of references to an obscure agreement signed in London 60 years ago. The 1953 London Debt Agreement (LDA) marked the end of a long period of German default on external debt owed to both governments and private entities …;

On Labour being taken over by Lefties, on Sturdyblog, by John Mann, Aug 2, 2015;

Global Capitalism – July 2015, Monthly Update, 96.42 min, uploaded by Richard D Wolf, July 22, 2015;
Richard D Wolf: on his website; on en.wikipedia; /See also; /External Links;

Un penseur très célèbre face à l’actualité – Noam Chomsky, 39.37 min, mise en ligne par MrFacilitateur, le 29 mars 2015;

La place des États-Unis et d’Israël dans le Monde – Michel Collon, 18.50 min, mise en ligne par MrFacilitateur, le 22 mars 2014;

Look Back, Look Forward and Look Down – Way Down, on The Automatic Earth, by Raúl Ilargi Meijer, Dec 5, 2011;

Welcome to the living dead economy, on The Guardian, by Larry Elliott, Dec 4, 2011;

Let Them Eat π, on Sturdyblog, by Alex Andreou, Dec 3, 2011.

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