In the long run, we are all dead.
JOHN MAYNARD KEYNES
Hotblack Desiato is a character from the satirical otherworld Douglas Adams created in The Hitchhiker's Guide to the Galaxy who spends a year dead for "tax reasons." This state of perpetual non-life was achieved by Desiato being hooked up to a "death support system." Our economy is on a similar death support system, and we call it the Federal Reserve,
I spend a lot of time listening to various economic thinkers warn of the impending economic collapse that never comes. It may or may not come, but so far, it has worn my patience thin. A bubble burst would be a good thing because it would end the calamity we find ourselves in today. This is the calamity of stagnation.
I suspect that the predicted collapse is never coming. This is based upon the fact that Japan has been in stagnation since the end of the 1980's as the Bank of Japan has followed Keynesian stimulation policies that amount to putting a cattle prod to a corpse. Nothing they do can bring or has brought their dead economy back to life. Now, the USA has been following the same program.
A widespread collapse would occur if Janet Yellen decided to hike interest rates much higher than where they are today. This is how the tech bubble and the housing bubble collapsed. The Fed gave a pin prick to the bubbles they helped create. But it is obvious today that no such pricking will ever occur by the Federal Reserve. They will keep propping up the failures and printing money and papering it all over. This is simply never going to end.
Capitalism needs failure in order to work. Malinvestment must be corrected. Bad businesses need to go out of business. People need to eat their losses. In short, capitalism needs the creative destruction of Joseph Schumpeter. The Federal Reserve is opposed to this creative destruction. Between Wall Street and Washington, all these friends of the Feddies want this spigot of free money to keep pouring. Not only is Janet Yellen not inclined to close the spigot, she has removed the handle and tossed it in the garbage.
If you are a rich one percenter, a government worker, or some other parasite, this is all great news. The Federal Reserve has your back. It will debase the currency continuously in order to prop you up for the forseeable future. The belief here is that success is not failing. An economy that never experiences a downturn is a good economy. You're not really dead until the rancid smell of decay hits the hallway, so keep those air fresheners handy.
The economy could and would come to life if they ever turned off this death support system. But failure is subsidized and rewarded while productivity and common sense are punished. Why work hard to earn your dollars when the Federal Reserve and the federal government simply hand them over in interest free loans?
How long can this madness last? It can last a long time. I suspect that it can last forever. This is because death is forever. The Japanese death support system has kept Japan in perpetual death for twenty years. They are in their third decade of stagnation with no sign of it ever ending. Consequently, a lot of economists of the Austrian school need to rethink their system. You are witnessing what they say could never be which is an economy without failure. Japan has it, and we have it, now.
What could change this? A currency collapse is one possibility. If hyperinflation ever hit, that calamity would cause a great deal of upheaval. Another possibility is that an Andrew Jackson style president could jawbone the Fed out of existence. But you would have to elect Ron Paul or Rand Paul to achieve this. Their moment has come and gone. Donald Trump will not end the Fed and neither will Hillary. This leaves the pitchfork mob to riot and burn down buildings, kill politicians in the streets, and cause a massive civil unrest. Unfortunately, this will amount to a great deal of misdirected anger.
I have personally suffered from this stagnation, and I have believed that it began with the collapse in 2007. But I see now that I was wrong. This stagnation has been with us since at least 2000. 2007 was merely a bump in the road that made the Fed commit to money printing for the rest of time. What I got wrong was when this stagnation began and the belief that another bubble bursting was on the near horizon. Now, I see that the economy has been in stagnation for the last 16 years and will probably continue for a long time to come.
I don't have a strategy for stagnation except the distributist answer of creating your own economy. You can protect yourself against currency collapse and inflation theft by buying gold. You can avoid stocks, bonds, and other inflated assets. But I have no strategy when it comes to buying a properly valued home, an affordable college education, or starting a business. Anything touched by debt in this economy is warped and demolished. What we know about physics breaks down in a black hole, and what we know about economics also breaks down in a world with a central bank committed to extreme money printing forever.
Yes, a reckoning must come. The problem is that you will either be very old or very dead when that reckoning arrives. The madness can outlast you. John Maynard Keynes has possessed the minds of everyone at the Federal Reserve and in Washington, DC. The argument that Keynesians like Paul Krugman has made for years is that the creation of paper and debt has not been robust enough. Prior Keynesian stimulus was only halfhearted which is why it failed. In order to really succeed, you need to triple the national debt relative to GDP. We are already headed to double. The logic is simple. You are only broke when you run out of money, and the Federal Reserve can never run out of money.