balloon theory

By Craig Harris
4.14.2010

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History and Background

In 2008, the peoples capacity to finance the debt they carried was exceeded. A global balloon of debt burst causing the largest financial crisis in world history. As articulated by the former Secretary of the Treasury to the US congress, a near cataclysmic chain reaction breakdown of the entire global financial system occurred. With the near systemic failure of the existing financial system, the Keynesian economic model was exposed as a fraud, and other theories and ideas are now emerging in an attempt to better explain past events as well as to offer predictive value that the now discredited Keynesian model will surely fail to predict.

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.  – John Maynard Keynes

It is a current subject of debate whether the debt was intentionally inflated to an unsustainable level or not  by the FED for the purpose of consolidation of wealth, power and control of it’s shareholders, because that has surely been the effect.  Since 2008, ever fewer, ever larger and ever more powerful financial institutions exist, wielding enormous power and control over political bodies and entire populations.  We have anonymous owners of a powerful banking syndicate and non transparent accounting. They claim immunity from any kind of audit. They are granted immunity by their employees (the US congress and Senate).

“And the banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place” – Senator Dick Durbin on WJJG 1530AM’s Mornings with Ray Hanania

With the worlds assets defined as the marked to market value of all the currencies in existence (the debt) viewed as a balloon, this balloon popped in 2008. As the balloon burst (as money was lost),  more money (debt)  was created in an attempt to reinflate the balloon, but the total balloon size is now much smaller and even more importantly the composition of the balloon has changed. The post crisis actions have amounted to a wealth transfer from (John Q Public not too big to fail lost money) to (too big to fail got money). The trillions of dollars in losses were socialized, but the profits have all been privatized. Bailout capital was directly skimmed off the top by the people who caused the crisis and euphemistically called “bonuses” by their media sponsors.

So since 2008, not only did the FED not “fix” any problems, their global network of central banks, their shareholders, their affiliates and their too big to fails have effected a global wealth transfer from everyone else to them. It is notable that the too big to fail’s margin calls were met by the people of the United States and other countries, instantly doubling 200 plus accumulated years of US debt and globally demonstrating the institutions deemed too big to fail along with the governments themselves now getting even bigger and more powerful. This balloon reinflation was all financed by fiat money in the form of a guarantee to be able to tax the people’s future labor. So looking at any instantaneous balloon size as a pie chart, the capital allocated to the banks increased and the capital allocated to everyone else decreased. That is the definition of a wealth transfer and an explanation for the true state of the economy today.

Whether intentional or not, the creation and then the bursting of this last in a series of ever larger serial bubbles was orchestrated by Alan Greenspan. By suppressing short term interest rates for several years prior to the burst while watching a housing mania develop, the eventual bursting was assured. Mr Greenspan is now quick to deny any responsibility for this obvious cause and effect, as would be expected. As interest rates moved lower during this period, the size of the mortgage people could “afford” was increased and a mania ensued causing real estate prices to spiral higher, thus setting the stage for the housing bubble and it’s subsequent burst. The current steward, Mr Ben Bernanke, has overseen the greatest wealth transfer in the history of the world, from the people, to the banks.  Mr Greenspan and Mr Bernanke’s only remaining defenders are the people in the banking system, their corporate press portfolio, and a few shameless shills who still call themselves professors.

The important point to note is that this bursting balloon of debt was exceeded on 90-100 percent leverage and the assets marked to market is now a loss of some, all or more than the entire individual or corporate net worth. The continued fallout is not at all unlike rolling over a losing position at 95 percent leverage in the futures markets, absorbing the cost of carry at every rollover. At some point, everyone in this position goes bankrupt. Even after the bailouts, today in 2010, there is a suspicion that the banks are still technically insolvent, amid widespread technical insolvency among the population. We don’t know for sure because there is no transparency in the accounting. Assets can be held “off balance sheet” and are not required to be marked to market. Furthermore, the FED claims an immunity from any kind of audit.

Unrelated to balloon theory but important to note, many people realized the housing mania at the time, and yet the responsible parties all argue no one could have seen it in advance. They are still the ones in charge.  That is cause for tremendous concern. Everyone however can agree at least that the bubble did burst.

Balloon Theory Overview

In summarizing the market action prior to, during and after the acute financial crisis of 2008, balloon theory can be used to explain the behavior of the global financial markets.

Balloon theory revolves around the simple idea that the global capital balloon is inflated or deflated by a global reserve currency status and the ground zero creation of the currency (debt) in by the FED NYC. As the balloon expands, the balloon capital is deployed from the US into markets around the world, inflating them as well. As the balloon contracts, the reverse happens. Margin calls in the US are met by repatriating foreign investments back into dollars. During the acute crisis, the US dollar was rising and commodity prices were falling. The corporate media pundits and the people who caused the crisis called it “a flight to safety” and “deflation”. A flight to safety to ground zero of the financial crisis? No, a repatriation of balloon capital back to the US to meet margin calls. So balloon theory says the whole “flight to safety” argument is a red herring or an erroneous explanation for a real event. There is no safety in an unpayable debt, which is what the US dollar and several other fiat currencies now represent.

Balloon theory would argue for a very simple analysis of global capital market flows and investing, at least for the time being until the reserve currency status of the US dollar is lost and a global central bank emerges. It would argue that if the balloon of debt is expanding, then capital is being deployed from NYC into every corner of the world, inflating all asset markets around the world as happened from 2000 to 2008. This explains why you can for the most part overlay an equity index chart from two seemingly unrelated countries and have them look more or less the same. They are both being inflated by the same balloon. When the balloon is inflating, then foreign assets are being bought and US dollars are being sold. When the balloon is deflating, foreign assets are being sold and US dollars are being bought to meet margin calls. The entries and exits with smaller doors experience greater volatility. When the US dollar was rising in the acute crisis phase, commodity prices were moving lower because they are priced globally in dollars and dollars were rising due to repatriation of money (debt) to met margin calls.

Balloon theory also offers a simple explanation for inflation. As money is printed, the balloon inflates, and as the capital is deployed globally, the chief US export becomes inflation. All asset markets around the world become inflated from too many dollars (too much debt). So we currently have a situation where the balloon burst, and an attempt is being made to reinflate the balloon by printing money. All the western central banks are following the same prescription, some more than others.

In the past two years since the 2008 balloon of debt burst, the worlds central banks have all printed money (bought their own debt) to finance it in what has amounted to an attempt to prop up their currencies versus real assets by eagerly buying them. This has been called quantitative easing or debt monetization. This action has now forced long term interest rates to an artificially low level.

Printing money out of nothing on behalf of the people’s future labor and giving the money an artificially high market value has provided the appearance of stabilization, but this is another red herring. In other words, if the people can’t pay the debt, then the current market value of the currency is incorrect. By a fraud, the central banks have all printed money (bought their own debt up to and beyond the people’s ability to finance it) and have all in the process fraudulently priced their currencies. At the present time, artificial relationships are now required to be maintained by brute force clandestine open market activities to coerce markets into established policy ranges. This is a warning sign of future instability. While appearing to be a “fix”, once free markets are now reliant on what are in effect stealth price controls on currencies, equity markets, interest rates and commodity prices.

If as a central banker you can price your currency by taxing up to an infinite amount of the people’s labor, then that poses new future systemic risks. On it’s most basic level, the people do not have an infinite amount of future labor available to tax. Thus on it’s most basic level, the worlds financial system currently rests on the fraudulent premise that the worlds central banks can tax their future labor up to an infinite amount.

The most fundamental problem with the post crisis policies is that although the balloon burst, the debt which has not yet defaulted and the derivatives still exist. So reinflation of the balloon by printing money piles more debt on to the existing debt only to achieve a balloon size smaller than the existing balloon before it burst. Balloon Theory says the instantaneous result of this action will be global asset inflation but at a reduced activity level which is exactly what we have seen. It says the long term result of this action will be decay in terms of a declining standard of living for all of the tightly coupled western monetary system economies. Lower aggregate incomes will meet higher taxes and increased cost of goods and services as the currency (or currencies), which have in effect become tokens of unpayable debts, continues to lose their legitimacy. Some countries will, and are being affected more than others. Social unrest will likely develop and indeed has already developed in some countries like Greece. It is obvious now however, as it was during the real estate bubble, that ever increasing and now in many cases unpayable debts are no kind of fix and must eventually be resolved. It will be resolved sooner, or later, but it will be resolved. Math doesn’t lie. Central Bankers, politicians and their corporate media staff do.

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  1. April 14, 2010 at 3:32 pm

    Re: “All asset markets around the world become inflated from too many dollars …

    If the stated value, of “Federal” Reserve notes, declines enough with respect to copper and nickel, the 1946-2009 U.S. Mint nickels, composed of cupronickel alloy, could become somewhat rare in mass circulation.

    The April 13th metal value of these nickels is “$0.0614575” or 122.91% of face value, according to the “United States Circulating Coinage Intrinsic Value Table” available at Coinflation.com.

    • April 14, 2010 at 3:59 pm

      Good point, thank you.. I have recently been discussing in the EarthBlog News the melt value of a nickel exceeding six cents and the implications.

    • April 16, 2010 at 8:19 pm

      If you check the metal value of 5 pre 1984 pennies you’ll find the value to be~.12

  2. Ron
    April 15, 2010 at 12:41 pm

    So basically you are saying the FED inflates or deflates a giant balloon of fiat money and this inflates or deflates asset prices all over the world, right?

    • April 16, 2010 at 4:41 pm

      Yes, correct. It’s a very simple premise. I call it the Occam’s Razor explanation.

  3. April 16, 2010 at 4:20 pm

    With the SEC filing a civil fraud case against Goldman-Sachs today, there may be some “change” in the wind regarding the untouchables, i.e., well-positioned and heavy campaign contributors to those now in power. The political landscape is rapidly changing to one of: THROW ALL OF THE IMCUBENTS OUT! While the entrenched ruling class had much fire-power to try to buy the election in the Fall, the people are increasingly up in arms and eventually on the double-dip will take to the streets. At least those that pay all of the taxes for those who pay none!!!! The slime-bags in Washington now realize that burning some personna in the Bankster World at the public stack prior to November may serve their cause. However, it may indeed crash the stock market if the bought officials bite the hand of Goldman and JP Morgan just when they are needed to prop up the equity market! We live in interesting times. NOTHING HAS IMPROVED SINCE FALL OF 2008. In fact, anyone who can count on their toes (Congress????) knows that piling Trillions of Dollars of New Debt on top of Tens of Trillions of BAD Debt is not a solution to anything but just Chinese Theater. Accurate accounting is dead in the U.S. financial system and in Government reporting. How does one judge anything with such garbage data about??? The Greater Depression unfolds before our tired eyes. Got Gold?

    • April 16, 2010 at 4:47 pm

      Hi David.

      Thank you for taking the time for such a long comment. What you are saying has a lot of merit and is somewhat related to my most recent post regarding the corporate media’s de legitimization of itself. In a sense, we are all preaching to our own choir here, and the problem is that the mainstream remains completely ignorant of the reality.

  4. Rick
    April 16, 2010 at 5:01 pm

    Hey Craig

    First time I’ve been to the new site here. Great post and I LOVE format and especially the live RSS feed links. Good Job. You are doing a great public service.

    R

    • April 16, 2010 at 5:06 pm

      Hi Rick. Good to hear from you. WordPress makes it easy to add the live feed links for any sites that supply RSS feeds. I use it myself for daily news gathering.

      I have also extended a complimentary offer (see about earthblog news) to any bloggers on my blogroll or live feed links. My hope is that the new independent media can together challenge the establishment media.

      Craig

  5. Anonymous
    April 16, 2010 at 5:10 pm

    I’m here from a link at 321gold. Nice site. love the graphic 🙂

    • April 16, 2010 at 5:11 pm

      It was the closest I could find to a flying pig balloon with lipstick.

  6. Craig M
    April 16, 2010 at 5:33 pm

    With all central banks printing money with a global debasement of all currencies, I do not understand why you think people will want a global cental bank, which will print just more paper fiat currency? The history of China, which invented paper moeny, shows that when people distrust fiat paper, they return to specie currency such as gold, silver, copper and iron. Given the internet perhaps, the next iteration will be a digital currency backed by gold, silver and other metals.

    • April 16, 2010 at 5:38 pm

      Hi Craig and thank you for the comment. I don’t think people want a global central bank, I think that’s what they’re going to get. This has been an ongoing topic in EarthBlog News and I have written about this in some of the other posts here at my site. The rationale is too involved to go into in a comment reply, I hope you understand.

      Craig

  7. G. Sanders
    April 16, 2010 at 6:47 pm

    The original U.S. dollar had a statutory value equal to “the value of a Spanish milled dollar” (Coinage Act of 1792). The average Spanish milled dollar in 1792 contained 0.7737 ounces of silver, which is today worth about $13.92, and the original U.S. dollar also contained 0.7737 ounces of silver. According to Coinflation.com, the current U.S. dollar contains no silver and it has a melt value of only $0.06. The U.S. dollar has lost about 99.6% of its original, statutory value. That debasement of the dollar has allowed the Federal Reserve Banks to inflate away 96% of the value of the U.S. dollar since those Banks started operating in 1914. That’s 96% in 96 years. That’s not a coincidence, it’s a conspiracy; a deliberate effort to destroy the life savings of millions of Americans. END THE FED!!!

  8. Tom
    April 17, 2010 at 12:35 pm

    I have had an idea like your balloon theory floating around in my head too. Basically I think of it as a giant sack of cash that is created out of nothing for free and deployed by the investment banks. I agree about equity indexes of two completely unrelated countries looking almost identical and to me this is proof of the sack of cash balloon theory idea. It kind of makes all this country analysis and charting a moot point. Sometimes the simplest explanations are the best.

  9. April 18, 2010 at 4:56 am

    If anyones interested – the Gold man himself, Jim Sinclair has just released a book called A Pocketbook of Gold. Its on his excellent site – http://www.jsmineset.com

  10. steve
    August 5, 2012 at 5:50 am

    My country has avoided corrupt practices ,have bala

  11. January 25, 2013 at 12:03 am

    Heya i am for the first time here. I found this board
    and I in finding It really helpful & it helped me out much.
    I hope to present something again and help others such as you helped me.

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