muses of the moment

October 31, 2010

Exter Pyramid

These are scary numbers.

Click here for an updated Exter Pyramid.

As you can see, the derivative, national bonds, and money supply numbers are higher than before. As I said, things are much worse, not better. The opportunity for a worse crash (or major global credit contraction) in the future is higher than it was before QE1. Therefore QE2 will make the opportunity even greater, not less.

Even if half of the global derivatives collapse, it will be major. Even if half of the derivatives are formally written off in a reform package, it will be major. Even if half of the derivatives are considered by all global entities as worthless (no matter what the balance sheets say), it will be major. Extend and pretend has its limits, and there is no plan B.

The larger portions of this pyramid must contract, they are unsustainable debt. We have to mentally prepare for this. It will never be like the last 20 years again. The middle class will vanish.

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

Austrian economist Ludwig von Mises (1881 – 1973)

Our government/Fed has clearly chosen not to “abandon further credit expansion” with QE1 and  QE2 (and every other program the last 30 years). The current credit expansion will probably be limited to the primary banks creating derivatives and buying Treasuries (thus leaving the real economy out in the cold), but it is continued credit expansion on a massive scale none the less.

This pyramid shrinking is what the K-Wave Winter cycle is all about. There must be a correction to balance the last 55 years of credit expansion in the US. We have seen none of that global contraction overall, things have just moved around within the pyramid’s categories and overall it has expanded.

The gold and silver portion is always at the top, as it has no debt/liability attached to it to collapse. This why it is considered “insurance” in a Winter cycle.

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