One question, above all others, has dominated our recent discussions here. This is the issue of whether the financial system will fracture as the underlying “real” or material economy inflects from growth into contraction.

Has some kind of chaotic reset – either contractionary or hyperinflationary – become inevitable? Are we – to put it colloquially – heading into a re-run of the Wall Street crash and the ensuing Great Depression?

The answer is that we are. Only two outcomes remain possible. One is a cascade of defaults and asset price crashes, and the other is a full-on resort to money-creation, resulting in an uncontrollable surge in inflation.

The likelihood is that the latter will be tried, but will fail to prevent the former.

The financial system has been set up to fail.


To understand why, we need to follow trends in the relationship between the two economies – the “real economy” of material products and services, and the parallel “financial economy” of money, transactions and credit.

The road of folly

One of the main characteristics of financial markets is that they endeavour to price the future. Left to their own devices, they might well have done this effectively, pricing in a gradual and manageable contraction in the underlying economy.

Investors would have become increasingly risk-averse, switching from discretionaries into staples, and pulling back from non-sovereign credit exposure

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