Jim’s Mailbox

Posted at 12:19 PM (CST) by & filed under Jim's Mailbox.

This makes common sense in a world without any. Higher debt + higher rates=higher debt service payments. The only question is, how high is too high?


Hi Bill,

Jim thought you might like this piece.



Myrmikan Research End Game
February 14, 2018

Myrmikan erroneously called the end of this credit cycle in the summer of 2015.

China’s stock market had cracked, and the world was following the classic model of how credit bubbles pop, repeating a pattern established in the nineteenth century. The fractional reserve money creation process would push yields in the London money center artificially low. Low rates would encourage domestic malinvestment and prompt capital to go abroad in search of higher returns in sketchy locations. Overcapacity always ends a boom, usually affecting the credit periphery first because the most thinly capitalized are the least able to bear the diminution in cash flow that overcapacity brings. As capital began to be wiped out abroad, there would grow a need for liquidity in the money center from those most affected, which would drive interest rates higher, and thus the contagion would spread to the center.

The 2008 panic was a variation of this story in that the periphery was not some place like Argentina or Poyais (a fictional country of which Scottish adventurer Gregor MacGregor purported to be king in order to raise credit in London) but the U.S. subprime housing market. Nevertheless, the mechanism was the same: despite the Federal Reserve’s continual claims that it had “contained” the risks, losses in subprime housing credit crept inwards toward the center until the fractional reserve process suddenly reversed and nearly took down the global banking system.