Newton was right

It is somewhat apt, where in a day which applied physics and mathematics are widespread in their use in finance and investing, that newton's third law would come into play with a pervasive viciousness unimaginable by your average American citizen. To truly equate the current financial situation to newtons law, one must understand not only did Newton infer what goes up must come down, but that the reaction will be the opposite of the initial action, or, in layman's terms an over correction. An easy way to visualize this motion, is to think of a guitar string, which when plucked, moves in an initial direction, then snaps back beyond the original position from where the string started.

This over correction, though typically benign in the natural world, has a very unpleasant effect when taken in the context of economics and finance. The reality of the apocalypse the United States, and the rest of the World, faces, is an unwinding of decades of unfettered growth of credit, money supply, and economic excesses of all sorts. And much like a guitar string, the farther you push in one direction, the harder and farther the snap back. We sit barely past the apex of the boom, facing reversal which will only accelerate until we pass the mean, where an eventual bottom will be found. But as it stands now, no government bailout or printing press can possibly stop the events now set in motion, as they have in the past with lowered interest rates, stimulus packages, deficit spending, and all other assortments of misinterpreted and horribly applied Keynesian economics. These failed policies have led to a massive amount of money and credit being injected into the global economy, with it's most notable acceleration beginning with the outsourcing of manufacturing jobs from the United States. These injections of money, mostly by the deficit spending of the United States government, had two effects. Primarily, it helped to offset the hemorrhaging of critical manufacturing jobs from the United States economy.

Secondarily it helped spur on growth in developing nations, by allowing trade deficits to bloom without a damaging negative effect on the US economy in terms of raw GDP or inflation. The government put money directly into the hands of the newly poor via welfare, or section 8 housing, or any other host of socialist programs, and additionally injected more capital into the economy by running deficits and issuing treasury bills. The interesting paradigm created by this situation was that, in order to maintain the trade surpluses developing nations had with the United States, they had to recycle in part, or in whole, their dollars back into t-bills to prevent a dollar collapse. The symbiotic relationship worked well, as it allowed emerging countries to modernize, and allowed the United States consumer to purchase a myriad of goods at relatively low cost, but the real benefactors were corporations whose margins exploded due to the cheapness of foreign labor and relatively low cost of shipping.


The overall effect is a creation of artificial imbalances within the economy, structurally speaking, on all scales. The growth in consumption, should not have been possible without growth in production, as a net drain of money from the country should make consumption drop. Due to BRIC (Brazil, Russia, India and China) nations and Japans willingness to buy our treasury bills, the government was able to run massive deficits injecting money back into the economy that would have otherwise wound up overseas. This has lead to demand and wealth that would not have existed otherwise, a finite charade as the foundation of America's economy has been gutted (the middle class, blue collar jobs) and has been replaced with a FIRE (Finance, Insurance, Real Estate) shell.

The unsustainability of a FIRE economy is how the wealth moves, as it is shifted from one person to another, with companies and middlemen taking a cut with each transaction. Deficit spending, whether it be on a personal, corporate or government level, is necessary in order to maintain wealth levels that would otherwise decline as money spent on non-FIRE related goods leaves the country to manufacturing countries. This system of deficit spending is sustainable only for finite time periods, as continual additions of debt (and subsequently higher debt payments) eventually leads to a breaking point, where those who have taken on debt can no longer service their obligation, and default. This is highly deflationary, and it is the situation America faces, a long deflationary depression.