October 2012 - Richard 'Jerry' Haworth: Bullet time

“Bullet time” is a concept of time introduced by the movie The Matrix where Neo eventually masters time itself and makes it slow down enough to avoid a slew of bullets bearing down on him.  Consider that “Neo” is the economy and Bernanke has done the exact same thing as in the movie. By taking interest rates to zero he has effectively slowed down “debt time” to avoid “repayment bullets”.  The economy has dodged the bullets. For now.

Financial life in “debt time” is glacial and distorts reality, but it does buy time. The only problem is that the “debt repayment bullets“, however slow, never stop coming!  How do you ever escape “debt time”? This is clearly seen in Japan. The bust which followed the 80’s boom was met with “debt time” where interest rates went to zero. Japan has been stagnating ever since, frozen in space/time for the last 20 years.  And like every delusion which man has created, the second and third order consequences are almost never seen and are invariably worse than the original malaise.

We didn’t mind that Japan was frozen in space/time because we don’t live in Japan but now we are living in it. Are we resigned to a lifetime of sluggish growth, asset prices which move at snail’s pace, and politics which involve ever increasing distortions of the truth to represent some plausible version of the world as it seems to be?

Probably the answer is no, “Neo” will get back to reality either by choice, or dragged kicking and screaming like a recalcitrant child. Why? It takes resources to keep the illusion alive and unlike Japan who had massive savings it could predate on, the Western world has no such luxury. The most obvious answer is for “the matrix” itself to come to its senses and start to reintroduce “reality”.  Normalising interest rates and “debt time” would have severe short term consequences. It is politically unacceptable and is asking “the matrix” to commit hara-kiri.

What about the other alternative?

Just muddling on in “the matrix” and letting reality deal with us… if it can. This is by far the most likely scenario. Thus asset prices will get more and more distorted and the distribution of wealth will get more and more lop-sided as money printing, the “fuel” which feed the illusion of the matrix, morphs into inflation and income inequality.

If the “moms and pops” of the economy are benign, inflation will destroy their earning power and grind their wealth into dust and the respective nations will be impoverished. If they are not benign, they will create social unrest, disorder and destroy their own wealth by “raging against the machine” first.

Either way, they will eventually leave the “matrix” and bizarrely, should be happier for it in the longer term.

Where is that telephone box, I need to get out of the matrix urgently.