Where the economy is now.

One of the greatest minds of the last century compared economics to plate tectonics. As the plates shift, small earthquakes allow the tension generated by the movement of the plates to be released. If earthquakes did not occur, the tension would be relieved by catastrophic moves. Thus it is with economics. The stress caused by inventions and the movement of capital are relieved by occasional recessions and bankruptcies. If these small (but traumatic) changes are not allowed to occur, the resultant imbalance will be relieved by  a catastrophe. And that is where we are heading.

The housing bubble created by the policies that began in the Carter years and continued unabated throughout 2007, were not allowed to fully unwind. The Bernanke response to the Great Recession that began in 2008 was to create another bubble, the US Stock Market bubble.

In addition to the Stock Market bubble, we have the Japanese Yen carry trade. Big Players can borrow Japanese Yen at virtually zero interest and buy something that earns income. In the US we had QE that allowed the FED to depress interest rates. As the US is trying to unwind QE, Europe is starting its own QE.

What is the result? We have a currency war as countries trying to cheapen their currencies to promote export. This reduces US exports and reduce the value of US companies' production overseas that are reported and sold in Euros or other currencies.

The sovereign bond markets are where governments are causing the greatest stress to build up. German, Swiss and Japanese bonds pay less than 1% in interest and even Italy and France can borrow money at 1.3 and 2.4%. Thus, there is no incentive to rein in govt spending. When interest rates will rise (and they will) deficits will skyrocket. And if money printing continues, inflation will take off.

The world is waiting for a Black Swan event to loosen the plates and set off a catastrophe. What will it be? A breakeup of Great Britain? Further bloodshed in the Ukraine? Or the Swiss gold initiative?  Switzerland wants its gold back and buy enough in the open market to cover 20% of its currency.