- The Keynesian Endpoint Has Arrived

In math, you can't extrapolate a line from a point, but you can in politics. Greece is run by a socialist government. That should be more than enough to figure out how this will all end. And the other countries in Europe are having funding trouble too; in the precise amount that their politics is similar to the politics in Greece.

Both socialism and it's economic lap dog Keynesianism, are based on the idea of adding 1+1 and getting 2.26. The numbers always require an outside input of capital, or wealth, or labor, or something. They never net out. Over the last 40 years or so, the differences have been made up by issuing government debt, which is essentially a tax on future wealth. But the market is no longer willing to suspend disbelief, so the value of that debt is collapsing. It's the Keynesian endpoint.

Ironically, our own socialists are benefiting greatly from the turmoil among their European brethren. At present, money is floating out of European debt and into America's. That's putting enormous pressure on the price of US debt and keeping rates low in America without further action from the Fed. At present it's a 'risk off' trade, where money flows to the least risky asset even if that asset doesn't look particularly good itself.

In other words the real crisis for America hasn't actually arrived yet... but it will.

The thing to look for will be deflation of investment assets. You can tell that's occurring when commodities, equities and bonds all begin to lose value together. That will mean that instead of a risk off trade, we'll be entering the final global Keynesian endpoint. That will be the big 'waterfall' moment.

The Fed will see that occurring too, and won't lay down for it. In fact if they act prudently they may delay the inevitable for quite a while. They'll monetize the debt and place a 'floor' under prices by pushing the dollar lower. If they can break the trend and make commodity prices rise again, they may hang on for a bit longer. But the endpoint can't be avoided over the long term without slashing government spending, and America's socialists remain very reluctant to do so.

We're back at the cliff's edge folks. All of us. Nothing has changed - there has been no improvement. All the debt, and all the risk is still out there. It's been distilled from Mortgages and Agency debt into general obligations of the government - but that's made it no more likely to be paid.

At this point we're just waiting for the investor class to quit watching Europe's white knuckled desperation, and to begin to worry about our own.