The third stage of economic grief

The global economy is suffering from a third massive misallocation of capital. And when each stage means a larger and larger distortion of our financial system, the third time is definitely not the charm.

By Bill_Fleckenstein Feb 15, 2013 4:02PM

International currencies © Brand X/SuperStockEarly last week there was some chatter regarding the upcoming G-20 meeting that tried to play down the idea that the G-7 countries -- the biggest of the industrialized nations -- are engaged in a competition to see who can debase their currency the fastest. Of course, such chatter is meaningless, because even if those countries were in a currency war, they wouldn't acknowledge it.


More important, what is under way is bigger than squabbling over who can make the most confetti. We are in the midst (or, more likely, somewhat past that point) of the third massive misallocation of capital of the past 15 to 20 years, all three of which have been precipitated by irresponsible central bank activity.


Anyone hear an echo?

The first instance was mostly a Federal Reserve-inspired party/debacle (the equity bubble) that allowed people to live beyond their means, dream that they could be day traders or start up spurious businesses they believed would one day be worth billions of dollars.


When that burst, the Fed printed even more money and we had the even more dangerous misallocation of capital that resulted in the real estate bubble, where people used debt to live beyond their means and the financial system itself embarked on a similar strategy. The result was a cataclysm that nearly wiped out the world's banking structures in 2008/2009.


The response to that was worldwide quantitative easing (as central banks monetized government debt with money they created with the click of a mouse). While this has not produced the bubble-like euphoria we saw in the equity and real estate bubbles, it has allowed governments to behave in totally irresponsible fashion.


That has allowed people to believe that a recovery is under way, that the bond markets are OK and that we don't have any inflation; thus, all of our problems are in the process of being solved. In other words, everything is just right (à la Goldilocks).


Aka, a Grimm reality

That is, sadly, pure fantasy (again). What has caused the stock and bond markets to levitate is nothing short of an extraordinary amount of worldwide money printing that thus far has not resulted in "enough" inflation for people to recognize it as such. (Most likely, the fear of a deflationary accident still lingers, even though that is receding into the background.)


How long folks will remain in denial (delusional) is not knowable in advance, just as it wasn't possible to know when the equity and real estate bubbles would end. What is knowable, as it was with the prior two bubbles, is that it will end, and very badly.


Once central banks cannot monetize government debt, we will have a variation of the scare we saw over the past couple of years involving European governments, but this time focusing most likely on Japan, Great Britain and the U.S., as well as Europe.


In other words, we are in the final misallocation of capital. As I have noted before, we can't really call it a bond bubble, since we don't have the euphoria and behavior-changing aspects that normally accompany bubbles. But the warping that has been caused during this go-round is no less significant, and the ramifications will be even more powerful, simply because the scale of the abuse is gargantuan.

Feb 15, 2013 6:04PM
Hold on to your hats. The ride down will be very bumpy. 
Feb 15, 2013 9:42PM
Free money for banks only exacerbates one of the biggest real problems in the economy: assets and commodities are overpriced. 
Feb 16, 2013 12:15AM

I think  all of  us  without  money  know  it's  a game  of  "Risk".  and we don't get  to  play.  only  the  ones  with  a  certain  number  of  "pieces"   can  buy  and  sell  countries,  wheat, armies, commodities

gold, silver.  you  get  the  idea.   If  you  own  the  bank  anything  is  possible.  But  Insurance 

companies  rule  the  world.    No I'm  not  paranoid,  just   practical....once  in  a  while  they  let  'us'  think  we  can  own  something.   It's  a  Wonderful  Life.........

Feb 16, 2013 11:26AM

It never ceases to amaze me that people do not see that the Federal reserve and all other Central banks with their FIAT money system are the core of all economic troubles. They create COMPOUND DEBT and INFLATION. These two factors NEVER rest. They are constantly at work slowly transferring the wealth of a nation to the Central banks. We blame Republicans, Democrats, entitlements, Corporations, Unions, ETC., ETC, for our problems but these factors only change the SPEED of the collapse not the collapse itself.

Think of the central banks as a casino. The casino will only keep 2% of what is gambled. There will be times you may be up on the casino (just as you can make fortunes under a FIAT money system, or when a "bubble is created) There will be times you will be down (just like some will lose under a FIAT money system, or we have recession/depression). But, given enough time, it is with mathematical certainty that the casino will take all your money. That 2% never goes away or takes a rest just, like COMPOUND DEBT and INFLATION in our FIAT money system.

As this system slowly takes away, the poor will be the first to fall. As it continues the middle class begin to suffer and join the ranks of the poor (47% proves this). Corporations feeling the squeeze must resort to outsourcing to remain profitable. Taxes go up to pay the mounting public debt. Prices rise as inflation devalues the dollar. These things all compound each other to cause the downward spiral to speed up. SOUND FAMILIAR?????? We are living it!

Start blaming the REAL ENEMY.....The FEDERAL RESERVE....The worlds CENTRAL BANKS....FIAT MONEY....This is what is causing our economic problems.

Feb 16, 2013 2:36AM
It is better to be an hour early, than a minute too late.
Feb 15, 2013 11:49PM

Bill; you are a freak!


But I think you are right, and I am acting just like I believe it.


Folks, if you are smart enough and quick enough to be early at the exit, well god bless you!


I am out of equities, and I won't be back until we see a major bottom.


Best of luck in whatever you do; I'm with Bill and playing it safe...




Feb 15, 2013 10:05PM

I hope everyone has a strong community. We will need it when the dollar crashes and the banksters come knocking to claim our homes. It will be a war of attrition. Do  not submit do, not comply. Defy them with all you have and help your neighbors do the same.

Feb 16, 2013 7:50AM
This is teetering in a bad way. It does not show it, You cannot smell it and you cannot hear it. The reason for the rise in the Stocks is because wealthy people with the money are playing with each other trying to top out. Soon wee will see a pullback and a huge drop. Go Ahead Government keep playing with your only source of income. TAX, TAX, TAX until there's nothing left.
Feb 16, 2013 11:50AM
Hard to believe that most people want to deceive themselves into thinking that the ride will continue but it has never stopped them in the past. Manipulating supply and demand curves always ends in a correction that will hurt many and benefit the few who did the dirty deeds with their own self interest in mind. Watch out middle class, there's a train at the end of the tunnel.
Feb 16, 2013 12:29PM

Don't know if this whole circus just collapes or like the once great state of NY where I have lived for 63 years. Just kind of keeps getting worse and worse. Here our road, bridge, building are falling down, we have the 2nd generation of do nothing males, and of course the single moms. They line up every morning at the busiest mall in town, the welfare office. Can't find a place to park if your life depended on it. We also have cops on top of cops all make phat stack of cash, teachers with 10-12 kids in each class. Also making well over 125k per year, with benefit to die for. As far as the private sector, well that died a long time ago. Good luck out there, your all going to need it, hope your ready.

Feb 15, 2013 6:25PM
Here's the rub,  many of my gold miners are down, even sold  nugt at a loss.  My point is, I can keep buying gold stocks when they go lower.  Problem is they can keep going lower till I'm out of cash.  Money printing can go on longer than I can stay solvent.

The people shorting stocks are making the money, I wish I was one of them.
Feb 16, 2013 12:03PM
There is a simple fix for this problem. It happened in South America years ago , it's called bankruptcy. Countries simply declare bankruptcy and then print new currency. Everyone forgets that currency is simply paper script. Financial systems are simple illusion and only exist because people believe in them.     
Feb 16, 2013 8:16AM
Is this the reason Banks aren't held accountable for the great filibuster on 2008?
Feb 16, 2013 8:39AM
and the market has shrugged off all the news including the slow-growth-no growth economy and the piles of debt accumulated by governments and moves higher; the smallest news of economic growth will cause the market to sky rocket.
Feb 15, 2013 9:39PM

what were witnessing is the ultimate conclusion of free trade. Its caused a relocation of the worlds manufacturing base to low cost third world labor. This labor pool doesn't earn enough to buy its own manufactured products. Its concentrated wealth into the hands of a very small amount of people. The same thing happened during the depression

to have a healthy economy you need money finding its way into the hands of people that will spend it. Ostensibly the middle class. You do this by making outsourcing unprofitable via tariffs and you organize labor so that they can demand a fair share of the profits. The last thing you need is a prohibitively high progressive tax system that makes reinvesting in america essential to capital retainment.70 to 90 percent is about right

Feb 16, 2013 8:55AM
and the market shrugs off all the news including the slow-growth-no growth economy and the piles of debt accumulated by the government and moves higher; the smallest news or rumor of economic growth will cause the market to sky-rocket
Feb 16, 2013 3:07PM
" has not resulted in "enough" inflation for people to recognize it as such" - Horsepucky - we see the true rate of inflation when we buy food, gas, utilities, rent etc. The fact that the true rate is hidden (not very well) does not mean we do not feel it.  The buying power of the dollar in real terms is the best judge of inflation and that is down dramatically.  We are not foooled, we are just powerless to do anything about it.
Feb 16, 2013 3:03PM
So how long before each & every person sees the problem then start voting for change? 25-50 years into the "recovery"? Maybe
Feb 16, 2013 4:34PM
I wonder if I can buy stock in that company that makes the cotton/paper that our money is printed on?  I figure their stock has gotta be zooming upwards!
Feb 16, 2013 4:06PM

Obamanomics cannot continue...  We must stop trying to Borrow and Spend our way out  of debt...  We must stop trying to Tax and Print our way to prosperity...  We MUST balance our budget and PAY down our debt...  We cannot continue to spend 34% more than we take in...


This will not end well, inspite of what the democrat minions say...

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Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website,, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.



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