Thursday, 16 November 2017

On The Importance Of A Catalyst


A catalyst is often required to bring about an economic crisis or a stock market crash. On that we can all agree, with one proviso; credit expansions can simply go bust under their own weight when the debt being assumed can no longer be supported by the income generated - no catalyst needed.

But of greater importance than spotting a potential catalyst is identifying the environment in which catalysts thrive which then, as a result, paves the way for an event of some sort to become a catalyst in the first place.

As the economic distortions such an environment fosters will be different every time, so will the catalyst. This helps explain why identifying what the catalyst will actually turn out to be is so difficult to predict prior to financial- and economic collapses. 

But the fundamental reasons for the collapse however are basically the same every time; easy money which fosters overconsumption, malinvestments, stock market- and housing bubbles, illiquid banks and so forth.

In other words, there would be no catalyst available in the first place to trigger a crisis without easy money, certainly not on the scale we've become accustomed to (ignoring major acts of god and warmongers of course). 

When the environment is prime, a catalyst at some stage simply will be unleashed. Alas, if you can identify the environment in which catalysts thrive, you can predict that a catalyst will eventually trigger an economic downturn or a stock market crash.

Foreseeing the identity of the actual catalyst is therefore largely irrelevant when it comes to forecasting the probabilities of major economic- and financial inflection points. As everything is connected in the world of trade and finance, large chunks of the system will collapse when the shaky foundation it's built on jitters. This shaky foundation is of course the elastic currencies employed around the world today.

Applying your foresight to perfectly time events (and make phenomenal returns over very short periods) is a whole different ball game though.


For more on such an environment, see my latest article: A Glum Note On The U.S. Savings Disaster

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