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Thursday, 16 November 2017

On The Importance Of A Catalyst




It is often said that a catalyst is required to bring about an economic crisis or a stock market crash. In real life, this might appear to be true, but it's in important to be aware that debt expansions can simply go bust under their own weight when they can no longer be supported by the income generated - no catalyst needed.

True, spotting a "catalyst" can be a fruitful endeavour, if you put your money where your mouth is. But of greater importance is being able to identify the environment in which catalysts thrive before any single one is actually "triggered".

As the economic distortions such an environment fosters will appear to be different every time, so too will the eventual catalyst that ends up receiving all the blame (dot.com stocks, subprime mortgages, shadow banking, and so forth). This helps explain why identifying the catalyst will be difficult prior to economic collapses. But the underlying reasons for the collapse however are basically the same every time; easy money and debt growth 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 in the absence of easy money, certainly not on the scale we've become accustomed to.

When the environment is prime, a catalyst of some sort, at some stage, simply will be unleashed and receive the blame. Alas, if you can identify the economic environment in which catalysts thrive, you can predict that a catalyst will eventually trigger, in the eyes of the many, 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, finance, and fractional reserve banking, 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 that by their very existence are responsible for creating the catalysts, i.e. the inevitable symptoms that incorrectly are confused with causes, that alone ends up with most of the blame.

Applying your foresight to perfectly time events (and make phenomenal returns over very short periods) is a whole different ball game though. But somebody out there will nail it this time as well, and become branded a genius, as the economic environment is now truly ripe once again. 

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