“How “Prosperity” Ends

Faster Than You Think [The Daily Reckoning] February 04, 2023 [WEBSITE]( | [UNSUBSCRIBE]( “How “Prosperity” Ends - The two kinds of prosperity… - Free money, big costs… - The psychological stages of market collapse… [GONE: your shot at 102% gains in 6 days…]( Hate to say, “I told you so”… But we’ve sent you a countless number of emails trying to draw your attention to this unprecedented wealth-building opportunity. And according to our file, you still didn’t take action. And that’s a shame. Because you just missed your shot at a 102% gain in 6 days – in the middle of a market selloff. That’s the bad news. The good news? We’re issuing a brand-new buy alert right now with money-doubling potential. [Click Here To Get In While You Still Can]( San Francisco, California February 4, 2023 Editor’s note: There are two kinds of prosperity — real prosperity and false prosperity. Today, Charles Hugh Smith shows you why false prosperity is doomed to fail. [Charles Hugh Smith] CHARLES HUGH SMITH Dear Reader, There are two kinds of prosperity, one fake, one real. Bogus "prosperity" depends on credit-asset bubbles inflating, magically creating "wealth" not from labor, production or improving productivity, but from the values of assets soaring as bubbles inflate. This bubble-generated "wealth" then fuels a vast expansion of credit and consumption as assets soaring in value increase the collateral available to borrow against, and the occasional sale of soaring assets generate capital gains, stock options, etc., which then fund sharply higher consumption. When the value of a modest home skyrockets from $200,000 to $1 million in a few years, that $800,000 in gain was not the result of any improvement in utility. The house provides the same shelter it did when it was worth 20% of its current value. The $800,000 gain is the result of the abundance of low-cost credit and the global search for a yield above zero. Eventually, this vast expansion of "money" chasing yields and seeking places to park all the excess cash trickles into the real economy and the result is inflationary. Consider how soaring home prices affect rents. Why All Credit-Asset Bubbles Are Self-Liquidating When an investor bought the modest home for $200,000, the costs of ownership were low due to the costs being linked to the value: The property tax, insurance and mortgage were all based on the valuation. (The costs of maintenance were unrelated to valuation, of course, being based on the age and quality of construction.) Let's say the modest house rents for $1,500 per month. The investor who buys the modest home for $1 million has much higher costs, even if they bought the property with cash and didn't need to borrow money (i.e., obtain a mortgage). The property taxes and insurance are much higher, and the comparable market rent of similar houses reflects the expected yield on investing $1 million: If investors expect a 3% yield after all expenses, then the rents have to rise so the investor/owner nets $30,000 annually. Due to the valuation increasing in a bubble, the rent is now $4,500 per month, even though the house hasn't materially gained any utility at all. The rent has to be high to justify the purchase price of $1 million. [Has World War III Just Begun?]( [Click here for more...]( NATO sends tanks to Ukraine… Russia prepares for a winter offensive… Is the beginning of World War III? I’ve just released an urgent message with my thoughts. But more importantly, I’m offering to send you an exact playbook on what I see playing out in the world and what you need to do to prepare… [Watch My Short Video Message Here]( This is why all credit-asset bubbles are self-liquidating: Once the cost of credit drops to near-zero, there's no discipline left: Any loan for any investment can be justified by the "guaranteed" increase in value/collateral. Since everything will rise in value, then it makes sense to leverage up as much debt as possible to gain control of as many assets as possible, as the means to maximize gain. This leads to marginal borrowers overextending, borrowing more than is prudent. Free Money, Big Costs All this nearly free money sloshing around seeps into the real economy, jacking up prices (such as rents) without increasing the production of goods and services or improving productivity. Costs rise solely as a result of the bubble, pressuring wage earners and enterprises. Central banks are eventually forced to raise interest rates and reduce credit expansion to put the brakes on the bubble's inevitable offspring, an inflationary spiral. Once credit is no longer expanding rapidly, the air starts leaking out of the asset bubbles. Marginal borrowers can no longer roll over their debt based on ever-higher collateral (as valuations rise, so does the collateral to support new loans) and default becomes inevitable once markets tighten. For example, those willing and able to pay outrageous rents thin out, and commercial residential properties are vacant, generating zero income. Stickiness But inflation generated by bubbles is "sticky." Landlords are reluctant to drop rents, as they've been trained by central bank bailouts and decades of easy money/credit to expect a prompt resumption of the bubble's expansion. This mentality permeates the entire economy. Once valuations stop rising like clockwork, the bubble "prosperity' is revealed as illusory. All the "wealth" was illusory; it wasn't generated by improvements in productivity or the production of more goods and services; it was all based on soaring valuations driven by cheap, abundant credit and the bubble-mentality faith that bubbles never pop and so the "wealth" created by soaring stocks, bonds, collectibles and real estate would only continue expanding forever. The inflation generated by bubbles remains as collateral crashes and credit expansion reverses into contraction. Suddenly, there are fewer greater fools willing to pay bubble prices for assets. The smart money sold long ago, but the not-so-dumb money finally awakens to the potential downside of bubbles popping: Rather than reaping huge gains, assets might become illiquid (i.e., there are no buyers at any price) or valuations might fall faster than anyone believed possible in the heady bubblicious decades. [“The Situation Is Getting Worse By The Day”]( That’s what the President of the US Chamber of Commerce just said about the supply chain. If you thought the supply chain issues were over, think again… Things are about to get much, much worse. And everything from your local grocery store to your gas station could be impacted. That’s why I’m urging everyone I can to prepare now… See the #1 move to make before this problem gets any worse… [Click Here To Learn More]( The Liquidation Phase Bubbles liquidate the illusory "wealth" they generated when they pop, and then the bogus "prosperity" dissipates into the air from whence it came. The only source of real prosperity is improvements in productivity that generate more goods and services with fewer inputs of capital, labor, materials and energy. So here we are: The global credit-asset bubbles are popping, and the illusory "prosperity" generated by the bubbles is about to tumble off a cliff. The $20,000 week at the posh resort was fun, as was the $80 lunch for two (two avocado toasts and two beverages), but it was all fake, phony, a fraud. Jacking the valuation of a bungalow fivefold doesn't actually improve productivity or create any new goods and services. It jacked up prices and property taxes, but it didn't actually create any real wealth. Alas, the natural order of markets is mean reversion and the collapse of whatever is unsustainable. This includes speculative manias, credit bubbles, asset bubbles and projections of endless expansion of margins, profits, sales, consumption, tax revenues and everything else under the sun. The Psychology of Collapse There's a well-worn psychological path in the collapse of bubbles. This path more or less tracks the Kubler-Ross stages of denial, anger, bargaining, depression and acceptance, though the momentum of speculative frenzy demands extended displays of hubris and overconfidence, i.e., the first wobble "must be the bottom." There are also repeated spikes of false hope that "the bottom is in" and the bubble is starting to reflate. This pattern repeats until the speculative fever finally breaks and all those betting on a resumption of the bubble mania finally give up. This process often takes about the same length of time that it took for the bubble mania to become ubiquitous. If it took about 2½ years for the bubble to expand, it takes about 2½ years for the bubble to pop and the market to return to its pre-bubble level. Once again we hear reasonable-sounding claims being used to support predictions of a never-ending rise in stock valuations. What hasn't changed is humans are still running Wetware 1.0, which has default settings for extremes of emotion, particularly manic euphoria, running with the herd (aka FOMO, fear of missing out) and panic/fear. Despite all the assurances to the contrary, all bubbles pop because they are based in human emotions. We attempt to rationalize them by invoking the real world, but the reality is speculative manias are manifestations of human emotions and the feedback of running in a herd of social animals. It's a long way to the bottom, but it won't take as long as many seem to think. Regards, Charles Hugh Smith for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) Editor’s note: It’s finally happening: • Credit Suisse is imploding… • The Russia-Ukraine war is escalating… • And the Fed is about to break the economy in half… But according to Jim Rickards’ research, [what comes next could be even bigger.]( And depending on how you respond to this message… It could potentially send you to the poorhouse… or a penthouse. You decide for yourself if you agree or disagree with this research. But we strongly encourage you to at least look it over before making up your mind. [Go here now for all the details.]( Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Charles Hugh Smith] [Charles Hugh Smith]( is an American writer and blogger, and serves as the chief writer for the blog "Of Two Minds". Started in 2005, this site has been listed No. 7 in CNBC's top alternative financial sites, and his commentary is featured on a number of sites including Zerohedge.com, The American Conservative, and Peak Prosperity. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your The Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. 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