Tuesday Never Comes

There was a farmhouse that had long since been deserted

We stopped and carved our hearts into the wooden surface

We thought just for an instant that we could see the future

We thought for once we knew what really was important

--Til Tuesday

The chart here comes from this month's letter by Bill Gross. I have found BG's thought process to waver from time to time, but he really nails it here.

He masterfully reviews the history of credit, observing that it was the evolution from bank paper to the creation of the Federal Reserve that permitted the expansion of systemic credit capacity to modern levels. 

Today, Gross claims, "credit is the foundation of the wealth creation process, but it can also be the cause of financial instability and potential wealth destruction." While it seems to me that production, income, and savings are more appropriately labeled the foundations of wealth creation, it is certainly true that credit drives financial instability and wealth destruction. 

This proposition seems to follow: The higher the level of credit (and associated debt and leverage), the more unstable the system.

Given our unprecedented levels of debt and leverage, this proposition suggests that our financial system has never been more unstable.

As BG demonstrates in his Chart 1, the only remedy the Fed has for 'fixing' systemic instability is more credit and debt. Which of course, further destabilizes the system in the long run.

A Minsky Moment in the making.