How Developed Markets Become Banana Republics: “Debt Is A Much Easier Way To Gather Consensus”

Perhaps the most dangerous thing about where the world seems to be headed now that central bankers have not only lost credibility in the minds of investors, but in their own minds as well, is that it’s not entirely clear what will happen to society if credit suddenly dries up.
That is, if the central bank put finally disappears and the market is once again free to purge speculative excess and correct the rampant misallocation of capital, the days of easy money will quickly come to an end as rational actors begin to make decisions based on prudence and fundamentals rather than on the assumption that because the cost of capital is effectively zero, and because central planners will never ‘allow’ the system to fail, credit can safely be extended to unworthy borrowers.
We’ll likely get an early indication regarding the market’s tolerance for a return to some semblance of normalcy in the coming months as capital markets become less forgiving towards the exceedingly uneconomic US shale space. But as mentioned above, the truly interesting question is what happens when everyone else starts to get the bankrupt shale driller treatment because after all, in a world where everybody is living on cheap credit, metaphorically speaking we’re all just broke US oil producers, surviving on debt and the willingness of our neighbors to finance that debt.
It’s against that backdrop that we bring you the following excerpts from RBS’ Alberto Gallo, whose latest note takes a look at the history and proliferation of the fiat regime.

This post was published at Zero Hedge on 10/06/2015.