The debt behind our money became a Fuel-Air Explosive

[Originally posted on iTulip.com, in response to someone asking "Where will all the capital flight go to?" ]

Our capital is debt-based money, which is a gas, not a liquid. That is, it compresses and expands dramatically.

Debt based money monetizes future income streams, such as the tax collections of a government or the mortgage payments of a home "owner." When those income streams seem to be increasing, then the quantity of "money" expands. This happens when individuals, corporations and governments increase their debt.

When moreover we allow serious degradations in the quality of those monetized income streams (such as NINJA home loans - "no income, no job, no assets"), then the quantity of this "money" expands further and faster.

This expansion is inflationary. Ordinarily, in a closed economic system with honest and competent financial leaders, this inflation would be recognized as such and could be resisted.

But thanks to the Far East coming on line, taking up the manufacturing of the worlds goods with much cheaper labor over the last 25 years, and thanks to using a corrupted Consumer Price Index rather than a measure of all debt paper (and derivatives and swaps and other crap thereon) to guide our Federal Reserve Open Market operations (which attempt to throttle the creation of some of this debt based money), our Illustrious Financial Leaders missed seeing (or refused to see?) that inflation. They watched California housing prices double, and Wal-Mart prices halve, and thought we needed more fiat paper. Meanwhile, they turned a blind eye to the massive, stunning, outlandish, outrageous growth in derivatives and swaps and secularized debt piled in a Grand Pyramid on top of these NINJA mortgages. We were no longer just monetizing real income streams and fantasy income streams, but we were also monetizing the continuation of falling interest rates, rising asset prices, falling dollar exchange rates, stable economies and low debt default rates.

It resembles how one sets off a Fuel-Air Explosive [FAE]. Disperse an air cloud of fuel and ignite it.

So my opening analogy of a compressing gas is the wrong analogy. This is not merely an expansion and contraction of a compressible substance, but the transformation of liquid petrol into gaseous petrol into burnt carbon dust.

The final gas cloud dispersal occurred during roughly the years 2002 to 2007. The cloud has now ignited. Wealth is being burnt at a horrific pace, world wide, with no end in near sight.

That's where your nice liquid capital is going. Ouch.