In the latest article for his blog Bear Traps Report, Wall Street veteran Larry McDonald says “We believe we are at the early stage of the biggest cobra effect in the history of economics.”
The “cobra effect” he alludes to is when a problem’s solution turns out to make the problem worse. He also explains the origin of the saying.
“The Cobra Effect comes from a story from the British rule of India. Once upon a time, there were too many cobras in Delhi. So a bounty was offered for each dead cobra delivered. This proved initially successful, until, that is, entrepreneurs began breeding cobras for the income,” says McDonald.
The Government and the Cobra Effect
At that point, the government recognized their error and their solution to their mistake made the problem worse.
“Once the British authorities were aware of this unforeseen consequence, they stopped the program. So the breeders released their inventory, resulting in a larger cobra population than before the bounty was initiated.”
The exact same thing is happening today, McDonald warns. It takes place as governments try to save their economies from the turmoil of the coronavirus pandemic. Their actions highlight the “unintended negative consequences of public policy and government intervention in economics.”
He says governments are “incorrectly stimulating an economy,” and all the money printing going on across the globe has “rendered incoming economic data relatively meaningless in 2020. The utility value today of an economist is far less than it was just 18 months ago, the data has become far too erratic with little predictive value.”
The money printing has increased inflation expectations, and McDonald says that by not letting the economy simply run its course and punish the bad actors, the bubble keeps inflating along with the eventual damage.
“Inflation expectations rising with bond yields artificially suppressed by central bankers is a potentially toxic cocktail. When you do NOT allow the cleansing process of the business cycle to function over longer and longer and longer periods of time, there are two primary outcomes. 1) You create a proliferation of bad actors. Just picture 1000 Bernie Madoffs running around the Hamptons from one beach party to the next. 2) More and more money is searching for a “safe” new home.”
Setting Up For Disaster
McDonald says this sets the stage for a massive economic collapse, one that could get even worse if the government recognizes the inevitable collapse and tries to change course.
“We believe we are at the early stage of the biggest Cobra Effect in the history of economics. As the massive monetary and massive fiscal stimuli (over $15T globally) conjoin to save the economy from a deflationary depression, they will cause instead a hyperinflationary economic collapse.”
He continues, “If the government becomes aware of this beforehand and withdraws current policies, then indeed a deflationary depression will follow, but one much more severe than if the government had done nothing.”
If there’s anything we can count on, it’s for the government to compound a bad situation and make it worse. If McDonald is correct, then that means we’re headed for a deflationary depression after we go through a hyperinflationary collapse.