Click on the cover to buy the eBook
Debunking Economics was first published in 2001 by Pluto Press (Australia) and Zed Books (UK). There has been renewed interest in it since I began warning of the impending financial crisis, and I decided to release the book in electronic format to make it more accessible (the hard copy can still be purchased, if your bookshop will order it, from Zed Books UK, or online from Amazon).
I have gone with the (free) Mobipocket Reader format–which runs on PCs and PDAs as well as eBook Readers like Amazon’s Kindle. The eBook priced at US$10 (about a third of Amazon’s paperback price).
If you’d like to purchase a copy, click here to access the Mobipocket store. For those of you who haven’t yet visited it, I have a website dedicated to the book that provides additional detail on some parts of the book, my lectures for free download, and much else.
December 16th, 2008 at 10:15 am
Great title, and I will try to plough through it.
However, I really wanted to add to the previous thread on the Madoff “Ponzi”. This is becoming more interesting.
Barrie Ritholtz at BigPicture has begun a thread questioning the capacity of a single person to pull this off saying, bluntly, that it impossible. More intriguingly, within the comments that follow a number of points are made that suggest it is naive to imagine that this was a simple Ponzi. Bigger than LTCM yet barely a blip recorded on stock prices; big hedge funds putting in almost all of their clients money when the most trivial due diligence (eg. just a glance at the auditors) would reveal that it was not above board; SEC told for years but does nothing.
Others also comment on the virtual absence of reporting on this on Fox news and elsewhere. Here, unless I have missed something, the sole report to appear on this – the biggest scam in history – in the SMH is a small piece in the business section on Friday. Nothing in any of the weekend review sections and nothing today. Sure there are touchy ethnic considerations but how can this massive story be almost totally ignored?
It is thus more important than ever that respected blogs like this continue to monitor the corruption beneath and within all of these so-called bubbles.
December 16th, 2008 at 11:42 am
I thought folk might like this chart, which just goes to show how crazy things have gotten.
http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s%5b1%5d%5bid%5d=AMBSL&s%5b1%5d%5btransformation%5d=ch1
Alan Kohler (ABC News business report) on Friday showed a version of the chart of the dramatic spike in the US money supply that has occurred over the last year (his version was year on year % change, which you can select from the pulldown).
From what I can gather this is happening because of:
- the Central bank taking ‘money-like’ financial instruments that were created in the ’shadow banking system’ during the credit boom onto it own balance sheet, in exchange for federal reserve deposits (“printed” for the purpose). This is done through re-purchase agreements (repos). The ’shadow-banking’ instruments were not part of the official monetary aggregates data, hence the spike.
- treasury equity purchases of bank stocks (capital injections) using federal reserve deposits (“printed” for the purpose).
- fiscal stimulus (expansion of US govt deficit)
Essentially it is the result of monetary emergency measures (trying to ‘catch’ falling assets), equivalent to an attempt at inflationary “money printing” as discussed elsewhere on this blog (i.e. federal reserve deposit creation without commensurate bond issues). But as Steve has noted this won’t work because the ‘printed’ money won’t compensate for the collapse of credit going on in the banking (and shadow-banking) system, as central bank action and govt spending are not a sufficiently large portion of the total economy relative to the private sector (compared say with Zimbabwe).
Further, there are massive structural problems in the world economy, particular excessive (debt-fueled) consumption by the west (with too many shops and not enough bridges or hospitals, or to paraphrase John Kenneth Galbraith, our society has for so long been in a state of “private affluence and private squalor” and is undergoing something of a catharsis… possibly). This will mean a painful structural re-adjustment process that badly needed govt infrastructure spending will mitigate but not avoid. The only option from what I can see would be a combination of debt-forgiveness and improving wealth-distribution so that households can attain sustainable consumption patterns without needing excessive debt. We also need a range of taxation and regulatory changes to discourage debt-fueled asset speculation and fix the capital gains loopholes, but I’m not holding my breath.
What I am wondering though is whether the central bank action outlined above could be inflationary further down the track, once excess business inventories are depleted through cut-price (deflationary) sales, as the private sector declines (unemployment rises and consumption falls) and the govt continues to ‘pump-prime’ into a stagnating economy undergoing structural re-adjustment. With world governments all aiming to ‘pump-prime’ via infrastructure spending, could we see asset and consumer goods deflation combined with commodity inflation? And if commodity inflation did occur, the central banks might be tempted to raise interest rates, but because the debts of households have not be reduced (other than by bankruptcy), this would exacerbate further collapse in asset prices.
All this ignores the potential problems with exchange rates if (when) we start seeing sovereign defaults, which could see the Australian dollar fall such that import inflation becomes a significant problem, again tempting our central bank to use interest rates to stabilise the currency but being unable to do so due to the debt overhang. I am inclined to think though that should significant sovereign defaults occur and currencies go haywire an international agreement akin to Bretton Woods would be brokered to calm things down.
So are we potentially looking at a period of deflation –> inflation –> deflation… ?? Or is monetary policy, or at least the use of the ‘interest rate lever’, becoming ineffectual to deal with the crisis…?
Or am I right off track here…?
December 16th, 2008 at 3:18 pm
bear-foot economist,
The spike in the monetary base indicates that the fed. is merely supplying liquidity to an extremely illiquid market.
The adjusted monetary base consists of cash plus bank reserves on deposit at the fed. Banks must hold a portion of their assets as liquid assets in order to meet the demand from depositors for their money. If they go below the threshold, the fed. demands they promptly increase their liquid assets.
The fed. is stepping in, expanding their balance sheet and providing this liquidity, via the various alphabet soup facilities recently put in place.
The fed. is taking the illiquid assets held by the banks, and in exchange, providing the banks with MZM [money of zero maturity] instruments, such as t-bills.
These instruments are liquid and are fungible to cash (but not quite), whilst they have the full faith of the u.s. fed. reserve behind them and thus tradable on the capital market.
They are, therefore, not injecting new capital into the market and monetising the debt, as some have been led to believe.
In this way the fed. is injecting liquidity into the capital market, without providing new cash.
The base money, in this way, is expanding although at the same time the change in monetary base velocity has literally collapsed, from a 1-year moving average growth rate of 4% to -2%.
This is definitely not inflation, rather deflation!
The spike is larger than any other in it’s history, however, the U.S. economy is also significantly larger than at anytime in it’s history. In comparing the size of the spike of the monetary base in 2008 to that of 1929 provides an incomplete picture, one *must* also relate this to the size of the nations economy now, 2008, and then, 1929.
The exploding debt does *not* infer that this debt, in total, has or is to be monetised. The government has the option of also fiscalising a large portion of this debt, where by future generations of U.S. citizenry will be obliged to take on the burden of paying this debt down.
To believe the U.S. will simply use monetary policy to innocently monetise the entire debt, as a means out of this mess, is nonsense. A policy of that nature, perceived by the capital markets would precipitate a collapse in the U.S. dollar.
The Chinese have already lectured the U.S. administration, as recently as last Thursday, that they must stabilise their economy, boost their savings rate and protect Chinese investments. The U.S. will likely use a combination of fiscalisation and monetisation to get themselves out of this chasm.
The monetisation of some debt does not infer rampant inflation.
From the fed. reserve board, bureau of economic analysis HIMCO.
Q3 2008: V=GDP/M, GDP=14.4 trillion, M2=7.7 trillion, V=1.87
Q1 2008: V=GDP/M, GDP=14.17 trillion, M2=7.6 trillion, V=1.85
Q3 2007: V=1.9
They are at present expanding M2 at a rate of about 7+% to counteract the collapse of the monetary base velocity. Whether this growth is too little or too large, we will have to see. History tells us, the Japanese did not succeed.
It must be understood that growth of the money supply does not directly infer inflation. The other variable, just as important as the money supply, is the monetary base velocity. Both matter. To look at one, whilst ignoring the other leads to conclusion that are just wrong, period.
The proposed fiscal policies are an attempt to put a floor under aggregate demand, so as to prevent it from entirely collapsing. This is not trying to re-inflate the bubble, the U.S. is past that stage.
They are attempting to stop the deflationary death spiral. Traditional monetary policy is no longer effective, they have hit the zero bound on the short end of the yield curve. They are now intending to use other more exotic means in their monetary arsenal, such as quantitative easing, pioneered by the Japanese with little success, which for a start, will be to purchase GSE debt and securities held by the GSEs’ *without* the counterveiling sterilisation that they have been performing to date.
Futher, they are likely to begin to move towards targeting the longer end of the yield curve as an attempt to bring down the yield of long dated maturities as an attempt to put a floor on mortgage defaults, as well as, purchasing corporate paper and even intervening and purchasing in the equity market.
There is no magic bullet here that will stop debt deflation or avoid a deep and severe recession. Although, the measures being used are an attempt, at least, to diminish the pain and duration. To what extent they will succeed will be written by historians.
After twenty years in an economic malaise Japan did not hyperinflate. It is not, however, out of the real of possibility, although, it is far less likely than likely. The more likely outcome being a long and bleak economic malaise.
December 16th, 2008 at 8:39 pm
‘Nanks’I knew there had to be some fish out there somewhere.
I don’t know that it is so much a matter of you show me my report and I’ll show you a bigger one, it is just that the climate change worshipers and alarmists get so fired up that anyone can contest “their science”
I thought science was a ‘journey not a destination’ fluid, evolving, open and challenging.
For sure the ‘climate change industry’ have done a pretty good job and got the ‘Jack in the box’ (acceptance of their mantra) pretty well locked down. And they have certainly a well oiled machine ready to slam new or evolving(contrary) presentations.
“Oh yes they (those nasty ‘deniers’ )have run all this before, but we’ve already debunked that with our special irrefutable science”
I think some of the scepticism comes out of the fact that ‘global warming’ has become a pretty big industry and there are an awful lot of people owing their income, jobs and future
to having it just continuing to ‘roll along nicely thank you’
Getting back on topic – I see a lot of parallels with the GFC and I believe it is that very GFC that is going to have a growing number of people wanting to revisit the purchase of their ticket on the global warming bandwagon.
It is all very nice to feel warm and fuzzy and touchy-feely , and part of the crowd who can point the finger at those ‘nasty CO2’s’.
But when the big economic merry-go-round really starts grinding down (we have only just started haven’t we Steve?), then I think there will be a lot for ’skeptics’ wanting to revisit carbon trading schemes and cost of limiting those nasty CO2’s.
December 16th, 2008 at 11:53 pm
Why do people still insist that global warming is a fraud? I know 1998 was the hottest year on record (and it’s been cooler since). That’s one outlier. The scientific consensus has been around for ages, with temperatures trending up the whole time. Sure, the “Global Warming Industry” may be making money. Chewing gum companies probably make some money off smokers trying to quit, but chewing gum companies did not invent lung cancer as a scare marketing campaign.
December 17th, 2008 at 7:49 am
al49er – what I’m getting from your reply (consistent with other ‘deniers’ – hate that word) – is that you don’t have principled and evidenced arguments against the science supporting global warming. Ad hominem attacks against the thousands of scientists producing research into climate change are low value. Whilst you may have caught a fish this time I won’t be caught by this silliness again.
December 17th, 2008 at 8:55 am
A possible suggestion is for a fairer tax system which would go some way to help with global warming, should it be a real threat or not ? , – would be to tax people based on their consumption and not what they earn – now there simply isn’t enough space and time to put details of any suggestion on how it would work , but my observation has been that GST and VAT collected around the world is a far more efficient and fairer system to all concerned , simpler to manage and less complex for governments to adjust according to any changes in the economy – and yes the more you consume the more tax you should pay which would be a direct incentive to produce less carbon emissions.
By using tax payers money to compensate small business ( or any other business for that matter ) seems ludicrous when the objective is for us to all produce less carbon output.
Obesity is universal problem associated with Western Life Styles and I think it’s a problem which currently reflects both environmental and economic problems faced by us all today . We all know the answers – this is not a state secret.
December 17th, 2008 at 9:03 am
“nanks” you obviously jumped out of water too quickly without reading the remainder of my post.
It is in fact the Global Warning devotees that have made an art form of ad hominem attacks on anyone (not just contrary scientists) who question their science and view of the world (climate – available evidence). What also gets up people’s nose is that they attempt to do it from the high moral ground.
For example the link that iconoclast gave on the US Senate Minority Report seems to me to be pretty comprehensive and provides countless links for the detail of the arguments and statements put forward. On the other hand on the link that you gave seems simply to retort in a dismissive manner “that it’s all been heard before,” and that the view of these people (including some pretty eminent scientists) is bunkum.
Now I suspect like me ,you are neither a scientists and nor have you studied to the degree necessary, the material available (from both sides of the argument). It therefore simply means that for reasons that can’t be tested or debated in this forum we have different and honestly held convictions about the subject. The fact that you are in the seeming majority doesn’t ‘proove’ anything. Which is why I returned to the subject of this site, ‘economics and the GFC’.
It is now becoming very clear that the majority case with all the experts and commentators vilifying contrary views such as those held by Steve Keen, are proving to be culpable in the creation of a worldwide disaster.
I have held the view for quite some years that this Global Financial Meltdown was imminent , I didn’t have the technical knowledge to put the case the way Steve Keen has done so clearly. The position from which I formed that opinion was not that of viewing the technical economics, financial and monetary system, but from considering the sociological indicators. And although I like to read and glean as much as I can, from the scientific based presentations of ‘both’ sides of the global warning argument, I have found these sociological indicators to be pretty telling.
In this, I came to the position that I simply don’t trust, a mass of people who I know cannot in the numbers that create the majority, truly comprehend the technical arguments, but do so eagerly and blindly scramble up the high moral ground to be part of the ‘in crowd’ and for the apparent purpose of “being seen” to be knowledgeable whilst getting their ‘warm and fuzzy’ hit.
A really good indicator of this “nanks”,
is that when charging I do not have the “arguments” (against anthropogenic global warming) you used the descriptors “principled and evidenced”. You see scientific quest is about evidence yes, but not ‘principled’ in the context you apply (principled in scientific rigour, openness and inviting of review certainly) but not in the sense that people like you ascribe moral character to it.
And therein lies the problem of where you are coming from -in my opinion of course.
December 17th, 2008 at 9:16 am
al49er – I am a scientist – PhD in Neuroscience. I meant principled in the manner you ascribed to science.
December 17th, 2008 at 10:18 am
I’m not a scientist but I have been saying for a while that global warming is the next Y2K, an elaborate ploy to get people to spend lots more money for a slightly modified product.
December 17th, 2008 at 10:32 am
nanks – so as a neuro scientist ( as opposed to climate scientist) you will better appreciate the working of the human system
( as opposed defective system of climate modelling) and I might therefore expect, also have a better appreciation of the matters I established.
December 17th, 2008 at 10:33 am
spot on ‘ned’
December 17th, 2008 at 11:02 am
al49er – I can understand your general annoyance at the attitudes of some people promoting human involvement in climate change. I can’t see how that affects the underlying science.
December 17th, 2008 at 11:53 am
nanks – again you are right, it is some, in fact lots and lots of people “PROMOTING human involvement in climate change”, as opposed to openly embracing any challenge,questioning or review of the “underlying science” by many (and a growing number) of equally if not more reputable scientists.
as I have said earlier, science is about
a journey not a destination – the not all
(but a significant majority given the
‘hangers-on’, as opposed to continue and committed scientists reading things that way) anthropogenic global warming
PROMOTERS, have made it the destination.
That is the problem.
December 17th, 2008 at 11:55 am
no al49re – climate change is the problem.
December 17th, 2008 at 12:08 pm
There you go again proving up my case “nanks”.
It is your, or someone else’s hypothesis.
You simply cannot say it “is” fact
I am open to soundly based scientific persuasion NOT the promotion of a ’cause’.
It appears that rather than being open-minded, you are a promoter of the cause.
We had better watch out that we don’t get into trouble from the people on this site more interested in the ‘real’ current world calamity.
Sorry Steve but I think there are instructive parallels.
December 17th, 2008 at 12:26 pm
Excuse me guys,
But can you please cease and desist on this discussion of global warming.
This blog is about debt-deflation, and the failings of economic theory. Global warming is an important issue in its own right–and for the record, I accept the peer-reviewed, highly empirically based science behind the proposition that human activity is causing rising greenhouse gas levels (a reasonable fraction of which I have read).
But there are other forums to discuss this topic–even others on which to dispute the hypothesis. I am quite happy to have those who accept the science, and those who call themselves sceptics on this list–just as I’m happy to have people who disagree with me on debt deflation etc. But if you incessantly debate the topic of global warming here, you fill up people’s email in-trays with a discussion they don’t necessarily want to be involved in.
If you want to continue the argument over this, then please do it directly to each other via emails–which should be visible in your posts.
Steve
December 17th, 2008 at 12:59 pm
Steve,I could appreciate you would be getting a little miffed, which is why I apologised in advance of your post which expreessed that.
Consider the discourse closed here and as you suggest if desired, it could happen elsewhere if ‘nanks’ had a forum to suggest.
December 17th, 2008 at 1:29 pm
iconoclast,
The monetary base spike is no less dramatic (or historic) if you change it to a percentage. The percentage change from a year ago during the 1920s, 30s and 40s was always less than 30%. The percentage change this year is almost 80%.
This relative size of the economy now and then is irrelevant.
December 17th, 2008 at 1:53 pm
Can someone please tell me what Bill Evans (and his fellow economists) are smoking?
Australia will avoid recession: survey
Unexpectedly positive developments in global economic conditions!?! Is Bill in some parallel universe where China isn’t crashing?
December 17th, 2008 at 2:28 pm
Steve,
firstly I must apologize for making the initial posting with the link to the US Senate Minority Report.
I shall refrain my posts to matters that are pertinent to the debt deflation debate.
December 17th, 2008 at 3:09 pm
Steve and others – my apologies for going off topic
December 17th, 2008 at 3:19 pm
carbonsink,
of course the size of the U.S. economy matters.
The expansion of the Federal Reserves balance sheet corresponds directly to assets purchased by the Federal Reserve from the U.S. financial and banking system.
The financial assets and their value, financially, represent the size of real economy.
The size of the U.S. economy in 2008 is *not* the same as the size of the U.S. economy in 1929.
With respect to the statement:
“The spike is larger than any other in it’s history, however, the U.S. economy is also significantly larger than at anytime in it’s history. In comparing the size of the spike of the monetary base in 2008 to that of 1929 provides an incomplete picture, one *must* also relate this to the size of the nations economy now, 2008, and then, 1929.”
With respect to the Federal Reserve graph that had been referenced, the above statement is factual. The axes on the graph represent the change from a year ago in *billions of dollars*.
The percentage change of the adjusted monetary base shows that in 2008 the change was 30%, whilst in 1929-32 it recorded a change of 10%. See the chart below:
http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s1id=AMBSL&s1transformation=pch
The change is certainly greater, I don’t think any one is denying what is self evident.
This infers that the financial market is significantly more illiquid now than at any time in history, suggesting greater risk aversion than at any other time in history.
It is an extremely illiquid and risk averse market.
So we can take heart in the fact that the graph from the Federal Reserve matches what most informed individuals already know.
December 17th, 2008 at 3:33 pm
You selected “percentage change” (month-on-month I assume), I chose “percentage change from a year ago” (as I stated above).
Either way, this spike is about 3x bigger than anything that happened during the Great Depression.
December 17th, 2008 at 4:43 pm
carbon sink,
yes, this is the worst financial crisis that the world is experiencing since the Great Depression.
Your tone, seems to be suggesting that I am at odds with you on, possibly, the severity of this crisis?
Although, attempts to make a direct comparison with the social dislocation and suffering of the Great Depression to that of today’s Great Deleveraging is being fallacious. That is not to say there will not be pain and misery.
To reiterate, this financial, and impending economic calamity that we are soon to experience, is by no means run of the mill.
So, I’m not quite sure whether there is anything that we are actually disagreeing upon?
I think that a more pertinent question is how does the world wean it’s self off the fiscal stimuli and redirect its capital and human resources back to something that resembles a market based economy?
December 17th, 2008 at 6:14 pm
I have one further point I would like to add regarding the money supply, to which I forgot to add in the original posting is added below.
The money multiplier, see the following chart
https://research.stlouisfed.org/fred2/series/MULT
has also collapsed.
So we have a situation where the existing money supply, measured under M2 is contracting, due to the collapse in the velocity of money, but at the same time the money multiplier, which allows the monetary base M1 to expand, has also collapsed.
December 17th, 2008 at 9:12 pm
It seems Bill Evans (hey I worked with him) is a classic case of thinking the map is the same as the territory.
December 17th, 2008 at 9:14 pm
Steve Keen
This news comes too late for, I already bought the book from Amazon. No problem, the old paper version is easier to read on the train.
December 18th, 2008 at 3:27 am
Hi Guys,
The debt levels and run up in asset prices is far greater than the period prior to the GD. Your debate and the debate of many has been. Will this be anything like the GD?
Many numbers suggest to me that this collapse will be worse than the GD.
December 18th, 2008 at 9:44 am
iconoclast,
I have no argument with you about the seriousness of the situation. My only point is the spike in the Monetary Base is bigger than anything we saw before, during or after the Great Depression, regardless of how you measure it.
I agree there has been nothing like the social dislocation and suffering of the Great Depression, but its early days yet. Hopefully the social safety nets in civilised nations will help this time around.
Bullturnedbear,
I agree the debt/asset bubble was much bigger this time than the 1920s, not just in nominal terms, but as a percentage of income. Hopefully we will manage it better this time.
December 18th, 2008 at 3:01 pm
carbonsink & Bullturnedbear,
I think we are all in agreement, phew….
The next area of focus, coming just around the corner, will be trade tensions.
We can already see it with Germany’s stance within the EU. China doesn’t think all that is happening it has anything to do with it and it’s enormous surplus.
Furthermore, with the U.S. currency looking shaky we might be in for some Obama Bonds, that is, U.S. treasury paper denominated in a currency like the Yen.
December 18th, 2008 at 3:51 pm
Hi Icon and Carb,
I agree about increasing tensions and trade restrictions. I fully think over the next two to five years the countries of the World will become very mistrustful of each other. As much as they say publicly we have to all stick together and work together. It will be every man and woman for themselves.
December 18th, 2008 at 9:14 pm
Hi,
I have a limited economic understanding, having studied it some 20 years ago. Probably neoclassical theory.
In one of the posts by iconoclast, he mentions the following;
” This infers that the financial market is significantly more illiquid now than at any time in history, suggesting greater risk aversion than at any other time in history.
It is an extremely illiquid and risk averse market.”
However if the financial markets are illiquid, it is my understanding that there should be a shortage of money to lend to others. We hear regularly that small and medium businesses and even some larger ones like Centro are experiencing difficulty in securing funds.
If it is the case that there really is a shortage of funds, and the markets are becoming more risk adverse, why do we have falling interest rates?
December 19th, 2008 at 10:01 am
Rooivis I’m so glad you’ve asked that question. I also studied some Economics nearly 20 years ago, and am no expert.
I’m still sitting frozen like that proverbial rabbit as I try to make up my mind about moving my hard earned money from Super into Cash.
But with Interest Rates going down all the time, like Rooivis I just can’t understand if there is a shortage of money why aren’t the banks trying to attract those of us who want to ‘give’ them Cash by offering a decent Interest Rate?
December 19th, 2008 at 12:39 pm
Effit:
Er, you probably should have moved your super to cash 12-18 months ago.
Interest rates are low because the global economy is in deep recession. Investors are still flocking to cash and cash-like investments despite pathetic yields because they’re scared sh*tless about further falls in other asset classes.
A few brave souls have been nibbling at equities recently though. I’m still sitting in 100% cash, and getting a crap return, but things could be lot worse in a deflationary environment.
December 19th, 2008 at 1:58 pm
Thanks Carbonsink.
You’re probably right that I should have moved my money to cash 12-18 months ago, but I hadn’t yet found Steve’s website, and having survived quite a few of what my financial advisor called at the time ‘these usual ups and downs’ I thought at first we would all ‘ride it out’ like before. Oh – the benefit of hindsight!
And what about the shortage of money? If there is so much cash sloshing around as people have deserted other forms of asset classess why is there a shortage of money?
December 19th, 2008 at 5:34 pm
Money is always scarce…when it ceases to be scarce it is no longer money.
December 19th, 2008 at 5:36 pm
Mate, my financial adviser had me in a CDO-like thing that halved in mid-2007, then vanished completely in Feb 2008. The d*ckhead didn’t even have the courage to call me. Charlatans the lot of them!
It was a wake up call for me. I moved everything into cash at one of the big four in April and sat out the worst of the downturn.
There is a shortage of money because the banks are hoarding cash, trying to rebuild capital.
December 19th, 2008 at 5:40 pm
Look on the bright side, at least you weren’t stormified
December 19th, 2008 at 6:08 pm
Thanks again Carbonsink. You’re right. At least I wasn’t stormified!
Charlatans is a good word for them! I think they might be a dissappearing breed very soon.
December 19th, 2008 at 6:14 pm
rooivis & Effit,
a few reasons why the credit market is the most illiquid it has ever been is:
1. banks world-wide are making colossal losses in financial instruments that have now been marked-to-market rather than marked-to-disney-land. The equity on the balance sheets of these institutions has been decimated, having reached a point where they are no longer able to viably operate as lending institutions. Some have been recapitalised, or completely nationalised, whilst others have been left to wilter. In countries, where the shock wave hasn’t, as yet, permeated, these banks are in a rush to raise capital, seeing a rise in bad debt defaults rising. We have seen this with ANZ, NAB, and recently with the CBA, which was initially botched.
2. No one in the credit market trusts their transacting counter-party. No one is prepared to execute on a trade, fearing that the counter party may default before they reach maturity; this is certainly the case for long duration transactions, save possibly overnight repos. Central banks are, effectively, being used int the intermediation process between each of the counter parties.
3. An assortment of financial instruments, developed during the era of so called financial innovation, which are backed by fixed-income streams that are now defaulting, ranging from, but not limited to, house mortgages, personal loans, car loans, credit card receivables, commercial loans, commercial paper are no longer considered by the market as fungible, and thus are illiquid instruments. Credit spreads on these instruments to that of treasury paper has blown out. Central banks have stepped in to provide instruments that are liquid, that is, treasury paper that has the full faith of the respective countries central bank, whilst at the same time expanding their balance sheet.
4. Central banks all over the world — Australia, U.S., U.K., Europe, Latin America, Japan, Korea, Russia etcetera. They are all in on it. Central banks have established currency swap facilities to alleviate the massive demand in U.S. currency. They, the central banks, have even broadened the range and duration of securities they are prepared to accept as eligible. For example, a recent press release by the Reserve Bank of Australia, below.
http://www.rba.gov.au/MediaReleases/2008/mr_08_26.html
So, make no mistake, this is not only happening overseas, it is also happening here in Australia.
That’s after all why it’s a credit crunch.
December 19th, 2008 at 6:29 pm
I’ve always liked the quote from “A Man In Full” by Tom Wolfe “Let me tell you two gentlemen something about loans. A loan is not a gift. When we make a loan we expect to get paid back.”
It didn’t apply for a while but does now, and totally explains the credit crunch.
December 19th, 2008 at 6:38 pm
Ken,
the only problem is that the one’s that expect to get paid back are now realising that they were naive to have loaned in the first place.
December 19th, 2008 at 7:06 pm
iconclast
Thank you for your explanation. I’m learning new stuff every day (and sometimes every hour!).
December 19th, 2008 at 8:19 pm
Carbonsink,
regarding storm, what a joke they are, where was ASIC ?
As I said a while back, about all this baloney about the Australian financial market being well regulated etc.
We will see how well regulated the Australian financial market is, when the seismic shock permeates through the Australian economy in the near future.
December 19th, 2008 at 10:29 pm
Ok, my understanding now is that there is oodles of money (people cashing up or out), but no one is prepared to lend this to anyone, other than supposedly safe harbors. Should getting funds then not be more difficult and expensive. When is interest rates going to increase? Is it possible that central banks can override market forces?
Surely some of this money is used to pay back some of the existing credit. How is the multiplier in reverse (I think Steve may refer to this as de-leveraging)going to impact economies in the future? Am I right in suggesting that current happenings may be just the tip of the iceberg?
December 20th, 2008 at 4:45 am
Re: Storm Financial.
The only thing of mine that can grow in someone elses hands is my c#@k.
Get some Gold & Silver and preserve what little you have.
Good luck.
December 20th, 2008 at 9:18 am
I attended a lunch last year at which Bill Evans was the star attraction. His take on everything then was that ‘it’s all good for as far out as we can see….5 years’ I didn’t bother trying to argue at the time. I’d have just upset myself and the pig (note not a direct reference to Bill Evans).
It’s amazing! These blokes got it all wrong because they didn’t understand what was wrong. they still don’t, yet they seem to reckon they have all the answers.
I dunno how they have the temerity to stay in their jobs and i don’t know how the hell anyone allows them to keep their jobs.
December 20th, 2008 at 5:15 pm
Looks like GM-Holden Adelaide plant might be in for some tough times. The Pontiac G8, which is the re badged VE Commodore built at the Adelaide plant, may be looking shaky. GM may shrink the Pontiac division to a single model from six following a drop in sales every year since 1999. The likely survivor is Pontiac’s redesigned Vibe small car, which has increased sales this year.
Given GM-Holden have a mix of 50:50 between domestic and export production. It looks like there will be some tough times ahead for GMH.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aNlDpevePRtU
December 21st, 2008 at 6:00 pm
Just a very quick word (as far as my words go anyway) to say Merry Christmas to you all and the best of New Year’s.
I have enjoyed reading all of your thoughts thus far and have managed to nationalize telecommuinications, banks, energy and public transport as well as change the whole eductional structure to make sure that a little thing such as ethics makes an appearance as well as toughening up the regulatory framework (actually I haven’t suggested that yet but I have now lol). CBA, what a disaster. A little thing like increasing your bad debt provisions by 20% is not material to the market lol.
Wonder what I will get to next year at least in my own mind.
It been a lot of fun!!!! Stay safe. I wanna hear from you all next year.