The Kabuki Dance
A few days ago Maxfill posted about how the Federal Reserve has now found itself in a pickle. At the end of his piece, Maxfill referenced Murray Rothbard and his theory of the business cycle or the causes of economic depressions. Earlier this year I ran a series of posts concerning Rothbard’s book titled America’s Great Depression. Any one interested in a serious discussion of Federal Reserve policy needs to read this book. But the Federal Reserve is only one component, albeit a major one, in this Kabuki dance we call government economic growth manipulation.
The role of government is to alter behavior; whether it is a standing army or the members of the monetary politburo that we call the Federal Reserve. Changing interest rates and the money supply [these are not necessarily parallel terms] has a direct affect on individual mindsets as to borrow or save and the relationship between debtor and creditor. Monetary policy is not and never will be neutral in nature.
Economic growth through expansive monetary policy at its core is accomplished by means of debt. Individuals and businesses are enticed to leverage current dollars against potential future growth. Simple examples are well illustrated in either the stock market or land investment. An individual can buy stock on margin where they only have to put up 50% of the purchase price. During the 1920s the margin requirement was as low as 10%. By using margin, an individual could literally, in simplified terms, double their purchases of stock. All is fine as long as the price of stocks go up. However, when prices fall below the purchase price, then the margin may be called setting off liquidations to cover the loan. No different with mortgages where little is put down. All is fine and dandy as long as the home value increases. But what happens when the value, due to over supply, drops precipitously to the point where the market value is less than the mortgage? In the cases of foreclosures, the debtor walks away and the creditor is holding the bag.
It would be a mistake to imply that economic growth is the determinant for increasing the money supply. The fact is that the government has rung up huge debts with the largest coming as a result of Medicare and government pension-retirement programs. These liabilities which I reported on this past summer are somewhere in the neighborhood of 57 trillion dollars [more than the wealth of the world]. This debt needs to be funded. But how can such large government debts be funded without causing economic havoc. The only answer is to flood the world with liquidity [dollars everywhere].
This liquidity has been growing at an alarming rate. Domestic money credit year over year has increased 10% and foreign dollar holdings are up 19%. The world is choking on dollars. This liquidity has shown in real estate speculation which has led to an over supply of houses. The countryside is choking on housing construction. This malinvestment in real estate is now rearing its head at Andersen Corporation and other suppliers. Dollars for some time have not only been chasing real estate, but also oil, commodities, and stocks. At some point and time the world can consume only some finite amount of houses, oil, stocks, autos, and commodities.
There are definitely storm clouds on the horizon. In the housing market foreclosures are up dramatically. Not only are suppliers feeling the impact, but now lending institutions are feeling the affects of loans gone bad. Today a sub prime lender, Ownit, declared bankruptcy. The commercial banks are loaned to the gills. Wage growth is increasing while productivity is flat. Iran, probably for political maneuvering, will now transact oil in Euros instead of dollars. And state public pension funds whose obligations are greater than wealth have turned to investing in hedge funds which use sophisticated leveraging techniques to increase returns.
Debt is like what the late Ohio State football coach Woody Hays said about the forward pass, “three things can happen and two of them are bad.” The truth is our country is leveraged to the hilt. The chances of completing a long a one is not good.
Mark Pribonic - OTBL
The role of government is to alter behavior; whether it is a standing army or the members of the monetary politburo that we call the Federal Reserve. Changing interest rates and the money supply [these are not necessarily parallel terms] has a direct affect on individual mindsets as to borrow or save and the relationship between debtor and creditor. Monetary policy is not and never will be neutral in nature.
Economic growth through expansive monetary policy at its core is accomplished by means of debt. Individuals and businesses are enticed to leverage current dollars against potential future growth. Simple examples are well illustrated in either the stock market or land investment. An individual can buy stock on margin where they only have to put up 50% of the purchase price. During the 1920s the margin requirement was as low as 10%. By using margin, an individual could literally, in simplified terms, double their purchases of stock. All is fine as long as the price of stocks go up. However, when prices fall below the purchase price, then the margin may be called setting off liquidations to cover the loan. No different with mortgages where little is put down. All is fine and dandy as long as the home value increases. But what happens when the value, due to over supply, drops precipitously to the point where the market value is less than the mortgage? In the cases of foreclosures, the debtor walks away and the creditor is holding the bag.
It would be a mistake to imply that economic growth is the determinant for increasing the money supply. The fact is that the government has rung up huge debts with the largest coming as a result of Medicare and government pension-retirement programs. These liabilities which I reported on this past summer are somewhere in the neighborhood of 57 trillion dollars [more than the wealth of the world]. This debt needs to be funded. But how can such large government debts be funded without causing economic havoc. The only answer is to flood the world with liquidity [dollars everywhere].
This liquidity has been growing at an alarming rate. Domestic money credit year over year has increased 10% and foreign dollar holdings are up 19%. The world is choking on dollars. This liquidity has shown in real estate speculation which has led to an over supply of houses. The countryside is choking on housing construction. This malinvestment in real estate is now rearing its head at Andersen Corporation and other suppliers. Dollars for some time have not only been chasing real estate, but also oil, commodities, and stocks. At some point and time the world can consume only some finite amount of houses, oil, stocks, autos, and commodities.
There are definitely storm clouds on the horizon. In the housing market foreclosures are up dramatically. Not only are suppliers feeling the impact, but now lending institutions are feeling the affects of loans gone bad. Today a sub prime lender, Ownit, declared bankruptcy. The commercial banks are loaned to the gills. Wage growth is increasing while productivity is flat. Iran, probably for political maneuvering, will now transact oil in Euros instead of dollars. And state public pension funds whose obligations are greater than wealth have turned to investing in hedge funds which use sophisticated leveraging techniques to increase returns.
Debt is like what the late Ohio State football coach Woody Hays said about the forward pass, “three things can happen and two of them are bad.” The truth is our country is leveraged to the hilt. The chances of completing a long a one is not good.
Mark Pribonic - OTBL
posted by Anonymous @ 1:20 PM
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