"Ignoramus18605" wrote in message
...
On 2008-10-11, Ed Huntress wrote:
"Ignoramus18712" wrote in message
...
On 2008-10-10, Ed Huntress wrote:
And the reason for this happening, is that with the new financial
structures, derivatives etc, there are many players that act like
quasi-banks, borrowing money and lending it, without being subject to
reserve restrictions. So during the growth years, all of that stuff
ballooned, leveraged up and expanded.
If you look at M3 versus M2 in that graph to which I posted a link
earlier
in this thread, you can see it happening. It's no wonder the government
no
longer reports M3. It makes it look like the money supply is out of
control.
'Can't have that, being monetarists and all...
So here comes the corollary.
More entities than banks participated in lending and creation of money
(such as hedge funds buying mortgages on credit using leverage, etc).
Right.
And now, besides banks per se, these entities are also suffering from
losses and forced liquidations.
Well, commercial banks are suffering (probably) *because of* the losses
and
forced liquidations of the "shadow banks."
A part of it.
So, obviously, bailing out banks would not restore lending capacity of
these other entities. So the money contraction cannot be prevented by
bailing out banks.
I suspect that money contraction, at least at the M3 level, would be
impossible to stop. At the M2 level it still will be somewhat contracted.
But whether it's going to have a long-term effect on M1 is questionable.
Keep in mind that M2 is also expanded by these "non-bank banks".
Sure. That's why I said "somewhat contracted."
Here's a good graphic showing how this bear market compares to
historical ones (Great Depression, 70s, etc).
It looks very scary.
http://www.nytimes.com/interactive/2...ARKETS.html?hp
Yeah, it does, until you think about the fact that when the stock market
goes down, it always comes up. This market is so quick to move, with trades
coming in so fast from every point of the globe, that it's not a surprise
that it's hyper-volatile compared to previous tankings.
Much of M2 and M3 is really ethereal stuff, which exists mostly in the
form
of claims by one institution upon other institutions, much of it out of
connection to the system that provides real liquidity to the real
economy.
Now we're going to find out if its existence has irreversible
consequences
to the economy that produces goods and services. Recent comments by a
couple
of Chicago School economists say they don't think so. The answer to that
is
'way over my head, but I can imagine a scenario in which the government
intervenes at a point that cuts off that ethereal money and lets it
disappear, while providing liquidity and enabling the credit system that
operates for the real economy to continue.
This is a point where many bifurcations are possible, including
flooding the economy with money to cause inflation and effectively
erase all debts. What is not possible is to return to the pre-crisis
times quickly.
I think that ultimately, we, as a whole, were misled about how wealthy
we really were. Much of that wealth was self delusion and
borrowing. So in the end we will wake up and realize that in fact we
are collectively only 1/2 or 1/3 as wealthy.
Iggy, a couple of years ago I was reading some background material for a
trade article and I kept being hit by the fact that 40% of US corporate
profit was coming from the financial sector. Then I looked at the dollar
numbers in the financial sector and said to myself, "self, what the hell
does all this 'money' represent? Where is it? Where did it come from"?
Self said, it seems to represent nothing but a circle of obligations; it
exists on hard disks; and it fell from the sky. Of course, I look at these
things from an economics point of view, with very little understanding of
finance. But I think I recognize an economic circle-jerk when I see one.
I never thought we were remotely as wealthy as the numbers suggested. I
still believe that Adam Smith had it right, and by no stretch of the
imagination could these financial "services" be labelled honestly as things
of value. They were tricks of multiplication.
So I'm not surprised. I don't claim prescience, but the whole thing has
stunk, from my point of view, for at least a couple of decades. Sooner or
later there would be a reckoning. When Warren Buffet said, in the mid-'90s,
that he didn't understand any longer how this market was working, I knew we
were in trouble.
I'm shrugging a lot these days. I have no idea where it's going, but I'm not
surprised about where we are.
Check out the above graphic.
It is very scary.
Yes. But it will go up again.
--
Ed Huntress