by MrBill » Fri 17 Oct 2008, 06:23:32
Threadbear I have been trying to write about the real causes of this credit crisis now for sometime. This research from Standard Bank focuses on my own concerns that the heart of the credit crisis lies in excessive money supply growth and aggressive credit expansion that has been made possible by governments running large debts and budget deficits as well as central banks that would not allow their home currencies to appreciate, so they instead sterilized those export receipts and re-invested that currency back into global capital markets. This is the true cause of the current crisis of which home loans and subprime were just the tipping point.
$this->bbcode_second_pass_quote('', ' ')"Policymakers are like fire-fighters in the midst of a rampant forest fire. They are trying to put out fires in toxic mortgage assets, fires in interbank lending, fires in emerging markets and fires elsewhere. Just as one seems to come under control another one sparks into life. But who lit the blue touch paper?
Fed Chairman Bernanke gave his thoughts on this on Wednesday. He said that "Large inflows of capital into the US and other countries stimulated a reaching for yield, an under-pricing of risk, excessive leverage, and the development of complex and opaque financial instruments that seemed to work well during the credit boom but have shown to be fragile under stress". We think this is pretty accurate. It is pretty accurate because Bernanke stressed the role of capital flows as well as financial market excesses. He suggests that the financial market community took the liquidity that was on offer from capital inflows and overreached.
It also hints that financial institutions could not have embarked on such a ruinous spree without the liquidity in the first place. Whatever the merits of this argument we believe that it has implications for the currency market, specifically the renminbi. It is our view that this surge in capital exports to the US (and other countries) are a consequence of the dollar slide between 2002 and 2008. This slide has been resisted by many countries, including China. The consequence of this has been phenomenal reserve growth among the central banks (see figure 1). These reserves have to be invested somewhere and many found their way into the Treasury market, which loweredyields and boosted global liquidity.
source:
research@standardbank.com I compare governments attempts to re-inflate markets at the moment to hypovolumic shock. If you have internal hemorrhaging the problem is not a lack of blood. It is that it is pooling in areas of the body where it is not needed, and may even be harmful, while those areas of the body that desperately need it are not getting that oxygenated blood flow. Eventually it leads to hypovolumic shock that can further lead to cardiac arrest. Neither epinephrine nor ventricular fibrillation alone can save the patient much less ensure recovery until you also treat the internal hemorrhaging. If you just treat the symptoms the patient is lost.
Here I am trying to put the 'massive' $3.2 trillion liquidity infusion into perspective. I am sorry I did not have all the facts and figures at hand, so I used only stock market losses as a proxy. The loss of wealth, and the amount of debt borrowed against that paper wealth, are of course much larger. I just did not have the numbers.
$this->bbcode_second_pass_quote('', 'J')PM CEO says, "If you're not fearful, you're crazy!"
Sometimes I lose track of all the links, but off the top of my head before this 'bounce' worldwide equity markets had erased some $25 trillion in wealth. Some, but not all of that paper wealth, has been used as collateral, in Russia for example, to borrow additional funds to either re-invest in the stock market or in assets such as real-esate.
Now that the equity market is down, it might be a double-whammy (a technical term) or simply be requiring further margin calls - most likely in cash given the size of the drop - that those investor may or may not be in a position to meet. If not, then they lose their collateral. It will be sold to repay the loan. So the investor takes a market loss, a loan loss, and in the end loses their collateral as well. They are a lot poorer today than, say, two months ago.
That is only equity markets. The $25 trillion does not include real-estate losses or other physical assets. Many of them have gone down in value as well. The merely wealthy may have seen 30-percent of their networth disappear this year. They are feeling decidely less optimisitic about the future, so are still moving into such assets as cash and high grade government bonds. Some too late, but for them it is all about protecting the bottom-line not looking at the upside. It may not be the right investment logic for those still hoping to make a fortune, but for those that have a fortune can you really blame them?
blah, Blah, BLAH! Okay our bottom-line. Do the bailouts - as sizeable as they are - much, much less than the $25 trillion loss in wealth as represented by equity alone - outsize the magnitude of the losses both real and on paper? The losses probably by a factor of ten to one. The bailouts might add-up to just 10-percent of the total loss of wealth year to date. And the real economy is still weakening, so those losses are no where near from over.
The question is not so much about will the US dollar survive as the world's reserve currency, but what will the world's financial architecture look like after this crisis is finished? Recent cracks in the ERM make me doubt the euro's role as well as those such as Sterling's?
The measures taken so far may be too little, too late, but really if there are other plans on the table I would sure like to hear them? Short of governments buying every asset, and guaranteeing every liability, this is a momumental round of deleveraging risk. That is going to affect the value of every asset. That process is still well underway. We may not even be halfway there, yet? A time-line in such a crisis is usually more optimistic than not. But a three year base case scenario is certainly not too wide of the mark? 2010?Unless this time things just get worse?
I believe the conclusion is that we will have deleveraging, disinflation and deflation in all asset prices up until that time where there is capitulation in all financial markets, and possibily a severe recession cum depression in the global economy. Only then if governments continue to flood the market with liquidity will inflation (or hyper-inflation) then truly become The Problem.
Although one has to make the distinction between US dollar devaluation and inflation. The USA can obviously make their own currency worthless, while not being able to address falling global asset prices due to a lack of demand and/or ability to pay in some other foreign currency. And as always, I have to stress that no asset, not even gold, has a fixed value. They all change in value relative to one another based on scarcity and demand. The flipside of demand is the ability to pay.
Other countries do it, so can the U.S.
- I'm half serious...