Marc, i'm not sure if i understand your question...
but basically i would say that defaults and bankruptcies help money to go to money heaven, so in a sense they destroy liquidity.
i have heard a comment by Cohen on TV, that was echoed by other commentators, namely that 'fundamentally, nothing has changed in the past few weeks'. you could have said the same thing about Japan in 1990 however. when the stock market began to crater, fundamentally nothing had changed yet. that began about 6 months later.
in the coming years i believe we will see a de-leveraging of the economy, and a big surge in defaults. after all, defaults in the below investment grade bond arena are already at levels normally found during recessions, with the economy growing at an extremely fast clip. credit spreads are at panic levels for a REASON. they are telling us that the market begins to foresee the big debt wipe-out.
consider this: even according to the doctored official figures, CPI inflation year-to-date is running at 5,8% p.a.
so why would the 30 year bond yield a mere 5,79%?
the only reasonable explanation is that a marked economic slowdown, perhaps even a recession, is coming (forget about the treasury buybacks...their size is negligible compared to the total outstanding debt).
the spate of malinvestments that have characterized the credit-induced boom will perforce lead to a survival of only the fittest debtors.
in such an environment the typical Fed policy response of turning on the taps will cease to work. i have heard it said that the Fed following the crash of '29 made the mistake of not easing monetary policy enough. that's complete nonsense. they were easing a lot faster than they tightened ahead of the BK. it's just that they were already pushing on a string. the REAL mistake was not what they did after the boom ended, but that they had let it get out of hand in the first place, by keeping their monetary policy too loose. precisely the mistake made by the Fed during the '90's.
regards,
hb |
