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Give Money, Don't Waste It
It shows the hollowness at the core of economic thinking if, in a time when capital should be more closely guarded than a wayward teenage daughter, the pundits are all out proclaiming this is a time to buy - stocks, goods, whatever - as long as money is passed from hand to hand, then Freedom and Democracy will stand firm.
Capital has been lost this past week on a huge scale - not just in the smouldering tons of rubble which mark the mausoleum of so many innocents, but in the dislocations caused to commerce and the swelling of the State.
Look simply at the reservists. 50,000 men and women will be taken out of productive work and placed fruitlessly (though arguably not needlessly) monitoring Combat Air Patrols over the nation's major cities. Say they work a 40-hour week at $20 an hour, then allow for the fact they left real jobs of equal worth (producing goods and services hopefully of even higher value). That alone comes to nearly $4 billion a year in economic cost.
Now assume these people patriotically spend (and perhaps even increase their debts to do so). Less goods have been produced by them, more expenditure is their preference, ergo scarcity increases and prices probably rise.
Also, let's look at the bipartisan rush to print money to help the suffering and to fund the rescue effort. All very laudable, but the resources which this money will forcibly devote to such ends will have to be reallocated from other uses, uses which in happier times would have been given greatly higher priority. That in itself is an impoverishment.
To the extent that government is expressing the will of the people to make a sacrifice in order to speed healing and repair, that is well and good, but if that is honestly the intention, the whole sum should be funded by direct sales of bonds to non-monetary institutions and individual citizens (and preferably in a form not eligible for borrowing against), or by a one-off tax rise.
Want to bet instead that the Fed conjures up some reserves and the banks and brokers buy up the inevitable deficit financing issue, thus monetizing it and risking inflation?
The Fed is also frantically pumping money in to shore up the dangerously stretched fractional reserve system. No doubt some of this - not having been smoothly distributed - will be in sufficient local surplus at the larger houses that there will be some appetite for stock buying. Additionally, there has been an intense psychological barrage for days, aimed at persuading ordinary people to buy stocks.
They may as well buy papal indulgences for all the good that will do.
Now, it is in no-one's interests if the market crashes, but neither is it of any benefit to try to forestall the accurate discounting of the parlous economic situation in which America and the world now find themselves - straits to which we have been reduced, remember, not by the spectacular atrocities of last week, but by the multi-year interaction of easy money with cultivated credulousness.
Who knows how many firms have been tapped out in this? The airlines are probably only the visible projection of an economic iceberg. They have billion dollar leases on which they will exercise get-out clauses, or on which they will default. Finance houses such as GE Capital and a host of banks will find that hard to swallow. Down the chain, customers and clients will be posing threats to an intricately interwoven time structure of liabilities - much of it, no doubt, enmeshed in the half trillion ABS market.
And not just here. In a world where revenues have been shrinking, profits evaporating and in which the main corporate imperative has been to squeeze outgoings below income, who knows how many hullplates will part under the strain?
No revenues - especially none of those specifically alienated cashflows which fund ABS pools - means no payments and that takes us to the mutual funds which are large holders of such securities.
For many years now, money market mutual funds have striven to give the impression to people that they represent money - ie that they are demand liabilities, payable instantaneously at par. Marketing themselves under the slogan that they will 'never break the buck' (ie that principal is absolutely safe under all circumstances) and granting checking facilities, the sellers of the $2.1 trillion dollars currently embodied in this form indisputably portray these as 'money' holdings - a perception which could all too easily receive a very severe test.
Ask yourselves whether this is a time for rational actors to be blindly committing more money to the sink of dreams which is the current day stock market?
If you want to be patriotic, if you want to do some good, ring the Salvation Army, not Schwab, and spare yourselves unnecessary anguish and the economy needless further distortion, in the days ahead.
Finally, in an act of Jacobin idiocy, we are to ban - or at least actively discourage - short-sellers now the 'Free' market has reopened.
Pity those who want to sell one liquid stock they don't happen to own, so they can hold more comfortably to a less liquid asset which they do. Pity the patriotic trader who bought call options last week who now needs a quick, flexible hedge. Pity the mutual fund anxious to lend out its stock and so use the cash raised to cushion against possible redemptions, forestalling involuntary sales.
Pity the stockholders in Britain or Europe or Asia who see such flows redirected there instead, as leveraged accounts anxiously seek protection wherever they can get it.
Do we learn nothing from the past? By helping make a market liquid, short sellers perform a valuable service - where else do resting bids get the supply to fill them? By providing a future source of buying power, they prevent that exhaustion of underlying demand, which causes all those terrifying discontinuities in price and time, which range from air-pockets to outright Crashes.
Without them, as we found in 1937-8, we never limit the downside, we merely make the path to the bottom more precipitous.
Sean Corrigan
Capital Insight
www.capitalinsight.co.uk |
