Pondering post-bubble America
...
In an attempt to simplify a very complex environment to accessible terms, I see two critical issues today. First, the U.S. “service sector”/consumption-based Bubble economy has about reached the end of its rope. The consumer is piling on debt at a precarious and unsustainable pace (“blow-off”). Furthermore, the degree of Credit excess necessary to sustain spending/“output” at boom-time levels (in the context of a severely maladjusted economic system) is increasingly destabilizing. Credit excess-induced created purchasing power stimulates over-consumption, massive trade deficits, and uneconomic “investment,” with only a trickle financing sound investment. If one were to calculate a Stable Finance Ratio of “sound investment to total Credit growth” it would undoubtedly be crashing to an all-time historic low. Conversely, a Financial Fragility Ratio of “foreign liabilities to economic wealth creating assets” would now be rising exponentially. Continued rampant Credit inflation has in reality become dangerously counter-productive, and we look to the dollar level and gold price as confirmation of this view.
Second, the “structured finance” monetary regime that retains its dominance at the epicenter of our nation’s financial system (The Master of the Great Credit Bubble) is absolutely and unalterably dysfunctional. Indelible Monetary Processes specifically direct finance to where it is not needed – to sectors where there remains an inflationary bias. The entire U.S. financial system, then, has become trapped in a consumer and Mortgage Finance Bubble that has the corporate debt and stock market Bubbles appearing quite manageable in comparison.
As monetary analysts, we’ve never respected nor trusted “structured finance.” This is because it’s all about lending volume and financial speculation – the nemeses of sound money and economic and financial stability. The Aggressive Loan Originator (and his cohorts Clever Securitizer, Oblivious Credit Insurer, Gumptious Rating Agency, and Enterprising Leveraged Speculator) has supplanted the anachronistic Prudent Loan Officer and his preciously mundane Bank Loan. Along with volume, the Structured Finance mob covets yield. As such, Structured Finance has a rather intense fancy for subprime. Poor credits provide an almost limitless captive audience – at least during the self-reinforcing, Credit excess-induced boom. Consumption-based lending, as we have witnessed, knows no bounds (when one governs over the world’s reserve currency). Structured Finance also has a devoted love affair with asset-based lending and speculating. As we have witnessed, inflating asset (equities, homes, mortgage-backs, agency bonds, baseball teams, etc.) prices provide unbounded lending opportunities during the boom; again, music to the ears of Structured (“Speculative”) Finance.
...
... Considering what we have and continue to observe, I do not feel it is at all outrageous to assert that our system has set a perilous course toward the collapse of the world’s reserve currency. This is the harsh reality that we should recognize as a nation as we contemplate Post-Bubble America. And no amount of inflation will change the facts of economic life. There are no available shortcuts but many risky gimmicks to prolong the Bubble, hence only making the inevitable day of reckoning all the more painful and Balkanizing. There is nowadays only louder call for stimulating and “reflating,” but there is absolutely no discussion of the consequences. There is so much a stake. It is our view that the longer we travel down this dangerous course the more rapidly the Post-Bubble America pendulum swings away from a Japanese scenario in the direction of Argentina.
from D. Noland 31st jan 03
prudentbear.com |
