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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: Elroy Jetson who wrote (80260)	3/24/2007 2:24:26 AM
From: pogohere	Read Replies (2) of 110194

Economic depressions are the realization that capital has been previously destroyed - even though most imagined it was still there. I believe it was Anatole Fekete (sp?) who pointed out that just prior to the depression of the 1930s many corporations were actually bankrupt but didn't know it. If I remember correctly he pointed out that there was no formal accounting requirement to determine the ability to pay off debt when interest rates were falling. The amount required to retire indebtedness rose with falling interest rates. Many corporations lacked the capital to retire the debt under these conditions and were unlikely to be able to generate the income to do so, and so were, on such an accounting basis, bankrupt. They just didn't know it. Your use of the word "realization" reminded me of this. It occurs to me that a depression is actually triggered when the facts of the situation become transparent. Until then, no one heads for the exit because the need to is not apparent. Then some event happens and the exits are jammed with players/entities who realize that their capital is fatally impaired and unrecoverable unless they can make it through the exit before the other players who have just had the same "realization." Maybe this is what was meant by the term "animal spirits" of the markets. If the animal spirits are not attuned to the circumstances, the market can stagger on for quite a while before the deluge (Keynes: "markets can stay irrational longer than you can stay solvent"). I think we are in this situation now: all the elements are present, but not transparent to the players. Something will happen which will be labeled as the cause of the depression/panic, but which is really, merely, coincident with the realization of the truly, terribly unbalanced and now untenable condition of things. This will be the subject of debate in later years as to whether this event could really have caused the depression that dates itself with that event. Think Creditanstaldt in 1931 (see: econlib.org, offered only as to the sequence of events, not the causes). But the conditions were ripe all the while--it was the transparency, the realization, that was lacking.

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