Monday, April 29, 2013
Coming In For A Landing
The Baby Boomers are on the final approach to retirement and they don't want anyone to do anything, that might derail that event. But unfortunately they smoked a few too many "doobies" back in the '70s, so we have to wait for them to remember that they sold the runway...
If young people are to have any hope of turning this country around it will require a wake-up call for the over 50 set who are totally bought in to the status quo. Barring a market "event", it's easy to see how Extend and Pretend could go on for decades as it has in Japan. An endless series of lies and obfuscations as the government deficit grows ever-larger as a proxy for a real economy. It's the perfect solution for an aging society that can't face the pain of reform and just wants to keep things as they are for their lifetime and hand-off the inevitable collapse to the next generation.
Bernankenstein Thinks the U.S. is Japan
He thinks he can monetize unlimited amounts of debt, because Japan has been monetizing its debt since the 1990s on an ever-increasing magnitude. Here in the U.S., the output capacity of the economy was artificially expanded during the household debt accumulation phase aka. "housing boom" - ironically also due to monetary policy. Now after-the-fact, the debts remain, but household purchasing power has been depleted. So, there is an output gap between supply and demand, putting downward pressure on prices. Whatever borrowing is taking place is going towards paying for household necessities, not towards buying McMansions. Meanwhile, productivity continues to grow, as fewer workers accomplish more, yet as has been the case for decades, the gains from productivity accrue only to profits, not wages, therefore demand is stagnant to down. And, of course, deflation is constantly being imported from the Third World via low cost goods. So, all of this taken together is extremely deflationary. It allows the U.S. government to be the borrower of last resort, wherein the deficit becomes the marginal consumer. It also allows Bernankenstein to monetize all government debt knowing that the extra money won't be lent out again after it's spent by the government. So, given this line of thinking and prevailing circumstances it's not hard to believe that the Fed thinks this can all be sustained indefinitely, or at least the remaining lifespan of the Baby Boomers.
If At First You Don't Succeed - Add 11x More Leverage...
Unfortunately, 0% interest rates are like crack cocaine to speculators because they open up the ability to make leveraged carry trades by borrowing in a low interest rate currency (e.g. Japan, U.S.) and lending in high interest bearing currencies. Leverage up 5x and capture the interest rate differential. This type of speculation is so common now that there are brokers out there that literally facilitate all aspects of the trade, whereby the speculator just puts up the capital, picks the two currencies, picks the amount of leverage to apply - pushes a button and sits back to collect profits. Of course, there is no free lunch. The currencies typically used for "funding" the carry trades are by their nature the most stable, whereas the currencies (and assets) that bear the higher yields are by their nature of higher risk. So, mass unwinding of these trades when the markets are under duress has the effect of self-imploding the trade - the low interest currency rises, while the high interest currency falls - rapidly. However,again, the temptation is overwhelming, especially when trading with client's money and the timeframe for achieving "success" is measured in months. It was the Yen carry trade that sparked the Asian financial crisis way back in 1997 when hot money flowed into and then eventually out of the Asian Tigers causing an asset and currency collapse. It was a self-fulfilling collapse, because the inflows boosted the local currencies, which killed exports and slowed the economy, which then led to a mass exodus of capital and the self-fulfilling currency collapse. Already it's starting to happen again. Except this time the Yen monetization is orders of magnitude larger than what obtained in the '90s. Of course, the U.S. dollar is the biggest carry funding currency of all, especially for banks and hedge funds that have been buying up insolvent Spanish and Italian debt - I am sure that will all turn out just fine. Therefore, across the globe, leveraged speculation is now occurring on a scale that was previously not even possible, prior to Quantitative Easing.
The whole point is, that the inevitable bursting of this latest bubble will set-off a domino asset collapse, that will finally wake the geriatric set from their narcoleptic coma and force them to face the issues they largely created.
Or, they can just get the hell out of the way - which would actually be preferable - three decades of having the Mickey Mouse Club in charge is probably enough. In fairness to the Boomers, they can't help that they are overconfident buffoons who have the answer for everything and the solution for absolutely nothing. They were always told that they were "exceptional", and it went straight to their heads, or maybe it was the LSD and the doobies, who knows.
"Here lie the Baby Boomers. They auctioned off the real economy and then just figured they would print money instead. They were utterly shocked and dismayed when it all ended badly - but worst of all, in their lifetimes."
Posted by Mac10 at 10:19 AM