Monetary Madness

Monday, October 06, 2008

Financial news have been coming fast and furious in the past four weeks, taking the nationalization of Frannie as a starting point for the worst turmoil any living market participant has experienced in his/her life. What we have seen since can only be called monetary madness where central banks and governments ultimately saddle more than one generation of citizens with debts for the rescue of a financial system that ultimately cannot be successful by generating still more debt.
It has become almost impossible to follow all inflationary measures disguised as "liquefying operations" by monetary authorities. At the same time governments begin to blow up future inflation expectations with their unlimited guarantees of savings deposits that have a good possibility of blowing up in their face.
Socialism for the haves has become commonplace almost overnight in Europe. After Ireland and Greece governments in Germany, Austria, Denmark, Sweden and the UK followed suit in a move to reassure savers that their money is safe in a bank. We can be confident to hear similar announcements from more countries in the near future.
Not even bankers agree in private that this is the case, being grateful that the non-financial world is still not aware of the debt Himalaya that starts crashing upon the world and has not yet led to a massive run on continental European banks which are bleeding on all ends.
Central banks meanwhile keep trumping themselves who will create more money without a correspondent value. But the pinstriped inflationistas have only a single strong card left in their hands. It is the card of public ignorance and the blessing that nobody can remember the last periods of hyper inflation.
Crisis Engulfing the Broader Economy
This will change as soon as the public will see that the next bank run will not be the last one. At this point of time the banking crisis will have become toxic for the broad economy.
Anything real estate related, insurance companies and the leisure sector will feel the pinch next, either from hard to get credit or falling bond prices or the disappearance of disposable income due to rising prices. Do not mistake the current correction in commodities as a bear market. It is rather another result of the global margin call taking place right now.
Climbing spreads in the fixed income markets show the dichotomy between market reality and the wishful thinking of central bankers who increasingly lose power over their only tool, establishing leading interest rates for the short end of the market. The game can go on as bankers and investors are so foolish to accept negative real rates. This behavior will stop soon, once the tightening continues. And I see no step so far that is designed to restore confidence in a market where participants would like to adapt accounting rules to converge with their wishful thinking.
Sorry, the signs have been on the wall for at least four years. Money supply and debts first grew in the USA and the EU and this dangerous policy was followed by countries at such diverse stages of development like China, India and Russia which are all fighting the same inflation problem by now.
The avalanche of cheap credit pumped out by central banks does not reach the broad economy and consumers in Europe anymore as banks scramble to improve their balance sheets. This may become a roadblock for the ailing economy, already limping ahead at growth rates that fall within the statistical margins of error.
As all measures since August 2007 have not helped to alleviate the crisis we probably have to get ready for a very brute and nasty crash that will do what a crisis is here for: to cleanse out the weak part of the economy and start again with a clean plate. I know this euphemism does no justice to the economic contraction which will cost many their existence the way they have known it. But no authority in the world has ever been able to prevent a depression by decree or by printing money in limitless amounts. It only fuelled inflation further, without any historical exception. Don't think it will be different this time. All economic and financial indicators have long surpassed the toxic levels that led to the 1930s depression. Oh, yes, one thing will be different: This time it will be global.


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