Five Things: The Debt Crisis Is Not a Conspiracy
1. The Debt Crisis is Simple
Awash as we are in a sea of Federal Reserve- and Treasury Department-sponsored financial acronyms, it would be easy to assume the complexity of the debt crisis is beyond the comprehension of the average person. After all, who, apart from a wonkish cadre of financial engineering geeks, can be bothered with trying to sift through the details of things like the Primary Dealer Credit Facility or an array of seemingly sketchy repurchase agreements? Yes, it would be easy to assume the complexity is beyond comprehension; easy, but wrong.
Recently, I ran across a long-winded, chart-filled screed haranguing the Federal Reserve for single-handedly taking over the entire capital market. The claim actually made a certain kind of hysterical sense, perhaps because it appeared in bold typeface, even if it missed the point; outrage over the Fed intervening in equity markets is akin to expressing outrage over what color sack the robbers are using to haul away their loot. At what point did we all become armchair central bankers?
The reality is that the Federal Reserve is simply following the Irving Fisher debt-deflation game plan and doing exactly what the vast majority of US central bankers have always insisted they would be doing if trying to prevent a full collapse into a deflationary depression; that is, try and reflate.
2. When Did We All Become Armchair Central Bankers?
The various mechanics of this reflation attempt are only worth arguing about among armchair central bankers and the various banking system participants concerned with how big of a slice they're getting of the great reflation pie. For everyone else, things are far less complicated and, sorry to spoil a good conspiracy theory, far more bureaucratic and mundane. In order to understand it, let's go to the source.
Toward the end of the Great Depression, economist Irving Fisher outlined a nine-step sequence of events that followed a debt bubble, which became known as his Debt-Deflation Theory of Great Depressions. Believe it or not, the St. Louis Federal Reserve actually has available for download a very easy-to-read 21-page paper by Fisher outlining this theory here.
The paper consists of what Fisher called his "creed," consisting of 49 "articles." Among the most important for our purposes is number 20, covering "over-indebtedness":
Over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money. That is, over-indebtedness may lend importance to over-investment or to over-speculation. The same is true as to over-confidence. I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles its victims into debt.
3. The Debt Bubble Sequence
In that brief article, Fisher handily summarizes why this is no ordinary recession. This debt bubble, over-indebtedness, was fueled by borrowed money, which was made too cheap for too long, and which resulted in massive over-investment, over-speculation, and over-confidence.
But everyone knows that. After all, it's how Alan Greenspan became a household name, appeared on the cover of Time magazine, and became known as The Maestro in the first place, and it's why all those accolades will ultimately be for nought as we continue to try and transfer the excessive corporate and public debt incurred during Greenspan's tenure, and which accelerated under Ben Bernanke, to government debt. More on that in a moment.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved.
Great article. A must read.
The "berries" seem to want to push dealing with the debt out as far as possible (aka Japan). Thank you for reminding people this is a debt crisis.
But in a few years (2011, 13, 15) we MAY have peak oil which will lead to a sharply falling GDP combined with rising energy and energy related goods.
So a muddle-through (John Mauldin) slow Japanese style solution could carry with it a big future risk. We would then not just get stagflation but could get "reciflation"(recession+inflation)
But no one can predict the future. We must personally deal with todays issues. I just wish the "berries" considered the risk involved with a repeat of the Japanese experience. It may not be so benign to just "kick the can down the road"
That may very well be the case. On the other hand one might also conclude that if one was planning on deflation first and was holding dollars and the dollar had an unprecedented slide commensurate with the unprecedented printing programs, that hole may be difficult to get out of as well. Of course we are not like Iceland, we are the worlds reserve currency, and it is not too likely to be taken away from us swiftly by our friendly international financiers. As is stated often in these parts - "risk is high". Good luck to us all!
When the world's central banking cartel teaches us, the hard way, that complete economic collapse is the actual outcome of their ongoing activities (I suspect that they remain aware of this inconvenient truth), I doubt that any further transactions will be taking place in the US$. I suspect that resultant loss of human life will be horrific.
Another great article as always. To your last sentence on being careful which scenario you're prepared for, given the array of intelligent and varying opinions here on the Ville, isn't it more an issue for people to be careful which scenario they're NOT prepared for? It seems all a person can do is have an allocation with a balance and variety of outcomes/timeframes in mind, and hope for the best. Regardless of which side or degree of the inflation/deflation debate you believe, I guess from my view it would be just as foolish to be sitting entirely in cash waiting/hoping for another round of deflation as to be 100 percent in gold, given what the recent breakout in gold (if it does not turn out to be buying exhaustion as your DeMark analysis suggests) may be signalling as it relates to the dollar. A recent article on the Ville suggested that the real question may not be what gold is worth as much as what paper currencies are going to be worth (consistent with your "crisis of the real" theme). Anyway I know you don't give advice on the Ville, but at this point are you positioned with an extremely confident expectation of deflation, or do you have at least a small percentage in gold (aside from your pillow case) or stocks "just in case" as it relates to the dollar? It just seems like a very precarious time to be heavily positioned for any scenario given the level of uncertainty as it relates to everything, including the value of money itself. Would welcome your comments, as well as an update on the Cheech/Chong stock market indicator!
do the demark indicators allow for variance, or would it simply change the expectations?
thanks!
http://www.tradingstocks.net/html/prepare_for_market_crash.html
"Come on, stop that conspiracy BS. The whole herd will be laughing at you!.."
(sorry for my less than perfect English, and if anyone finds it an old joke - I still thought it contrasts nicely in this serious context)...
