The Economy & The Fat Kid
Economics / US Economy Jan 09, 2008 - 03:19 PMBy: Darryl_R_Schoon
Credit-based economies constantly need to expand in order to service constantly increasing levels of debt. Central banks adjust the flow of credit to maintain the balance between economic expansion and economic contraction.
Then one day, a fat kid shows up at the playground. While everyone knows it's a private playground and admittance is strictly controlled, no one knows where the fat kid came from or how he got in. Nonetheless, the fat kid's there. Then the fat kid walks over to the teeter-totter and sits down. The fat kid's end of the tetter-totter slams to the ground as the other end skyrockets up; tossing all those on the high end off. The name of the fat kid is risk.
RISK IS IN THE HOUSE
LIBOR's getting high
As central bankers try
To calm the markets down
But risk is back in town
Risk is in the house
YO! Risk is in the house
Credit lines are drawn
Where's the money gone
Spreads are growing fast
Markets sucking gas
Risk is in the house YO!
Risk is in the house
Triple A means squat
Commercial paper rots
Monolines are down
‘Cause risk is back in town
Risk is in the house
YO! Risk is in the house
Risk is going ‘round
Can you hear the sound
As tranches hit the ground
‘Cause risk is back in town
DON'T BLAME THE FAT KID
THE ROLE OF RISK IN FREE MARKETS
When the dot.com bubble burst in 2000, it was the largest collapse of a speculative bubble since Japan 's Nikkei crashed in 1990. The Nikkei plummeted from its high of 38,957 down to 7,607, dropping 80% over thirteen years and setting in motion deflationary forces still in effect today.
It was deflation that spooked “Easy Al” Greenspan to open the floodgates of credit in 2002 hoping to prevent deflation from then gaining a foothold in the US economy. Greenspan's gambit, however, backfired. The crisis feared by Greenspan did not materialize—but another one did.
Although 1 % credit from the US Federal Reserve and 0 % credit from Japan staved off a potentially lethal wave of global deflation in 2002, it also caused a collapse of credit markets that is now threatening the underpinnings of credit-based finance in 2007/2008; and, it did so by virtually banishing market risk for five years.
Between 2002 and 2007, risk went into hiding as central banks flooded the markets with cheap credit; allowing capital flows to mask losses while boosting asset values to record levels. Billions of dollars of central bank credit translated into trillions of dollars of leveraged bets creating bubbles in all asset classes—real estate, stocks, commodities, and even bonds.
Global market risks, temporarily hidden by cheap credit, have now reasserted themselves with a vengeance. With many AAA rated bonds now suddenly worthless, buyers of Wall Street's now suspect wares have deserted the credit markets in droves. The rush for returns has been replaced by a rush to safety, reflecting the sentiment penned by the 19 th century humorist Mark Twain:
I am more concerned about the return of my money than the return on my money.
Risk is back and no matter what the playground supervisor tells us, we know the playground's not safe. Even the big kids are falling off the ladder. The fat kid's back and so is the whiff of deflation.
Darryl Robert Schoon
www.survivethecrisis.com
www.drschoon.com
About Darryl Robert Schoon
In college, I majored in political science with a focus on East Asia (B.A. University of California at Davis, 1966). My in-depth study of economics did not occur until much later.
In the 1990s, I became curious about the Great Depression and in the course of my study, I realized that most of my preconceptions about money and the economy were just that - preconceptions. I, like most others, did not really understand the nature of money and the economy. Now, I have some insights and answers about these critical matters.
In October 2005, Marshall Thurber, a close friend from law school convened The Positive Deviant Network (the PDN), a group of individuals whom Marshall believed to be "out-of-the-box" thinkers and I was asked to join. The PDN became a major catalyst in my writings on economic issues.
When I discovered others in the PDN shared my concerns about the US economy, I began writing down my thoughts. In March 2007 I presented my findings to the Positive Deviant Network in the form of an in-depth 148- page analysis, " How to Survive the Crisis and Prosper In The Process. "
The reception to my presentation, though controversial, generated a significant amount of interest; and in May 2007, "How To Survive The Crisis And Prosper In The Process" was made available at www.survivethecrisis.com and I began writing articles on economic issues.
The interest in the book and my writings has been gratifying. During its first two months, www.survivethecrisis.com was accessed by over 10,000 viewers from 93 countries. Clearly, we had struck a chord and www.drschoon.com , has been created to address this interest.
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