Saturday, October 18, 2003

Doug Noland - Credit Bubble

Lot's of people mistakingly think the market has no downside fault, recently. How quickly they forget when false confidence enters their foolish bones. It must creep in through their toes, clear to their greedy demented little brains. I really truly feel sorry for those who can not read the handwriting on the walls of global finance. I fear we're in for a rough ride - maybe not this year, but surely next. A world of massively excessive credit and liquidity - massive global debts - and a truly severe shortage of demand - where will real sustainable growth come from - deflationary/bubble increasing China? What is the marketable limit to our deficit growth? ...{Derivatives - C.H.I.P.S. - Dollar}

Credit Bubble

...And now some brief thoughts regarding the current Extraordinary Environment. For the first time in history, we operate in a global financial system dictated by unfettered money and Credit creation. There is absolutely no control over the quantity or quality of monetary expansion. There’s no gold standard, no dollar standard, No Standards. Things have regressed to “Wildcat Finance” on an unprecedented global scale.

The U.S. is in the midst of an historic Credit Bubble that is coveted by a self-serving Wall Street and nurtured by our incompetent Federal Reserve. It has gotten so out of control that the Fed’s role is simply to sustain an unsustainable Bubble and hope to avoid a debt collapse. This is disastrous central banking. I fear that Wall Street is self-destructing; I fear that our Credit system is self-destructing. And these dynamics are going to have a major influence on our careers and lives, so I urge independent study.

The great American economist Hyman Minsky was known – and harshly criticized - for arguing that Capitalism is “flawed.” Much of his analysis evolved from his brilliant understanding of the “roaring twenties” and the subsequent financial collapse and Great Depression. Very liberally paraphrasing Minsky, there are miraculous attributes of risk-taking and profit-seeking in the real economy that interplay with the financial system’s tenacity for achieving both earnings gains and expansion. But, when left unchecked, there is a propensity for over-expansion and increasingly risky behavior. The system can run out of control, which spawns financial fragility, economic distortions, and eventual self-destruction.

Minsky’s powerful analysis is quite pertinent today. But I would argue that instead of “flawed,” Capitalism is, instead, inherently vulnerable. I will try out my Eyeball Analogy: One could argue that there is a serious “flaw” in the design of our eyeballs – something with such a critical function shouldn’t be so soft, delicate, and left unprotected to the elements. Yet it is the very nature of this organ’s amazing functionality and capabilities that create its vulnerability. Your eyeball and Capitalism are not flawed, but they are – by their very nature – Inherently Vulnerable. Article Continued

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