The Central Banker's Bank

Today's feature article is from the Sydney Morning Herald (link above) quoting the annual report of the Bank for International Settlements. The title of the article is "Great Depression fall looms".

'In its annual report the Bank for International Settlements noted that the conditions which led up to the Great Depression of the 1930s and the Asian crises in the 1990s were reflected in the current environment. '

Of course the article will be dismissed by most readers, most business people, most people in banking and finance, most economists. For most people they will need a 7% rise in their mortage interest rate, or a termination notice before they have a concept of recession or economic depression. When this horrible reality becomes apparent to all there will be one question asked, and it will be asked repeatedly "How did this happen?" Everyone will want to explain why they were betrayed or misled and how their government's central bank failed to protect them from themselves. Like the generations born in the 20s' to 40's our children will grow up in an environment where debt and incumberance are frowned upon and moderate living well regarded.

What me Worry?

Apparently Big Al was speaking recently to a group of U.S. investors who canvassed the pertinent question.....should we be worried about the Chinese choosing not to hold, or to decrease their holdings of US Treasuries.

Big Al of course responded with the Alfred E. Neuman response, slightly paraphrased. Click the title of the post to check out this article.

It is remarkable for two reasons. Firstly, the frank admission (that Mr. Schiff often asserts) that China is the US's "lender of last resort". That is, no one else would be there to buy US Treasuries if the Chinese were not in the market. Secondly, that this unstable and potentially disasterous set of affairs is of no concern. Make no mistake about this, if the Chinese did choose for whatever reason to walk away from its massive holdings of US Treasuries the title of this blog would swiftly move away from conjecture into current affairs and then into history.

Geckoism

This month's feature article is from Forbes, citing a number of similiarities between current economic and market conditions and the mid 1980's....

--"Real gross domestic product… grew at a seasonally adjusted annual rate of 1.3% in the first three months of the year. That was down sharply from growth of 2.5% in the fourth quarter of 2006 and was the slowest rate of growth since the first quarter of 2003." The Wall Street Journal, April 28, 2007.

--"The U.S. economy, battered by foreign competition, grew at a sluggish 0.7% annual rate during the first three months of the year ... The gross national product, the broadest measure of the country's economic health, has not expanded at such a low rate since the end of the 1981-1982 recession." Associated Press, May 21, 1985.

Makes for an interesting read. The more I contemplate the prevailing economic conditions the more I believe the root cause lies with: excess liquidity driven by excess US dollar production (read Treasuries) driven by irresponsible US economic policy and unsustainable deficits. Markets usually have self corrective mechanisms however the mercantilist policies of China and Japan in particular are ensuring that the US dollar is not being appropriately priced.

Ultimately a correction to the global liquidity glut will be associated with a re-rating of the US dollar probably associated with a significant decline in value and a sharp rise in US, and then, global interest rates. The 'valuation crisis' that this article describes will lead to the pricking of the world's innumerable asset bubbles accelerating the decline in liquidity.

However, rather than this correction being a bull market hiccup as suggested, it will be the beginning of an extended bear market and so the more accurate comparison remains the late 20's. Why I take this position is influenced both by a view on the economic fundamentals we are currently seeing and an intergration with generation theory which would predict a crisis of this scale. To explore this link yourself I would recommend familiarising yourself with Howe and Strauss's conceptual framework at www.fourthturning.com