A great article by
Dan Denning just published on Goldnews. Extracts [my
emphasis]:
"The economy is turning into Barack Obama's Iraq... All the gains in equities since Alan Greenspan uttered his famous words about irrational exuberance have been wiped out. All that remains to know now is how irrational the downside would be.
The good news is that you're seeing signs of capitulation. Investors are giving up on stocks for the long-term.
For example, we got a text message this morning from a long-time bull. He always finds reasons to disagree with our analysis. He texted early this morning after watching Wall Street's depressed closing.
"It's over."
That's not quite a buy signal. But it's not a bad sign either.
...we agree with John Robb that this is not just a stress test of financial firms. It's a stress test for national governments.
Banks and governments have co-evolved to get to this point where we are today in the modern world (where interconnectedness and complexity threaten to crash the system). The "Cash Nexus" as historian Niall Ferguson calls it,
is the murky relationship between fractional reserve banking, perpetual government debt, and the fiscal warfare/welfare state. That is, governments would never have the money to build powerful military machines without modern bank financing and the bond market (where banks buy and sell government debt, bridging the gap between private capital and government borrowing).
Similarly, banks could never have gotten as large without the regulatory and legal framework set up to favor them. And of course it would favor them.
A few things have changed in the last ten years. The main one is that
leaders have become looters, be they political or corporate. On the political side, instead of conventional armed conflict, which had diminishing marginal returns (in addition to being really unpopular in a culture addicted to leisure)
governments have gotten into all sorts of other wars, mostly against their own people (War on Poverty, War on Drugs, War on This, War on That, War on Everything, War on You.)
And for their part,
the banks and even non-bank lenders figured out that if the government was going to encourage home ownership for political reasons by discouraging rigorous lending standards, then
the best way to deal with the increased risk was to sell it!
Alan Greenspan called this "disaggregation" of risk. But obviously securitization did not lower systemic risk. It heightened it. But for a little while anyway, the banks and bankers made a mint off of the government's desire to gear the entire national economy towards the goal of home ownership. This happened in Ireland, the UK, the US, and Australia to name few English-speaking companies.
You'll forgive us if we don't quite have our head wrapped around the idea yet. It's a work in progress. But yes, we are suggesting that
the co-evolution of the modern welfare/warfare state and the financial system has been impacted by a financial meteorite of sorts.
The co-dependency has always required a little inflation to keep it going. But lately, the last one hundred years or so, it's turned into a lot of inflation. The expansion of global money supply through fiat money (i.e. not backed by a tightly supplied physical commodity, such as – say – the Gold Bullion which underpinned the world's money for the previous 5,000-odd years) and widespread credit has created an inherently unstable scale of modern living. We have a living arrangement that uses resources too quickly and too inefficiently. And now we have bumped into that fact in a rather abrupt way.
A re-localization of the economy would be something to think about and even plan for. If the centralization of money and power has reached its useful limits, then you'd think we'd be moving away from it. Yet in Washington, Canberra, Paris, London, Tokyo, and Berlin everyone wants government to get bigger and spend more and take a larger role in the economy.The response to the crisis has become activist and interventionist.
This, ironically, echoes the ideological response of the Bush Administration in Iraq. So meet the new boss...making the exact same strategic mistake as the old boss, only in a different theatre."
Dan Denning,
04 Mar '09 Source