• Question
  • The Impending Global Liquidity Crisis - Part 3

    Asked on 6/9/2007

    Our Trade Deficit is being concealed by these gargantuan mega-deals in the markets.

    And there’s something else we need consider about these mergers; they’re not producing growth in the economy. In fact, GDP keeps falling while stocks keep going higher.

    Why?

    Because the mergers do not increase productivity; they’re an indication of “Asset Inflation”. As Thorsten Polleit says, “the government-controlled paper money systems have DECOUPLED credit expansion from the from the economy’s productive capacities.” The link between the stock market and GDP has been broken by inflation.

    Henry C K Liu explains it like this in his article “Liquidity Boom and Looming Crisis” in the Asia Times:

    “The five-year global growth boom and four-year secular bull market may simple run out of steam, or become oversaturated by too many late-coming imitators entering a very specialized and exotic market of high-risk, high-leverage arbitrage.

    The Liquidity Boom has been delivering strong growth through Asset Inflation (property, credit spreads, commodities, and emerging-market stocks) WITHOUT ADDING COMMENSURATE SUBSTANTIVE EXPANSION OF THE REAL ECONOMY.

    Unlike real physical assets, virtual financial mirages that arise out of thin air can evaporate again into thin air without warning.

    As Inflation picks up, the Liquidity Boom and Asset Inflation will draw to a close, leaving a hollowed economy devoid of substance. …A Global Financial Crisis is Inevitable”.

    Liu’s right. There’s no “expansion in the real economy”—no increase in output; no boost in GDP. It’s all recycled credit which will “evaporate” at the first sign of trouble.

    Greenspan’s low interest rates and currency deregulation have set us up for “global liquidity crisis”.

    The basic problem is that credit growth has been outpacing GDP for some time now. That means that debt has been building up faster than the rate of growth in the economy. Eventually those imbalances will have to work themselves out by way of a steep recession or perhaps another Great Depression. There’s a price to pay for low interest rates and, inevitably, we will end up paying it.

    Thorsten Polleit of the Mises Institute explains it like this in his article “The Dark Side of the Credit Boom”:

    “Today's government-controlled paper-money systems have decoupled credit expansion from the economies' productive capacities: "circulation credit" feeds a "credit boom" that is doomed to end in severe economic, social and political crisis. Austrian economists of the Mises Institute fear that the collapse of the credit boom will lead to the destruction of the currency through a deliberate policy of (hyper-)inflation, destroying the free-market order.”

    “Destruction of the currency”; is that too strong?

    No. In fact, the United Nations issued this gloomy statement just last week:

    “The United States dollar is facing IMMINENT COLLAPSE in the face of an unsustainable debt”. America’s current account deficit is now a matter of international concern.

    Polleit says that “the increase in debt-to-GDP ratios ….can actually be observed in all major currency areas, not only in the United States”. This is true. Most of the industrial countries in the world have increased their money supplies to dangerous levels to avoid strengthening against the dollar. It is a prescription for disaster.

    If the Fed chooses to lower interest rates now; (to ease the slumping housing market) they will only aggravate “existing disequilibria”. In fact lowering of interest rates will only perpetuate “the fateful expansion of circulation credit that must end in a collapse of the monetary system”.

    So, why would the Fed engage in such reckless behavior when it violates fundamental laws of economics? According to Polleit, “the ongoing lowering of interest rates and the accompanying rise in circulation credit and debt-to-GDP ratios — the characteristic features of today's state-controlled paper-money systems — is driven by a deep-s

  •  
  • Categories: Your Life in Retirement, Politics and Policy

Answers

This question has not been answered yet.