Interesting analogy.

There’s a critical flaw in the analogy though, in that the gulf stream is a cyclic process by which heat is moved around the planet, but without resulting in the accumulation of heat in any particular place. The money convector, in contrast, leaves a buildup of debt in one place and a buildup of excess reserves in another.

In other words, the gulfstream is a self-correcting system, whereas the debtstream is an unsustainable buildup of forces which are liable to unwind violently.

A better analogy might be a thunderstorm. If the pressures equalize sooner rather than later, we get a bit of rain and wind, but we’re okay otherwise. If the pressures build to far though, we get hurricanes and tornadoes.

An Economy On Thin Ice
Washington Post, April 10, 2005
http://www.washingtonpost.com/wp-dyn/articles/A38725-2005Apr8.html

Volcker wrote: “under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks — call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember …”

“I don’t know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.”

American Economy: R.I.P. By PAUL CRAIG ROBERTS

-A-

But housing prices have become unaffordable. To a large extent the problem we’re having in the financial markets is that housing prices got too high, so Americans borrowed on a wing and a prayer to afford the house they thought they deserved. Housing prices need to correct, by as much as dividing by 2. Sure, you can keep housing prices up to “avoid recession”, but this is favoring the old over the young, the house owner (who is already greatly favored in the tax code) over the renter. And in the end, it probably wouldn’t work anyway.

There was a time when recessions happened and didn’t threaten economic catastrophe. Because of Greenspan, this is no longer the case, because everyone is so leveraged that the first whiff of recession may send the entire pyramid of cards crashing down. Continuing this game is a fool’s gambit. (I’ve used this metaphor before, but think of a recession as a forest fire. It’s awful, but it burns up all the dry tinder, so that the next forest fire won’t be so bad. Not fighting a forest fire looks like a waste – think of all those trees – but eventually it’s become standard policy, because over the long-term it’s better.)

But, let’s continue this idea about global imbalances. If the U.S. consumer consumes less, then either other countries will step to the plate and consume more, and buy American products, thereby softening the impact of the lower American consumption. Or they won’t; and maybe we should just have economies where consumption is less, with global warming and peak oil and all.

I read this comment by economist and money manager John Hussman on Monday and I think that it dovetails nicely with Mr. Wolf’s thoughts.

http://www.hussman.net/wmc/wmc070910.htm

Thanks for the article.

Cheers,
Paul