Munchau: Next Crisis Coming Sooner Than You Think

Wolfgang Munchau has a solid, thoughtful piece at the Financial Times which argues that the widely applauded rallies in stock and commodity markets are already looking very much like bubbles, and the efforts to contend with them (either directly, or as a result of the need to start reining in liquidity) is likely to kick off another crisis.

That much had been said in various ways in other venues, although Munchau does offer valuation data to back up his views. The more novel part of his argument is that instability is the inevitable result of an overly-large financial sector, and the result is bigger and bigger swings in output (meaning GDP growth) and prices.

Ouch. And the two scenarios he sets forth are not pretty either.

From the Financial Times:

On the surface, this looks like 2003 and 2004 when the previous housing, credit, commodity and equity bubbles started to inflate, helped by low nominal interest rates and a lack of inflation. There is one big difference, though. This bubble will burst sooner.

So how do we know this is a bubble? My two favourite metrics of stock market valuation are Cape, which stands for the cyclically adjusted price/earnings ratio, and Q. Cape was invented by Robert Shiller, professor of economics and finance at Yale University. It measures the 10-year moving average of the inflation-adjusted p/e ratio. Q is a metric of market capitalisation divided by net worth…

…they both tend to agree on relative market mispricing most of the time. In mid-September both measures concluded that the US stock market was overvalued by some 35 to 40 per cent. The markets have since gone up a lot more than the moving average of earnings….

The single reason for this renewed bubble is the extremely low level of nominal interest rates, which has induced people to move into all kinds of risky assets…

But unlike five years ago, central banks now have the dual role of targeting monetary and financial stability. As has been pointed out time and again, those two objectives can easily come into conflict. In Europe, for example, the European Central Bank would under normal circumstances already have started to raise interest rates. The reason it sits tight is to prevent damage to Europe’s chronically under-capitalised banking system, which still depends on the ECB for life support. The same is true, more or less, elsewhere.

Now, I agree there is no prospect of a significant rise in inflation over the next 12 months, but the chances rise significantly after 2010.

Once perceptions of rising inflation return, central banks might be forced to switch towards a much more aggressive monetary policy relatively quickly – much quicker than during the previous cycle. A short inflationary boom could be followed by another recession, another banking crisis, and perhaps deflation. We should not see inflation and deflation as opposite scenarios, but as sequential ones. We could be in for a period of extreme price instability, in both directions, as central banks lose control.

This is exactly what the economist Hyman Minsky predicted in his financial instability hypothesis.** He postulated that a world with a large financial sector and an excessive emphasis on the production of investment goods creates instability both in terms of output and prices.

While, according to Minsky, these are the deep causes of instability, the mechanism through which instability comes about is the way governments and central banks respond to crises. The state has potent means to end a recession, but the policies it uses give rise to the next phase of instabiliy….The world has witnessed a proliferation of financial bubbles and extreme economic instability that cannot be explained by any of the established macroeconomic models. Minsky is about all we have.

His policy conclusions are disturbing, especially if contrasted with what is actually happening. In their crisis response, world leaders have focused on bonuses and other irrelevant side-issues. But they have failed to address the financial sector’s overall size. So if Minsky is right, instability should continue and get worse.

Our present situation can give rise to two scenarios – or some combination of the two. The first is that central banks start exiting at some point in 2010, triggering another fall in the prices of risky assets. In the UK, for example, any return to a normal monetary policy will almost inevitably imply another fall in the housing market, which is currently propped up by ultra-cheap mortgages.

Alternatively, central banks might prioritise financial stability over price stability and keep the monetary floodgates open for as long as possible. This, I believe, would cause the mother of all financial market crises – a bond market crash – to be followed by depression and deflation.

In other words, there is danger no matter how the central banks react. Successful monetary policy could be like walking along a perilous ridge, on either side of which lies a precipice of instability.

For all we know, there may not be a safe way down.

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47 comments

  1. dbt

    I don’t know what it will take to get this kind of view aired more widely in the media, but it needs to happen or we’re screwed.

  2. Cullpepper

    What?!? Are you trying to imply, sir, that this paper is *worthless?* It happens to be covered with images of the *finest* dead white guys.

    I’d leave, if there were somewhere else to go…

  3. catkiller

    we have reached relative planetary saturation, with a ponzi economy dependent on rapidly increasing population, which is why they have no solution. Pavlov behavior modification under media saturation conditions is simple to implement, but most difficult to rescind.

    the old system will continue to consume itself to death, and attempting to reboot in china is the last thing you want to do. from the perspective of the planet, which is the one that counts, humans are now less intelligent than other critters, a dangerous condition.

    programming people to chase capital, which left to its own devices would become inert, is a critical failure in reasoning.

    the next threat / opportunity is indeed far greater than the imagination of capital.

    1. DownSouth

      catkiller,

      I began Reading Hannah Arendt’s The Human Condition last night. In the introduction, Margaret Canovan expounds on some of the points you make.

      Your observation that “we have reached relative planetary saturation, with a ponzi economy dependent on rapidly increasing population, which is why they have no solution” seems to echo this passage from Canovan’s introduction:

      Looking at what she(Arendt) calls “the modern age,” she diagnoses a paradoxical situation in which radical economic processes were set off by human action, while those concerned increasingly thought of themselves as helpless flotsam on the currents of socioeconomic forces.

      As Canovan goes on to explain, Arendt believed the modern age began with the expropriation of peasant property carried out during the Reformation, a process by which “stable property was converted into fluid wealth—capital, in fact—with the dynamic effects that Marx had described so well.” “Instead of inhabiting a stable world of objects made to last,” she says, “human beings found themselves sucked into an accelerating process of production and consumption.”

      “[T]his process of production and consumption had gone far beyond catering for natural needs; indeed the activities, methods, and consumer goods involved were all highly artificial,” she continues,

      …for modernization has turned out to be extraordinarily good at increasing production, consumption, and procreation, giving rise to a vastly expanded human race which is producing and consuming more than ever before. Her contention is that since these economic concerns came to be the center of public attention and public policy (instead of being hidden away in the privacy of the household as in all previous civilizations), the costs have been devastation of the world and an ever-increasing tendency for human beings to conceive of themselves in terms of their desire to consume.

      Arendt, however, unlike Marx and practically all modern economists, does not believe this situation is immutable. She believes these thinkers are all trapped in the tradition of Western thought: Plato’s pessimism regarding politics as well as his confusion and conflation of labor, work and politics. Marx thus mistakenly concluded the current predicament “was part of an inevitable historical process.” And almost all modern economists and social scientists “like Plato have tried to substitute for action a model of politics as making a work of art,” Canovan concludes. “Following the philosopher-king who sees the ideal model and molds his passive subjects to fit it, scheme after scheme has been elaborated for perfect societies in which everyone conforms to the author’s blueprint.”

      Thus we get the formulation of “passive subjects” such as “economic man,” which, as David Sloan Wilson put it, “have about as much basis in factual reality as the Garden of Eden.”

      Another example of “passive subjects” are those fabricated by the “neo-Darwinian scientists” who, according to Canovan, “encourage us to believe that everything about us is determined by our genes.” Here she is undoubtedly speaking of the New Atheists like Ayn Rand, Dawkins, Dennett, Harris and Hitchens.

      Arendt, however, was not nearly so deterministic nor as pessimistic as any of the aforementioned. Since “the central political activity is action,” she believed that when people begin to “act in concert,” any number of totally new and previously unknown, as well as highly unpredictable, things can happen.

      1. Skippy

        Very much in line with my personal portent, with the caveat that financial/political energy vs population mass coefficients have yet to be determined or resulting reactants yields deduced, but it could look something like this see: Photo Release – heic0615: Colliding galaxies make love, not war.

        Link:http://www.spacetelescope.org/news/html/heic0615.html

        Skippy…Chemistry and Astronomy combined, good grief I better get some sleep.

        1. catkiller

          the kids always win because of their energy to mass ratio.

          the fulcrum between galaxies balances net imbalances within galaxies.

          1. Skippy

            Catkiller said…the kids always win because of their energy to mass ratio.

            Too true, as I am in possession of four of said critters, although I find that exciting the reaction *energetically* shortens the duration of kinetic action, lack of mass sheds energy quickly to opposing forces…eh.

            Skippy…or kids lets go out side and play tiggy (tag in the US) followed by a dissertation on formulae of drive engineering used in our play today.

            PS. works on pollys too.

          2. catkiller

            skippy “Skippy…or kids lets go out side and play tiggy (tag in the US) followed by a dissertation on formulae of drive engineering used in our play today.”

            I’m an old man in a rocking chair now. I can talk,
            but I can no longer do. On the job, I can still work
            rings around people, but what is the point of
            wiring up trash devices that are going to be replaced
            two years from now with more trash devices. There
            are no more real jobs in this country. Everyone is
            living off of work done by their predecessors,
            keeping busy, but not much more, which is why the
            economy is liquidating. Last year, I made six figures,
            and they are replacing the stuff because of flawed
            proprietary design, again.

            When they destroyed the family here, they destroyed
            childhood, and imagination along with it. Without
            imagination, there is no economy. I hope your
            economy is faring better. I do enjoy watching the kids,
            globally, and I have a pretty good seat for their show,
            but the other show is pointless.

            Liked the marriage of galaxies. Always look forward
            to the birth of new stars.

        2. DownSouth

          Skippy,

          One wonders, if Arendt were alive today, if her optimism would still be intact.

          When she published The Human Condition it was 1958. At that time, there was still great hope that nuclear power plants would provide the world with unlimited energy. A year earlier, in 1957, “an earth-born object made by man was launched into the universe,” she writes, an event “second importance to none, not even to the splitting of the atom.” She cites the eulogy engraved on the funeral obelisk of “one of Russia’s great scientists: ‘Mankind will not remain bound to the earth forever’.”

          But now, more than a half century later, the great promise of nuclear energy has not been realized. The chances of mankind colonizing outer space seem more remote than ever.

          Arendt believed that capitalism and the practices that go hand-in-hand with it–“overtaxation”, “a de facto devaluation of currency” and “inflation coupled with a recession”–were simply a continuation of the process of confiscation of the peasant’s property, a process that began in the 16th century. And that process has now not only accelerated in the Western countries, but gone global.

          The “devastation of the world” has continued unabated and is 50 years more advanced. And the negative consequences of “the splitting of the atom”—nuclear weapons—are more ominous than ever. A failure of politics now, as in 1958, means the extinction of the species, if not the end of all living things on Earth.

          Can unforeseen scientific and technological advances save us?

          If not, then the only way out is through the successful practice of politics.

          In the 1960s, when mostly white, affluent students first joined the Civil Rights movement and then went on to engage the anti-war movement, Arendt saw this as a very hopeful sign for the future of politics, and for mankind. These students, after all, were not black. And they had their college deferments. So their politics they practiced were not a self-serving.

          I just wonder how she would see things today.

          1. Skippy

            Disproportionate influence by small self indulgent segment of the total population (past and present), seem bent on grooming us to satisfy their malignant dreams/needs.

            Skippy…generational mental pedophilia, me thinks, followed by adroit hand washing in the name of continuation aka I’m a victim too.

          2. catkiller

            we have the necessary technology; the only question is who will be going along for the ride. The valley is always on the other side of the mountain, requiring energy of catalysis, the recycling of non-performing assets.

            the behavior of current operators is hard-wired; no rational argument is going to change their course. they will hold onto their non-performing assets until death do them part.

            it’s difficult to climb a mountain with either a house or its mortgage on one’s back; do they really expect to roll their bmw(s) onto the space ship? yes. and if they can’t, they certainly do not want the field hands to go either.

            inert capital has its uses, however.

      2. Jim in MN

        I don’t think Dennett should be lumped in as favoring ‘passive agent’ constructs of human nature. He’s been trying to work with concepts like evolution and bounded rationality to explain how free will and agency, and indeed (quite explicitly) the whole ‘western’ canon of human rights and liberties, can fit into a carefully constructed philosophy that doesn’t have to rely on ungrounded assumptions or magical thinking. There is plenty of room for discontinuous social action….

      3. i on the ball patriot

        DownSouth you present an interesting and thought provoking juxtaposition of comments and quotes … some thoughts;

        “Your observation that “we have reached relative planetary saturation, with a ponzi economy dependent on rapidly increasing population, which is why they have no solution” seems to echo this passage from Canovan’s introduction:”

        They do have a solution; the intentional — and well orchestrated and metered out — string of bubbles that is currently drastically reducing the high resource consuming global middle class (the class that was conned into producing all of this ‘wealth’ in the first place) and will ultimately be responsible for a rapid decrease in world population as individuals (again through propaganda orchestration) are pitted one against the other in a debilitating perpetual conflict. The perpetual conflict is well on its way in scamerica. The goal is a two tier ruler and ruled world. Will it be successful? The key is perception in time to take action. The window of remedial action closes as mitigating resources are drawn down.

        Further;

        “Arendt, however, unlike Marx and practically all modern economists, does not believe this situation is immutable. She believes these thinkers are all trapped in the tradition of Western thought: Plato’s pessimism regarding politics as well as his confusion and conflation of labor, work and politics. Marx thus mistakenly concluded the current predicament “was part of an inevitable historical process.” And almost all modern economists and social scientists “like Plato have tried to substitute for action a model of politics as making a work of art,” Canovan concludes. “Following the philosopher-king who sees the ideal model and molds his passive subjects to fit it, scheme after scheme has been elaborated for perfect societies in which everyone conforms to the author’s blueprint.””

        Marx actually was correct, the ‘system’ is immutable, but his context was wrong because it was limited to history (the wrong ‘system’): “was part of an inevitable historical process.” And this from the communist manifesto; “The history of all hitherto existing society is the history of class struggles.”
        Marx was brilliant, but his works, like software, are in need of an upgrade.
        Had he said; “was part of an inevitable evolutionary process.”, and; “The history of all hitherto existing society is the history of deception against perception.”, he would have been more correct.

        Its a dog eat dog world. All organisms must cannibalize in order to survive. Evolution is clearly in charge. The ‘passive subjects’ have been deceived (lack perception, or, willingly accept the deception as it gets their perceived needs met).

        Arendt also does not go far enough when she says; “the central political activity is action,”. It would be more correct to say ‘all life is politics’ as every millisecond of life is spent in getting one’s need met.

        The ‘passivity’ will end when needs (perceived or real) are not getting met. That will cause people to ”act in concert”.

        The current problem is that the resource window for positive change is closing and perception is greatly lagging deception. Evolution has shown that it will tolerate wide extremes in the yin and yang of deception and perception. The challenge is to throw open the window now, see the deceptions, and act in concert to mitigate them. Moving forward it is a matter of how much of an imbalance will evolution tolerate.
        It is a matter of figuring out what evolution wants. I believe evolution will tolerate and wants a more fair electoral process. We have a sphere of influence within the immutable constraints.

        Deception is the strongest political force on the planet.

      4. catkiller

        I’ll have to put this book on my list. It’s been several decades since I had an opportunity to read recreationally, but this sounds good, and I need to get used to the rocking chair.

        However, we are quickly approaching ignition, so the simpler the language we employ to explain the situation, so others may take immediate action, the better.

        The people who align themselves to take advantage of the gravity in this blackhole are going to do quite well. The people who get sucked in, and that may be entire societies, are not going to do so well.

        1. Vinny G.

          catkiller,

          Oh, yes, I obviously need to add a sixth step to my “Dr. Vinny’s 5-easy step prescription for your continued health and well being” which I posted below. Thank you, catkiller.

          So, folks, after you get the house abroad, the second citizenship, the gold, the blue-ray recorder, and lots and lots of coffee, make sure you also invest in a comfortable rocking chair, or possibly two rocking chairs, if you’re married.

          As far as the house abroad goes, may I recommend one of the Greek islands for your consideration? Trust me, they may be dirty, peasanty, and backward by American standards, but if you think you can get used to living without freeways, the lifestyle they offer is hard to beat.

          Vinny G.

      5. Swedish Lex

        Thanks a lot for your comments and insights.

        I would however not go as far as saying that the ““neo-Darwinian scientists”” would “”encourage us to believe that everything about us is determined by our genes.””

        While the boundaries of our imagination and actions are ultimately determined by our genes, there remains plenty of wiggle room for humanity to wreck the economy and the planet inside those, regardless of the genes. Also not to do so, of course. I imagine that Dawkins would agree with this.

        1. cougar_w

          If our genes are selfish then they are greedy. The antidote for greed is fear.

          Fear is what prevents us from venturing into the cool river that we know to be full of crocodiles. For the crocodiles, we suffer in the heat on the shore and learn the importance of patience.

          We have had 50 years relatively free from fear — and perhaps 300 years free of the limiting bonds of nature. During this brief episode our impulses have driven us — and the planet — deep into the realm of the crocodiles. Thus fear is returning in the clueful few. For the rest, there is likely only digestion.

          Watch how quickly the sentiment changes now. All that we thought was permanent will sputter away like so much wax in the inferno.

          cougar

        2. DownSouth

          Swedish Lex,

          I don’t know how closely you’ve followed the debate over Dawkins’ Selfish Gene, which he published in 1976, but Dawkins’ “science” has not withstood the test of time very well.

          Selfish Gene, very much in the tradition of Ayn Rand, celebrates a theory of human nature which holds that man is a selfish, greedy and self-serving animal. “Red in tooth in claw,” from a poem by Alfred Lord Tennyson, is often used to describe this concept of man.

          With the passing of time, and especially with the more recent findings by neuroscientists, incontrovertible evidence has emerged that altruism, benevolence and empathy are very much hardwired into the human brain.

          Now this poses quite a problem for Dawkins, because it pretty much demolishes his entire life’s work. But instead of dealing with the way humans are, he has now deftly shifted the discussion to how humans ought to be. Take the following lecture, for instance, starting at minute 56:40:

          http://thesciencenetwork.org/programs/beyond-belief-science-religion-reason-and-survival/session-7-1

          Dawkins acknowledges that “kindness, altruism, generosity, empathy, pity and sympathy” are indeed immutable human urges. But they shouldn’t be, he asserts, because they no longer enhance survival. They are “misfires” or “mistakes,” he says, “programmed into our brains” in “ancestral times,” holdovers from a time when they did facilitate survival.

          Science is the study of the way things are, not the way Dawkins or anybody else believes they ought to be. And the hypocrisy here is mind boggling. Just imagine, Dawkins and the other New Atheists hold themselves out to be “objectivists”! What a joke.

          So put me into the David Sloan Wilson and Jonathan Haidt school of thinking.

          Indeed, the New Atheists like Rand, Dennett, Dawkins, Hitchens and Harris are the mirror image of the very thing they condemn. What’s the difference between them and a James Dobson or a Pat Robertson? Not a one of them is interested in the way the world is, but are all trying to remake the world in the way they think it ought to be. And that is the description of religion, not science.

          1. i on the ball patriot

            DownSouth says – “With the passing of time, and especially with the more recent findings by neuroscientists, incontrovertible evidence has emerged that altruism, benevolence and empathy are very much hardwired into the human brain.”

            Yes they are hardwired into the brain, not as Dawkins says, as “immutable human urges”, but rather as coping mechanisms that facilitate getting the needs of the organism met, i.e., “enhancing survival”. Dawkins was initially close to right, but is now wrong when he contends that they do not enhance survival. They very much enhance survival.

            All organisms must cannibalize others in order to survive, as such these coping mechanisms ARE self serving. When these coping mechanisms (altruism, benevolence, empathy, kindness, generosity, pity, sympathy, love, etc.) are deployed by an organism an alliance is formed with another organism(s), and there is always an expected return by the initiating organism that will enhance or facilitate the survival of that organism.

            The coping mechanisms of highest value are deception and perception. Is the love genuine? Is the empathy real? Does Obama really have my best interests at heart? Who are you deceiving today? What is the exploitation footprint in the products and services you use to get your own needs met?

            Deception is the strongest political force on the planet.

          2. i on the ball patriot

            Dan Duncan says:
            October 19, 2009 at 6:59 pm

            “Then why should I believe you?”

            Your beliefs are a product of your own perceptions.

            Deception is the strongest political force on the planet.

  4. DoctoRx

    The brilliant Brit money mgr Jeremy Grantham lowered his fair value estimate for the S&P 500 to about 880 at least a month ago, if I remember correctly.

    This is a world where the most important traded commodity, oil, with stable patterns of usage, dropped more than 75% in about 7 months last year. How can this be in even a semi-rational world?

    These markets are either loony or manipulated. Perhaps they are just all derivatives moved around by OTC instruments that we know not of.

    I do think that we are in uncharted waters. Prices of all financial instruments could move in almost any direction and amplitude from here over the next months and the Big Finance guys would find a way to explain why prices deserve to be even more in the same direction.

    1. cougar_w

      This is because they have learned a new trick, which is how to move money into their vaults on both the ups and the downs. Chasing real value is an old man’s game. The smart guys need swings so they can arbitrage the float. The faster the swing, the better their advantage. The greater the amplitude, the easier to destroy competitors. These dual realities are geared together. They will oscillate the economy until it hits its harmonic, at which point it will simply implode. There will be no explanation and no warning; like a bridge in a cross wind, it will suddenly vibrate and then blow up and then disappear as if it had never been.

      Eventually they will be utterly alone, a few computational clouds hacking and out maneuvering each other’s algorithms in some kind of global economic wargame. It would be interesting if there were any humans hanging around at the exchanges bothering to tally the score at some point, or if all the quants who wrote the software are down at the lake bucketing water into plastic tanks to cart back to the shack.

      There is no force on the planet can stop this madness. I fear it must all burn.

      cougar

  5. Bank CD Rates

    No doubt, if we continue the same way we did before this ongoing great global economic recession then the time is not far that we would face another financial crisis soon.

  6. Francois T

    “For all we know, there may not be a safe way down.”

    Alan Greenspan, at last, admitted the obvious, which would be a safe way down: “If it is too big to fail, it is too big.”

    Of course, that would assume that our beloved leaders in DC come to their senses and do the right thing; downsize the financial sector.

    Hence, it is safe to say that the ONLY way is down, down, down.

    This is not going to end well.

  7. fresn dan

    “The single reason for this renewed bubble is the extremely low level of nominal interest rates, which has induced people to move into all kinds of risky assets…”

    Coming soon – negative interest rates. I plan to use up my worthless federal reserve notes on booze, hookers, and cheese burgers (for somebody with my cholesterol levels, thats more risky than blow)

  8. Bob_in_MA

    If Federal budget projections stand ($9B debt over ten years), stimulus spending will fall $265B between FY2010 and 2011 and the effect of letting the Bush tax cuts expire in 2011 will be a $200B rise in taxes. That’s 3+% of GDP, a greater negative impact than the positive impact being felt this FY.

    I think that’s when we hit the real horns of the dilemma. Either we accept a large contractionary force and hope the economy has grown wildly enough to endure it, or we blow out the budget with more stimulus and risk a dollar crisis.

  9. Siggy

    I’m uncertain as to whether the size of the financial sector really matters. That is, in and of itself, size may not be a driving force, rather, it may be a critical symptom of that which is the driving force.

    It is my view that the attraction of Wall Street is that it is where the money is. Well, it is where the money can be had without great physical toil. It is the nurturing place for a kleptocracy. It is a place that needs draconian regulation to prevent it from destroying the greater society.

    The reason we will soon be visited by another fiancial crisis is that the first, or perhaps current and ongoing one, has not yet been corrected. The Fed, the Treasury, the Administration, the Congress, and the Public have not yet come to agreement that it is the money supply that is the problem. In particular it is the credit component of the money supply that is especially problematical.

    A fiat currency in union with fractional reserve banking is the engine of the excess credit that has been created and which credit supports asset price bubbles we have and are still experiencing. To solve that problem, we have thrown what is effectively borrowed money at the problem which is, in itself, borrowed money. How one borrows ones way to a stable economy is a propostion that no one has explained.

    There is no painless solution to this problem. What we need to discuss and agree to is a process that extinguishes that debt which cannot be serviced. Converting debt to equity, for example is one of several approaches that might be applied, complete write off is another. Too Big To Fail is a canard that needs to be sent to the dust bin. If the liquidation of a givien institution engenders financial chaos, that may well be what has to occur if there is be any genuine stabilazation and improvement in economic activity.

  10. i on the ball patriot

    The Gang Rape

    Its a brutal gang rape,
    By a pack of elite scum,
    Lady Liberty screams,
    Then her body goes numb,

    Obama holds the Lady,
    Pinned firmly to the floor,
    While the bankers abuse her,
    As they scream, “Give us more!”

    Dimon salivates,
    Rubin admires all their tools,
    Fuld wipes his body fluids,
    Greenspan simply drools,

    The shame now appears,
    In Lady Liberty’s eyes,
    As she feels the deception,
    The betrayal and the lies,

    There will be no rape kit,
    For there is no ‘rule of law’,
    Only mass demonstrations,
    Will make the rapists withdraw,

    A new electoral process,
    Should be the demonstrations only goal,
    it will mend the rule of law,
    And restore humanity’s tattered soul …

    Deception is the strongest political force on the planet.

  11. Vinny G.

    Indeed, indeed, the next crisis is nigh at hand. Behold, it is descending upon us already, like a thief in the night!

    You need to be prepared. So, once again, here’s Dr. Vinny’s 5-easy step prescription for your continued health and well being:

    1.) A residence outside of the US and Western Europe

    2.) 2+ passports

    3.) Enough physical gold and silver to survive for at least 20 years

    4.) A high quality blue-ray recorder and digital cable service, so you can record in high definition the collapse of the evil western world as we know it

    5.) A stockpile of high quality coffee and a decent cappuccino machine, so you can maximize your viewing pleasure of the recordings made in point (D) above.

    Now, if you have not already covered items (1) through (3) above, may I politely ask, “What is wrong with you?”

    Vinny G.

    1. catkiller

      my three rules:

      1) if it doesn’t fit in a backback, leave it behind;

      2) if the backpack is lost, just get another one;

      and

      3) leave a rocking chair suitably located in every port
      you visit.

  12. gruntled

    The System seems incapable of dealing with the after-effects of previous bubbles without blowing new ones. This process reminds one of that definition of insanity that goes something like “… doing the same thing over and over and expecting a different outcome.” Meanwhile, the Wall Street makes off like bandits, the middle class shrinks even further, and the country is in deeper debt…
    This surely cannot go on forever.

    1. Vinny G.

      These bubbles do resemble the process of addiction, where relapse is part of the very definition and diagnosis of the disorder.

      Unfortunately, addictions are not an easy thing to treat. Take an alcoholic, for example. The physiological withdrawal from alcohol (although painful and potentially dangerous) clears up in a matter of days. However, the psychological addiction lingers on for a lifetime. Every time such a “recovering” addict passes by the bar where he used to hang out, the cravings will return. Every Friday evening rolls around (when he used to do most of his drinking), the cravings will return. And, most importantly, every time one of his old drinking buddies calls, the cravings will return. In order for this person to truly prevent relapse, he needs to end his contact with his drinking friends, needs to take a different route back home (avoiding the bar where he used to hang out), and needs to fill his Friday evenings with non-drinking activities such as going to see a movie or two.

      The same is true about our society which is addicted to easy credit, excessive consumption, and an arrogant attitude of entitlement. The booze pushers here are Wall Street, so we need to cut them down to size, and we need to get them out of our face so we don’t have to listen to their lies and empty promises day in and day out. Then we need a radical change in lifestyle. No more credit, no more keeping up with the Johnses, no more getting a new car every 3 years, no more 3000 square feet homes for a family of 3. It is possible, but it takes work. And, first and foremost, it takes putting Wall Street in its place.

      Just a few thoughts from a guy who dealt with a lot of addicts.

      Vinny G.

      1. catkiller

        Talking is one thing; doing is another.
        Addiction is a good analogy.

        You have a substantial open source project on your hands,
        and you must get it up and running as quickly as possible
        to give potential participants confidence that the problem
        can se solved, so they will quit hoarding bullets, and start working on the problem.

        Time is growing short, I worked on the last kernal / rodeo, and am no longer young enough to work 7/24. My code is already circling the globe. I don’t have to break in. My code breaks out, and tells me who is using it and how they are using it.

        The curent sticking point is form. Drupal, or some other group needs to provide you with a forum format that allows participants to build the thread required to pull everyone through.

        You need the physics of current financial participation (as is), which the Science publication has nearly completed. You need a general, testable theory that any of the old economic kernal programmers can provide you with (preliminary to be); You need a new education system; You need an investigation of representative financial cases to
        drive improvement development; And you need input from past programmers, efficiently telling you where all the mistakes were made in the last development cycle. Among other things (most importantly, a new energy system).

        In short, you are at the wall, and the entire system is exploding in your direction(implosion). You need a forum that will induce mass, effective, simultaneous participation, one that creates, logs, and incorporates actionable information. It’s a one foot in front of the other process. The door is an effective prototype for a forum.

        Speed to disclosure is accelerating nicely. You need an articulating mechanism to make it actionable. Everyone must be able to see everything, so individuals can effectively insert their talents, without replication or overlap. Consider forum format.

      2. Vinny G.

        If I may add to my analogy between addiction and our economic system above:

        The fundamental question that any addict must answer is the following: “Is it worth going through all the trouble of kicking the addiction, losing your current friends, changing your lifestyle, just not to drink anymore? Is it worth doing this, especially considering that that is the only thing you know how to do well?”

        The answer is emphatically “Yes!” In the long run the life of any “recovering” addict will be infinitely better. His relationship with his wife will improve immensely (assuming she did not already leave him, as she should have, years ago), his children and grandchildren will now not be afraid to hang around him, and his relationship with the rest of the family will improve immensely. Additionally, his legal standing will improve (no more DUIs or spending the night in jail after a bar fight). The money that used to be spent on booze can now be spent on more constructive and useful things. His health will also improve dramatically, with the probability of dying of liver disease or ending up with dementia decreasing radically. And, his mental stability will improve for the better — no more alcoholic mood swings, no more unprovoked explosions, and a dramatic improvement in self-esteem. All these are good things.

        The same type of improvement can occur at national level if we change our economic model to one that is not based on financial addiction. An America without a Wall Street driven economy will no longer need to get into mindless wars, it will not be hated or despised by most of the world, and will be able to provide decent health care and education for its people, rather than paying off massive bailouts to the crooks that caused the problems to begin with. We can then rebuilt this decaying infrastructure, enjoy a prosperous lifestyle anchored into reality rather than phony credit, and most importantly, we will be able to live in peace with the rest of the world.

        All it takes is putting this Wall Street drug cartel in its place. Yet, this entire discussion is purely academic, considering this cartel of criminals already turned this nation into the type of plutocracy they had wanted. As such, I simply need to refer the “sane” people amongst us to my “Dr. Vinny’s 5-easy step prescription for continued health and well being” above.

        Vinny G.

        1. catkiller

          Government is the denominator in the growth equation,
          and government is the remainder of personal responsibility
          not taken by individuals. That is a function of the risk /
          reward system and the ability to see where their skills
          may be most usefully employed, for themselves and the
          system. Both must be reworked.

          An effective forum will directly increase transparency,
          solving the participation portion of the problem. To
          ignite the reactor, participants need an education system
          that will allow them to develop their talents effectively.

          Energy is the primary physical utility, therefore
          individuals need to improve their education in order to
          gain a direct equity stake, and recurring returns, from
          the new system. Once the system becomes a full fledged
          fulcrum, the piano player can go back to focussing
          on the piano.

          In symbiotic development, you never know who will have the
          critical key next, and output affects input. You cannot
          expect internal organizational reorganization to improve
          the system directly, and the individual only has the
          ability to change him or herself. Transformation is all
          about induction.

          Everyone will require a much better understanding of the
          scientific method in order to operate in the resulting
          self-regulatory structure. Once you begin to deploy the
          real power available in the universe, ignorance becomes
          incredibly dangerous. You could blow up a building, or a
          city simply by moving a wire, yet everyone needs to be
          comfortable with wiring.

          Education. People who have so far chosen to opt out, and
          dull their senses to the irrationalities surrounding them,
          need a real reason to begin participating, which is better
          than all the very good reasons not to participate.

  13. RueTheDay

    People REALLY need to read Minsky, and I mean the original, not the internet bastardizations. What’s happening now vindicates his theories every bit as much as the crisis did. Asset prices easily get disconnected from the discounted present values of the income streams they provide, and the level of asset prices are key to the level of investment in new capital projects, which in turn drives output and employment.

  14. Hugh

    What Munchau is describing is the persistence of the paper economy, too much money in the hands of investors with too few opportunities or interest in real, productive investments. The result is a lot of unhinged money sloshing around, chasing itself, and doing untold damage to the real economy where the two intersect. This is where the instability comes in. It is why this excess needs to be done away or redistributed. It is why the paper economy needs to be dismantled.

  15. mmckinl

    Naked Capitalism has been shouting the answer for over a year …

    DE-LEVERAGING !

    The losses must be taken and the leveraged shadow financial system severely curtailed.

    This whole episode was debated ad infinitum when the Swedish and Scandinavian Models were discussed last year …

    But it is inevitably coming back to bite us in the butt because the banks political power overrode the only real exit from this crisis.

    1. bill w

      Have no fear because DELEVERAGING is coming. Deleveraging is a primary trend and as such can’t be stopped. All that these political clowns have done is delay it by throwing so much money at it that the results will be at least 3 to 4 times worse. We have not fixed anything, but we have blown another bubble that is ripe for implosion!

      1. mmckinl

        There is an enormous difference between orderly and disorderly de-leveraging …

        I was hoping for the orderly variety … but as you say the disorderly variety will be 3-4 times worse.

        Such is the case for Disaster Capitalism …

  16. Vangel

    “Alternatively, central banks might prioritise financial stability over price stability and keep the monetary floodgates open for as long as possible. This, I believe, would cause the mother of all financial market crises – a bond market crash – to be followed by depression and deflation.”

    Why wouldn’t the fiat currencies collapse first and drive prices into the stratosphere in nominal terms even as they fall off a cliff in real terms? The way I see it there is no short term political incentive not to keep adding liquidity to the markets and keep voters happy by allowing them to service their debts as long as possible. As long as the next election goes well why not let the next guy worry about the final outcome.

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