Liquidity Trap
This link to a recent article by Henry C. K. Liu explains (albeit in the arcana of high finance) what a liquidity crisis is; and where it is likely to lead… soon. What does that mean for us? It means get as independent as we can, as soon as we can, of the financial-industrial grid. This is a community, not an individual, effort.
US Economy: Liquidity boom and looming crisis
by Henry C.K. Liu
Economic growth in the US slowed to 1.3% in the first quarter (Q1) of 2007, the worst performance in four years of an overextended debt bubble. Yet the Dow Jones Industrial Average (DJIA) rose to an all-time intra-day high of 13,284.53 to close at 13,264.62 last Friday, rising more than 1,000 points or 9% in the same period.
The DJIA is now 82% higher than its low of 7,286.27 on October 9, 2002, during which US gross domestic product (GDP) grew only 38%.
The 10-year cycle of financial crises
The historical pattern of a 10-year rhythm of cyclical financial crises looms as a menacing storm cloud over the financial markets.
The 30% US market crash of 1987, in which investors lost 10% of 1987 GDP, was set off by the 1985 Plaza Accord to push down the Japanese yen with an aim of reducing the growing US trade deficit with Japan. The 1987 crash was followed 10 years later by FULL
Stan’s NOTE: Michael Hudson once wrote me in an email — after I’d been complaining about how difficult it was to follow the threads of financial analysis — that leftists are not generally “wired” to understand finance… that it functions almost as another language. I’d extend his remarks to more than just leftists. Like any new language (and this one is vitally important if we are to understand power in this new eopch of exterminism), repeated exposure, from varying facets, eventually renders the unfamiliar more familiar. So here is a link to a 1998 essay — written in language very familiar to the left — by Loren Goldner, on the emerging liquidity crisis. I hope it’s helpful. This is extremely important; because the wreckage of this hyper-reified system — even if the language is cripplingly arcane and often boring — is likely to be unimaginable.
Timothy R. Anderson:
Hi there, and a big, big chuckle was shot right out of me when I saw the ” leftists are NOT generally
wired to understand finance . ” It is painfully true that the ‘exposure ‘ to such stuff is limited.
But I know a thing or two about a thing or two .
When I was a shorter person and younger by a decade or two than I am now , I watched very, very closely how much the British pound was worth against an American dollar . Without getting too highly technical about it, the British pound and the American dollar , say, twenty years ago, were approx.
like this :
To buy one British pound I would spend about
$ 1.24 American .
Uh, that’s not the reality currently.
Currently, the situation is , roughly, thus :
To buy one British pound I would spend
about $ 1.98 American .
Yes, that is but one example in a financial world that is overwhelming and occasionally overlooked.
Aside from my prose here, I think I’d like to give any readers out there something to think about……
Other countries in this world do NOT borrow vast amounts of money, as the United States of America does, and they are likely better off for it. Yes, some countries borrow money, please educate us all about the such and such thingy that some small size country borrowed back in 1967 and still has not paid off……….. blah blah blah.
This is NOT about other countries. This is about the United States of America. Furthermore, it is about what happens when there is no more water in the well.
Tim
25 May 2007, 12:56 pmr graves:
the links don’t seem to be working
thanks
25 May 2007, 5:04 pmChristopher Kachouroff:
The only way to rid ourselves of the “liquidity crisis” is to go back to our Constitutional roots: Congress shall “coin” money and the States shall not make anything legal tender in payment of debts other than Gold or silver coin.
25 May 2007, 9:16 pmBarb:
I especially liked these paragraphs from the 1998 link, which bear repeating here since the webpage was hard to read:
‘Today, particularly in the “advanced capitalist” world, so many wage workers perform unproductive labor in the spheres of “ficticious capital” (banking, insurance, state and corporate bureaucracy, advertising), so much production goes into socially destructive sectors (arms production, law enforcement, office construction, prisons) there are too many “workplaces” which should not be placed under “workers’ control”, but simply abolished. Too many proletarians have been expelled from the old production process, or will never arrive there, because the assault on the global wage bill has produced a world-wide “rationalization” movement and “race to the bottom” which, to this day, workers have been virtually powerless to combat. In the same way as “the limit of the capitalist mode of production is not in production, or at best is a very elastic one” (vol. 3), more than ever before, the problem of class struggle today cannot limit itself to the point of production. It is rather from a “vol. 3″ “total social capital” viewpoint, the reproduction and valorization of capital as a whole, that the ultimate vulnerability of the system and a renewal of “programmatic imagination” beyond “nationalization under workers’ control” emerge into view….
‘Imagine, instead, workers in a country such as Korea, or any other major industrial country, going beyond a dual power factory occupation and/or general strike, imposing themselves as the sole power and saying, in effect: “to hell with these jobs, many of them socially useless and others positively harmful. We repudiate Korea’s foreign debts and call on workers of other countries to repudiate theirs. We repudiate the international dollar standard and invite workers in all countries to join us in its abolition. We will replace it with a “Bretton Woods” of the world working class which will establish a global program for a transition out of capitalism, as rapidly as possible. The world today has a productive capacity to abolish wage labor everywhere, and therefore the capitalist law of value as the regulator of production and reproduction. This cannot be achieved in any single country or small group of countries but only on a world scale. We call for the abolition of all socially useless and socially harmful work (both of which exist only to reproduce capital) and the freeing of labor from those spheres for socially useful work….’
It is just a matter of language - different words for the same things. The (self) educated Left may know what he’s talking about, but outside that small circle the theoretical bits were as arcane as Liu’s article, which was relatively plain-speaking in its own financialist context.
Basically, there are an expanding number of potential triggers building up in the rest of the world which could make the dollar tank, despite all the mechanisms in place to protect it. It remains to be seen whether the rest of the world would shrug this off or equally go into economic depression.
I agree that now is the time to get collectively prepared, by growing our own food and participating in and developing skills-trading schemes outside the money system like this: http://www.letslinkuk.net/index.htm I don’t know if there are similar schemes in the States.
People here may scoff, but it is interesting that there are a growing number of capitalists worried about the current disconnection of the money supply from anything that can carry real value, whether that’s resources or (socially) productive labour. Not all of them are terracidal socio-paths like Wolfowitz and Cheney, and some of them want people to know what’s going on.
The plainest speakers about what capitalists are doing I’ve found are at http://karmabanqueradio.com
Max and Stacey are rich American marketeers who have exiled themselves to Paris but their ‘Truth About Markets’ podcasts and broadcasts on Al-Jazeera English translate the financial news and jargon into what and how things are being affected on the ground. They read the Financial Times and Economist so you don’t have to.
Though if you did, there’s a lot to be learned in those bastions of the capitalist press, and from websites like Jim Puplava’s FinancialSense Newshour.(http://www.netcastdaily.com/fsnewshour.htm) It’s capitalists talking to each other, so there’s no diversionary shit about celebrities and little lying about facts, though people might not have the same interpretations of them because their goal is to make money, not change society.
An instructive comparison to make is to listen to two interviews of John Ghazvinian, the author of ‘Untapped: the Scramble for Africa’s Oil’, one by Jim Puplava in his May 12 podcast (same link as above) and the other by Amy Goodman for Democracy Now, May 17 (http://www.democracynow.org/article.pl?sid=07/05/17/1350254&mode=thread&tid=25)
Karmabanque have a notion that it’s not so much an income gap developing but a ‘risk’ gap. To listen to them most current capitalist activity involves insuring those with the most money take no risks, while devolving any real risk inherant in any activity to those with the least - sub-prime mortgage buyers, pension funds, indigenous peoples, wage-earners, the environment.
The Left I know of has not kept up with all the different ways capitalists ‘make’ their money, though I hope there are more people like Loren Goldner I didn’t know about - thanks very much for that link, Stan. All capitalism may boil down to human and natural resources being ripped off and misdirected as if there’s no tomorrow, but it is useful to actually follow the money to the arcane financial products to see how we’re being controlled and by whom, and how this is likely to change. And hopefully, what we might do about it. The key point is to keep an open mind, and learn to not get so hung up on ideology and jargon that we miss the information.
Finally, a quote from a Bernanke speech from last year, which shows you what the government’s going to do:
“The best way to prevent increases in energy and commodity prices from leading to persistently higher rates of inflation is by anchoring the public’s long-term inflation expectations.” (http://www.federalreserve.gov/boarddocs/speeches/2006/20060605/default.htm)
In other words, they’re just going to keep saying it’s not happening. Remember that the ‘core’ rate of inflation (3%) is based on someone who doesn’t eat, drive a car or live in a house, while we can all (world-wide) feel the fact that it’s more like 10-15%. Which is the rate the money supply is expanding - a more truthful number to track these days.
Reading over this it sounds impressionistic, but I hope there are some useful links in here.
27 May 2007, 12:17 pmCraig:
Barb: “Karmabanque have a notion that it’s not so much an income gap developing but a ‘risk’ gap. To listen to them most current capitalist activity involves insuring those with the most money take no risks, while devolving any real risk inherent in any activity to those with the least - sub-prime mortgage buyers, pension funds, indigenous peoples, wage-earners, the environment.”
This link from Bloomberg News describes this phenomenon exactly. (See also here for background on CDO’s and “toxic waste.”)
One problem is that no one really understands the risk profile of a CDO, and, in fact, no one totally understands the risk profile of the subprime bonds that underlie the CDO, either. Otherwise, you wouldn’t see the rating agencies revising downward the ratings of so many subprime-backed bonds so quickly.
Another problem is that the debt pyramid described by Henry Liu fed a demand for subprime-backed bonds that far outpaced supply, with the consequences described here.
The industry universally recognizes subprime loans originated in 2006 as performing significantly worse than loans originated in other years, and this fact is referenced in the first link by a pension fund manager.
Unfortunately, the subprime borrower is facing a liquidity crisis of his/her own. First, the majority of subprime refinances were cash-outs, i.e. a refi that withdraws equity from the home rather than a refi into a better rate. This worked while home prices grew at double digit rates for the past 5 years, but doesn’t work now that home prices are on the decline. Second, a large number of subprime wholesalers like New Century and Fremont have gone out of business, which means there aren’t as many lenders willing to refinance your mortgage. On top of this, the lenders left standing are imposing stricter criteria before they refinance a mortgage. Hence, if a borrower gets into trouble by missing a payment, he/she now has far fewer options to refinance out of trouble. This in turn leads to higher delinquency rates and losses among CDO’s and holders of subprime-backed bonds, which leads to capital flight away from subprimes, which depresses the mortgage market even further.
4 June 2007, 2:34 pmLisa:
Fortunately there are a few sites that make economics–and especially money–quite intelligible to the layman. Among the best are these three:
There is the very important video on Google, “Money as Debt”
http://video.google.com/videoplay?docid=-9050474362583451279
The British site, Prosperityuk, is excellent:
http://www.prosperityuk.com/prosperity/prosperity.html
And finally, there is the American Monetary Institute, which publishes Stephen Zarlenga’s remarkable work,”The Lost Science of Money”–approved of by Michael Hudson, by the way, who also participates in their conferences. There are also a bunch of free articles available on the site.
6 June 2007, 8:35 pmLisa:
Here is the URL for the American Monetary Institute:
http://www.monetary.org/
6 June 2007, 8:36 pmTimothy R. Anderson:
The final ten days of February 2007 were very, very
18 June 2007, 1:56 pminteresting for the folks that work on Wall Street.
I think I recall being told that the Dow Jones Industrial Average dropped 400 points in a single day.
What was more significant, though, was how it did NOT recover until the latter half of March 2007.
Even at that point things kinda look ” iffy .”
Well, now it is June 2007 and I will go out on a limb here and predict that the Dow Jones Industrial Average is gonna drop and have difficulty gaining …..
Tim
Linda c:
Tim,
If this is the case, shouldn’t what Stan wrote ring true.
“It means get as independent as we can, as soon as we can, of the financial-industrial grid. This is a community, not an individual, effort.”
18 June 2007, 4:19 pmCraig:
If there is a financial news story that needs posting on this site, it is this one from Bloomberg News, entitled CDOs in `6-Inch Hooker Heels’ Fooled Moody’s, S&P, Gross Says . Welcome to the juvenile world of financial research!
26 June 2007, 10:28 amLaurent:
Thanks Stan for feeding us with some financial insight.
Yes we ALL MUST LEARN this language, as it is [sadly] the main language behind business, politics, wars… and gender.
Please let us have more.
3 July 2007, 6:49 amTimothy R. Anderson:
Tuesday July 10, 2007 . Is 11 : 30 a.m. too soon
to call today a bad, BAD day for the Wall Street persons ? This summer might one day
be looked at as the season that started the
2nd Great Depression. Or I could be wrong.
Tim P.S. If I was so convinced I was wrong, I’d probably shut up . . or would I ?
10 July 2007, 1:34 pm