|
-- Posted Monday, 16 February 2009 | | Source: GoldSeek.com
By James West
Bill Gross of PIMCO makes the argument in his most recent “Investment Outlook” that the government needs to support asset prices to stop the hemorrhaging of the global economy. He argues that the TARP funds, while successfully instigating lending among large financial institutions on a limited basis, have not slowed the continued deleveraging by what he calls the “Shadow Banking System” continues to drag asset prices down. The reason, he says, is because government assistance cannot be diverted to the institutions in this class (hedge funds, investment banks and structured financial conduits) because they are invisible, and therefore such rescues would not pass public scrutiny. PIMCO is the world’s largest bond trader, and so his perspective is derived from a lofty point high up in the financial food chain. As is increasingly evident by the discourse from on high, too far removed from the economic happenings on the ground precludes the ability to either understand or navigate successfully the uncharted and turbulent waters of the economic landscape. He furthermore confirms his conviction that capitalism itself is dependent on credit, and that no real recovery will be possible until lending resumes amid stabilized asset prices engendered by the munificence of government support. Such logic from the leadership of the largest financial institutions, who also advise policymakers in government, assures the depths and duration of the upcoming financial market chaos. The stream of such mindless platitudes emanating from on high is solid evidence that it’s the fools at the top who got us here, and that they, for all their impressive accomplishments and credentials, are no more qualified to oversee the evolution of human economy than would be a baboon. Credit is not essential to commerce. In fact, the requirement for credit to survive by any business is evidence of dubious cash flows which call into question the viability of a business. Credit is an alternative to investment, and depending on market conditions, is either more or less expensive than credit. The reward for putting capital at risk through lending is interest. The reward for doing so through investment is capital gains. In a perfect world, a financial institution should only be able to lend as much capital as it has on hand in deposits and in marked-to-market real assets (derivatives are not assets, nor are securitized debts, nor are CDO’s and other forms of gambling scrip). But our world, as is plainly evident, is quite the opposite of perfect. Our world is chaos. And that chaos is morphing into a novel type of financial black hole into which assets and liabilities and eventually even countries will be swept, never to be heard from again. The current mainstream media argument swirls around how effective, if at all, the bailouts will be. In ten years time we will look back and marvel at our naïveté. The banking system became corrupted and now exist as the ground zero for the over-capitalization/deleveraging cycles we have come to refer to as bubbles. They underwrite real economic hyper-growth through the extension of credit that should not exist, and thereby reduce the demand for investment, which is much more efficient at both pricing and realizing risk. Any financial position that is permitted to leverage itself to 90% or more of Net Asset Value is a juggernaut of financial ruin both for itself, the economies and businesses within which it grows, and ultimately for the populations who permit their existence. The self-regulating nature of free markets is defeated when excess liquidity is synthesized through the over-extension of credit derived from overleveraged asset bases. Supporting the value of assets through the exploitation of overleveraged financial institutions is a death-spiral of the first order. The toxicity of such fractional banking is now being off-loaded into the government layer, the layer of human hierarchy that is by definition supposed to be the last bastion of protection for citizens against such manifestations of abuse that encumber and render impossible the natural regulating effects of free markets. Smug pronouncements like that from Bill Gross are testimony to the ineptitude governing global economic policy. Does his conviction stem from the security of his tenure as high priest of bond economics? If so, it is with no small satisfaction that I shall applaud the implosion of PIMCO in the years ahead as the bond market, which is the beard for the destructively rationed fractional banking system, disintegrates in the atmosphere of financial anarchy slowly engulfing the world. The decadent self-delusion we opt for in favor of a genuine objective analysis of our collective collusion in permitting a banking system so blatantly top-heavy amid such fractional banking ratios will be the just dessert we savor as so much sand on the tongue of a man dying of thirst as we continue this slow motion fall off the proverbial cliff. If banks and financial institutions and businesses and consumers were permitted no greater leverage than 10% of net worth, (in other words, a reversal of the prevailing ratio), there would be profound effects on future economic cycles. For one, economic growth would proceed much slower. Resources would be consumed ten times more efficiently, because their availability would be restricted both quantitatively and temporally. The slow growth would defeat asset volatility, as demand and supply would ten times as predictable. Instead of living under the ultimately destructive globalist mantra of trying to raise the rest of the world’s living standards to the wasteful and decadent levels of G& nations, we might be forced to reduce the standards of living in G& nations to something that we could then begin to anoint as “sustainable”. Living on planet Earth right now is like sailing on the Titanic and knowing we’re going to fast and we’re bound to hit an iceberg. As a mere passenger, the suggestion that we change course and slow down will be met with derision and antagonism. The captains of the boat, who have been sailing for years and have the epaulets to prove it, know far better than we. James West MidasLetter.com
-- Posted Monday, 16 February 2009 | Digg This Article | Source: GoldSeek.com
Previous Articles
|
