“The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years. However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.” 

George Soros, Financial Times, January 23, 2008

(Looks like Soros knows his Kondratiev)

To extend and deepen Soros’ analysis with reference to Ben Bernanke’s identification of the ‘Asian savings glut’, the conversion of Asian savings into Anglo-saxon debt is undoubtedly the most significant contribution to Soros’ ‘era of credit expansion’. For a time, it was a symbiotic relationship that seemed almost perfect – one half did the saving and the other half did the spending. US savings declined from about 5% of GDP in the mid 90’s to zero by 2005, while Chinese savings surged from below 30% to nearly 45%.

The housing bubble (and household indebtedness in general) throughout the anglosphere was fuelled by the Asian savings glut – footloose savings looking for a home – made it much cheaper for households (and governments) to borrow money than would otherwise have been the case. Some economists hailed a “stable disequilibrium”. What?! They should read up on Aleksandr Lyapunov’s work on stability and equilibrium. A great deal of work has been done on the dynamics of complex systems since the 1890’s.

IMHO, (and that of others) the sub-prime bust was just one of may potential sources of turbulence for the global financial system. It could have been credit-card defaults (expect to hear a great deal about this in February), it could have been some emerging economy crisis (as unfolding in the former iron curtain countries right now). Turbulence is now the prominent regime in just about all asset and commodity markets: volatility reigns, and any attempt to drive or dampen the oscillations will, inevitably, make the fluctuations worse. Locking the stable door after the sub-prime horse has bolted is as futile as treating the mosquito-bite when the patient is close to death from malaria. The markets will return to stability of their own volition, however, it is inherently impossible to predict with certainty when that stability will come and what that stability will look like.

Doc trumpets his prescience of the housing bubble bust, very good; I predict that autumn will turn to winter. Sorry, that’s a bit mean, but the point is valid. Predicting cycles is easy – you’re bound to be right eventually – it’s picking the point of inflection in financial markets that’ll make you a millionaire – one can place bets, but it’ll be luck and not any special insight or genius on the gambler’s part which determines the outcome.

But what of Soros’ and Kondratiev’s 60-year super-cycle, dating from the end of WW2? All the current talk of Neo-Keynesian stimulus packages to mitigate the worst effects of the onrushing debt deflation automatically makes one think of FDR’s New Deal. The New Deal did not work. As late as 1938, one in five American workers was still unemployed. Genuine recovery came only with the advent of WW2, with its vast arms budgets and deficit spending. I feel uneasy that the ‘engine’ that finally pulled us out of the Great Depression may have been WW2 and then the permanent war economy of the United States; this impression does chime with some of the more bellicose comments from Doc and others above.

        DV82XL said:

You’re enjoying this whole mess are you McGlashan?

Not at all, but neither am I alarmed. The things which I most value cannot be affected by financial or political crises.

        The McGlashan said:

Doc,

Why worry? It is unlikely that you will starve. The sun will continue to rise every morning. The birds will still sing in the trees.

You’re enjoying this whole mess are you McGlashan?

Why worry? It is unlikely that you will starve. The sun will continue to rise every morning. The birds will still sing in the trees.

Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play, and nowhere is this more apparent than with the ex-Soviet bloc. The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. But that’s not all, Spanish banks alone have lent to South American countries almost twice the amount heldby all US banks combined; Austria’s bank exposure to emerging markets is equal to 85% of its GDP. Of course the impact of this will not be restricted to the Continent, many of these loan were denominated in U.S. dollars, so the splatter from this will hit everyone.

Bretton Woods is all but consigned to the dustbin of history at this point and, like it or not, we are going to need a new global monetary system. That or pray that China will take up the slack by buying euros, pounds, rubles, and every other currency that overextended. Mind you that will make Beijing the financial capitol of the world, and give them the same power that the U.S. was able to exercise on world affairs when it took financial control of the world after WWII. These are really the only two choices.

        David Herr said:

When the dust from the current deleveraging environment has settled, when all debt that can never be repaid has finally been defaulted on, we can start over, with monetary discipline, and eventually a gold standard, to prevent inflation in the future. In the process, we will go from a society that borrows to consume more than we produce, to a society of people who save money. That is where Barack really frightens me — it’s the anti-savings nature of his tax and trade policies.

A gold standard? That’s going to be very very very difficult to ever go back to, almost bordering on impossible. The current US holdings of gold bullion at the Fort Knox Repository is valued at under $200 billion. That is just not nearly enough to back the monetary system at the current GDP – it’s not even close.

That’s not to say the monetary system doesn’t need to change. I’d prefer it did. For one thing, the constant federal debt is worrisome. I’d rather have a monetary system which didn’t use the fed’s lending practices so much as a means of economic stimulation. My preference would be to have the government also withdraw more excess cash from circulation at times basically by spending less than it taxes and putting aside the surplus to be used during times of economic downturns, at which point the reserve funds set aside from surplus could be pumped back into the economy – generally resulting in equilibrium and keeping things from swinging in either way too much.

I just don’t think this is possible. I don’t think that politicians are capable of making the changes necessary. I don’t think it can be done. I think the government is just plain too incompetent to do it. My whole life I’ve had one major worry about society: That eventually the government bureaucracy would collapse under its own weight. Politicians never clear house – they never repeal regulations, it’s not in the nature of the government to do so. They only create new ones. Thus it compounds.

The “bailout” bill that passed the senate and house was full of crap it didn’t need. It had provisions to govern how insurance companies pay out over mental illness. It had all manner of clauses and unnecessary crap.

Think of Windows Vista and now imagine it clogged with so much scumware that you can’t even open a browser window. That’s the government. Now imagine that you are trying to re-write the operating system code but the only computer you have to do it with is the messed-up one. You’re fighting your own system to try to rebuild it better. It’s a loosing battle.

I am just amazed that the government works at all, even slightly. The fact that social security checks get sent in the mail and that the mail is delivered and that the postal workers actually get a paycheck and that mail trucks are bought or that the heating bill for the capital building is paid… that just amazes me. It’s a damn mirical that this ridiculously incompetent system even works that well.

You forgot the most important regulation of all, one which obviates the need for several of the ones you proposed: monetary discipline when it comes to expansion of money and credit. Greenspan’s Fed kept the monetary spigots on after the dot-com crash and 9/11, creating the easy credit conditions that encouraged speculation and blew up the real estate bubble. No easy credit at cheat short-term rates, no leveraged speculation. No leveraged speculation, no crisis. It’s just that simple. When the dust from the current deleveraging environment has settled, when all debt that can never be repaid has finally been defaulted on, we can start over, with monetary discipline, and eventually a gold standard, to prevent inflation in the future. In the process, we will go from a society that borrows to consume more than we produce, to a society of people who save money. That is where Barack really frightens me — it’s the anti-savings nature of his tax and trade policies.

        George Carty said:

Why should Palestinians be punished for a crime perpetrated by Germans?

They shouldn’t. I’m not saying that at all. I was directing the question at “scorch” because some of the links he provided made me wonder what kind of an individual I’m dealing with. That is a good bellwether to see if someone is party to some of the further out theories over Israel and modern history in general.

        drbuzz0 said:

Do you believe that Nazi Germany killed millions of jews or do you think that was fabricated by Israel?

Why should Palestinians be punished for a crime perpetrated by Germans?