| The central bank heads in Jackson Hole, Wyoming, | | | | financial crisis. |
| appeared reasonably satisfied with themselves. The | | | | The fourth boom was in commodity futures, leading |
| common policy of flooding the financial markets with | | | | to the 2008 spike in oil and grain prices. Fuel and food |
| money was assumed to have prevented a major | | | | prices followed, chilling U.S. consumption and |
| economic depression, and the global economy to be | | | | transferring the financial bust to the real economy. |
| bottoming out. The chief proponent of this policy, Mr. | | | | Each boom came right on the heels of the preceding |
| Bernanke of the U.S. Federal Reserve, set the tone | | | | one, fed by the ever growing pool of global liquidity. |
| with an optimistic assessment. | | | | Under this scenario the current central bank and |
| Stock markets and commodity prices have shot | | | | government policy of flooding the financial system |
| upwards since March. Fundamentals, however, are still | | | | with money actually aggravates the fundamental |
| bad if not awful. Unemployment continues to rise; | | | | supply and demand imbalance and leads to an |
| whole industries, such as housing, automotive and | | | | intensification of the cycle. Whatever temporary |
| shipping, are at depression levels; foreclosures are | | | | recovery it may create will be followed in short order |
| setting records, and the consumer is pulling back. The | | | | by a larger bust. |
| stock market rise of 50 percent is way ahead of a | | | | This is already apparent in stock markets around the |
| real economy still bumping along the bottom. | | | | world. There is no way that a depressed real |
| Such discrepancies raise a key question: are the | | | | economy can absorb the funds shoveled out by |
| positive news inconsequential ripples in a still | | | | central banks and governments. Very little of it |
| deepening crisis, or a sign of basic improvement? | | | | reaches the general population. Most of it is already |
| The answer depends on the explanation given for | | | | finding its way into stocks, commodity speculation |
| the crisis. The conventional wisdom assumes that | | | | and real estate. |
| financial markets were struck by a crisis of | | | | In the meantime massive government intervention |
| confidence leading to a liquidity freeze. A flood of | | | | has impaired market mechanisms and productive |
| cheap money provided by governments has | | | | investment. In the current climate financial speculation |
| addressed the issue, and we are back on track to | | | | is far more profitable. |
| renewed economic growth. | | | | In essence the prevailing policies are turning instability |
| We prefer another explanation, under which the | | | | from a cyclical to a permanent condition, with any |
| cause is not a lack of liquidity, but a growing excess | | | | number of possible events capable of precipitating a |
| of it. | | | | new crash. |
| A vast and growing pool of loose money has been | | | | When and where such a crash would occur is difficult |
| created worldwide, in particular by large and | | | | to predict, but we expect it to be soon, most likely |
| continuous U.S. trade and budget deficits. | | | | this year. We also think it likely that it will be |
| At the same time investment opportunities have | | | | triggered by events in China, where government |
| been restricted through the migration of entire | | | | intervention to stimulate the economy has been |
| industries to countries such as China, which severely | | | | most intense. |
| limit foreign corporate ownership. Share buy-backs | | | | Stimulus spending and government-ordained credit |
| and private equity takeovers in the West further | | | | expansion amount to roughly 40 percent of Chinese |
| shrank the pool of available assets. | | | | GDP. There is no way such sums can all be turned |
| The result is a growing unbalance between supply | | | | into productive investments, and speculative bubbles |
| and demand: too much money chasing too few | | | | have already formed in the stock market and in real |
| opportunities, leading to asset inflation, rampant | | | | estate. |
| speculation and an intensifying boom and bust cycle. | | | | Remedial action by the government is limited by the |
| The first warning bell was the Asian crisis of 1997, | | | | need to present a positive facade during the 60th |
| caused by over-investment followed by catastrophic | | | | anniversary celebrations of the Peoples Republic of |
| capital flight. The second bust was the Wall Street | | | | China. Beyond that loom the factional struggles |
| dotcom bubble in 2001. | | | | leading to the next leadership change. |
| The third was the 2002-2006 U.S. housing boom in | | | | A similar situation exists in the U.S., with the 2010 |
| which the value of U.S. real estate was wildly inflated. | | | | congressional election looming on the horizon. The |
| In addition a whole class of assets of dubious value | | | | Beijing-Washington axis is in for a bumpy ride, and |
| was created to soak up the flood of money seeking | | | | until effective policies are implemented it will only get |
| returns. These assets were the true cause of the | | | | bumpier. |