Crackernomics Gets the Bends 2

Decompression sickness (DCS; also known as divers’ disease, the bends or caisson disease) describes a condition arising from dissolved gases coming out of solution into bubbles inside the body on depressurisation.
(From Wikipedia, the free encyclopedia)

These bubbles are really starting to hurt now.

A few years ago when I first began to describe the democratisation of money I realised that the Credit crunch was different from every financial crisis that had gone before because:
‘Standard’ financial crises are a mismatch between the value of any given commodity (houses, tulips, whatever) and the value of money (expressed in interest rates).
But the Credit Crunch was a mismatch between the value of a commodity (housing) and the value of the private democratised currencies (derivatives), that were issued on the back of it.
What this meant was that the state or open economy was effectively locked out of the financial ecosystem built on the last property boom- it had no way of fixing the problem.
The state was forced to devise a new solution:
They would substitute state money for democratised money diluting the private, closed bubble with state money. So state money went into the banks from the treasury and democratised money went out of the banks and into the treasury on a one to one basis.

It is very important that you understand this process accurately.

Imagine that America supported the regime in say, Uruguay and it became clear that the economy in Uruguay was close to collapse and there was going to be massive hyperinflation. How would the USA support the Uruguay economy? The USA would have to use its own currency to support the Uruguay economy. Either it would give millions of dollars to the Uruguay government on loan or it would give them favourable trade deals on even in the last resort (and this kind of thing has happened), it would directly pump dollars into the Uruguay economy which would then be used by ordinary citizens to buy and sell in preference to their own devalued currency. What this means is that the USA state, by using its own money, would put itself in the position to be able to influence or even control, the Uruguay economy.
If you think of the bankrupt banks as sovereign countries whose governments the federal Reserve is pledged to protect, you understand exactly what is really meant by Quantitive Easing.

After Q.E. the housing bubble is not fixed but it is now open to a traditional resolution.

What is that resolution?

A bubble happens when the purchase and ownership of an asset is a more efficient way of earning money than anything else.
If your house is rising ten percent a year it makes more sense to spend all your spare cash on buying the most expensive house you can, than say for example using that cash to start a business. So all of the spare cash in a given economy tends to flow into housing as everybody tries to get on the bandwagon.
Now here is the interesting bit.
This only works so long as more and more people enter the housing market; in other words, buy and sell houses. There has to be fresh blood entering the market to keep prices going ever higher. But there is a limit to the number of people who can enter the market. That limit is the amount of credit that is available. If there is more and more demand for money ( in the form of mortgages), by people trying to get on the housing bandwagon, at some stage interest rates have to go up. New entrants to the market are discouraged. More importantly all those who entered the market in the hope of making a killing are left out on a limb.

The bubble deflates.

There is a clear out of bad debt.

But this has not happened yet. This failure to clear out bad debt is the reason that solid growth patterns have not been established in the economy.

The purpose of central banks throughout the Credit Crunch has been to create a balance between defending certain kinds of contract and allowing certain kinds of contract to be cleared out. The kinds of contracts they want to preserve are derivatives- democratised money. The kinds of contracts they want to be cleared out are mortgage contracts that can’t be paid.

At some point, central banks in the Anglo Saxon zone are going to have to allow interest rates to go up to some extent. Has that point arrived now?

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