Have you ever been on the motorway and run into a traffic jam only to get to the front of it and discover there was no reason for it at all? One of those jams caused by someone slowing a bit, for no reason, but which causes the people behind him to slow down a little bit harder, and the people behind them to slow a bit harder still, setting off a self-amplifying peristaltic convulsion back along the line of traffic until presto, there is a jam and no one can understand why.
That is what is happening in the markets and the real economy at the moment. Something slows, a month later something following it slows more and all the pundits nod their heads. Something else picks up a little and the road looks clear for a while. Until one of those mystery jams comes out of nowhere. Housing starts are weak. Industrial output is lifted by car production. But consumer spending seems to be slowing. Half digested lumps of mystery data squeezing by, pored over by pundits and soothsayers who stroke their chins thoughtfully as each one passes.
The situation we are in is a crowded but slow moving line of more or less lost traffic. There is no crash to gawp at, no idiots and victims to curse or feel sorry for. We are stuck going nowhere. And while our car slowly overheats, little things are having random effects.
Traffic has slowed because ‘The Plan’ has not worked. I think even the banks are getting resigned to that. The central banks are wondering how to break the news without sounding like anything has gone wrong. What is going to be worse, they are wondering, to say we have a ‘new’ plan, and risk people figuring out that the old plan must not have worked, or to say we have complete faith in our plan but need to do it again, perhaps bigger this time – risking people thinking their leaders have run out of ideas and are getting desperate?
Is it best to call it QE2 or pretend its something new? Today the president of the Minneapolis Fed, Mr Kocherlakota, who we are quickly informed will next year become a voting member of the Federal Open Market Committee (FOMC) which takes the important decisions , said it was QE but felt that those saying this meant the Fed had ‘lost confidence’ in the recovery, were “unwarranted”. The Markets reacted ‘with confidence’ and rose. Next week something will be said and they will fall.
We are becalmed. stuck in heavy traffic without a map. And this will not do. The plan, such as it was, required growth. And not tepid growth. The turbo capitalists as some of them call themeslves aren’t called turbo for nothing. The debts outstanding and the leverage that gears it, means that we must have rather a lot of growth. Take Greece and Ireland as examples. Both are cutting their expenditure and trying to grow but both are also getting poorer faster. Their debts are blowing up faster than their growth. The same is true in the UK and even in the U.S.
Both Greece and Ireland are going to fold. Greece is broadly felt to be odds on to default, unless Germany feels like donating its growth to help them out. Ireland is in a fool’s purgatory all of its own. If the Irish ever wake up to the scale of their total debt and how very much larger it is than their national debt, they will realise what a sick joke has been played on them.
Part of the problem is human beings just aren’t good with slow motion disasters. Fast, we’re good at. Lion jumps out, you run. Sea levels rise we deny it, get angry with it and finally decide maybe there is a problem after all but far too late to do anything to stop it.
At the start of this debacle once the fire took hold, we were fine. Massive debt bubble burst. Four alarm fire. spray the whole place down with cash. Fire reduced to smoldering. Everyone has a beer.
Slow smoldering fire seems to go underground where it spread unseen, smoke rising in odd places here and there. Everyone just stands around looking mildly puzzled doing nothing much. That’s us now. 18 months into the mess first round of debts bailed out. But now we have something new. Sadly a slow something-new. Now we have the accumulated deficit in tax take and all the bills which taxes would normally pay, coming due. We don’t have the money and are not resigned to making the cuts. We have no contingency plan for this at all. It was not a part of ‘The Plan’.
In ‘The Plan’ growth was to have been re-ignited by the bail-outs and stimulus. The Plan said we would not even have to pay for the next lot of losses because re-ignition of growth would have evaporated them. We keep pressing the little ignite switch and hearing the little ‘click’ but no roar of ingition. So we just keep pressing away.
Meanwile the term of commercial loans are coming due, recasts of ARM mortgages are getting closer, growth is halting or faltering, while the costs of welfare and schools and health are all piling up and taxes are just not there. There is nearly $5 Trillion in debt to be sold globally just to cover short term debts!
The problem with leveraged capitalism is that there really isn’t any such thing as standing still. Like a pencil on end it is far too unstable for that. It must fall one way or the other. If we do not get robust, sustained and significant growth long before Christmas we WILL get the opposite. We will enter a downward spiral of cuts, unemployment, spending collapse, growth decrease, more unemployment etc. “Modest” growth will just not cut it.
It is tempting to wonder, if how-we-are-now is a ‘new normal’. Forget growth, this is how it’s going to be. Anaemic growth, high unemployment, pervasive job insecurity and a government wholly in the service of those few percent doing well out of it all and charged with a religious ferver for slashing everything they have never liked about the kinder more egalitarian aspects of the state. I don’t think where we are is stable enough to even hope for this.
If endless bail-outs and deft spending of money we don’t actually have, can keep us here, like modern computers can keep unstable and undynamic fighter planes in the air by constant corrections, then the wealthy will be ecstatic. They will have us in a permanent state of fear and crisis sufficient to keep us all in line for ever. Too afraid to listen to anyone who has doubts.
If they lose control and the instabilities grow then we are going to find we have all the aerodynamic ability of a brick. Which sounds worse. But is what I am hoping for.
I want to be free to govern myself and think what I want. I do not want to be owned by bankers and creditors. I was not born a debtor. We are not a nation of debtors. We are better than that. Our leaders would sell us. I and my family are not for sale.
Hi Golem, nice simple explanations as usual – thanks!
I also wonder what the trends are from the adverts on TV. There are an awful lot of car adverts IE cheap money is available. And look where that got us. I am also wondering about all those insurance ads and comparison site adverts. As an aside, I just had a look at my credit report and see that a couple of insurance companies I ask for quotes from literally years back have been querying my credit history. I presume they are seeing if I am a worthwhile bet before sending junk mail…who knows how these things work.
I agree that we on a holding pattern for the summer and the inevitable will hit the fan when Autumn comes.
Interesting times to look forward to.
I think those adverts are a ready measure of desperation. When you can't sell but have to, you put your own corporate money on the line to entice with credit. This is what killed GMAC.
Such lending and credit lines will kill them again if there is another down-turn.
Interesting indeed
Great piece of rhetoric to keep us warm while we wait for defining events! I have sometimes expressed some reserve about the metaphors, but the aerodynamics one is really close to the actual situation just now…
Thanks Mr Eirik,
I will try not to let the metaphors get out of control. promise.
Fitting metaphor or not, I think –
"We keep pressing the little ignite switch and hearing the little 'click' but no roar of ingition. So we just keep pressing away." –
is a great mental image!
Martin,
Thankyou. Good to hear from you.
Martin,
Too true – looks like it's cold showers all round (except for you-know-whom of course).
Golem – meet you at the barricades.
Hello gorgeous,
Let us hope we are not forced to that. But if all peaceful democratic means are denied us by those just not willing to loose their power or their wealth. Then barricades it will have to be.
You cannot but love the elaborate smoke screens put up by certain not to admit that they're utterly, desperately broke, from the New York Times today, enjoy:
Druckenmiller to Shutter His Hedge Fund
August 18, 2010, 11:44 AM
11:49 a.m. | Updated Stanley Druckenmiller, the hedge fund magnate who led George Soros’s famous bet against the British pound, is calling it quits and shutting down his investment firm, Duquesne Capital.
Mr. Druckenmiller wrote in a letter to investors that he had grown increasingly dissatisfied with the pressures of running a big fund, and that while Duquesne Capital was on track to yet another positive return, it was not performing up to his personal standards.
“I have had to recognize that competing in the markets over such a long timeframe imposes heavy personal costs,” he wrote. “While the joy of winning for clients is immense, for me the disappointment of each interim drawdown over the years has taken a cumulative toll that I cannot continue to sustain.”
During his career, Mr. Druckenmiller has hit many highs, perhaps none greater than spearheading Mr. Soros’s $10 billion bet against the British pound in 1992. That gamble shook markets, forcing a devaluation of the pound.
Imagine the heavy costs for clients!!!
the link to the farewell letter, it's even better in his own words…
http://www.scribd.com/doc/36068828/Druckenmiller-August-2010-Letter-to-Investors
Dear Mr Eirik,
I could be wrong but I don't read this as a cover for being broke. I do think it is an admission from an insider that the market is broke, rigged and heading for a very, very larg collapse.
The SEC, I believe has been suborned. The Fed has ceased to serve its intended function and has lost its way while a coterie of banks have come to dominate and distort the markets for their own purposes.
I'd want to get out too.