deja vu all over again?

Michael Panzner observes what the macro environment reminds him of:

"Recently, there have been clear signs that the global monetary environment has taken a turn for the worst.

Japan has all but said that it will end its five-year policy of "quantitative easing." [BRdone!] Last week, the European Central Bank raised short-term interest rates and indicated there is likely to be more of the same. And U.S. policymakers have hinted that the light at the end of the tightening tunnel is not yet in sight.

Indeed, St. Louis Federal Reserve Governor William Poole reportedly said yesterday that the central bank may have to raise interest rates "further than expected."

In the past, the transition from a period of excess liquidity to one of tight money has often been accompanied by crises involving shaky enterprises, fragile, far-flung markets, and developing economies. While that relationship has not always seemed causal to contemporary observers, history — and logic — suggests  there is a certainly a link between stability and liquidity. A case of "money soothes the soul"?

Given that, one wonders whether the seemingly unrelated political, geopolitical and market-related disturbances that are increasingly erupting in various parts of the world are, in fact, somehow connected. A reflection, perhaps, of the worsening monetary climate. If so, that begs the question of whether we are near  the end of it, or whether these events are like the tiny fissures that open up ahead of major upheaval.

From the continuing stand-off with Iran over its nuclear activities, to the repeated attempts by Nigerian militiants to disrupt oil facilities in that African country, to growing political instability in the Phillipines and Thailand, to the sharp sell-offs in once high-flying markets such as Iceland, Turkey and Russia, to recent weakness in the Mexican peso and Brazilian real, ominous portents abound.

Could this be a case of deja vu all over again?"

Global synchronized rate tightening just as the US economy shows signs of cooling.

Quite intriguing  . . .

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  1. me commented on Mar 9

    So what do we do? Cash 75%

  2. spencer commented on Mar 9

    A major consequence of the growing dependence on foreign capital that is little talked about is that you lose your ability to implement an independent monetary policy. We have seen that with the Greenspan conundrum. But the real problem may develop when the fed needs to ease and international factors prevent it or at least keep the policy from lowering long rates.

  3. druce commented on Mar 9

    hmmh, let’s see…

    1929: large imbalances in capital flows as US lends money to Germany, which pays off reparations to France, which in turn buys from/invests in US. 2006: China lends to US and rest of world, which buys their goods.

    1929: real estate bubble (Florida) followed by stock market bubble based on new technologies such as radio. 2006: stock market bubble followed by real estate bubble.

    1929: US raises rates due to monetary flows, stock market boom, inflation after leaving too low too long. 2006: US raises rates due to monetary flows, real estate boom, inflation after leaving too low too long.

    1929: US under sway of isolationists – fails to stabilize system. 2006: US under sway of wackos, destabilizes rest of world.

  4. Dennis commented on Mar 9

    Actually it is a good sign that Japan has finally decided to begin to raise interest rate because it signals that Japan has finally come out of deflation and its economy is growing again. So that is going to be good news to the US stock market as well.

  5. james commented on Mar 9


    Japan’s economy strengthening has little to no correlation with US financial assets doing well. Reduced liquidity will reverse the trend of credit driven asset inflation that has dominated the globe for the past 3 years.

  6. Abobtrader commented on Mar 9

    I think there can be little doubt that the excess liquidity that has resulted from a lax global monetary policy has pushed the prices of risky assets to high levels.

    On the one hand, ultra low rates meant that borrowing to invest was very cheap in real terms, and second, the fact that safe instruments were low yielding meant that investors who wanted to make a decent return had to search further along the spectrum of risky assets.

    While I won’t go so far as to say we are due a significant pullback across markets, it does appear that risk-return is increasingly skewed to the downside.

  7. Mike commented on Mar 9

    Fed, ECB and BOJ all tightening. 30 yr, 15 yr and arms all at 3-4 yr highs and going higher. Today’s record trade deficit “overlooked” by enthusiasts. Today’s first-time jobless claims above 300k first time in 8 weeks.

    Hmmm. And that’s just today’s news…

  8. alex commented on Mar 9

    thanks for the historic perspective. sometimes such attempts seem to cloud the view on reality more than they reveal or explain it. the fundamental problem, in my view is that the way we think our economy is working and how economies are connected is mismatching. an interesting debate about “the dark matter” just errupted and is worth following. new insights could be gained from such a debate. example: treating expenses on education as consumption is stupid (duuh!). our gdp accounting system is far from reality (too far)it would be nice to change the concept. a more profound question: do we have the insitutions that can deal accurately with the problems, challenges and chances that globalization offers? I doubt it. our insitutional arrangements are not sufficient. we are good in organising the divison of labor globally, but we are really bad in putting things together again. market forces alone are not going to do the job. government inventions are too messy and driven by too many wackos (I agree on that). we need new insitutional arrangements that allows the business community as well as the consumers to collaborate on economic issues. how about associations of business and consumers governing economic life on their own?

  9. Lord commented on Mar 9

    From Institutional-economics: “the authorities will probably argue that any subsequent recession was necessary to correct these imbalances, substantiating their view about their ‘unsustainability'”
    So true.

  10. alex norman commented on Mar 9

    Liquidity is the wonder drug for financial markets…in fact, one might argue that it’s effects on capital markets are similar to the effect of Nicotine on the human body: Liquidity is both soothing (decreased perception of risk) and stimulating (increased borrowing, carry trade, etc., etc.) at the same time. Which is why it is so brutally addictive.

    At the risk of taking the metaphor too far, after a period of prolonged liquidity, might the world’s capital markets/economies respond to unified tightening the way a nicotine addict’s body responds to quitting cold turkey:
    convulsions, paralysis, shock, horrible pain and suffering…

    Just a thought.

  11. Idaho_Spud commented on Mar 9

    “Am I the only one…that article comes across as absolute gibberish to me. ”

    It’s not the best-written article I’ve ever read either. Nevertheless the author makes some valid points.

    Greenspan unfailingly bailed out his finance sector buddies for with huge doses of liquidity every time they stepped in dog poop for 18 yrs. The ‘Greenspan put’ is real. Too bad it’s also inflationary and salvages reckless financiers at the expense of US savers.

    Wanna know why personal savings rate is negative? Because it’s been financially *stupid* to save.

  12. angryinch commented on Mar 10

    The writer asks if we are near the “end of the worsening monetary climate.” Hmmm, let’s see…the SPX is a whopping 2% off 4+ year highs.

    Does he really think an SPX decline of 2% would mark the panic low in a global monetary crisis?

    The smallest intermediate SPX decline over the past 30 months has been 6-7%, and that’s during a bull run. We saw numerous 10-20% declines during the ’90s, also during a bull run.

    Either we haven’t topped yet, or we have quite a bit further to fall.

  13. Enzio von Pfeil commented on Mar 10

    I fully agree with Michael’s view: “In the past, the transition from a period of excess liquidity to one of tight money has often been accompanied by crises involving shaky enterprises, fragile, far-flung markets, and developing economies.”

    In my world he is alluding to Charles Kindlebergers’ anatomy of crashes: first comes the displacement, the smart guys buy in, the dummies follow and then the big Kahuna erupts.

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