Major Central Bank Intervention in the Current Global Liquidity Crisis

Perverse liquidity –> Inflationary pressure –> Diminished returns –> Increase risk taking/leverage in order to keep up with / overtake inflation –> breeds MORE inflation –> too much leverage makes the wrong bet –> game over –> taxpayer bailout

Rinse…10-20 years…Repeat.

http://finance.yahoo.com/q/bc?s=%5EIRX&t=1d&l=on&z=m&q=l&c=

I suppose it might just be a little like money laundering:

Dickie Fred (“Discount Window” DF): – “Hey… you got any more of that goooood stufff for me?”

Trickie Notie (TN): – “Yeaaaa boy!… Here, this is some choice stuff… just picked it up… what’ll you give me?”

DF: “It’s good all right… Giveya 12… but not less!”

TN: “You shittin’ me Dickie?… Why, I’d flush this shit for more than 5.25!”

DF: “10?”

TN: “Get lost!”

DF: “9 but that’s it!”

TN: “Bullshit… I’ve got you by the balls… I’ll fuck you over on Kudlow’s show… wanna try me?”

DF: “*8* then…?”

TN: “5.5”

DF: “Sheei-ittt… can’t go 5.5!”

TN: “5.75!… or I’m walkin’ and I’ll give the tellers your phone number!”

DF: “AlRiGhT!!… done!… (mumbles)mooffooofoo..shfiittt.m.oooffoo.”

Barry I know of another chart that could be handy. It was used during the cold war. I think it went, bend over and kiss your ass goodbye towards the end. They have decided to monetize the debt of even the worst paper out there, and the borrowers can roll it over after 30 days if they like. The dollar is total toast. Junk silver sounding damn good right about now.

http://finance.yahoo.com/q/bc?s=%5EIRX&t=1d&l=on&z=m&q=l&c=

Anybody that thinks that this is a bullish chart for equities is just not in touch with reality.

The FED 4-Step plan of Economic Management

Step 1: Uncover problem
Step 2: Throw money at problem
Step 3: Problem solved
Step 4: Uncover problem

Ad infinitum…..

Fooking, fooking, fooking bad. Where it ends is in the shitter. But one of your cohorts says buy, buy, buy! lol

Billy Gross?

…Are you gettin’ the notion that you got head faked out of your 3-5 year vision?

Given current c-i-r-c-u-m-s-t-a-n-c-e-s can we expect the epistle to change?

What was it you’d been saying about the 10-Y-T?… What wuzzit?… Wuzzit sumpin like… say?… down in the 3s?… Whuzzat what I’m ‘memberin’ wuzztha story?

I ‘member thinkin’ you wuz jiss about riite!

What say ye now, Billy?

I just gotta relate this real-life anecdote.

I went to my Wells Fargo branch in Silicon Valley b/c I upgraded my banking status to VIP (called it “PMA”) and that waives all banking fees.

All I wanted was to remove $75/y fee from our untapped $75k emergency HELOC.

But within <10 seconds of sitting down at the desk, the young banker - without so much as asking my name - offered to bump the limit from $75k to $250k. No charge, no strings.

And...upon acceptance of his generous offer my HELOC entry interest rate would drop by .5%

So who says credit done run dry? At my bank, it's Friday and the taps are flowing.

Afterward, I asked my fearless banker about the week's credit turmoil. He looked at me blankly, and said, "What credit turmoil?"

On principle, I then went to the teller, withdrew $1,500, bought 2 gold coins down the block.

We had a RARE 90% UP day today, and it couldn’t have come at a better time. It is very rare (and bullish) to have a 90% up day so close to 90% down days. The historical stats are siding with the bulls at this point — despite the complacency of the bears (put call went out at 1.2).

Remember — there is $2.68 TRILLION sitting in cash now. Weak hands were flushed out of the market this week.

Posted by: Fred | Aug 17, 2007 4:06:49 PM

I will tell you what else you had. After pumping tens of Billions into the system including taking MBS paper and lowering the Discount Rate one half percent including now taking the toxic shit for a minimum of 30 days, the DOW managed to lose 160 points for the week. Congratulations.

This is a very amusing comment thread. My favorite though has to be a commentator named “SPECTRE of Deflation” telling us the Dollar is toast.

:):)

The article made a good point, “the conclusion remains to rather err on the conservative side with whatever you do and not to frown upon holding cash.” or as Proverbs 21:5 said, “The plans of the diligent lead surely to plenty, But those of everyone who is hasty, surely to poverty.”

Now for the big picture, for Bernanke and major brokerage firms, as Shakespeare said in ‘The Merchant of Venice’ “No. Take heed, honest Launcelot,”.

It is now all about the Dollar, and as the dollar drops, inflation increase, reducing buying power and consumption, stalling the economy.

I’m trying to understand why this crap keeps happening, under different disguises.

Let’s see — in the late 70s/early 80s, there were lots of loans made to developing countries that didn’t perform, and were bailed out.

In the late 80s/early 90s we had the whole S&L debacle.

Now we have the subprime mess.

Every time, people get filthy rich making bogus loans on ridiculous terms to people who have no way of paying them back. Then it turns into a gigantic crisis that requires governmental intervention.

Why can’t we regulate these mofos to begin with???????

So this has me wondering what will be the deal when all of these new private exchanges run into a situation like the public exchanges have now???

Jake, unfortunately, fullcarry is right. Are you that leery of equity risk? There have to be some safer bets that you’re willing to take. Through inflation, you’re being taxed at higher than nominal rates.

for 40 years you could get 5% in a bank passbook savings and inflation was much lower….now they lie about inflation and give you next to nothing…the bond vigilantes are gone…..doesnt pay to save like it used to…bail out the speculator….bail out the speculator….makes me sick

The question that should be posed is, “Why would anyone invest in something they do not understand?” As complexity increases, so does risk. Unfortunately, complexity becomes a synonym for “exotic,” which has a positive context in the human mind, which brings about temptation. You can get the rest…

rj, you are right.

The big players who made bad calls get liquidity to stay afloat while they save their asses; CNBC tells the small guy that the FED says its ok to get back into the pool and prop up market prices; and next week, the big players will cash in/out and leave the small guys holding the bag.

And all of this wouldn’t have been possible without Uncle FED rushing to the aid of the big players and help sticking it to the little guy.

Winston Munn said:
“The only demand is from those in the money game, who try to create wealth with the alchemy of debt to gold. That kind of demand is unsustainable.”

I am not so sure that it is unsustainable- I learned a valuable lesson last year about confusing common sense with the alternate financial reality that we live in and came to the conclusion that you will not be well served by putting money on strong convictions.

If you accept the idea that money is just a convention (or more accurately, an illusion), then it has potentially boundless supply. At least until the locals finally get tired of 200% inflation and stage a revolution that takes out all of the money game people to use your term. Until then, they can pretty much do whatever they want and we are nowhere near that point.

Because global market correlation is fairly close to 1.0, no major nation can really afford to call any other’s bluff and they all just keep marching together creating more fictitious wealth. The only potential show stopper at the moment appears to be Iran via oil threats which is probably why there is such persistent interest in starting a war with them, it certainly has nothing to do with “democracy” or their nuclear ambitions.

For investing purposes, I would say that a basic strategy would be to assume that equities will be substantially higher in five years than they are now because the power structure will make sure of that. For trading purposes, I would say that common sense is your worst enemy and the only thing worth following is price action.

==whipsaw==

Whammer is on to it.
“I’m trying to understand why this crap keeps happening, under different disguises.

Let’s see — in the late 70s/early 80s, there were lots of loans made to developing countries that didn’t perform, and were bailed out.

In the late 80s/early 90s we had the whole S&L debacle.

Now we have the subprime mess.

Every time, people get filthy rich making bogus loans on ridiculous terms to people who have no way of paying them back. Then it turns into a gigantic crisis that requires governmental intervention.

Why can’t we regulate these mofos to begin with???????”

You could have added the moneycenter/investment banks involved in Mexico in the early 90’s, or the Asian crisis and Russia in the late 90’s.

Why can’t WE regulate? “We” don’t control “our” government. Just look at the bipartisan pillaging of “our money” in the S.S. trust fund, racking up all those deficits over the last quarter century, before the money has to be paid back to US. Who has benefited from all this?

And (please correct me if I’m wrong) isn’t it true that what’s going on now with the Fed’s moves lately is helping, not the “non-bank” banks (who need it most, whether rightly or wrongly), but once again the moneycenter/investment banks?

Jdog33 said:
“Whipsaw, that might be one of the best comments I have seen on the Big Picture ever.”

Thank you Sir or Madam, but I suspect that some will disagree and, in any case, the most useful comments I ever read here were from Alaskan Pete before he disappeared to Oregon or Washington. Anybody recall?

My general view at this point in my life is simply that trying to apply reasonable capitalist theory to actual market transactions will lead to losses in both the short term and the long term. The Borg is running things, has nothing to do with capitalism, and will do whatever it takes to perpetuate itself which means that it will eat you up if you bet against it.

==whipsaw==

Marcus Aurelius said:
“It’s good to know that you understand that you are not an island of independent wealth. Your very personal problem is that when it all comes crashing down (I do hope you understand, also, that nobody but nobody actually “rides” the bull – not even “the powers that be”), you will not be prepared to deal with those who have never had the luxury of surrendering to the illusion.”

Unfortunately, I am not an island of independent wealth and was not suggesting that the only time I cared about things was when it hit me, altho it probably came out that way. I was just saying that once a crisis impacts everyone, it requires special measures.

I also understand the Constantinople reference, etc., but I have been hearing things like that for 40 years now. If you are familiar with Russian history, you will recall that it took around 200 years for the peasants to finally stage a successful revolt and I suspect that we are in pretty much the same mode now.

The upshot is that an essentially corrupt system can live longer than you can, so fighting it is pretty futile.

==whipsaw==

I’ll begin by reproducing part of a quote provided by VJ above (source not provided)

Quote:

[“It’s because of the fear of the bankruptcy,” Ashmore, president of Irvine’s Impac Mortgage Holdings, which escaped bankruptcy itself recently by shutting down virtually all its lending and laying off hundreds of employees told the paper. “It’s got my wife totally freaked out. I just don’t want to deal with it. I don’t care about losing 90 days’ interest, I don’t care if it’s FDIC-insured — I just want it out.”] end quote.
—
Once more, currently evolving circumstances are providing a sort of real-time experimental observation of some of my theoretical work done over a period of more than 50 years. Read the above quote again and allow it to soak into your cognition for a moment and then read 3 excerpts below from my writing:

(1) – Consider the following illustration. Assume an individual contemplates $20 in nominal fiat currency over two consecutive days. Given both that the time value of money is ignored and that the price and availability of goods and services are identical from one day to the next, then, if asked how he perceived the value of the $20 over the two days in question, how do you suppose he would answer? I suggest he must, by any reasonable application of logic, perceive the values on both days to be exactly the same.

But, let us add another assumption without altering the prior assumptions. Assume that after the first day’s evaluation he learns that he has lost his job or that there has been some other economic tumult in his life or in his consciousness. Now, do you suppose he will still consider the perceived value to be the same over the two days? In my opinion it would be simply an absurdity to think he would. No, he will modify the nominal value of the $20 to some higher perceived value after learning the news. That increased modulation is one of the ways he arrives at an increased coefficient of perceived liquidity.

The other way is that, on both days, he subconsciously perceives that he may substitute intellectual or physical labor in order to augment the transactional nominal liquidity demand of the $20. On both days this causes his perception of the value to be greater than $20, but on the second day he perceives it to be even higher than on the first. Because of that higher perception (due to an economic upset to his personal steady state), his level of perceived liquidity is raised progressively higher in amount than the unchanged nominal sum of $20 could ever indicate.

Consequently, he will view marginal additions of nominal liquidity quite differently than if he had not experienced the phenomenon of an increase in perceived liquidity. The aggregated effect of this phenomenon is what disturbs the capacity of nominal monetary expansion to affect a return to equilibrium. In the enigma of macroeconomics this may be analogous to the singularity observed in theoretical physics.

(2) – The change in perceived liquidity will obviate central bank actions to expand the money supply, because aggregate perceived liquidity, relative to aggregate nominal liquidity measured at the same time, will have already risen and begun to absorb the nominal money expansion by being substituted for its transactional demand. Its transactional demand thus reduced by substitution, nominal money expansion will produce no corresponding linear modulation of economic output. This is much more critical when the nominal money supply has declined as a consequence of the upset, because that is when the central bank will recognize it and have the greatest intentions for expanding it.

(3) – Monetarists point to a collapse of the nominal money supply during one or more economic recessions after the market crash of 1929 as being the primary cause of the Great Depression, and they further argue that expanding the nominal money supply more rapidly and earlier during this time would have prevented it. It is simply not the case, for the reasons (in all of my writings) I have given.

Too, Keynes, though he was absolutely correct in my opinion that a collapse of aggregate demand was the cause of the Great Depression, also focused on other elements he contended resulted from it. His arguments concerning those elements (for example, the relationship of interest rates to investments and monetary liquidity preference, and about velocity) have largely been challenged and determined not to be proved, or at best, archaic and in need of clarification or integration.

Keynes was also right that it would require an increase in aggregate demand to bring about a recovery because the economy would not respond to monetary expansion. The rub is that Monetarists can defeat his assertions about liquidity preference, later categorized as a “liquidity trap,” by claiming to observe inconsistencies which refute the phenomenon. And rightly so, because now I have discovered that though there probably is a trap in a severe recession, it is not a high nominal liquidity preference resulting from some low interest rate and the teeter-tottering competition of cash against debt (bonds) that causes the trap, but something else.

The elements of Keynes’ argument are of little consequence to market participants at such times. Rather, they are interested in satisfying a primal instinct for survival, economic and otherwise, even if only subconsciously and marginally expressed. ***Interest rates and investments and their competing merits are simply ignored***

It is the supply of that coercive or compelling force (my definition of money is that it is a “force” rather than a tangible thing) that they trap and covet, and that trap is real and it sweeps up both nominal and perceived liquidity into an animal with no name recognizable by either Monetarists or Keynesians. In these cases depressed economies will certainly emerge from the doldrums eventually, given a sufficient association of higher aggregate demand and depleted aggregate perceived liquidity, but they ***will not do so just because they are made to float in a sea of nominal money***

Istanbul was Constantinople
Now it’s Istanbul, not Constantinople
Been a long time gone, Constantinople
Now it’s Turkish delight on a moonlit night

So take me back to Constantinople
No, you can’t go back to Constantinople
Been a long time gone, Constantinople
Why did Constantinople get the works
That’s nobody’s business but the Turks

“Istanbul” 1953
Words by Jimmy Kennedy
Music by Nat Simon

“People on this board are very intellectually smart, but they are missing the “Big Picture”. It is in very few people’s interest to see the equity markets collapse in the US or around the world.”

The only simple Q that I have is that why this concern for a collapse coming out now? Why not earlier when the seeds were being sown?

The Quants Explain Disaster

Joe Nocera (Subscription): Back in 1998, that now infamous quant fund really did melt down, not only liquidating, but shaking the entire global financial system. Long-Term used complex computer models that failed to anticipate some severe once-in-a-lif…

“A crash only helps the perma-bears (of which most in the world probably frequent this board). While 99.9% of the public is helped by equity prices gradually rising over time.”

Well my personal opinion is crashes are as necessary to the ecosystem as forest fires. Its not that I look forward to the crash, but what comes next.

Eclectic:

In your example it would seem that the perceived nominal value would also rise with a general decline in prices – deflation.

Deflation should actually encourage consumption; however, as there is no real national savings, there are no held dollars to benefit from deflation and therefore nothing to spend; it is only by the mechanism of reduction of perceived nominal value (inflation) that consumption can be spurred.

Or so it seems to me.

Winston, quoting you:

“In your example it would seem that the perceived nominal value would also rise with a general decline in prices – deflation.”…end quote.
—
Of course that is true, although it needs no separate stated case because anticipated deflation would simply be another component element of an increase in perceived liquidity. That should be obvious.
—
But, when you say:

“Deflation should actually encourage consumption; however, as there is no real national savings, there are no held dollars to benefit from deflation and therefore nothing to spend; it is only by the mechanism of reduction of perceived nominal value (inflation) that consumption can be spurred.” end quote.
—
That’s an illogical assumption for these reasons:

-Anticipated deflation actually constrains consumption, since participants desire to wait until prices decline further. It’s the opposite of Weimar, Winston, when workers took special bill-paying lunch breaks (they even initiated worker revolts for the rights to do so) to pay bills with payroll earnings because the same bills would only be higher just hours later.

-It’s not realistic to attempt to extrapolate net negative national savings into a case of zero aggregate money in a given national society. That residual money that is possessed (somebody’s always got money) still participates in the deflation mechanism.

-While hyperinflation does spur the immediate expenditure of all species held, because it is rapidly declining in value, it doesn’t really stimulate consumption itself, per se. Hyperinflation is an economic upset and still results in a higher perceived liquidity value that participants just install in all of the non-fiat elements of perceived liquidity. If you remember, nominal fiat is just one element, but there are others. I’ll define perceived liquidity again and then list its components:

Perceived Liquidity is the sum total value of the entire capacity an individual has for executing transactions in order to obtain goods and services in real time present value. That entire capacity also includes the value of goods and services he may provide for himself or provide to others in exchange for nominal money, for bartered credits or directly for other goods and services.

Perceived liquidity consists of:

-the perceived value of nominal cash(*) either on hand or immediately receivable;

-the perceived value of liquid nominal credit balances on deposit at banks or other financial institutions;

-bartered credits immediately receivable;

-commodities (including food, precious metals and gem stones) immediately exchangeable or consumable;

-finished goods immediately exchangeable or useable; and…

-the immediately exchangeable or consumable value of the intellectual or mechanical labor the individual may produce himself.

There are no other components of perceived liquidity, since every monetary transaction ever completed either by primal or modern man has resulted from the exchange of one or more of these forms of perceived liquidity, and all economic exchanges occur in terms of perceived liquidity.

(*) – even though hyperinflation may occur, it is still true that the individual p-e-r-c-e-i-v-e-s his nominal fiat to have a higher value after and during an economic upset than before it, but remember… it’s his perception of currency value relative to its nominal value, but **only when measured at the same time** Winston, that’s the reason no special case is needed to reorder my theories either in situations of deflation or inflation. The hypothesis holds for either case.

Winston,

I respect your opinion, but d-e-m-a-n-d is what drives consumption.

Inflation is not theoretically requisite to an economy, and there are theoretical economies that would function very well without any inflation. For example, imagine an economy composed entirely of altruistic brothers:

-There would be no profit.

-Creativity and productivity would reduce the costs of goods and services marginally toward philosophical infinity (neg infinity – zero), because altruistic brothers could possess the capacity and incentive to c-o-n-c-e-p-t-u-a-l-i-z-e that this is mankind’s true economic objective.

-Demand could be vibrant.

-Consumption might therefore correspondingly be vibrant.

-Inflation could n-o-t exist, because altruistic brothers would recognize it for what it is… a misconceptualization of profit, itself an erroneous concept.
—
I realize this might be very difficult to conceptualize, and it may sound strikingly similar to communism, however communism fails because it can never ultimately maintain sufficient altruism to achieve mankind’s true economic objective. Since it lacks altruism, there’s no other motivation available for the creativity and productivity needed to obtain the objective.

Both creativity and productivity are carrots held before the donkey in the form of assumed profits to be had in capitalism. Capitalism has the greater potential for achieving mankind’s true economic objective, but only because it substitutes the conscious objective of attainment of riches from profiting from economic exchanges, for the sub-conscious but real objective of attainment of zero costs for goods and services… this is the only true engine of wealth creation that mankind has ever experienced… p-r-o-d-u-c-t-i-v-i-t-y.

Eclectic:

According to Pete’s mom: “Pete, there is what’s real and then there’s what’s right. You have to deal with what’s real.”

Agreed that demand always drives consumption; however, cannot adjustments to debt availability cause an artificial demand/supply imbalance. Isn’t this the exact nature of the housing bubbble?

While I agree in principal with your theoretical models, I have trouble adjusting those models to actual events. That is probably simply my lack of brain power – I must work awfully hard to keep up with you.

For example, you stated that inflation is not a theoretical requisite for an economy. While this is absolutely true, it does not seem to address the debt-based fiat system under which out current economy is based. It is also helpful to have a definition of inflation. If money is an exchangeable unit of lanor, then inflation must be a reduction in real value of present labor.

The theory:
Money = exchangeable unit of labor

Howerer, we are operating under this:
Money = exchangeable unit of labor plus some portion of future productivity.

If money = labor, then the current system demands an expansion of labor (money) in order to satisfy the debt requirement of present money creation.

Therefore, although I agree 100% with your theory, in my opinion the practical actuality is that under the present form of debt-based fiat, inflation is a requisite to service the debt. When there is no national savings, no passbook savings accounts, no money stuffed under mattresses, no jars of coin – all these are used to service present needs (paycheck-to-paycheck), then the only avenue left to spur demand is to increase real wages or expand the availability of credit.

In my opinion, there are many very bright people who seemingly do not see the incongruence and necessary divergence between debt-based fiat and theoretical economic goals; if the very creation of currency mandates debt, then an absolute inflation rate of zero is an impossibility, and thus targeting an issue that is derived from supply/demand, i.e., price change, cannot facillitate the effective management of necessary reduction in present labor value that debt demands.

Please understand that I have no formal economic training, so everything I surmise must be done by self-education and critical analyzation of presented facts. It took about every brain cell I have to write this reply.

If it is rubbish, blame Pete’s mom.

Eclectic:

I only want you to know how much I appreciate your sharing of your time and knowledge.

Thanks