The Impending Global Liquidity Crisis
By Mike Whitney
" -- -- Stock markets across the world have been
skyrocketing lately. In fact, Forbes reported on Tuesday that:
“all 22 of the developed-world markets tracked by Morgan Stanley
Capital International are in positive territory year-to-date.
…Emerging markets are looking just as flush. Of the 29 emerging
market countries that MSCI tracks, only four--Argentina, Sri
Lanka, Russia and Venezuela--are in negative territory.”
Yahooo! The markets are soaring and we’ve entered a new
“globalized” Age of Prosperity.
Sounds great doesn’t it?
There’s just one little problem; the Commerce Department
announced yesterday that that GDP in the first quarter was
revised downward to a measly .6%.
Are you kidding me? Economic growth is underwater and yet the
stock market is still flying-high? What gives?
It’s easy. The markets are just responding to the growth in the
money supply which is in double-digits just about everywhere
around the world. When there are more dollars chasing the same
number of assets---stocks go up. It’s just that simple. What
we’re seeing isn’t the result of investor confidence or
industrial output. Heck no! Stocks are rising because our $800
billion current account deficit is recycling into the stock
market. What we are really seeing is the first signs of
inflation---galloping inflation which will soon spill over into
the broader economy.
If we eliminate the “frothy” exuberance of America’s trade
deficit, then the stock market would be sucking air through a
tube right now. And, you can bet that as soon as our foreign
creditors wise-up and start raising interest rates the Dow Jones
will quickly become the Dow Doldrums and the economy will
nosedive into a 1929-type Depression.
Does that sound overly pessimistic?
At present, the “don’t worry, be happy” crowd still thinks the
good times will roll on forever. They don’t see that the US
consumer is running out of gas and won’t be able to sustain his
gluttonous spending spree much longer. He’s already stopped
siphoning the equity out of his home ($600 billion last year)
and now he’s has started to max-out his credit cards. (Credit
card debt increased 9.2% last month alone!) Now, US consumers
are facing a blizzard of bad economic news---rising prices at
the gas pump, a 6.7% increase in food prices, and a sickly
dollar that keeps losing ground on the currency exchange.
(Kuwait is the latest country to announce they will be dumping
the dollar for a basket of currencies)
Currently, the US gobbles up two-thirds of the world’s credit
each year with no conceivable way of paying it back. That won’t
last much longer. Central banks around the world are
increasingly hesitant to accept are our flaccid greenbacks and
the Chinese are the only ones who are still buying our
Treasuries. That’s mainly because it gives them power over
political decision-making in Washington. The truth is the
Chinese are planning to send the US into receivership and take
over as the world’s bank. With dollar-backed reserves of $1.3
trillion, their plan appears to be going “full-steam ahead”.
The bottom line is that we are buried beneath a $9 trillion
mountain of debt and there’s no way to dig out. If there’s a
break in the liquidity-flows to our stock market---stocks will
crash, unemployment will soar, and we’ll be pulled into a
Economic soothsayer Elaine Supkis puts it like this:
“World wealth isn't growing, world DEBTS are growing and the
place they are growing the fastest is the US which is the sole
terminus of world trade at this point. The biggest growth
industry today is selling debt instruments. The entire existence
of hedge funds, for example, is to funnel profits from uneven
trade with the US back into the US via dumping debts onto the
backs of any corporations that can run up more debts!” (http://elainemeinelsupkis.typepad.com/money_matters/)
Get it? It’s all just recycled dollars---debt piled on debt
piled on debt piled on debt-- repeat ad infinitum. America’s
equities portfolio = 1% assets, 99% pure helium.
This may explain why Treasury Secretary Hank Paulson has been
frantically beating the bushes for “foreign investment” to keep
the stock market bubble afloat. He has no interest in rebuilding
America’s industries or increasing our competitiveness. No way.
What he’s looking for is a quick liquidity-fix to keep the
over-bloated stock market sputtering along while more wealth is
shifted to mega-rich corporations. In fact, no one in Washington
is even talking about renovating America’s battered
manufacturing sector. What do they care if we turn into a nation
of busboys and bed-pan cleaners? They’re just hanging around
long enough to sell off whatever’s left of our national assets
then it’s “off to new markets in the Far East”.
And, they are doing a great job, too! The United States is
handing over 1.5% of its national wealth every year to foreign
investors while the American public continues to snooze away.
We’re having a giant garage sale and everything must go---roads,
water, mineral rights, natural gas etc. We’re getting “picked
clean” and no one seems to care.
The boys in Washington and Wall Street don’t work for you and
me. They’re destroying the currency and selling everything that
isn’t bolted to the floor. Then, they’ll pack-off to Asia and
Europe where they can begin the scavenging-cycle all over again.
How bad will it get in the USA?
Consider these comments from Princeton University economist Alan
Blinder, who recently attended the business summit at Davos,
Switzerland: (summarized by Rep. Ron Paul)
“Word has it that there may be plans yet again to “outsource”
highly skilled American jobs to other countries. Approximately
40-million American jobs could be at stake and yet US workers
have not been told or consulted about it, until now. Just to put
the number of 40 million into perspective, that is more than
twice the amount of people that are employed in manufacturing.
(According to Alan Blinder) The ‘choice’ jobs of skilled
Americans could be lost and given to foreign countries within
the next decade or two.”
40 million high-paying US jobs will be outsourced to lower-wage
countries within the decade?!?
This is a blueprint for the economic destruction of America!
Maybe this will finally convince the dozy American public that
the corporatists who run Washington are a disloyal gaggle of
traitorous swine. “Globalization” is public relations swindle
designed to steal jobs, plunder the economy, and shift wealth to
The name of the game now is to keep the stock market flying-high
for as long as possible while the transfer of wealth continues
unabated. That means the hucksters on Wall Street will have to
devise even better scams for expanding debt---increasing margin
limits, escalating derivatives trading, loosening accounting
standards, inflating the booming hedge fund industry, and---the
new darling of Wall Street---increasing the mega-mergers, the
biggest swindle of all.
These over-leveraged mergers create boatloads of new credit, but
add nothing to GDP. They reflect the basic disconnect between
the stock market and the real economy. May is on track to be the
biggest month for global mergers ever recorded. Marketwatch
“For the year to date, companies have announced at least $2.2
trillion in deals worldwide. Of these, US companies have engaged
in $830 billion”.
But look at the figures---Do they sound familiar?
Once again, the insightful Elaine Supkis makes this observation:
“Note that the 'deals' roughly equal our trade deficit. This
isn't accidental. They are one and the same! And I will never
see this fact stated so baldly in our media. No one dares say it
Wow; she’s right. Our trade deficit is being concealed by these
gargantuan mega-deals in the markets.
And there’s something else we need consider about these mergers;
they’re not producing growth in the economy. In fact, GDP keeps
falling while stocks keep going higher.
Because the mergers do not increase productivity; they’re an
indication of “asset inflation”. As Thorsten Polleit says, “the
government-controlled paper money systems have decoupled credit
expansion from the from the economy’s productive capacities.”
The link between the stock market and GDP has been broken by
Henry C K Liu explains it like this in his article “Liquidity
Boom and Looming Crisis” in the Asia Times:
“The five-year global growth boom and four-year secular bull
market may simple run out of steam, or become oversaturated by
too many late-coming imitators entering a very specialized and
exotic market of high-risk, high-leverage arbitrage. The
liquidity boom has been delivering strong growth through asset
inflation (property, credit spreads, commodities, and
emerging-market stocks) WITHOUT ADDING COMMENSURATE SUBSTANTIVE
EXPANSION OF THE REAL ECONOMY. Unlike real physical assets,
virtual financial mirages that arise out of thin air can
evaporate again into thin air without warning. As inflation
picks up, the liquidity boom and asset inflation will draw to a
close, leaving a hollowed economy devoid of substance. …A global
financial crisis is inevitable”.
Liu’s right. There’s no “expansion in the real economy”—no
increase in output; no boost in GDP. It’s all recycled credit
which will “evaporate” at the first sign of trouble.
Greenspan’s low interest rates and currency deregulation have
set us up for “global liquidity crisis”.
The basic problem is that credit growth has been outpacing GDP
for some time now. That means that debt has been building up
faster than the rate of growth in the economy. Eventually those
imbalances will have to work themselves out by way of a steep
recession or perhaps another Great Depression. There’s a price
to pay for low interest rates and, inevitably, we will end up
Thorsten Polleit of the Mises Institute explains it like this in
his article “The Dark Side of the Credit Boom”:
“Today's government-controlled paper-money systems have
decoupled credit expansion from the economies' productive
capacities: "circulation credit" feeds a "credit boom" that is
doomed to end in severe economic, social and political crisis.
Austrian economists of the Mises Institute fear that the
collapse of the credit boom will lead to the destruction of the
currency through a deliberate policy of (hyper-)inflation,
destroying the free-market order.”
“Destruction of the currency”; is that too strong?
No. In fact, the United Nations issued this gloomy statement
just last week:
“The United States dollar is facing IMMINENT COLLAPSE in the
face of an unsustainable debt”. America’s current account
deficit is now a matter of international concern.
Polleit says that “the increase in debt-to-GDP ratios ….can
actually be observed in all major currency areas, not only in
the United States”. This is true. Most of the industrial
countries in the world have increased their money supplies to
dangerous levels to avoid strengthening against the dollar. It
is a prescription for disaster.
If the Fed chooses to lower interest rates now; (to ease the
slumping housing market) they will only aggravate “existing
disequilibria”. In fact lowering of interest rates will only
perpetuate “the fateful expansion of circulation credit that
must end in a collapse of the monetary system”.
So, why would the Fed engage in such reckless behavior when it
violates fundamental laws of economics? According to Polleit,
“the ongoing lowering of interest rates and the accompanying
rise in circulation credit and debt-to-GDP ratios — the
characteristic features of today's state-controlled paper-money
systems — is driven by a deep-seated anti-capitalist ideology.”
This is also true. The serial “bubble-makers” at the Federal
Reserve secretly hate the free market system; that’s why they
are engaged in plutocratic social engineering. They're using
interest rates as a means for shifting wealth from one class to
another and creating a centrally-controlled economy. There
actions are essentially anti-free market and “anti-capitalist”
as Polleit says. We can see this trend even more clearly in US
foreign policy where the pretense of “free markets” has been
abandoned altogether and America is securing its resources with
gunboats and missiles rather than with a checkbook.
The current credit bubble is bigger than anything we’ve ever
seen before. For example “The total market volume of credit
derivatives outstanding was an estimated US $20.2 trillion in
2006, amounting to around 1.5 times annual nominal US GDP….The
market is expected to grow further to US$33.1 trillion until
2008. In fact, the credit derivative market has become the
biggest market segment of the international banking business
already. The problem, however, is that the “credit derivative
markets have emerged on the back of a government-controlled
credit and money supply system. And as the latter is assumed to
be crisis prone, credit derivative markets might be seen as a
multiplier of the crisis potential inherent in today's monetary
In other words, the whole $20 trillion derivative’s market is at
risk because it is built on a shaky foundation of hyper-inflated
currency. Once again, if money supply exceeds GDP there’ll
eventually be a day of reckoning. We expect that derivatives and
hedge funds will get hammered once the huge imbalances begin
rumble through the markets.
So, what should we be looking for now?
Any break in the liquidity chain will send markets into downward
spiral. The likely catalyst for such a crash could be contagion
from the housing bubble creeping into the stock market, a sudden
downturn in the Shanghai stock market, (which is up nearly 300%
in just 2 years) or an increase in Japan’s interest rates. Any
one of these could potentially trigger a massive sell-off on
Today’s stock market needs a steady flow of cheap capital to
stay aright. That’s why Paulson is desperately looking for new
investors. But there’s a basic problem which the markets cannot
escape. Inflation is surfacing in all the countries where the
stock markets are soaring because of their increases in the
money supply. When the central banks are finally forced to raise
interest rates; money will tighten up, it’ll be harder for
creditors to make their payments or for banks to issue
additional loans. As credit dries up more people will default on
their loans, demand will drop off for consumer goods, prices
will fall, and we will go into deep recession.
Once this process begins, speculators will be forced to abandon
their positions, liquidity will continue to evaporate and the
market will go into freefall.
Markets are self-correcting. Eventually the overleveraged
debt-instruments, which pushed the Dow to historic highs, will
be expelled from the system, but not without considerable pain
for everyone involved.
Here’s an excerpt from Paul Lamont’s excellent article “Credit
Collapse—May 10” which provides a compelling description of what
happens a credit bubble begins to unwind:
“On May 10, 1837, the banks of New York suspended gold and
silver payments for their notes. Fear of a bank run spread
throughout the United States. The young country fell into a 7
year depression. How could two decades of prosperity end so
suddenly? According to America: A Narrative History: “monetary
inflation had fueled an era of speculation in real estate,
canals, and railroad stocks.” Cracks in the dam were visible
much earlier, as the stock market peaked in inflation-adjusted
value three years prior. According to Rolf Nef, debt levels in
the private sector rose to 150% of GDP. In late 1836, the Bank
of England concerned with inflation raised interest rates. As
rates rose in England, credit tightened, and U.S. asset prices
began to fall.
On May 10, investors panicked and scrambled for cash. “By the
fall of 1837 one third of the work force was jobless, and those
still fortunate to have jobs saw their wages fall 30-50% within
2 years. At the same time, prices for food and clothing soared.”
We can expect a similar scenario in the very near future. When
interest rates are kept below the rate of inflation for an
extended period of time; enormous equity bubbles arise and
threaten the entire system. The stock market is undergoing a
period of asset inflation. It has broken free from the real
economy and is headed for a crash. As Edward Chancellor, author
of “Devil Take the Hindmost: A History of Financial Speculation”
says: “The growth of credit has created an illusory prosperity
while producing profound imbalances” in the American economy….At
some point the system will have to adjust “to face a new
reality. The process of adjustment is likely to be painful. It
may well end in either an extraordinary deflation...or an
Get ready. The credit boom is coming to an end.
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