The timing of the Crash

Daily news cites evidence of how sensational the global economy is performing. Not surprising really when you consider how loose monetary policy is these days. Yet its as ‘real’ as the illusion of omnipotence one gets from a hit of ecstasy. Like any drug though, you get addicted, and you have to take more to get the same effect. So it is with western government policy. Western governments are allowing current account deficits to run amuck in order to preserve a strong economy, or at least the illusion of one, cause this consumption is not financing fixed investment (to generate income), but mostly final consumption (eg. Furnishing new homes with plasma TVs). What’s wrong with that? Well, its an illusion. People are only full employed & consuming because their property prices have skyrocketed. This asset inflation is primarily because of excess money supply. Sure we have experienced 3.1%per annum growth in productivity (compared to 1.6% a decade ago), but inflation has eaten most of that up. How do you explain property selling at 2% yields? How do you justify excessive price-earnings ratios when debt levels are so high. WHY IN HELL ARE INTEREST RATES SO LOW WHEN WE HAVE A CURRENT ACCOUNT DEFICIT OF 6% of GDP?????? Because the leaders people elect are on ecstasy. Mindless, dishonest, evasive fouls.
The credit expansion has been caused by loose US monetary policy. The EU has sensibly not participated, refraining from stimulating a consumption boom. Japan has not either, but it is financing the US deficit, and subsidising US household spending, and you’d have to wonder why? China is doing the same, but at least they are the recipients of vast capital inflows which has expanded their productive capacity. Japan is just watching its US treasuries (denominated in $US) go down the toilet. Normally interest rates would adjust upwards to stifle such largesse, but instead Japan and China just invest more. There is a new political paradigm – a boys club at the top. The EU is excluded because they won’t play NATO. Japan is financier, China is the manufacturer, the US is the consumer, and Australia is the raw material supplier. This clubby group have an agenda as all meetings for the old boys clubs do. Its to stay in power and to make a difference. Unfortunately they have no integrity, so any good they do will be undermined. Eg. Having globalised & liberalised trade, they will have caused a depression, which will cause a reactionary adoption of protectionist policies. Well, you can attribute that to George Bush, Tony Blair, John Howard , Koizumi and that Chinese guy Wehne??? Has anybody spoken to their parents?
If you are wondering why the newspapers aren’t filled with pages of doomsday articles citing the risk of a financial meltdown, its because they have been writing them infrequently for 5 years, yet the market moves higher. Max Walsh in The Bulletin offers very good economic analysis, as does Morgan Stanley and some of the Kitco contributors. The reality is – its difficult to know when it will end. Rest assured that Alan Greenspan will not want the US economy to collapse on his watch. He is due to retire in Jan’06, so we can expect another year of easy monetary policy. Personally I think that equity markets will be getting very anxious around Oct’05 about the possible direction of monetary policy under the next Chairman of the Federal Reserve Board. But then, these issues were decided years ago. The new candidate will be chosen for his ability to comply with US policy. On the fringes he might be ‘independent’, but at root they are collectivists preserving their jobs. But they will be uneasy times for financial markets. And of course a few crashes have happened around Sept (11th) and October (1987), so the markets will be jittery. Not something that a hit of ecstasy won’t cure though.
The best indicators of the crash are likely to be falling property prices in the US, or as a precursor to that a major slump in Wall Street. I don’t think Wall Street will be enough to undermine consumption, though it will likely be first. So I’ll be looking for a fall in US equities around Oct, real estate in early 2006. Downgrading of earnings at that point I think will have a final blow to Wall Street, and see interest rates take off under a new Fed chairman, who can wash his hands of the prior largesse.
There is a need for restructuring the balance of power in the global economy. Reading the IMF meetings with western countries. Its all about ‘compliant’ diplomacy. Money supply in Australia has been growing at 10% per annum for the last 5 years, but do you see the IMF saying anything negative. Well, yes, rumblings about the current account deficit. But why would they go beyond that? Their job security depends on donor funding. It doesn’t pay to criticise your financiers. No one likes a radical.
It all starts with honesty people – having a respect for facts over perceptions – objective reality. If we are going to delude others to keep them happy, we may as well be on ecstasy, and hand back the planet to the apes. It’s a fine line between apes and cannibals people.

Andrew Sheldon