'Bubbles are sustained only by ever increasing amounts of Credit.
The most pernicious Bubbles are those fueled by “money” – perceived safe and liquid Credit instruments.
Bubbles are mechanisms of wealth redistribution and destruction.
Structural impairment caused by Bubble excess escalates over the life of the boom.
The pain and dislocation unleashed during the bust is proportional to the excesses of the preceding boom.
Though we’re in uncharted waters when it comes to global Bubble Dynamics, I’ll suggest that geopolitical risks expand exponentially over time.'
- Doug Noland,
Made the Decision, February 19, 2022
'The nineties ushered in unfettered Credit in a scope never previously experienced. History teaches that Credit is inherently unstable. I became convinced this new Credit mechanism was instability on steroids. The 1994 bond market/derivatives blowup, Mexico, the spectacular Asian Tiger boom and bust, Russia, LTCM, the tech Bubble…
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What was to unfold over three decades was nothing short of history’s greatest period of Credit and speculative excess. Now the dreadful downside. Virtually everyone seems unaware of the extraordinary challenges ahead.''“
In 1939, a brief proposal auspiciously titled ‘A Program for Monetary Reform’ was circulated among economists in the United States. Written in the wake of The Great Depression by a group of prominent American economists which included Irving Fisher and Paul Douglas, it included a stark criticism of the fractional reserve banking system in the United States, referring to it as ‘a chief loose screw in our present American money and banking system’ (Fisher et al., 1939). Despite this, the fractional reserve system remained then, and continues to remain status quo for all developed banking systems in the world. It has gathered many more critics over the years that attribute to it many disadvantages, such as a tendency for bank runs and moral hazard on behalf of lending institutions, among other negative externalities.” Sergey Alifanov, “On the Dangers Inherent in a Fractional Reserve Banking System”, Trinity College Dublin, 2015
Bank panics and Runs certainly predate the Great Depression. Notable examples in more distant history include the Dutch Tulip Bulb Mania (1637), Britain’s South Sea Bubble (1719), and France’s (John Law’s) spectacular Mississippi Bubble (1720). And Runs preceded banks as we think of them today, with panicked efforts to redeem goldsmith-issued notes. Carmen Reinhart and Kenneth Rogoff, in “This Time Is Different,” noted a panic and Run in Sicily, fourth century B.C.
Credit and economic crises invariably drew attention to the inherent fragility of fractional-reserve banking. Here a deposit into a bank would fund a loan that would become a new deposit at another bank, where it could then be lent again (and again). “Fractional reserve” denotes a requirement to hold a portion of a new deposit in reserve (not available for lending). For example, a 20% reserve requirement would mean that of a $100 deposit $80 would be available for funding a new loan. And when this new $80 financial claim became a deposit at another institution, a $64 loan could be made, and so on – a process referred to as the “money multiplier.”
Reserve requirements to restrain Credit growth would invariably prove ineffective during periods of manic excess. Post-bust analysis would then target unhinged bank lending and resulting Credit and speculative excess as chiefly responsible for boom and bust dynamics. There was no pot of money available to satisfy throngs of panicked depositors rushing to pull their cash from troubled banks. There’s no pot of money in today’s troubled global markets.
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The nineties ushered in unfettered Credit in a scope never previously experienced. History teaches that Credit is inherently unstable. I became convinced this new Credit mechanism was instability on steroids. The 1994 bond market/derivatives blowup, Mexico, the spectacular Asian Tiger boom and bust, Russia, LTCM, the tech Bubble…
Rather than recognizing and addressing this dangerous new financial innovation and evolving Market Structure, the Fed pivoted in the opposite direction: it commenced a transformative era of monetary management doctrine that specifically underpinned non-bank Credit and market-based finance. Habitual central bank-induced market recoveries (spurred by rate cuts, bailouts and later, QE) ensured this new financial structure and associated monetary doctrine enveloped the world. A Federal Reserve liquidity backstop (“Fed put”) took root and would grow to become deeply embedded in market perceptions, prices and structure for securities and derivatives markets (Market Structure).
What was to unfold over three decades was nothing short of history’s greatest period of Credit and speculative excess. Now the dreadful downside. Virtually everyone seems unaware of the extraordinary challenges ahead.
..The Fed’s QE, zero rates and other bailout measures unleashed in late-2008 proved sufficient to sustain confidence in money market and mutual fund shares, along with financial assets generally.
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Market upheaval has turned systemic. No place is safe. And the Runs have commenced.
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Modern day Runs appear to have the potential to be every bit as destabilizing as the old bank Run. Keep in mind that contemporary financial crises have typically turned systemic in the money markets (i.e. Lehman “repos”). Crisis tends to erupt when perceived safe and liquid holdings (“money”) are suddenly recognized as at heightened risk. It’s this “moneyness” perception of all these financial instruments (i.e. ETF and mutual fund shares, derivatives and “structured finance”) that has me on edge. Myriad acutely vulnerable Bubbles and a Fed liquidity backstop blurred by newfound ambiguity. The New Cycle is off to a very troubling start.'
- Doug Noland,
Pondering Modern-Day Runs, July 1, 2022
'It tells the story of how the summer of 1931 felt to Benjamin Roth, a young lawyer in Ohio who began keeping a diary when he started to suspect he was living through the first major financial crisis in his life.''The June issue of the
Macro Value Monitor discusses a fairly important topic, given the market declines in the first half of this year: Missing the Forest for the Trees in the Early Months of a Long-Term Bear Market.
It tells the story of how the summer of 1931 felt to Benjamin Roth, a young lawyer in Ohio who began keeping a diary when he started to suspect he was living through the first major financial crisis in his life. The lessons investors today can learn from his observations are critical when looking through the carnage in the most speculative areas of the market since last November.'
- Email Sitka Pacific,
Missing the Forest for the Trees in the Early Months of a Long-Term Bear Market, July 1, 2022
Context(Global Stagflation) - 'Inflation hits record 8.6% for 19 countries using the euro [surging past the 8.1% recorded in May]'(An economic Ponzi scheme) – Evergrande Moment – ‘China Evergrande is not ‘too big to fail’, says Global Times editor’(Banking Reform) - 'Disaster is a strong but appropriate word that applies perfectly to the state of U.S. monetary policy..' - Dr. Hunt(Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'