Financial topics

[Higgenbotham]

The US dollar has been stable for 5 years, despite a multitude of predictions to the contrary, both pro and con. Seven years ago the drumbeat from the technicians was that if the dollar broke support at 80, it would collapse. Yet, for the past 5 years, it has remained stable around 80. The fundamentalists (including Warren Buffett) said that the dollar would weaken due to the large trade deficit that the US carries with other countries. A reasonable argument, but that didn't happen either. Other fundamentalists said that as the bubbles collapsed, the dollar would rise in value. I've been in that camp since 2008. Didn't happen. Did any of the so-called experts say that the dollar would remain stable? None that I know of.



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[John]

I tend to distinguish the different parts of a bubble. Something may
be in a bubble for many years, and still show only steady growth or
volatility within a range. The only way to determine such a bubble is
to apply the Law of Mean Reversion to the long-term trend value.
However, what other people call a "bubble" is what I would call "going
parabolic" - the point at the end of the bubble where insanity and
desperation reach a peak, preceding the final panic and crash.

[Higgenbotham]

The stability of the dollar is telling me that the bubbles haven't burst for real yet, and that the generational panic hasn't happened yet.

[vincecate]

The banking crisis, sovereign debt crisis, and currency crisis seem to follow each other with only a couple years lag. Do you know of a major banking crisis, followed by sovereign debt crisis, where there was a long time before a currency crisis, other than Japan?

Are you saying a banking crisis happened in 2008? I'm saying it still hasn't happened yet. Yesterday I said the generational panic didn't happen in 2008.

I agree that the generational panic has not happened but yes, I do think we have had a banking crisis.

[Higgenbotham]

I agree that the generational panic has not happened but yes, I do think we have had a banking crisis.

Banking crisis

This approach to dating the beginning of banking crises is not without drawbacks. It could date crises too late, because the financial problems usually begin well before a bank is finally closed or merged; it could also date crises too early, because the worst of a crisis may come later. Unlike in the case of external debt crises, which have well defined closure dates, it is often difficult or impossible to accurately pinpoint the year in which the crisis ended.

If generational panic is still yet to occur, paraphrasing the authors, the "worst of the crisis will come later" and, as the authors admit, the banking crisis will not be considered to have occurred starting in 2008, but when the worst finally comes.

Now it would be appropriate I think to quote Galbraith once again:

A common feature of all these earlier troubles was that having happened they were over. The worst was reasonably recognizable as such. The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune.

If the scale of the banking crisis is unusually large compared to the scale of a typical banking crisis, as the 1929 crash was unusually large compared to the scale of typical crashes, then as the "worst continues to worsen" using the typical banking crisis as a guideline will anticipate the results too soon.

[Higgenbotham]

I think this pattern has been repeated over and over, at least that was my take from reading "This Time is Different". To me the pattern seems to be:

1) Banks take in demand deposits and loan most of them out long term like 10 or 20 years
This is called "fractional reserve banking" but should be called "not matching terms on
deposits and loans" or "fraudulently telling depositors they can take their money at
any time when really the bank is not always able to handle it".
2) At some point banks are sure to get in trouble because there is always some amount
of withdrawals from the demand deposit accounts that they can not handle.
= "Banking Crisis"
3) Government bails out the banks.
4) Government get too much debt and get in trouble = "sovereign debt crisis"
5) Central bank bail out the government = monetizing debt = printing money
6) Currency Crisis

The Eurozone is teetering near stage 4 and I'm anticipating it will go into full blown stage 4 this month. Once that happens, I'm anticipating the true generational panic will hit the US. Some time later, and I have no idea how long it will take, the US should go into full blown stage 2. My guess is there will be runs out of the big banks because we're already seeing things like "bank transfer day" being talked about. At that point I can not guess any further as to what will happen. I've previously listed $25 trillion in US assets alone that are available to go into US bonds, but it's impossible to say how much of that the generational panic will wipe out. There will be money flows into the US from Europe too; that has already been happening.

[vincecate]

I think this pattern has been repeated over and over, at least that was my take from reading "This Time is Different". To me the pattern seems to be:

1) Banks take in demand deposits and loan most of them out long term like 10 or 20 years
This is called "fractional reserve banking" but should be called "not matching terms on
deposits and loans" or "fraudulently telling depositors they can take their money at
any time when really the bank is not always able to handle it".
2) At some point banks are sure to get in trouble because there is always some amount
of withdrawals from the demand deposit accounts that they can not handle.
= "Banking Crisis"
3) Government bails out the banks.
4) Government get too much debt and get in trouble = "sovereign debt crisis"
5) Central bank bail out the government = monetizing debt = printing money
6) Currency Crisis

The Eurozone is teetering near stage 4 and I'm anticipating it will go into full blown stage 4 this month. Once that happens, I'm anticipating the true generational panic will hit the US. Some time later, and I have no idea how long it will take, the US should go into full blown stage 2. My guess is there will be runs out of the big banks because we're already seeing things like "bank transfer day" being talked about. At that point I can not guess any further as to what will happen. I've previously listed $25 trillion in US assets alone that are available to go into US bonds, but it's impossible to say how much of that the generational panic will wipe out. There will be money flows into the US from Europe too; that has already been happening.

With the Fed printing like $1.6 trillion per year I think that the US is well into stage 5. So it is interesting that you are thinking the US is yet to enter a full blow stage 2. So we have rather different views on where we are in this pattern.

The US has had 3. Paul Krugman argues that there is no sign of 4 in the US. I think they have done so much of 5 that they are hiding the reality of 4. So that is debatable.

I think the generational panic is going to be related to hyperinflation of the US dollar. The panic may not be centered on the stock market. Worldwide hyperinflation is the scale of trouble I think we will have.

[Higgenbotham]

With the Fed printing like $1.6 trillion per year I think that the US is well into stage 5. So it is interesting that you are thinking the US is yet to enter a full blown stage 2. So we have rather different views on where we are in this pattern.

The US has had 3. Paul Krugman argues that there is no sign of 4 in the US. So that is debatable. I think there has been plenty of 5 in the US.

I think the generational panic is going to be related to hyperinflation of the US dollar. The panic may not be in the stock market. Worldwide hyperinflation is the scale of trouble I think we will have.

The US has had stage 3 for at least 24 years now, and it could be argued for even longer than that. The financial system has been bailed out in larger and larger amounts since at least 1987. As an example, when Greenspan lowered short term rates to 1% in 2003 and 2004, that was a bank bailout. So the US is looping back and forth between stage 2 and 3 with shorter lull periods as the amounts in stage 3 get larger and each economic recovery is weaker. This is the same thing that happened in the 14th Century.

I agree that the generational panic doesn't have to be in the stock market, but looking at what is happening right now in stocks and bonds indicates that if Europe goes into crisis this month it will be. For some recent evidence of that, the chart I recently posted going back to 1995 demonstrates the repetition of the pattern.

[vincecate]

So the US is looping back and forth between stage 2 and 3 with shorter lull periods as the amounts in stage 3 get larger and each economic recovery is weaker. This is the same thing that happened in the 14th Century.

I agree that the generational panic doesn't have to be in the stock market, but looking at what is happening right now in stocks and bonds indicates that if Europe goes into crisis this month it will be. For some recent evidence of that, the chart I recently posted going back to 1995 demonstrates the repetition of the pattern.

Euro Pacific has an interesting article on how they think things will unfold:

http://www.europac.net/commentaries/beg ... fiat_money

One point they make is that trying to get into gold after there is clear inflation is probably a bad idea. The price could go up very suddenly and very high before inflation is obvious. I agree with this.

[Higgenbotham]

Euro Pacific has an interesting article on how they think things will unfold:

http://www.europac.net/commentaries/beg ... fiat_money

He's got it exactly right. The only thing he gets wrong is the idea that anyone needs to do something now. I am waiting for stages 1 through 3 to progress as he outlines it and it will be obvious when the metals hit bottom. Even if there is no stage 4, the idea will be to watch the metals and look for the right time to buy when everyone turns bearish and gives up.