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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Doug Noland
October 3, 2011
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Before we get though all of this, I expect Dr. Bernanke and U.S. Federal Reserve doctrine to be fully discredited.  I fear Dr. Krugman has lost his mind. 

I’m not one for ideologies.  I’m for low taxes, but enact big tax cuts late in a historic Credit Bubble and you’re asking for trouble.  I’m sympathetic to a measured dose of “Keynesian” fiscal stimulus to help grease the gummed-up wheels of a post-Bubble “depressionary” financial mechanism.   Importantly, however, meander down an inflationist (referred to these days as “Keynesian”) policymaking path to sustain a Bubble landscape and you will eventually find you’ve destroyed the entire Credit system.  As Dr. Krugman notes, policy success (or, I’ll add, catastrophic failure) depends very much on fighting the right war.  Regrettably, Bernanke, Krugman and others have mobilized to fight the post-‘29 crash Great Depression.  The dilemma is that the global system has remained more in a historic financial Bubble than in a thirties-like environment. 

The consensus in the economic community (and among market pundits) is that 2008 was the “hundred year flood” – “the worst financial crisis since the Great Depression.”  Many view 2008 as our generation’s versions of the 1929 crash.  Policymakers, at home and abroad, have mounted an incredible mobilization to fight the Great War against so-called post-Bubble deflation risk.  More than any policymaker of our era, the focal point of Dr. Bernanke’s distinguished academic career has been fashioning the “how to” for marshaling post-Bubble recovery.  As Mr. Hilsenrath noted, Dr. Bernanke has a clear post-Bubble “mindset.”

I clearly recall the fear of depression that immediately followed the 1987 stock market crash.  Promising abundant marketplace liquidity, chairman Greenspan eased monetary policy, in the process helping to fuel late-80’s (“decade of greed”) excesses (the S&Ls, junk bonds, leveraged M&A finance, coastal real estate Bubbles, etc.).  Later, the Greenspan Fed dramatically eased monetary conditions in the early 90’s in response to a post-Bubble impaired banking system and renewed fears of economic depression.  The global system nearly buckled during the 1998 crisis, and the Fed was again at war against so-called deflationary conditions.  When the Tech and corporate debt Bubbles burst in 2001/2002, Fed governor Bernanke was already waging his war against deflation risk with talk of the Fed’s “electronic printing press” and “helicopter money.”  When the latest and greatest Bubbles in mortgage/Wall Street finance burst in 2008, what had been a more gradualist evolution of experimental policymaking quickly turned into an all-out nuclear campaign against some threatening scourge of deflation and depression. . .

Post-2008 reflation stoked a massive flow of “hot money” that inundated the “developing” world, where domestic Credit systems were already firing on all cylinders.  It was a historic boom – as well as a fundamental facet of my “global government finance Bubble” thesis.  And the more these currencies, markets and economies inflated, the greater the self-reinforcing flow of finance from U.S. and international investors into global funds and “developing” bonds and equities. . .

The focus remains the unfolding Greek and European debt crisis.  But there were further indications this week that the global leveraged players now face a heightened state of duress.  You were absolutely hammered this week if you were short Treasurys (or U.S. dollar securities) against long positions in global risk assets.  And there seems to be evidence of forced liquidations everywhere, as a 2008-like scenario comes into clearer view.  The bursting of Bubbles in global leveraged speculation and the associated reversal of finance away from the “developing” world portends tightened financial conditions and growth headwinds for the post-2008 crisis global growth “locomotive.”  This more than justifies the pounding that global cyclical stocks suffered this week.

I’ve been really worrying about the European banks; about global derivatives; about the unwind of leveraged trades throughout global markets.  This week’s policy and market developments only added to my anxiety, while confirming my view that risks are greater today than in 2008.  And it’s quite a contrast between the escalating global financial crisis and the rather sanguine consensus view for the U.S. economy and markets.  And I’ll be the first to admit that, with the Fed and global central banks still willingly accommodating Washington profligacy, the Government Finance Bubble-driven U.S. economy does appear, for now, relatively isolated from global crisis dynamics.  If I only had a dollar for every time I’ve heard “selling is overdone.” 

Much to the U.S. stock market’s relief, our policymakers retain the capacity to continue stimulating.  The Treasury will keep issuing, and the Fed will keep experimenting.  And wouldn’t it be ironic if this dynamic now works to bolster (the reversal of) flows into dollar assets, only intensifying the problematic squeeze on a vulnerable global leveraged speculating community.  It is not easy to envisage a scenario that would, at this point, reverse global risk aversion and de-leveraging.  But, then again, most participants here seem more fixated on areas of market technical support that could signal the rush of sideline cash into U.S. equities.  Not the mood one would expect at an important market bottom.