• I'm working mostly in renewable energy. As these are investment heavy projects, once they are built, they generate money whatever else happens - so there will be a financial incentive (in addition ot the obvious ones linked to global warming and energy independence) to keep them operating, and they will still generate funds which can be used to pay debt (their main cost to bear), however slowly;

• in addition, the likelihood of energy prices going down, even in the case of a pretty strong recession, is pretty weak. Electricity will still be needed, and its price will remain set by "low cost" producers like nuclear and carbon, the same as today;

• my sector (project finance) is also one where there hasn't been a lot of repackaging of debt into fancy financial instruments. So if anything goes wrong, I'll be the one in charge of dealing with the outcome - together wil a small number or similarly-minded and experienced bankers. I already did that in 1998 with the Russian financial crisis (and nursed my deals then to full repayment) and expect that it can be done. It is actually one of the strengths of the financial techniques we use that the projects are more resilient in times of crises - it's their main selling point, and it makes us a kind of backwater in highrolling times (because it's an expensive strength), but some clients still value that - or simply don't have the choice.

Debt creates the credit bubble, and hgh-profile dafaults pop it:

And thus the only way this ends is when some deals actually hit the rocks and bring about some real pain for the financial markets - at which point, those bankers aware of the context will finally have an excuse to pull out, thus triggering a stampede out, and generating more 'credit events' as more companies suddenly become unable to refinance.

Clearly, the industry of investment banking has, along side private equity and hedge funds, been under much scrutiny from several angles in the past years. This is not least because of the monumental sums of money which pour through the likes of Morgan Stanley and Goldman Sachs every year but also because of the ever more detailed instruments deployed to leverage, hedge and split risk. On the one hand we could see this as the epiphany of modern day's efficient and enduring capitalism or on the other hand as hollow wizadry which is only going to make the crash even greater when it eventually comes to drag investors into the abyss.

I tend to agree with you on this although of course the concept of 'hedging risk' through options, derivatives etc should not be frowned upon as such.

The issue I think is leverage and what happens if investors turn into a scary herd who wants to pull out all at once. I mean, the money is just not there :).

On the other hand hedge fund activity is specifically targeted at risks which other people don't want so the market forces clearly work too.

I am as I suggest in my post undecided. On a final note as Laurent also remarks ... the survey in the recent edition of the Economist is much worthwhile so off you go to the kiosk :).

What credit derivatives do - as guarantees by any other name - is to allow banks to outsource this primary function to investors.

In my view the logical way for Banks to operate (and indeed a logical extension of what they are doing already) would be for them to act purely as service providers putting no capital at risk, but managing bilateral credit creation between sellers and buyers within the context of a mutual guarantee.

This "Guarantee Society" model does not require "Interest" per se, but does require a payment to cover the manager's costs and a provision into a default fund.

The participation of local and national government in such Guarantee Societies would be analogous to the way that "legal tender" gives rise to "fiat" currencies.

But note that this would only solve the problem of allowing "value" = "money's worth" to circulate in a non-inflationary way.

Credit is not in fact "value" but is a means for value circulation (a claim over value) which our society has allowed to be "monetised" and mistaken for value.

The vast bulk of value is not in fact circulating (and the corollary is that most existing money cannot be inflationary since it is not in circulation) but is "static" - ie "tied up" in capital assets, principally residential property.

I believe that the "use value" of some assets, and the production of valuable commodities by others - particularly land rental values (ie "Land Rental Units")- could in fact form the basis of domestic currencies.

This was essentially the concept put forward by John Law 300 years ago, and I plan to write a concept paper outlining how that proposal may be updated to work in the here and now without any requirement for legislative changes which would never be made.

For a global medium of exchange, energy units appear to me the logical candidate, giving rise to a new "global reserve currency".

And of course all exchange would take place on the "International Clearing Union" suggested by Keynes.

Before any of this could possibly come to pass, of course, the current system has to fall over.

Which, as Jerome so coherently explains, is a matter of "when" not "if".

http://www.rgemonitor.com/blog/setser/195387/

Brad,

The Chinese economy is the recipient of an extremely loose monetary regime under the Bernanke Federal Reserve. While statistics to the general public by the Fed have been discontinued, broad M-3 money supply growth is estimated to be exploding at an annualized rate of 12 percent. Until I stop receiving an average of 3 credit card offers at zero percent interest in the mail each and every day, it is very hard to otherwise argue that money isn't "cheap". The US Economist community to date, has refused to acknowledge that the Federal Reserve bears primary responsibility for the numerous asset bubbles in the United States which has massively misallocated capital in the US Economy. Instead we are told an almost laughable narrative that the Chinese PBoC has somehow forced Americans to overconsume on gas-guzzler SUVs' and million dollar McMansions from coast to coast. The Chinese PBoC has been trying with some success to mop up excess US dollar liquidity without any cooperation from irresponsible US monetary authorities. The Federal Reserve writes Economist Stephen Roach is a "serial asset bubble machine". Simply stated, the loss of US global competitiveness from massive capital misallocation is certainly not the fault of the Chinese. Why should Chinese exports to the rest of the world be penalized with a higher yuan exchange rate for gross economic mismanagement decisions by the Federal Reserve.  

Written by Dave Chiang on 2007-05-20 09:59:22

1. The markets are divided into two sectors. The part with the asset inflation (I'm thinking of art works and stock prices as well as real estate) is one sector the one of bread and milk is the other. It's like the movie "The Million Pound Note" where the hero gets a single bank note and can't spend it because no one can give him change, but they are all willing to sell him things on credit. Only another millionaire could operate in his sector. So what the wealthy sell to each other and the price of it is disassociated from the rest of us. Whether these assets go up or down in price will have little effect on mere mortals.

2. The issue of ill advised lending is a well-known syndrome. No matter how out of control it is at present it is nothing like the poor quality loans that have been made in the past to third world countries like Mexico or Argentina. When the loans failed those who stood to lose the most (the big international banks) applied pressure to the appropriate governments to make sure they did not. In general this worked out well (for the banks). I expect the same thing will happen when this bubble breaks. Just as in the US savings and loan scandal there will be losers but it won't be the banks. In that case it was the tax payers.

3. As to why people don't get off the merry-go-round the answer is simple. We the people demand unrealistically high returns and this forces financial institutions to enter into risky or ill-advised transactions in order to satisfy Wall Street (in other words us). The laws about fiduciary responsibility and the prudent investor have gone by the wayside just like the consumer protection laws and the anti-trust laws. Any mutual fund, for example, which has a bad return for any period of time is likely to see many of its share holders withdrawing their funds and shifting them elsewhere.

So, yes, Jerome is right. It's a bubble, we know it's a bubble, but we are unable to stop playing the game since there aren't any others around.

Policies not Politics
---- Daily Landscape

As long as the Central Banks can 'make it up' as they go along we will experience inflation¹.  Inflation eats away at the savings of the producing class, forces business to increase profits at the rate of inflation merely to break even, and privileges the debtor over the debtholder.  

When a Central Bank greatly eases monetary policy, i.e., injects a whole bunch of money into the economy, as the Federal Reserve System has been doing since 1995'ish the result is what Jerome diaried and various other ETers have remarked in their turn.

Money is, among other things, a commodity.  And like any other commodity as the supply grows the price must move to reflect that growth.  Money is also a means of exchange². And as such the increase in money without a concurrent increase in goods/services produced requires those goods/services to be bid for with ever greater amounts of money.  

¹  My point is narrow here.  Yes, inflation is not merely the increase in money supply.

²  And where else but EuroTribune can one read breath-taking breakthrough analysis like this!  ;-)

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