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For over four years I've made this column a madatory read every Monday morning. It cuts through all the bullhockey and lays out the stark truth in cold, hard facts; it also reinforces the iTulip thesis as to the inevitable ruin of our once great economy.
Monday, May 18, 2009
The Destructive Implications of the Bailout - Understanding Equilibrium
John P. Hussman, Ph.D.
One of the features that has enabled the bureaucratic abuse of the public during the past year has been the frantic, if temporary, flight-to-safety by investors. The Treasury has issued an enormous volume of debt into the frightened hands of investors seeking default-free securities. This has allowed the Treasury to finance a massive and largely needless transfer of wealth to bank bondholders so easily over the short-term that the longer-term cost has been almost completely obscured. But by transferring wealth from those who did not finance reckless loans to those who did – providing monetary compensation without economic production – the bureaucrats at the Treasury and Federal Reserve have crowded out more than a trillion dollars of gross investment that would have otherwise have been made by responsible people in the coming years, shifted assets to the control of those who have proven themselves to be irresponsible destroyers of capital, and have planted the seeds of inflation that will cut short any emerging recovery.
In order to understand the impact of these interventions, you have to think in terms of equilibrium - recognizing that all securities that are issued must also be held by someone - and then follow the money. Initially, suppose you have a banking system with $12 trillion in assets, financed with about $7 trillion in deposits and other liabilities to customers, about $4 trillion in debt to the bondholders of the banks, and about $1 trillion in shareholder equity as a buffer against insolvency.
Now, suppose that the value of the assets deteriorates by $1 trillion, effectively wiping out the shareholder equity and putting much of the banking system in an insolvent position. Suppose also that government bureaucrats refuse to properly take receivership of insolvent banks, to impose haircuts on the debt to bondholders or to require them to swap debt for equity. Instead, suppose these bureaucrats prefer to defend the private bondholders who funded the bad loans from experiencing any loss whatsoever, and are willing to use public funds to do it.
In order to do this, the Treasury issues $1 trillion in government debt, with a preference toward shorter “money market” maturities (since it doesn't want to drive up long-term interest rates at the same time the Fed hopes to invigorate the housing market). It may seem like this means that there is $1 trillion of new “liquidity” in the economy, but you have to think carefully. ...
http://www.hussmanfunds.com/wmc/wmc090518.htm
Monday, May 18, 2009
The Destructive Implications of the Bailout - Understanding Equilibrium
John P. Hussman, Ph.D.
One of the features that has enabled the bureaucratic abuse of the public during the past year has been the frantic, if temporary, flight-to-safety by investors. The Treasury has issued an enormous volume of debt into the frightened hands of investors seeking default-free securities. This has allowed the Treasury to finance a massive and largely needless transfer of wealth to bank bondholders so easily over the short-term that the longer-term cost has been almost completely obscured. But by transferring wealth from those who did not finance reckless loans to those who did – providing monetary compensation without economic production – the bureaucrats at the Treasury and Federal Reserve have crowded out more than a trillion dollars of gross investment that would have otherwise have been made by responsible people in the coming years, shifted assets to the control of those who have proven themselves to be irresponsible destroyers of capital, and have planted the seeds of inflation that will cut short any emerging recovery.
In order to understand the impact of these interventions, you have to think in terms of equilibrium - recognizing that all securities that are issued must also be held by someone - and then follow the money. Initially, suppose you have a banking system with $12 trillion in assets, financed with about $7 trillion in deposits and other liabilities to customers, about $4 trillion in debt to the bondholders of the banks, and about $1 trillion in shareholder equity as a buffer against insolvency.
Now, suppose that the value of the assets deteriorates by $1 trillion, effectively wiping out the shareholder equity and putting much of the banking system in an insolvent position. Suppose also that government bureaucrats refuse to properly take receivership of insolvent banks, to impose haircuts on the debt to bondholders or to require them to swap debt for equity. Instead, suppose these bureaucrats prefer to defend the private bondholders who funded the bad loans from experiencing any loss whatsoever, and are willing to use public funds to do it.
In order to do this, the Treasury issues $1 trillion in government debt, with a preference toward shorter “money market” maturities (since it doesn't want to drive up long-term interest rates at the same time the Fed hopes to invigorate the housing market). It may seem like this means that there is $1 trillion of new “liquidity” in the economy, but you have to think carefully. ...
http://www.hussmanfunds.com/wmc/wmc090518.htm
), but lets see what happens when we get 10% y-o-y inflation for a decade with much smaller y-o-y increases in wages. Middle america is just scraping by as it is. Decrease purchasing power by say 30% and how many families are not going to be able to make it? When their simple dreams of retirement, college for their kids, vacations, electronic doo-dads, nice car will no longer be reachable. All the little things that give them hope are squashed how angry are they going to be. This has not sunk in yet. Give it a few more years.
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