The Impending Global Liquidity Crisis

The Impending Global Liquidity Crisis

By Mike Whitney

Created Jun 5 2007 - 1:06pm

Stock markets across the world have been skyrocketing lately. In fact,

Forbes reported on Tuesday that: "all 22 of the developed-world markets

tracked by Morgan Stanley Capital International are in positive territory

year-to-date. .Emerging markets are looking just as flush. Of the 29

emerging market countries that MSCI tracks, only four--Argentina, Sri Lanka,

Russia and Venezuela--are in negative territory."

Yahooo! The markets are soaring and we've entered a new "globalized" Age of

Prosperity.

Sounds great doesn't it?

There's just one little problem; the Commerce Department announced yesterday

that that GDP in the first quarter was revised downward to a measly .6%.

Are you kidding me? Economic growth is underwater and yet the stock market

is still flying-high? What gives?

It's easy. The markets are just responding to the growth in the money supply

which is in double-digits just about everywhere around the world. When there

are more dollars chasing the same number of assets---stocks go up. It's just

that simple. What we're seeing isn't the result of investor confidence or

industrial output. Heck no! Stocks are rising because our $800 billion

current account deficit is recycling into the stock market. What we are

really seeing is the first signs of inflation---galloping inflation which

will soon spill over into the broader economy.

If we eliminate the "frothy" exuberance of America's trade deficit, then the

stock market would be sucking air through a tube right now. And, you can bet

that as soon as our foreign creditors wise-up and start raising interest

rates the Dow Jones will quickly become the Dow Doldrums and the economy

will nosedive into a 1929-type Depression.

Does that sound overly pessimistic?

At present, the "don't worry, be happy" crowd still thinks the good times

will roll on forever. They don't see that the US consumer is running out of

gas and won't be able to sustain his gluttonous spending spree much longer.

He's already stopped siphoning the equity out of his home ($600 billion last

year) and now he's has started to max-out his credit cards. (Credit card

debt increased 9.2% last month alone!) Now, US consumers are facing a

blizzard of bad economic news---rising prices at the gas pump, a 6.7%

increase in food prices, and a sickly dollar that keeps losing ground on the

currency exchange. (Kuwait is the latest country to announce they will be

dumping the dollar for a basket of currencies)

Currently, the US gobbles up two-thirds of the world's credit each year with

no conceivable way of paying it back. That won't last much longer. Central

banks around the world are increasingly hesitant to accept are our flaccid

greenbacks and the Chinese are the only ones who are still buying our

Treasuries. That's mainly because it gives them power over political

decision-making in Washington. The truth is the Chinese are planning to send

the US into receivership and take over as the world's bank. With

dollar-backed reserves of $1.3 trillion, their plan appears to be going

"full-steam ahead".

The bottom line is that we are buried beneath a $9 trillion mountain of debt

and there's no way to dig out. If there's a break in the liquidity-flows to

our stock market---stocks will crash, unemployment will soar, and we'll be

pulled into a deflationary downspin.

Economic soothsayer Elaine Supkis puts it like this:

"World wealth isn't growing, world DEBTS are growing and the place they are

growing the fastest is the US which is the sole terminus of world trade at

this point. The biggest growth industry today is selling debt instruments.

The entire existence of hedge funds, for example, is to funnel profits from

uneven trade with the US back into the US via dumping debts onto the backs

of any corporations that can run up more debts!"

(http://elainemeinelsupkis.typepad.com/money_matters/ [1])

Get it? It's all just recycled dollars---debt piled on debt piled on debt

piled on debt-- repeat ad infinitum. America's equities portfolio = 1%

assets, 99% pure helium.

This may explain why Treasury Secretary Hank Paulson has been frantically

beating the bushes for "foreign investment" to keep the stock market bubble

afloat. He has no interest in rebuilding America's industries or increasing

our competitiveness. No way. What he's looking for is a quick liquidity-fix

to keep the over-bloated stock market sputtering along while more wealth is

shifted to mega-rich corporations. In fact, no one in Washington is even

talking about renovating America's battered manufacturing sector. What do

they care if we turn into a nation of busboys and bed-pan cleaners? They're

just hanging around long enough to sell off whatever's left of our national

assets then it's "off to new markets in the Far East".

And, they are doing a great job, too! The United States is handing over 1.5%

of its national wealth every year to foreign investors while the American

public continues to snooze away.

We're having a giant garage sale and everything must go---roads, water,

mineral rights, natural gas etc. We're getting "picked clean" and no one

seems to care.

The boys in Washington and Wall Street don't work for you and me. They're

destroying the currency and selling everything that isn't bolted to the

floor. Then, they'll pack-off to Asia and Europe where they can begin the

scavenging-cycle all over again.

How bad will it get in the USA?

Consider these comments from Princeton University economist Alan Blinder,

who recently attended the business summit at Davos, Switzerland: (summarized

by Rep. Ron Paul)

"Word has it that there may be plans yet again to "outsource" highly skilled

American jobs to other countries. Approximately 40-million American jobs

could be at stake and yet US workers have not been told or consulted about

it, until now. Just to put the number of 40 million into perspective, that

is more than twice the amount of people that are employed in manufacturing.

(According to Alan Blinder) The 'choice' jobs of skilled Americans could be

lost and given to foreign countries within the next decade or two."

40 million high-paying US jobs will be outsourced to lower-wage countries

within the decade?!?

This is a blueprint for the economic destruction of America!

Maybe this will finally convince the dozy American public that the

corporatists who run Washington are a disloyal gaggle of traitorous swine.

"Globalization" is public relations swindle designed to steal jobs, plunder

the economy, and shift wealth to ruling elites.

The name of the game now is to keep the stock market flying-high for as long

as possible while the transfer of wealth continues unabated. That means the

hucksters on Wall Street will have to devise even better scams for expanding

debt---increasing margin limits, escalating derivatives trading, loosening

accounting standards, inflating the booming hedge fund industry, and---the

new darling of Wall Street---increasing the mega-mergers, the biggest

swindle of all.

These over-leveraged mergers create boatloads of new credit, but add nothing

to GDP. They reflect the basic disconnect between the stock market and the

real economy. May is on track to be the biggest month for global mergers

ever recorded. Marketwatch reports:

"For the year to date, companies have announced at least $2.2 trillion in

deals worldwide. Of these, US companies have engaged in $830 billion".

But look at the figures---Do they sound familiar?

Once again, the insightful Elaine Supkis makes this observation:

"Note that the 'deals' roughly equal our trade deficit. This isn't

accidental. They are one and the same! And I will never see this fact stated

so baldly in our media. No one dares say it in public."

Wow; she's right. Our trade deficit is being concealed by these gargantuan

mega-deals in the markets.

And there's something else we need consider about these mergers; they're not

producing growth in the economy. In fact, GDP keeps falling while stocks

keep going higher.

Why?

Because the mergers do not increase productivity; they're an indication of

"asset inflation". As Thorsten Polleit says, "the government-controlled

paper money systems have decoupled credit expansion from the from the

economy's productive capacities." The link between the stock market and GDP

has been broken by inflation.

Henry C K Liu explains it like this in his article "Liquidity Boom and

Looming Crisis" in the Asia Times:

"The five-year global growth boom and four-year secular bull market may

simple run out of steam, or become oversaturated by too many late-coming

imitators entering a very specialized and exotic market of high-risk,

high-leverage arbitrage. The liquidity boom has been delivering strong

growth through asset inflation (property, credit spreads, commodities, and

emerging-market stocks) WITHOUT ADDING COMMENSURATE SUBSTANTIVE EXPANSION OF

THE REAL ECONOMY. Unlike real physical assets, virtual financial mirages

that arise out of thin air can evaporate again into thin air without

warning. As inflation picks up, the liquidity boom and asset inflation will

draw to a close, leaving a hollowed economy devoid of substance. .A global

financial crisis is inevitable".

Liu's right. There's no "expansion in the real economy"-no increase in

output; no boost in GDP. It's all recycled credit which will "evaporate" at

the first sign of trouble.

Greenspan's low interest rates and currency deregulation have set us up for

"global liquidity crisis".

The basic problem is that credit growth has been outpacing GDP for some time

now. That means that debt has been building up faster than the rate of

growth in the economy. Eventually those imbalances will have to work

themselves out by way of a steep recession or perhaps another Great

Depression. There's a price to pay for low interest rates and, inevitably,

we will end up paying it.

Thorsten Polleit of the Mises Institute explains it like this in his article

"The Dark Side of the Credit Boom":

"Today's government-controlled paper-money systems have decoupled credit

expansion from the economies' productive capacities: "circulation credit"

feeds a "credit boom" that is doomed to end in severe economic, social and

political crisis. Austrian economists of the Mises Institute fear that the

collapse of the credit boom will lead to the destruction of the currency

through a deliberate policy of (hyper-)inflation, destroying the free-market

order."

"Destruction of the currency"; is that too strong?

No. In fact, the United Nations issued this gloomy statement just last week:

"The United States dollar is facing IMMINENT COLLAPSE in the face of an

unsustainable debt". America's current account deficit is now a matter of

international concern.

Polleit says that "the increase in debt-to-GDP ratios ..can actually be

observed in all major currency areas, not only in the United States". This

is true. Most of the industrial countries in the world have increased their

money supplies to dangerous levels to avoid strengthening against the

dollar. It is a prescription for disaster.

If the Fed chooses to lower interest rates now; (to ease the slumping

housing market) they will only aggravate "existing disequilibria". In fact

lowering of interest rates will only perpetuate "the fateful expansion of

circulation credit that must end in a collapse of the monetary system".

So, why would the Fed engage in such reckless behavior when it violates

fundamental laws of economics? According to Polleit, "the ongoing lowering

of interest rates and the accompanying rise in circulation credit and

debt-to-GDP ratios - the characteristic features of today's state-controlled

paper-money systems - is driven by a deep-seated anti-capitalist ideology."

This is also true. The serial "bubble-makers" at the Federal Reserve

secretly hate the free market system; that's why they are engaged in

plutocratic social engineering. They're using interest rates as a means for

shifting wealth from one class to another and creating a

centrally-controlled economy. There actions are essentially anti-free market

and "anti-capitalist" as Polleit says. We can see this trend even more

clearly in US foreign policy where the pretense of "free markets" has been

abandoned altogether and America is securing its resources with gunboats and

missiles rather than with a checkbook.

The current credit bubble is bigger than anything we've ever seen before.

For example "The total market volume of credit derivatives outstanding was

an estimated US $20.2 trillion in 2006, amounting to around 1.5 times annual

nominal US GDP..The market is expected to grow further to US$33.1 trillion

until 2008. In fact, the credit derivative market has become the biggest

market segment of the international banking business already. The problem,

however, is that the "credit derivative markets have emerged on the back of

a government-controlled credit and money supply system. And as the latter is

assumed to be crisis prone, credit derivative markets might be seen as a

multiplier of the crisis potential inherent in today's monetary system".

In other words, the whole $20 trillion derivative's market is at risk

because it is built on a shaky foundation of hyper-inflated currency. Once

again, if money supply exceeds GDP there'll eventually be a day of

reckoning. We expect that derivatives and hedge funds will get hammered once

the huge imbalances begin rumble through the markets.

So, what should we be looking for now?

Any break in the liquidity chain will send markets into downward spiral. The

likely catalyst for such a crash could be contagion from the housing bubble

creeping into the stock market, a sudden downturn in the Shanghai stock

market, (which is up nearly 300% in just 2 years) or an increase in Japan's

interest rates. Any one of these could potentially trigger a massive

sell-off on Wall Street.

Today's stock market needs a steady flow of cheap capital to stay aright.

That's why Paulson is desperately looking for new investors. But there's a

basic problem which the markets cannot escape. Inflation is surfacing in all

the countries where the stock markets are soaring because of their increases

in the money supply. When the central banks are finally forced to raise

interest rates; money will tighten up, it'll be harder for creditors to make

their payments or for banks to issue additional loans. As credit dries up

more people will default on their loans, demand will drop off for consumer

goods, prices will fall, and we will go into deep recession.

Once this process begins, speculators will be forced to abandon their

positions, liquidity will continue to evaporate and the market will go into

freefall.

Markets are self-correcting. Eventually the overleveraged debt-instruments,

which pushed the Dow to historic highs, will be expelled from the system,

but not without considerable pain for everyone involved.

Here's an excerpt from Paul Lamont's excellent article "Credit Collapse-May

10" which provides a compelling description of what happens a credit bubble

begins to unwind:

"On May 10, 1837, the banks of New York suspended gold and silver payments

for their notes. Fear of a bank run spread throughout the United States. The

young country fell into a 7 year depression. How could two decades of

prosperity end so suddenly? According to America: A Narrative History:

"monetary inflation had fueled an era of speculation in real estate, canals,

and railroad stocks." Cracks in the dam were visible much earlier, as the

stock market peaked in inflation-adjusted value three years prior. According

to Rolf Nef, debt levels in the private sector rose to 150% of GDP. In late

1836, the Bank of England concerned with inflation raised interest rates. As

rates rose in England, credit tightened, and U.S. asset prices began to

fall.

On May 10, investors panicked and scrambled for cash. "By the fall of 1837

one third of the work force was jobless, and those still fortunate to have

jobs saw their wages fall 30-50% within 2 years. At the same time, prices

for food and clothing soared."

We can expect a similar scenario in the very near future. When interest

rates are kept below the rate of inflation for an extended period of time;

enormous equity bubbles arise and threaten the entire system. The stock

market is undergoing a period of asset inflation. It has broken free from

the real economy and is headed for a crash. As Edward Chancellor, author of

"Devil Take the Hindmost: A History of Financial Speculation" says: "The

growth of credit has created an illusory prosperity while producing profound

imbalances" in the American economy..At some point the system will have to

adjust "to face a new reality. The process of adjustment is likely to be

painful. It may well end in either an extraordinary deflation...or an

extraordinary inflation."

Get ready. The credit boom is coming to an end.

_______

Mike Whitney

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"A little patience and we shall see the reign of witches pass over, their

spells dissolve, and the people recovering their true sight, restore their

government to its true principles. It is true that in the meantime we are

suffering deeply in spirit,

and incurring the horrors of a war and long oppressions of enormous public

debt. But if the game runs sometimes against us at home we must have

patience till luck turns, and then we shall have an opportunity of winning

back the principles we have lost, for this is a game where principles are at

stake."

-Thomas Jefferson