the takeover of the real economy?


“…Unlike the inflationary 70’s when money and credit went into the real economy, since the early 80’s and accelerating into the 90’s, this new century money has been increasingly channeled into financial assets, creating asset inflation. This was visible first in the equity bubble of the late 90’s. New money created by the Fed to fight off a collapsing stock market bubble, recession, and a major terrorist attack led to additional bubbles in the bond market, mortgage and housing market, and finally in excess consumption in this new century. Rising bond, stock and real estate prices are simply another form of inflation that has been created through excess credit and money added to our financial system. All of these related financial bubbles are what is keeping the U.S. economy going. The fact that P/E multiples on the major indexes are now at 96 on the NASDAQ, 23 on the S&P 500, and 21 on the Dow Industrials is another manifestation of inflation. Just as increased demand raises the price of goods, excess demand for securities raises their price. In this case, the price of bonds goes up lowering their yield and the price of stocks goes up leading to higher market multiples.

The U.S. economy has morphed from a manufacturing economy to a service economy and finally to a financial economy consisting of multiple asset bubbles. It has been one reason why job growth in this latest recovery has been so anemic. Money and credit are no longer going into the real economy in the form of new investment in plant and equipment which would create new jobs. Instead credit and money creation is fed into the financial markets leading to multiple asset bubbles in the stock and bond markets and real estate.”

…Its just amazing the stuff that’s been securitized in the US. Everything, literally every kind of loan has been securitized and transfered from the bank’s balance sheet and into pension funds, trusts, and just about every one else. What is their real worth today, not even the brightest guy around probably knows. Seems to me the main job of the Federal Reserve in the US today is to desperately keep trying to avoid systemic flaws in their deregulated markets from ripping the American economy asunder.

Two words describe this whole securitization thing – cunning genius. Since you can always sell off a debt that someone owes you, you don’t bother too much about the recovery. Since you don’t bother too much about the recovery, the debtor won’t bother to repay anyway. Beautiful. Nice game this.

Will happen here in sometime. If the RBI plays ball, all the housing loans that are being handed out indiscriminately are going to be securitized in a few years time, and will be traded around, with some smart alec analyst mouthing inane comments like “the P/A ratio is still low, I see a 2X spurt in the value of these securities within the next two quarters.”


Posted on February 22, 2004, in Uncategorized. Bookmark the permalink. 1 Comment.

  1. Very interesting… This is going to require some serious study into economics from my side.

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