Booms, Manias, Windfalls and Die-Offs (June 5, 2009)
Perhaps financial booms and busts share characteristics with windfalls and the resulting die-offs.
Longtime correspondent Michael Goodfellow mades these astute comments about booms and busts from a perspective I would characterize as sociobiological:
I was thinking about financial booms and busts the other day. I think we both believe that crashes are just the price of bubbles. Which is why I'm suspicious of any statement that the 1929 stock market crash "caused" the depression. The crash was just the end of the bubble, and the depression was the prolonged unwinding of excess debt and poor investments. Prolonged by government attempts to reflate the bubble, among other things.Thank you, Michael. Excellent points. Now that all the happy little consumer-rabbits have eaten all the once-lush green grass of consumer/home-equity-line-of-credit down to bare earth, we might ponder what happens next in Nature when the grass fails to grow back.
Most of the rabbits die off, leaving only the hardiest, most adaptable of their numbers.
If we extend this cruel aftermath of "windfall exploitation" from green grass and rabbits to HELOCs (home equity lines of credit) and other forms of once-abundant credit now shriveled or consumed, we get to a consumer-borrowing/spending "die-off" in which spending that was based on housing/credit bubble "windfalls" vanishes.
The consequences are rather obvious:
1. Businesses which depended on this spending die off.
2. Tax revenues based on this spending die off.
3. Lenders dependent on this borrowing die off.
4. Households which depended on credit to remain solvent die off.
5. Asset classes like residential housing which depended on abundant "windfalls" of credit to fuel valuation increases also stage the equivalent of a die-off.
6. Exporters who depended on this credit expansion to sell their goods in the U.S. will also suffer a die-off.
Hmm, now we're talking about a significant chunk of the global economy, aren't we?
Extending the "windfall exploitation/green grass" analogy a bit further, we can anticipate that the consumers who require little to no new green grass (credit) will be the survivors. Everyone dependent on abundant cheap credit for their survival, from consumers to governments to enterprises to entire nations, will suffer financial starvation.
That's the inevitable consequence of "windfall exploitation."
"Quantitative easing" is supposed to sow millions of new little green shoots, but the dirt (the collateral needed to justify and support new credit) has dried out. All QE does is burden the government with collossal new borrowing; all the seeds sprouting will wither because the consumer rabbits have eaten through or lost their collateral and so there is simply nothing left on which to "grow" more credit.
Once all the grass and seeds have been consumed, starvation is the result. There is no collateral left in the U.S. except the "full faith and trust of the U.S. Treasury" and that is now (rightly) drawing mocking guffaws from university students in China.
Some see "green shoots" but the ground (collateral) is rock-hard; expect not
lush new fields but numerous expired rabbits.
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