Liquidity
The world is awash in it. If you listen
closely you can hear the giant slurping sound of it rushing the shores at home
and continents away. The Fed is providing it and the ECB is providing it while
China doesn’t need it but it is sloshing around anyway. The world’s problems,
the financial mess in Europe, the global slowdown that is resplendent from sea
to not-so-shining sea is all being addressed with liquidity.
There is nothing of substance to deal with
the structural issues that is forthcoming from the American Congress and there will not be until after
the elections are completed. Then it will be right or left, more social
programs or a rather serious cut-back in governmental spending but for now; the
spacious sound of nothing.
In Europe it is even worse. The ECB may well be the only functioning
institution on the Continent and they promise and they bray and they talk of an
unlimited response that is firmly tied to the political part of the equation,
the European Union, making up its mind and deciding and approving and blessing
the enterprise but with the lack of this divination; the spacious sound of
nothing.
China, the growth engine of the world for
so many years and the bringer of manna and other bread leavened and unleavened,
faces the shutting down of its almost mystical ovens. The end was due to come, the
manufacture of cities and the cheap labor that built them would inevitably
halt. It was always when and how and by how much and I believe we are
witnessing the drawing of the curtain on a fabled age. Perhaps it was complicated
by the change of guard in China or perhaps it is as simple as nothing else left
to do; but steel and raw materials and an almost 20% decline in exports to
Europe also echo with the spacious sound of nothing.
A very macro view of the world leads me to
suggest that it is not one nation or another or even one continent or another
but the totality of them all together that is leading the globe into what may
be quite a serious slowdown. It is nice to think that the Central Banks
will solve all of the world problems just as it is nice to think that ever
increasing debt paying off old debt will right the ship before it falters in
the storm but the very acts of the Central Banks are part of the
problem if not the cause of the problem as the accompanying structural reforms
that should be taking place do not and so liquidity is provided but it is not
the solution for the problem and hence we find an answer but it is not the
correct response to the question.
Liquidity, it must be said, has casual
effects such as inflation, ratings downgrades, decreasing valuations and,
ultimately, a lesser value of goods and services as ever more capital is
necessary to purchase what is desired to be bought. This Central Bank liquidity also
produces ever higher and higher levels of debt and, aside from the interest
rate, the principal must be paid back by economies such as America that are
flat-lining or by economies in Europe that are in distinct decline. You may
applaud at the opening act but the second act may produce quite different
results. The $2.2 trillion balance sheet now at the Fed is going higher and
there is not even a cap or a limit in place. Perhaps it is the “it worked for
the ECB and maybe it will work for us” play but it is rife with danger. The ECB
pledge of ad infinitum funds is clearly bound by the conditions of the pledge
and those that must approve may never approve given the political infighting
between the haves and have-nots that is currently taking place in Europe.
Europe and America face fiscal cliffs of
their own making and what anyone can afford is generally the needle that breaks
both a camel’s and a union’s back. The firewall in Europe, heralded by the IMF and
every institution in Europe, has been revealed to be a wall of translucence as
Spain is settling into the frying pan and dredging itself with oil for the
fire. The firewall notion was ill conceived and poorly orchestrated and as
demonstrated by reality, a firewall does nothing for those that live inside it
except defend it from outside enemies when the enemies were always within.
Finally, liquidity does accomplish
one other major factor; it provides a tremendous amount of leverage.
Liquidity provided must be paid back and if the banks and nations that receive
it do not provide structural changes, reduce their deficits, decrease their
borrowings then, ultimately, the gods of chaos are unleashed. At this point it
is no longer the interest that is paid but the return of capital that must be
paid that becomes the number one issue. Liquidity has its price and I submit to
you today that the time is fast approaching when a world awash in liquidity
overwhelms the barriers and the dike is breached. The applause of today may
become the tears of tomorrow if the current course continues.
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