Friday, July 20, 2007

Vanishing vigilantes

Why the markets may be undermining central banks

Thanks to the financial markets, central banks now struggle to police the economy. But this may imply that the bust, when it comes, is as hard to control as the boom that preceded it.

Posted by sold 2 rent 1 @ 10:36 AM (555 views)
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7 thoughts on “Vanishing vigilantes

  • sold 2 rent 1 says:

    “According to the Bank for International Settlements, the face value of outstanding derivative positions on over-the-counter markets is some $400 trillion. These instruments give investors a claim on a large chunk of assets, with only a small downpayment. When asset prices rise, speculators can then borrow against their increased wealth, helping to drive prices even higher.”

    Is this why BIS were warning of a depression a couple of weeks ago.
    The 70+ year debt cycle is reaching its peak.

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  • sold 2 rent 1 says:

    “As central banks lose authority, might credit-rating agencies play the watchdog role? By acting swiftly to downgrade debt, they would constrain companies (and countries) from borrowing too much. But the agencies tend to lean with the wind, rather than against it. They upgrade debt when the economy is booming and downgrade it when recession strikes.”

    “If the central banks do eventually slam on the brakes, therefore, the rating agencies will only exacerbate the downturn. As asset ratings fall, investors will be forced to sell their holdings and credit will be withdrawn from the system.”

    All eyes on Japan for an August rate rise to trigger the carnage.
    Shorters – to the starting blocks.

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  • dohousescrashinthewoods says:

    Interesting stuff S2R1 – it’ll be good to see how this plays out.

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  • japanese uncle says:

    Yes, many believe that the BoE is flexing its muscle looking to raising the IR by possibly 0.5 pp after the election of the Upper House in August. Spanpede from the yen carrytrade seems inevitable, bringind down USD and Sterling to hell.

    Anyway expecting central banks owned by the big financial boys, is quite like expecting thieves to do the nightwatch.

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  • japanese uncle says:

    Sorry correction; it should read as follows;

    Anyway expecting central banks owned by the big financial boys to do the policing of monetary system, is quite like expecting burglars to do the nightwatch.

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  • sold 2 rent 1 says:

    Look at this US debt graph spanning 200 years.
    http://www.thelongwaveanalyst.ca/downloads/NonPublicDeptPerGDP.doc

    There were 2 previous debt spikes in 1835 and 1933
    You might have thought the game was up after 2000 with the stocks crash because the debt level was high enough.
    With hindsight the steepness of the graph wasn’t quite at the mania level that is is now (near vertical).

    We are now in the final exhaustion phase where the debt level will go to 450% between now and 2011.
    The latter years of 2009, 2010 and 2011 the spike’s main “energy” will be from collapsing GDP.

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  • Unregulated or poorly regulated markets are like unregulated children. Have you ever read “Lord of the Flies” by William Golding. It’s about a group of schoolboys stranded on a desert island who ‘go native’ and turn to murder. It’s a very good allegory for the current state of global financial markets.

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