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     Apr 28, '14


CREDIT BUBBLE BULLETIN
Trouble brewing
Commentary and weekly watch by Doug Noland

Over the years, money and the "moneyness" of credit have remained focal points of my macro credit analytical framework. From my perspective, money is fundamentally defined by perceptions. "Money" is a financial claim perceived as a safe and a liquid store of nominal value.

Understandably, this definition is troubling to monetary purists.



Yet in the spirit of Ludwig von Mises and his notion of broad money/"fiduciary media", my view of contemporary "money" is focused on an array of financial claims and their functionality.

Importantly, money has throughout history proven itself dangerous. And the insatiable demand it enjoys is at the root its vulnerability. Folks simply just canít get enough of it, which ensures it will eventually suffer from over-issuance. On occasion it will be created in catastrophic excess and be completely discredited.

Traditionally, monetary inflations occurred through the over-issuance of currency, bank lending/deposits and government debt. Leading up to the tech bubble, the over-expansion of US government-sponsored enterprise liabilities provided a key unappreciated source of inflationary "money".

Traditionally, to safeguard the attributes of safety and store of value, money was backed by gold or real economic wealth (ie capital investment). Uniquely, contemporary "money" is to a large extent backed by nothing. This explains why I generally use "finance" rather than "capital" - in the context of financial flows as opposed to capital flows.

Contemporary finance - "money" and credit Ė amounts to electronic debit and credit entries in this massive global general ledger. Traditional "capital" has been relegated to a thing of the past. Today, too much of "finance" retains its value based solely on the perception of central bank and government backing. This is a recipe for serious trouble. More ...

Doug Noland is a market strategist for the Prudent Bear Funds.

(Republished with permission from PrudentBear.com. Copyright 2005-2014 David W Tice & Associates. All rights reserved.)





 

 

 
 



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