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2 For the markets, global
chill By Julian Delasantellis
The 1970s British Broadcasting Corp comedy
show Monty Python's Flying Circus once did
a skit about a new way that council flats - public
housing - were being built near the town of
Peterborough in England. Instead of building these
25-story towers through the conventional
employment of construction workers, concrete and
steel, this council was employing the services of
El Mystico (Terry Jones), a magician in cape and top
hat,
along with his curvaceous assistant, in her
sequined leotard, the Amazing Janet.
All
it took for El Mystico and the Amazing Janet to
put up a block of flats was a wave of his magic
wand. According to a council spokesman, Ken
Verybigliar, "Well, there is a considerable
financial advantage in using the services of El
Mystico. A block, like Mystico Point here, would
normally cost in the region of 1.5 million pounds
[US$3 million]. This was put up for 5 pounds, and
30 bob [shillings] for Janet."
These flats
constructed with the black arts were just as
reliable and sturdy as those conventionally
constructed - with one exception. According to
Clement Onan, identified as an architect to the
council, "They are as strong, solid and as safe as
any other building method in this country -
provided, of course, people believe in them."
If tenants did start to doubt the actual
existence of the buildings they were then living
in, the building would fall down, until their
faiths were restored, then the buildings would
magically reassemble themselves.
Of
course, unlike Monty Python's Britain, this sort
of thing could not happen these days - because
since the Margaret Thatcher/Ronald Reagan
revolution of the late 1970s and early 1980s,
neither the British nor the US government has done
much investment in public housing, even with the
dramatic cost advantages available with
construction by El Mystico.
If you want a
contemporaneous example of something held up only
by the faith of its participants, take a look at
the corporate debt markets of the past few years.
And if you want an example of what happens when
that faith evaporates, look at the world's stock
markets last week.
It has been the worst
two weeks for the world's equities since the
corporate-scandal-ridden summer of 2002 (I wrote
about the scandals of 2002 in my Asia Times Online
article of May 10, The decline of US equity
markets). In the US, the S&P 500
stock index has declined 6%, Britain's FTSE 100 is
down more than 8%, Japan's Nikkei 225 almost 6%,
Germany's XETRA-DAX almost 9%.
The
financial media and, as the losses accelerated
late last week, the general media (with the
exception of Fox News, which is pinning the blame
squarely on the proposal by US Democratic
candidate for president John Edwards to repeal the
2001 cuts in capital-gains tax for those with
incomes over US$250,000), have taken to blaming
the selloffs on what they call "the subprimes".
This refers to the part of the market for
US housing finance that specializes in lending to
those with poor credit histories, what the
industry calls "subprime borrowers". The media use
this phrase so often it almost seems it has become
a sort of tantric mantra for them; without even
knowing what it means, they say it and it makes
them feel better - probably because it presents
the illusion that they know what they're talking
about.
Four times this year [1] I've
written about the subprimes; those who want
background on how the subprime crisis developed
can read these articles. However, it is is no
longer accurate to describe the current world
equity-market selloff on the suprimes as if it
were the case that if only that problem would go
away everything would be fine. That's like a man
going to the doctor with gangrene from his toe to
his hip expecting all will be fine if only the
splinter he got in his toe six months ago and
ignored were excised. It's too late for that; as
for the markets, this problem has gone well beyond
what started out in the subprime housing-finance
market.
Much more so than any politician
or ideology, savvy commentators on what's going on
in the world economy point out that most of this
decade's remarkable run of global prosperity can
be traced to what has been called the tremendous
"wave of liquidity" that has crashed up against
the shores of most of the world's economies
lately. (The wave has not yet managed to wash up
against most of sub-Saharan Africa; hence that
region's continuing grinding poverty.)
Liquidity is, of course, econospeak for
just plain old money; "wave of liquidity", in its
simplest terms, just means that there's a whole
lot of money sloshing around the world. I tell my
students that in a free economy it's as if the
quantity of money and prices of assets are on
either side of an apothecary scale; if the
quantity of money goes up that platform gets
weighed down, driving the value of the physical
assets on the other side up. Hence the tremendous
run in global equity markets over the past few
years.
There are ever-changing attempts to
explain how the wave of liquidity was created.
Some credit or, depending on your perspective,
blame the US Federal Reserve; in response to the
bursting of the dot-com boom in 2000-01 it reduced
its key short-term lending rate from 6.5% in 2001
to 1% in 2003-04, before raising them back to the
current 5.25%.
With rates this low it
meant that banks were practically giving loans
away; as that money circulated through the
economy, from lender to borrower, from producer to
consumer, over and over again, that began the wave
of money. Low Japanese interest rates also get
part of the credit/blame. Interest rates in Japan
have been on the decline since the pricking of
Japan's Nikkei stock index bubble in the late
1980s.
Japanese interest rates have been
1% or lower since 1995; from 2001 until recently,
the Bank of Japan held its official discount rate
at around 0.1%, making it virtually cost-free for
international currency speculators to borrow funds
in yen, convert them into other, higher-yielding
currencies (this is what's referred to as the
"carry trade"), thus increasing these countries'
money supply, their "wave of liquidity".
But both the Bank of Japan's and the US
Federal Reserve's interest-rate policies are
basically on hold; they don't explain what
happened in world equities in the past couple of
weeks.
In William Shakespeare's
Hamlet, Lord Polonius advised that one
should "neither a borrower nor a lender be". It
follows, then, that Polonius, a chief adviser in
the court of King Claudius, might be particularly
piqued at a phenomenon of today's finance
capitalism where many banks, brokerages and other
financial institutions are simultaneously both
lenders and borrowers
American
economist and historian Edward Luttwak calls the
new globalized economy turbo-capitalism; applied
to finance, it means an essential blurring between
the distinction between borrower and lender. Where
once the distinction was very clear (the lender
lends, the borrower pays back with interest),
these days a borrower might turn around and lend
the money he just borrowed from the lender to
another borrower, who just might be doing the same
with another borrower further down the line.
Every successive round of borrowing and
lending acts to increase the global money supply;
the tops of the "wave of liquidity" grow ever
higher. There are a few limitations on this
process, but not many. Under an agreement brokered
under the auspices of the transnational banking
regulatory agency the Bank for International
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