Where Did All The Money Go?

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Friends and colleagues often ask me “Where did all the money go? someone somewhere must have it!”. I too used to wonder – until I read this dinner speech by Benoît Cœuré, Member of the Executive Board of the ECB, which was delivered to the BIS-ECB Workshop on global liquidity a few days ago. This is well worth reading, as it is written clearly, it is a short piece (recall, it’s a dinner speech!) and it explains to a large part what happened to the global economy over the last 15 years.

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Why I Oppose Financial Stability

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Democracies are supposed to strive to deliver outcomes that advance the greater good of society.

In a number of posts here on baobab2050.org I have been making the case that reining in public sector deficits (the fiscal austerity) and curing the persistent imbalances in the external accounts of Eurozone countries (Northern Euro / Southern Euro) are necessary but not sufficient prerequisites for the return of growth.

The third essential prerequisite is that the great losses caused by the past debt-financed excesses will have to be written off and banking systems restructured or forcibly recapitalized as necessary.

This is also the central argument of blogger London Banker in his latest post Why I Oppose Financial Stability, which I recommend to readers. Here is the gist of his post on the subject:

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Sir Mervyn King: Most Serious Financial Crisis At Least Since The 1930s, If Not Ever

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Sir Mervyn King was speaking after the decision by the Bank’s Monetary Policy Committee to put £75billion of newly created money into the economy in a desperate effort to stave off a new credit crisis and a UK recession. Sir Mervyn said the Bank had been driven by growing signs of a global economic disaster.

“This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing.”

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Fate of the Euro: More Indecent Proposals

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Hans Olaf-Henkel, the former head of the Federation of German Industries (BDI) who has joined about 50 other business leaders in a legal challenge at Germany’s Constitutional Court against the Greece rescue package, wrote an opinion piece for the FT where he calls for a European hard core – Austria, Finland, Germany and the Netherlands – to break away from the Euro.

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Australian Housing Bubble Meets Its Maker

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Eight months ago, this blog warned about Australia’s housing bubble in Australian, Canadian and Chinese Property Bubbles:

Everyone caught up in the frenzy of a bubble is so sure that “this time it’s different”. If their own bubble is different, why does it have everything in common with every other bubble that has ever burst? Such as, in Australia’s case, banks offering housing loans at 92%, 97% or 105% loan to value ratios, which unsurprisingly results in “strong” demand for loans? Or the fact that Australia’s housing stock has been valued at $4 trillion, which is a quarter of the US housing stock valuation pre-crash, even though Australia is twelve times smaller in both population and GDP?

All bubbles have in common three things: first, a speculative detachment from economic reality; second, a pool of greater fools that keeps growing in size with the addition of newcomers; and third, an inevitable self-fulfilling collapse phase once the newcomers start drying up and those inside the bubble start trying to sell to each other in exponentially increasing numbers.

My last September’s post also predicted this third collapse phase without attempting to time it (an almost impossible feat):

The more housing prices are disconnected from reality (price to income, price to rent), the bigger the household debt levels and servicing burden as a fraction of income, and the more brittle household budgets and with them, consumer sentiment, will become. Eventually, the pool of greater fools always runs out. It will not be at all surprising if or when psychological contagion from Chinese to Australian to Canadian home owners and banks causes their property bubbles to burst more or less in domino fashion.

Australia appears to have reached this third and most critical stage where newcomers are drying up. Good luck to Australia’s Banking system, it looks they are going to need it.

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The Herengracht Canal Perspective On Prime Real Estate

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During a recent visit to Amsterdam, I was impressed by a row of imposing houses lining the banks of a grand canal. It turned out that I was looking at the illustrious Herengracht Canal:

Herengracht Canal, Amsterdam (1671-1672)

According to Wikipedia, Herengracht is the first of the three main residential canals envisaged in the original Amsterdam city plan conceived in the early 17th century:

Herengracht (Patricians’ Canal or Lord’s Canal) is the first of the three major canals in the city centre of Amsterdam. The canal is named after the heren regeerders who governed the city in the 16th and 17th century. The most fashionable part is called the Golden Bend, with many double wide mansions, inner gardens and coach houses on Keizersgracht.

So, what can bankers, speculators and real estate tycoons learn from a 350-year old prime residential canal-side neighbourhood in the heart of the financial and trading capital of a centuries-old economic powerhouse nation?

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Book Preview: Endgame – The End of the Debt Supercycle, And How It Changes Everything

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John Mauldin, the often contrarian (and often right!) analyst known to millions of readers for his free weekly “Thoughts from the Frontline” e-letters has written a book titled Endgame: The End of The Debt Supercycle and How it Changes Everything which is available now on sale / pre-order from Amazon.

Here is what Rob, a reader of the book’s Kindle edition had to say:

We have a developed world that’s addicted to debt-financed consumption. That pattern works … until it doesn’t. When it doesn’t we get Greece, Iceland, Ireland and all-too-soon others, some far larger…

It’s the height of lunacy to expect the economy to keep merrily growing, with a debt overhang and demographic headwinds

The book also received favourable reviews from several well known figures, including Mohamed el-Erian of PIMCO and contrarian investor Jim Rogers. As a longtime reader of John’s “Thoughts from the Frontline” I have a pretty good idea what to expect, so I have ordered it and I plan to post a review here in the near future.

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