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Source link: http://archive.mises.org/7169/twilight-of-the-gods/

Twilight of the Gods

September 18, 2007 by

Right up to the second half of July, not only were commodity markets strong, but world equities were still raging ahead in utter denial of the spreading cracks in the credit boom, with both the S&P and the emerging markets’ indices making new highs in that time. All this despite the fact that there were elevated sentiment readings: record-high margin longs on the NYSE; record-low mutual fund liquid asset percentage holdings; a major turn in the breadth of the market (that for the NASDAQ has, indeed, since hit new multi-year lows); and volatility indices were climbing with — rather than against — the rise in stocks.

It is now clear that the sense of invincibility displayed by so many players was singularly ill judged. Far from forming a “permanently high plateau,” the early summer seems to have marked nothing less than the nose-bleedingly vertiginous pinnacle of what has arguably been the most spectacular mass hysteria in the whole sorry history of financial market manias. FULL ARTICLE

{ 12 comments }

mark September 18, 2007 at 10:38 am

Just curious?

Someone remarked that the Fed created an incentive to refinance long term at lower fixed rates.

With all those lower rate fixed rates on the balance sheet of financial institutions, how does the Fed write off bad loans by inflation without creating additional bad loans?

It would seem to me that in order to keep those readjusted loans profitable that deflation would be more desirable then insolvency from the banks perspective.

Cyd Malone September 18, 2007 at 12:45 pm

Wow. A bit bombastic, but incredibly entertaining and insightful. One thing about the Austrians, though – you all tend to underestimate the power of paper money. It’s just as likely that this ride will continue as it is not to.

For a real collapse, you need the common slob to figure it out, too, and we’re not even close to that moment.

Charles Smyth September 18, 2007 at 3:35 pm

Good article. It was amazing to watch the financial analysts on the boob-tube acting like the Iraqi Information minister with regard to what was happening. The slobs will find out soon enough when they discover that they cannot convert their paper money into property because property ownership is subverted by way of Human Rights legislation as an alternative to property rights in the drive for equality in lieu of liberty.

Alex MacMillan September 18, 2007 at 5:48 pm

Can’t disagree with the sentiments expressed, though clearly the author was focusing as least as much on the poetry of his piece as he was on communication.

Mitche Leigh Hunt September 18, 2007 at 6:00 pm

Cyd Malone and Charles Smyth said it all. But for how long, oh Lord?

As a Libertarian who served a two-year stint as an English Comp I and II college instructor, I can tell you. It will be as long as educators are required to comply with federal governments’ teaching mandates whereby no college student’s self-esteem — really illiterate ignorance; see how harsh that sounds — is to be left behind by an instructor who is demanding that work be done as assigned and turned in on time. As subjective as the evaluation of each of 125 students levels of self-esteem can be, I found it impossible to determine the non-shatterable quotient of that half of my students who did not do their work as assigned. (See how dictatorial that sounds! A teacher demanding from students work to be performed to certain standards!)

This, combined with the nod of administration to grade students liberally, combined with its concern for star athlete’s grades was too much for me. Yet, I know well educated and perfectly nice people who remain in this system. They may not like what goes on but they do not question it, and because they do not leave they are rewarded every two weeks by heaven-sent checks, which somehow drift down to them from somewhere and paid through “offices that do that” at their universities! And, after so many years they receive retirement pay — also as a gift, confiscated from the paychecks of the workers in the social order who had to put up with the graduates of this ongoing educational process.

Working Class Guy September 18, 2007 at 6:13 pm

From Ellen Williamson’s 1965 book “Wall Street Made Easy” the following excerpt is taken from the chapter “1932: A Funny Thing Happened to the Stock Market”

“What were the reasons for this complete reversal of extra good times to super bad? There was exactly one reason that sent our national personal income from 81 billion in 1929 to 41 billion in 1932 …
The reason was *debt*.”

“Almost everyone in the country had borrowed money right and left to finance various things: to buy stocks on the margin, to buy houses and co-operative apartments (no down payment necessary in those days), furniture, farms, the corner lot at Main Street and Central Avenue (bound to be worth a fortune in a few month’s time) a company manufacturing widgets, etc.”

This lady lived through that period so her testimony should not be discounted. For those of you who are unconvinced by this historic anecdote, I suggest you read Gene Callahan’s “Economics for Real People” which is part of the core collection at mises.org

gene berman September 18, 2007 at 7:08 pm

Cyd:

You’re right about “hard money” advocates not quite appreciating quite how flexible the money-expansion volumes can become without utter collapse.

And, there’s always the possibility that a more “normal” monetary relationship might be restored through manipulation in the opposite direction (deflation, recessions, etc.). But don’t bet on it. We’re sailing completely uncharted waters here; there are nothing but inconvertible currencies in the world today: no safe (or safer) havens in foreign currencies or money-denominated securities.

The unknown “wild card” today is the speed with which a collapse, once initiated, can occur; that is primarily a function of communications and at no time in the past can an idea be transmitted so quickly to nearly everyone on the planet.

The plain fact is that the common slob ALWAYS figures it out–even if too late. You’d think the smarter would have figured that much out a long time ago.

Mark Humphrey September 19, 2007 at 6:16 pm

The greatest beneficiary of this last artificial boom appears to have been financial enterprise–from housing mortgages to junk bond-equity financing to “insurers” of financial performance.
In fact, a great deal has been written about the rapid and outsized growth in financial derivatives. I read somewhere that financial futures encompass roughly $350 trillion dollars of contract value; and a quote from the Financial Times rated OTC derivatives at roughly $400 trillion. This adds to $750 trillion in derivatives, based on two mutually excusive kinds of derivative.

Of course, a good share of investment in derivatives is rational; futures markets in corn and hogs didn’t evolve as a distortion produced by monetary inflating. But a large share of the expansion in derivatives is probably malinvested capital. Therefore, it seems probable that a meltdown of interconnected derivatives and counterparties–Greenspan’s “avalanche of cascading cross-defaults” is a threat.

Does anyone have a grasp of the actual scale of the derivatives empire today? I wonder about this.

If the derivatives empire is as vast as it seems to be, and because these financial contracts extend across international borders, then it seems possible that trouble in the US or British financial systems could develope unexpectedly from other areas of the world. If so, doesn’t this possibility make it more difficult for central bankers to correctly guess at how much new money to throw at the problem? In other words, doesn’t this international counter-party exposure create greater risk of central bank miscalculation in holding their system together?

Finally, Harry Browne wrote years ago about the risk that skyrocketing demand to hold money in an emerging cyclical downturn could get out of hand, and precipitate a systemic deflationary meltdown. Browne’s reasoning always struck me as sound (but disconcerting, because we all want certainty.) Doesn’t the gigantic growth in the derivatives empire–all held together by great leverage and opaque counterparties–amplify the risk of unanticipated and uncontrolled skyrocketing demand for money that topples dominoes?

I’m not predicting a meltdown, only suggesting that this is a genuine, and widely unappreciated, risk during the down side of every business cycle.

Matt September 19, 2007 at 9:27 pm

Götterdämmerung? How long can this theft continue?
Longer than we think. Banks and Politicians are a devious and crafty crew and if all else fails there is always Marshal Law and in the meantime we are all dead. The New Age after that will start the process all over again. The Ethics of Self-Sacrifice will make that a certainty,it has been around for at least two millennium.
The masses shall be sheared over and over again.
There is no hope we are all doomed.

gene berman September 20, 2007 at 5:43 am

Matt:

It’s “martial” law–that is to say, law administered during civil disturbance or breakdown according to military (martial) regulations.

Matt September 20, 2007 at 12:12 pm

Gene,
You are right! We may not be doomed after all.
thanks

Me September 20, 2007 at 9:11 pm

I can no longer take Corrigan’s self-flattering poetic bs. If I wanted poetry I’d go to a poetry site. I wish he would just say what he wants to say in normal words. The article would then take 2 minutes to read. It’s not worth my time decipher his stupid Shakespeare.

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