(This is Part 6 of a continuing series. Go back to Part 5.)
The expansion of human affairs which has occured since the end of the Dark Ages around 950 AD has occurred against a backdrop of generally rising prices. And markets teach us that no human movement occurs in a straight line, but proceeds in zigzags—upward thrusts followed by periods of retrenchment.
This enormous movement—in stocks, social mood, real estate, credit and so on—reached its culmination in a blow-off bubble stage in the years surrounding the year 2000. For example, the Value Line geometric average peaked in 1998; the Dow, S&P 500 and Nasdaq peaked in 2000; the S&P Small Cap index in 2002; bonds and real estate are likely to peak in 2004, and so on.
These tops will probably stand as a thousand-year peak of these various markets (in real prices) for many years to come. Historians will most likely marvel at them.
A psychological corner has definitely been turned. Aside from the various economic and technical reasons that could be mentioned (and have been elsewhere on this website), you can feel it in the air:
Three years on, the stock market is still down from its peaks of 2000. The economy continues to send mixed messages. Employment is wobbly. The U.S. has been attacked by terrorists. Polarization among nations has increased. Political freedoms are declining while militarization is increasing.
Externally at least, the world feels like a different place than it did just a few years ago. This is entirely consistent with the picture of an historic economic, psychological, social and financial change of course that occurred at these recent millennial market peaks.
Why? Why must the world economy soon change course? The long-term fundamental reason, of course, is that the down-move is caused by the culmination of the previous up-move and its distortions. But what are the immediate, proximate causes?
To begin, let's look at interest rates—which are now at a two-generation low. Ultra-low rates mean that the Fed is very interested in fostering "easy" monetary conditions. In this process, the Fed has been aggresively increasing the "monetary base." What does that mean?
The monetary base can be thought of as the monetary core held by banks—some of it held by the banks themselves and some of it on deposit with the Fed.
The Fed can increase the size of the monetary core by buying treasury bonds, bills, etc. from the banks. And the way it pays for these purchases is really interesting—it just increases the banks' monetary reserves on deposit with the Fed by making an electronic entry saying so. Poof! Money out of thin air!
So the monetary base has increased, meaning that now the banks have more reserves on deposit with the Fed. The banking system's reserves have increased. Okay, fine.
But now things get interesting: For the extra monetary base to actually increase the larger societal money supply, the banks or other financial entities must lend out the money. New debt is how new money enters the economy.
So we now have a global economy based upon huge and growing quantities of credit—consumer, corporate and governmental. Hence the cogent description of it all as a gigantic credit bubble.
(This is the end of Part 6. Go to Part 7.)
—jim sloman, 5.13.03 for Sep 17
|
