The lost decade
Comments(0)Jeremy Blatch looks briefly at the series of US bailout plans and discusses what lessons may be learned for the future.
A recent definition of an investment bank goes something like this, on one side of the balance sheet nothing is right and on the other side nothing is left! Or as a friend quipped in a recent meeting ”what investors are seeking now is not a return on their capital, but a return of their capital!” Another friend has a been operating a very profitable waste disposal business for years. To me his business has similarities to that of the US Government. Like the US Government, who has the so called toxic waste of financial assets, my friend also starts with a pile of waste. Like the US Government my friend pays a speculative price for the waste, as he has no idea what it will yield. Unlike the US Government, my friend is neither arrogant nor foolish enough to borrow money from his sons speculating against the future earnings of his grandchildren, to fund his business. You don’t solve a problem of excessive debt with more debt! “Quantitive Easing” printing money , in plain old fashioned English, historically has never worked and will fail now. Current policy will result in a vicious inflationary spiral further down the road!
The Japanese economy went through a period in the 90’s which is still referred to as the “Lost decade”, propping up “zombie banks“and now some 19 years later the Japanese stock market is still 80% lower than at its peak. They have however cleaned up the banks and Japan is once again a competitive nation. The Japanese went into their “ depression“ as a creditor nation, in the early 70’s, the US, once the richest creditor nation on earth, have squandered over a decade what they had produced over centuries, to become now the most heavily indebted nation in the world, and growing, as they continue to print money until they run out of trees, further debasing the US Dollar! When national debt in the US was funded by Americans they bought stable 30 year Treasury Bills. The current debt owned by China, Japan , Asia and Saudi Arabia is mainly in short term volatile 2 year Treasury Bills with negative real interest rates and a devaluing currency!
The thesis of the US bail out plans accepts as its premise that banks are fundamentally sound and well run, and that bankers know what they are doing? The facts tell us otherwise. The fact is that financial leaders bet their banks value and name on the belief that there was no real estate crisis nor bubble, and the view that aggravated levels of debt were not a problem, and would revert to the mean. They were wrong. They lost the bet and no amount of “financial juggling” will bring back the status quo. They displayed the same arrogance and that was the undoing of the first large Hedge Fund, Long Term Capital Management (LTCM) to go under in early 2000.
We know deep down that making huge sums of money is often a matter of luck, good fortune or a degree of connivance, and yet we have bred a culture giving these people a sort of elevated intellectual celebrity status. By and large the very people that were responsible for presiding over the the financial and banking systems that lead us to the mess we are now in, are still directing policy in the US Treasury! Power corrupts and absolute power corrupts absolutely. As Gibbon wrote in, The Decline and fall of the Roman empire, “if I just keep building roads and lowering taxes the people will be happy” in present day jargon “The Greenspan put”. Or in plain English refusing to let insolvent financial businesses fail.
It seems to me no coincidence that the “golden age of spin” in plain English deception, grew with the paper wealth and prosperity during the last decade. It is true that philanthropy and charitable work benefited during this age of prosperity. But at what cost? Plato said ”everything that deceives can be said to enchant” we have had a decade of enchantment and some policymakers are still living the lie of this deception. What a hypocritical example the US and UK governments are showing future generations. Preaching a message of the need to save and produce, whilst borrowing more and printing money as fast as they can. Why wait for something when you can have it now?
Walking around the Dead Sea in Israel recently, whilst it was raining, I thought of how the “toxic saline water” yields absolutely no life at all, in spite of being replenished by fresh water, and wondered how much life will emerge from the ”so called Toxic financial waste” into which the US Treasury is pouring Trillions of USD?
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