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Rate cuts are not enough/谢国忠谢国忠搜狐博客 http://xieguozhong.blog.sohu.com/ Major central banks
coordinated rate cuts for maximum psychological impact. I am afraid
that the impact would indeed be psychological. Markets may stage a
significant bounce soon. If this round of rate cuts isn't enough for a
bounce, the central banks will come back with more, because they are
targeting stock prices. In the short term, they will win.
But,
central banks cannot cure the problem. A hard landing of the global
economy is unfolding before our very eyes. The reason is, of course,
credit contraction. The credit system doesn't function because there
isn't enough equity capital in all components of the western economy.
Households, at least Anglo-Saxon bit, have borrowed against inflated
house values. Now, property prices are falling. They have to de-lever
to stave off bankruptcies, let alone borrowing more to sustain
consumption.
Western financial institutions have
warehoused credit derivatives backed by inflated house values. The
bursting of the property bubble has destroyed their capital base.
Western governments are injecting capital into them through share
expansion or buying toxic assets at inflated prices. This process is
under way. But, unless households have restored their equity capital,
by increasing savings sufficient enough to offset house value decline,
they cannot borrow from banks. Even if they want to, banks cannot lend
to them for lack of collaterals.
The western business
sector is least levered. But, they won't borrow and invest when the
consumer sector is comatose. Besides, a significant part of the
business sector is highly levered. Private equity funds have spent
trillions of dollars on leveraged buyouts ('LBOs'). These highly
leveraged businesses are vulnerable to an economic downturn. A major
crisis in the LBO sector is coming soon, I think. It will cut capex
spending considerably.
Western countries are all now
relying on government borrowing to recapitalize their financial system.
The equity capital that they create is genuine, I think. It is just
shifting debt from one part of the economy to another. In the end, how
could their governments pay off their debts?
I think
that the west is moving towards an Inflationary Solution. As debts
shift to governments and central banks keep pumping money, inflation
will happen. It will inflate away their debts. That is essentially
robbing the countries that have earned trade surpluses over the past
decades and have kept their foreign exchange reserves in western
government papers. Watch out for the biggest robbery in history.
I
wrote ten years ago that globalization meant wage pressure in the West.
A reduction of living standard for the middle or under class in the
west was necessary. This pressure was hidden by borrowing to support
their living standard. The property-***-credit-***-derivative bubble
happened because there was this need to hide the truth.
As
the bubble bursts, we need to face the balance sheet consequences like
who would suffer the losses, how the financial institutions can be
recapitalized, and how the household sector could save to repair its
balance sheet. After all is said and done, the West still needs to face
the reality that that the living standard for most of its population
needs to decline. Their relative competitiveness against people in
China and India cannot justify their living standard.
The
political resistance to reduction in living standard will lead to
inflation, I think. Western governments will pile up more and more
debts to sustain unrealistic living standard. Their payment problems
lead to monetary expansion and inflation.
I am still
bullish on gold and energy, bearish on growth and leverage. The rate
cuts are starting a bounce of growth and leverage assets. It is a
selling opportunity.
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