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While You Were Sleeping
On the morning after a financial collapse things will look almost exactly as when you went to sleep. The elm tree and mailbox will stand where they were, the scene will appear unchanged all the way to the horizon. On the Day After the outward world is unchanged. What will have altered beyond all recognition are the invisible claims on that physical world.The homely mailbox, for example, may no longer be yours, nor the land on which the elm tree is growing. It could have reassigned while you were sleeping. If one can imagine the world in terms of a balance sheet, the immediate post-crash world assets start unchanged. It's the liabilities which have been rearranged. The write down process will not be uniform. In the bubble world there are more claims on assets than can be satisfied. In the pre-crash world this is unnoticed. As in the game of Musical Chairs, it is not obvious till the music stops. Only when the tune is interrupted, in the post-crash world, does the audience will see there is one chair short. Politicians and unscrupulous politicians are in the profession of overselling capacity, but ensuring they always have the chair. Politicians for example, promise the same taxpayer dollar several times over to different constituencies. And it goes along swimmingly as long as they can kick the can down the road. For example Obamacare was created to save Medicaid from bankruptcy. Now Medicaid expansion is used to prove Obamacare is working. Obamacare was funded by reductions from Medicare. Now the Medicare "doc fix" shortfall will be funded by obtaining "savings" from Obamacare. It's circular process where the same dollar moves from chair to chair. Banks operate on the same principle. Banks lend out more than the deposit dollar. They can do this sustainably for as long as the extra chairs can be provided by the real rate of interest. An extra chair will be created in the future, but only as many as the actual rate of growth will provide. But sometimes people get greedy and overpromise returns. Then if everyone with a claim on a chair came to the bank and demanded a stool, there would be a shortage of stools. This is called a bank run. In that case the system relies for its continued viability on keeping the music playing. Once the needle is lifted from the record, forcing the players to scramble for a seat, it will be obvious that somebody will have to be kicked out of the game. On the day after a crash the most important question is: who gets the chair when the music stops? Ben Stell and Dinah Walker, writing in the Council of Foreign Relations blog explain how the French got the Italians and Spaniards to hold the bag through the simple device of turning French exposure in Greece into someone elses', a process called "mutualization" Posted by: g(r)omgoru 2015-07-07 |
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