It is tempting to think of the Fed and its machinations as stooges for the World State and now the cattle trader and the idea that has the world in its grip, or to think of them as robots programmed to create a backdrop for the firmament, the vast infrastructure of the market, especially the dealers in bonds.

There is a rhythm to their activities that helps the automaton to do their job. One such rhythm is the series of speeches they give, designed by a hand sometimes visible to prepare the market for their fulfillment of their activities. Another such rhythm is that 11 of the last FOMC day meeting announcement occurred 2 days before the quarterly expiration. What shadows lie in the hearts of men?

Stefan Jovanovich writes: 

The hermit and I are teaching political economy to the E*E and his friend, both of whom are smart enough not to bother with Mensa. As the hermit cracked (before he went in search of King Crab), it is the students who took an incomplete hiring the A's. The most recent chapters in the syllabus have been two "name" people who are As - one an academic (Steven Keen) and one the Milo of hedge fund managers (Kyle Bass). (The hermit insists on saving EdSpec for the final lecture - which I (non-counter, non-trader) will be barred from attending.)

We have been using Keen's lectures from his current course at Kingston and some old Bass interview videos to teach E*E and friend our tectonic theory of the credit chain, which goes like this: wars and major inventions (coal and wood fired steam power, small A/C electric motors, telegraph, etc.) are the manias that produce credit expansions. (Kindelberger et. al. have it backwards: the mania is what begins the credit bubble, not what ends it, if you properly define financial mania as the willingness to spend without any regard to immediate reward.) The vastly increased amounts of financial credit (debt issued plus equity valuations) are maintained or further expanded as the new "normal". What breaks the chain is a foreign exchange/credit earthquake. The war winners and the initial adopters of the major invention find themselves being undercut in price by the war losers and secondary adopters and things go snap. The market prices the calamity but it cannot offer any broadly successful hedge because there are no counter-parties who are themselves rich enough to be able to endure the loss of wealth. Then people pick themselves out of the rubble and the lucky and the tough and the enterprising all get to work forging a new credit chain - unless the utopians take hold of the state and abolish markets themselves (Lenin in 1918, Mussolini in 1923, etc.).

The E*E, who is a very quick study, has already come back to us with a comment along the lines of "if Kyle Bass is still so smart, how come his short sale of Japan, Inc. has failed so badly?" The hermit's answer has been "because Mr. Bass has not followed his work to its logical conclusion. Japan can do what Steve Keen wants - have a debt jubilee - and have its central bank buy every Japanese government bond that matures or is offered for sale by the institutional holders - Japan Post Bank, etc. - for yen deposits without affecting the country's exchange rate, even if Japan's current account goes into deficit. There are no large foreign holders of Japanese debt; and with the decline in Japan's exports, there will be lower and lower holdings of yen by Japan's trading partners and other central banks. There is nobody "out there" to make a run on the Japanese currency." My contribution to the discussion was another snarky comment from the bleachers: "As a Texan and the creator and owner of a successful enterprise, Mr. Bass is still an innocent abroad (Mark Twain reference - read it, his best book). At heart he still expects currency to have a fundamental exchange value that is not controlled by the government's sovereign authority. What he sees as xenophobia in Japan is something quite different: a culture's complete acceptance of money as a purely domestic commodity."

"Ok, then, when's the next financial earthquake."

"That is the Slezak question."

anonymous writes: 

Not to put words in anyone's mouths, but if markets were about rules, laws, algorithms, etc, maths and physics types would rule the world.

However they don't but promoters do.

So choose your parents well.


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