Aron Task at Tech Ticker yesterday interviewed Christopher Whalen of Institutional Risk Analytics on the accelerating credit contraction that is now undermining the economic recovery. As I have said before, longer-term, reducing debt levels is part of the solution to restoring strength and equity in consumer balance sheets and the economy. Near-term though, the adjustment of reducing credit is painful and flies in the face of a quick economic rebound.
Whalen makes some excellent observations about why we have seen speculative capital fleeing into stocks, bonds and commodities the past 2 quarters. It’s not a good sign. It’s the same reason that Chinese people are using government incentives to speculate (gamble) rather than investing in building small business right now: the real economy is presently dying, drowning in over-capacity and still anaemic consumption demand. If entrepreneurs and investors see attractive business opportunity they are encouraged to direct capital and energy into creating enterprise. When they don't see it, they are more inclined to park in cash, buy bonds, speculate, and stock-pile rather than invest in building equity with a long term view.
In the same vein, we note that a significant motivation behind Australia's surprise rate hike yesterday, was the government’s concerns about rapidly re-flating asset bubbles again, particularly house prices:
“The Reserve Bank of Australia had previously voiced concerns that interest rates of just 3%, down 4.25 percentage points from their peak in March 2008, were fuelling excessive house-price inflation. House prices were up 8% in the first eight months of the year, according to the RP Data-Rismark Home Value index.
Australia isn't the only country fretting about asset prices. The Norwegian central bank has voiced similar concerns. Global excess liquidity also looks to be fuelling potentially destabilizing asset surges in several Asian economies, including India, South Korea and Taiwan. The market expects these countries to raise rates early next year. But following Australia's decision, they may feel tempted to move earlier to lean against the wind and try to tame some of the exuberance”
See: WSJ: Australia rate rise poses a global policy change.
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