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Guest Post: Liquidation Is Vital

Tyler Durden's picture




 

Submitted by John Aziz of Azizonomics

Liquidation Is Vital

Many Keynesians really hate the concept of liquidationism. I’m trying to grasp why.

Paul Krugman wrote:

One discouraging feature of the current economic crisis is the way many economists and economic commentators — apparently ignorant of what went on over the last 75 years or so of macroeconomic debate — have been reinventing old fallacies, imagining that they were coming up with profound insights.

 

The Bank for International Settlements has decided to throw everything we’ve learned from 80 years of hard thought about macroeconomics out the window, and to embrace full-frontal liquidationism. The BIS is now advocating a position indistinguishable from that of Schumpeter in the 1930s, opposing any monetary expansion because that would leave “the work of depressions undone”.

Andrew Mellon summed up liquidationism as so:

The government must keep its hands off and let the slump liquidate itself. Liquidate labor, liquidate stocks, liquidate the farmes, liquidate real estate. When the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. A panic is not altogether a bad thing. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.

In light of the zombification that now exists in Japan and also America (and coming soon to every single QE and bailout-heavy Western economy) — zombie companies, poorly managed, making all the same mistakes as before, rudderless, and yet still in business thanks to government intervention  — it is clear that the liquidationists grasped something that Keynesians are still missing. Markets are largely no longer trading fundamentals; they are just trading state intervention and money printing. Why debate earnings when instead you can debate the prospects of QE3? Why invest in profitable companies and ventures when instead you can pay yourself a fat bonus cheque out of monetary stimulus? Why exercise caution and consideration when you can just gamble and get a bailout?

Unfortunately, Mellon and his counterparts at the 30s Fed were the wrong kind of liquidationists — they could not heed their own advice and leave the market be. Ironically, the 30s Fed in raising interest rates and failing to act as lender-of-last resort drove the market into a deeper depression than was necessary (and certainly a deeper one than happened in 1907) and crushed any incipient recovery.

Liquidation is not merely some abstract policy directive, or government function. It is an organic function of the market. As the stunning bounce-back from the Panic of 1907 shows — especially when contrasted against the 1930s — a  market liquidation on the back of a panic avoids a depression. Prices fall as far as the market deems necessary, before market participants quickly come back in into the frame and setting the market on a new trail toward growth. For without a central bank, asset-holders who want to maintain a strong economy and growth (in 2008, that probably would have meant sovereigns like China and Arabia) have to come in and pick up falling masonry as lenders of last resort.

Under a central banking regime (especially a Bernankean or Krugmanite one committed to Rooseveltian Resolve) all expectations fall onto the central bank.

My own view is not just that liquidation is vital. It is that the market mechanism is vital. Without their own capital as skin in the game, central bankers are playing blind. The pace of the liquidation and the pace of the recovery should be dictated by market participants — in other words, by society at large — not by the whims of distant technocrats. Society has more skin in the game. The Great Depression was not a crisis of too little intervention — it was a crisis of too much well-intentioned intervention.

As we are learning in our own zombie depression, a central bank doing the opposite of the 1930s Fed and reinflating may solve the problem of debt-deflation, but it causes many of its own problems — zombie banks, zombie corporations, zombie markets, corporate welfarism, and the destruction of the market mechanism.

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Tue, 06/26/2012 - 18:53 | 2563184 Cursive
Cursive's picture

If you love someone, set them free.

Tue, 06/26/2012 - 18:54 | 2563188 veyron
veyron's picture

Do you love Krugman ???

Tue, 06/26/2012 - 19:10 | 2563220 Cursive
Cursive's picture

@veyron

No.  But this isn't about Paulie.  This is about liberty and freedom.  You can only have true love between absolute equals.  By the same token, you can only have free markets if all market particpants are equal; equal rights to succeed or fail.  As it is now, our economy is built on imbalances that would have the likes of Michael Jordan (in his prime) washing dishes and Paul Krugman playing center for the Miami Heat.

Tue, 06/26/2012 - 19:21 | 2563245 vast-dom
vast-dom's picture

when the Bernankster is the one that needs to be washing them dishes most so we may save this motherfucker!

Tue, 06/26/2012 - 19:30 | 2563265 Winston Churchill
Winston Churchill's picture

He would break them.

ABCD

Anything Bernanke Cannot Destroy.

Tue, 06/26/2012 - 20:08 | 2563268 vast-dom
vast-dom's picture

yeah but at least he can print up some more dishes. paper picnic QE plates.

Tue, 06/26/2012 - 20:20 | 2563373 CPL
CPL's picture

With spider man AND batman

Wed, 06/27/2012 - 06:21 | 2564346 old naughty
old naughty's picture

they want in-organic growth, and didn't get it.

Tue, 06/26/2012 - 19:35 | 2563278 BigJim
BigJim's picture

'Liquidation' is merely price discovery after the market realises asset prices have gotten out of whack.

Central planners like the Bernank and the KrugPot hate anything that even smacks of free market price discovery.

Tue, 06/26/2012 - 20:04 | 2563326 The Watchman
The Watchman's picture

I recomend max strength xlax - that will get some shit movin'

Wed, 06/27/2012 - 00:01 | 2563975 I am a Man I am...
I am a Man I am Forty's picture

"(in his prime)" was probably not necessary, but I digress

Tue, 06/26/2012 - 20:09 | 2563343 GenX Investor
GenX Investor's picture

Scratch that, if you love someone, take them to Puppy Lake.

Tue, 06/26/2012 - 19:24 | 2563223 vast-dom
vast-dom's picture

I have been saying this for quite some time here. Nothing new. Fundamentals, P/E, etc. have become as arcane as they are detested. We need a great purge. Period.

 

if you synthetically manage the cyclical nature of markets such that you do not allow the downward movement into the trough, you essentially distort and pervert said markets. if you believe markets are cyclical then you cannot avoid liquidity purge forever and can make the argument that The Fed will down the line cause a greater amplitude trough....

 

will these so-called values ever be recalibrated? the categorical imperative? justice? doubt it......

Tue, 06/26/2012 - 19:30 | 2563261 Caviar Emptor
Caviar Emptor's picture

Amen bro, you n me both been sayin'. My version, which I got junked for lots in the beginning, is that the stock market is now just a surrogate for monetary intervention. It's such a sick old man that it requires not just a Bernanke put under it, but a Bernanke-Geithner call (QE, stim and more stupid Fed tricks) to keep it from spiraling down. 

Tue, 06/26/2012 - 19:31 | 2563267 vast-dom
vast-dom's picture

junk builds character. lot of common sense haters up in here.

Tue, 06/26/2012 - 20:32 | 2563378 dexter bland
dexter bland's picture

Intervention or not, we got our liquidation in real estate, prices now back at mid-1990's levels in real terms. In labour markets likewise, the liquidation is ongoing. Intervention only prolongs the process, it can't stop it entirely.

But its true financial assets haven't been properly liquidated (they were but briefly before reflation). Equities to some extent remain overvalued, but commodities even more so. Fed actions remain of interest to the market but its impact decreases with each new round. Finally when risk asset liquidation is complete, it might be time to take another look at treasuries.

 

Tue, 06/26/2012 - 22:11 | 2563689 Bicycle Repairman
Bicycle Repairman's picture

If the market were set totally free RE would liquidate much, much further.

Wed, 06/27/2012 - 06:53 | 2564378 eclectic syncretist
eclectic syncretist's picture

I predict that several years from now it will be recognized that there is extensive accounting fraud going on right now across all capital markets, and that the Fed/government knows it and is looking the other way rather than doing their proper duty to their fellow citizens.

Wed, 06/27/2012 - 08:46 | 2564524 MeelionDollerBogus
MeelionDollerBogus's picture

Years from now? http://twitter.com/williamkblack - why wait for discovery, grab the bull by the horns

Tue, 06/26/2012 - 18:59 | 2563199 carefreemanjoe
carefreemanjoe's picture

The Fed has unwittingly released the genie of deflation though its intent is to inflate. The Fed is lending HUGE / OBSCENE amounts of money to the large too big to fail banks without any commitment from these banks that they will lend out this money to businesses in need. Instead, the too big to fail banks are strengthening their balance sheets by parking these funds back with the Fed at higher interest rates and continuing to use the now stronger balance sheets to take more risks in investment banking. At this rate deflation cannot be avoided regardless of whether Obama comes back to power or Romney is crowned. Amen.

Tue, 06/26/2012 - 19:03 | 2563206 q99x2
q99x2's picture

If they control the market mechanism should there not be a real war against them because they are truely the enemies of corporations with more to lose than countries?

Answer: Of course and it is under way.

Although sometimes a hugh blind multi-headed beast that is difficult to fight is best left utill it begins stumbling under its own weight a little help never hurts. It will fall quickly. Thursday at what time?

Tue, 06/26/2012 - 19:07 | 2563213 midgetrannyporn
midgetrannyporn's picture

During the great depression if the gubbermint and fed had merely guaranteed bank deposits it would have mitigated much of the pain. This time around the maggots saved their own bacon bonuses after exporting all the manufacturing abroad. This depression in the usa is permanent.

Tue, 06/26/2012 - 20:24 | 2563386 CPL
CPL's picture

This depression in the usa anywhere with a central bank is permanent.

Tue, 06/26/2012 - 19:07 | 2563214 Rainman
Rainman's picture

Liquidation means pounding the snot out of the public pension funds...already 3 trillion fiatscos in the hole.

If that be the case, I'm all for it.

Wed, 06/27/2012 - 03:00 | 2564219 Rick Masters
Rick Masters's picture

I understand and somewhat agree with the argument at hand but what I can't fathom on any level is sub-human comments like yours that appear to want to bring unimaginable pain to millions of your fellow countrymen. Your for leaving the elderly and retired completely fucked. Someone like you will never survive a situation like that where mass violence will occur by virtue of the sheer nature of the suffering. Because when fighting starts and groups form the ones that will win will be the ones that have team players that have human empathy which you clearly lack. They found a 10,000 year old female skeleton with no arms and feeble legs. She was born that way and she lived to the age of 33. That means 10,000 years ago a community of people took care of her cause she could not care for herself. That is what being a human is. I pray for you

Wed, 06/27/2012 - 03:00 | 2564220 Rick Masters
Rick Masters's picture

I understand and somewhat agree with the argument at hand but what I can't fathom on any level is sub-human comments like yours that appear to want to bring unimaginable pain to millions of your fellow countrymen. Your for leaving the elderly and retired completely fucked. Someone like you will never survive a situation like that where mass violence will occur by virtue of the sheer nature of the suffering. Because when fighting starts and groups form the ones that will win will be the ones that have team players that have human empathy which you clearly lack. They found a 10,000 year old female skeleton with no arms and feeble legs. She was born that way and she lived to the age of 33. That means 10,000 years ago a community of people took care of her cause she could not care for herself. That is what being a human is. I pray for you

Tue, 06/26/2012 - 19:08 | 2563217 XOFnews
XOFnews's picture

Breaking news! Romney says Krugman is his pick for Fed chair.

Tue, 06/26/2012 - 19:13 | 2563229 SILVERGEDDON
SILVERGEDDON's picture

Yeah. Bent over the chair, getting rudely mounted from the rear. Oh. Wait. That is current standard operating procedure for Romney and friends versus the rest of the universe.

Tue, 06/26/2012 - 19:11 | 2563225 bankruptcylawyer
bankruptcylawyer's picture

liberals are blindly faithful in krugmans word. 

they frequently have not done their homework, they and most people are intellectually lazy and take his word as gold. 

they understand his basic point which is that a slump in demand drives deflationary patterns whichare the stuff of depressions. 

that's as far as they get in understanding how the balance of conumption production debt creation, debt destruction constitutes economic behavior. they are misguided in seeing half a truth as 'the truth' and wind up frequently on the side of the banksters that they claim to hold grudges against. 

This political situation , that of 'well educated' liberals taking krugmans word as the full truth , ------is old enough. I thought for a whle that it would change. it hasn't , it has actually gotten worse to my understanding. The rise of the caricatured libertarian view point, along with many of its contradictions and paradoxes ( for example that the complex modern state can function without some acceptance of corporate taxes ) -------has operated to create a political oppositionism. the liberal sees themself not through their understanding of how things work, but through their opposition to who they percieve to be on the 'other side'. 

this diameteric opposition has gotten worse over time because the divide between the 'viewpoints' has accelerated. why? because as things get worse, people don't get smarter necessarily. they do not start seeing more of the subtleties. what they do is they get a taste for the truth only in so far as they can find enough of an explanation to let them 'choose sides'. the same impulse that allows people to divide themselves between republicans and democrats has allowed them into the trap of defining themselves as keynsians or austrians or whatever other bullshit, when it comes to 'picking a team' or picking a line of rhetoric and buzzwords to bring up during dinner parties. 

This will only get worse. more factionlism. Self Declared Backers of Occupy and the Tea party are generally more guilty of it than anyone else. Very few people who decide to put a flag or armpatch on their shirt----people who broadcast their team membership---are the types to understand where it is that the cohesion can be found. People are too stuck in their convictions---particularly the YOUNG people who mindlessly chant and join a team. The only quandary is that the OLD poeple are either Too Lazy, Too worried about their Families, or too bought off , to actually comprise the people that change things. 

SO where does this lead? Youth groups chanting slogans. that's where this goes.

 

 

Tue, 06/26/2012 - 19:17 | 2563235 XOFnews
XOFnews's picture

Breaking news! GO RP!

Tue, 06/26/2012 - 19:19 | 2563241 knukles
knukles's picture

If its not fair, its not liberal.

Tue, 06/26/2012 - 21:21 | 2563553 Mr. Fix
Mr. Fix's picture

"If its not fair, its not liberal."

Good one!

 And since everybody knows that life is not fair,

 there is obviously no need for liberals.

 Everything they do is contrary to the way things work.

Tue, 06/26/2012 - 20:38 | 2563417 OneTinSoldier66
OneTinSoldier66's picture

Get a clue.

 

Modern states do not accept Corporate taxes, they demand them!

 

Right is Might. Sound, honest money! You don't even have to be an Austrian to understand that money should be honest and sound, rather than a piece of paper with green ink and a Government stamp on it, and at their whim. Money is not something just because the Government says it is.

Tue, 06/26/2012 - 19:23 | 2563247 Quinvarius
Quinvarius's picture

I'd love to see them try liquidationism with debt based paper money.  You lost it all in a liquidation?  Too bad.  You there.  You held onto your paper money through the liquidation?  It is now worthless because all the debts and banks that were counter party to it defaulted and died.  Sorry.  You lost it all too.

Mass liquidation will not make your paper money worth more.  It will be worth less.

Tue, 06/26/2012 - 20:06 | 2563333 Manthong
Manthong's picture

Perfectly OK.. it's going to be worth nothing anyway, so let the (fire) hosing begin.

Tue, 06/26/2012 - 21:24 | 2563557 Mr. Fix
Mr. Fix's picture

Maybe a very large canoe would help to liquidate some of that debt-based currency.

Tue, 06/26/2012 - 19:26 | 2563253 lolmao500
lolmao500's picture

Aw yeah....

http://news.yahoo.com/german-court-outlaws-religious-circumcision-172728...

German court rules religious circumcision on boys an assault

Circumcising young boys on religious grounds amounts to grievous bodily harm, a German court ruled Tuesday in a landmark decision that the Jewish community said trampled on parents' religious rights.

The regional court in Cologne, western Germany, ruled that the "fundamental right of the child to bodily integrity outweighed the fundamental rights of the parents", a judgement that is expected to set a legal precedent.

"The religious freedom of the parents and their right to educate their child would not be unacceptably compromised, if they were obliged to wait until the child could himself decide to be circumcised," the court added.

Cue the angry jews and muslims... eh don't like it? Move back to where you belong, in that shithole called the middle-east.

Tue, 06/26/2012 - 21:27 | 2563562 Mr. Fix
Mr. Fix's picture

"fundamental right of the child to bodily integrity outweighed the fundamental rights of the parents"

 

I wonder if that argument holds true  If they want an abortion.

 

 I doubt it.

Tue, 06/26/2012 - 22:49 | 2563791 Demonoid
Demonoid's picture

"fundamental right of the child to bodily integrity outweighed the fundamental rights of the parents"

So no children in Germany have pierced earrings?

No dental fillings?

No pins inserted into broken bones?

Circumcision is currently out of favor with elites. All the right people know it, as they do with everything else PC.

Don't be fooled by the high-horse "principle." It's tribal, nothing more.

Tue, 06/26/2012 - 19:27 | 2563254 RoadKill
RoadKill's picture

Ahmen. But sorry to say liquidation is deflationary and thats bad for.PMs. Obviously most of them will tell you they are betting on everyone doing the wrong thing. But what if they dont? What if like during the SNL crisis (and I dont mean loosing Chris Farley) the US and Eastern Europe choose to xlean things up, default and deflate, and stick with strong dollar/DM low interest rates low inflation policies.

Tue, 06/26/2012 - 19:40 | 2563283 dwdollar
dwdollar's picture

That was a minor course correction on a bubble that was still inflating.

Tue, 06/26/2012 - 20:29 | 2563399 Quinvarius
Quinvarius's picture

Sorry to tell you, but they will be liquidating paper money to buy real money, PMs, along with everything else.  Our money is based on debt.  When things liquidate, the economy goes south.  When the economy goes south, the debts and taxes go unpaid.  When the debt and taxes go unpaid, the money that was created from the debt has no demand on it to pay back the debt.

This is not 1930.  Our paper dollars have no value beyond pure utility of bill pay.  No one is going to hoard that trash.  Why is it so hard to understand what has been going on with gold since the start of this depression in 2000?  I am constantly amazed about people immediately jumping to some conclusion that was fed to them by the TV.  That green garbage in your wallet is not money and has no real value in a system where debt is defaulted on or ignored.

Tue, 06/26/2012 - 21:25 | 2563560 malek
malek's picture

Inflating away is the opposite of orderly liquidation.

Tue, 06/26/2012 - 20:53 | 2563471 OneTinSoldier66
OneTinSoldier66's picture

"But sorry to say liquidation is deflationary and thats bad for.PMs."

 

How so? Even if the prices go down in terms of Dollars, they can be going down even more in terms of PM's, even as the Dollar price of PM's goes down.

 

In other words, even as the dollar price of PM's goes down, the value of PM's can rise.

 

Speaking for myself, I (might)quit buying PM's... when the National Debt has been paid off! Because when it comes to the ability of a Government to borrow and spend beyond its means, there comes a point when, enough is enough! And I haven't seen that ability deflated yet. Haven't seen it in my lifetime and have wondered if I will ever see it. Now, it is to the point where I believe that I am within my right to say that I...

 

VOTE NO CONFIDENCE!

 

I know when I'm being undermined and outvoted in the market with the very money that I commanded to use!

Tue, 06/26/2012 - 19:30 | 2563257 dwdollar
dwdollar's picture

Amen. Not going to happen though. Not without radical changes in policy, which means radical change in leadership, which means...

Tue, 06/26/2012 - 19:35 | 2563275 RoadKill
RoadKill's picture

Let me ask you this... Putting aside what you own (PMs vs bear bets) choose a team...Forbes, Kudlow and Romney vs Krugman, Stiglitz and Obama.

I would suggest team 1 will go for free market interest rates, a strong dollar and deflation and defaults... Team 2 will go for central planning, monetization and inflation.

I know most of you wilk rag on me for daring to suggest Mitt isnt Barry... But its an incremental world and on the spectrum its hard to say hes not "to the right" of Obama on economic policy.

Tue, 06/26/2012 - 19:43 | 2563289 fonzannoon
fonzannoon's picture

Kudlow was practically begging for QE not long ago. He probably still is. Here is my team if I had to choose. Schiff/Rogers/Bass.

Reality sucks but ignore it at your own peril.

Tue, 06/26/2012 - 19:44 | 2563290 fonzannoon
fonzannoon's picture

and by the way if we had free market interest rates today we would be bankrupt tomorrow.

Tue, 06/26/2012 - 21:17 | 2563545 geoffb
geoffb's picture

I don't know if you've noticed but we are bankrupt right now.

Tue, 06/26/2012 - 19:51 | 2563304 dwdollar
dwdollar's picture

Mitt Romney (the Crony Capitalist who made his riches riding the inflation wave) will tighten up? He might talk about it to score some Rand Paul moron votes, but I seriously doubt he will. Like he (or Obama) is in charge anyway...

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