Via Mark J. Grant, author of Out of the Box,
Liquidity
The world is awash in it. If you listen closely you can hear the giant slurping sound of it rushing the shores at home and continents away. The Fed is providing it and the ECB is providing it while China doesn’t need it but it is sloshing around anyway. The world’s problems, the financial mess in Europe, the global slowdown that is resplendent from sea to not-so-shining sea is all being addressed with liquidity.
There is nothing of substance to deal with the structural issues that is forthcoming from the American Congress and there will not be until after the elections are completed. Then it will be right or left, more social programs or a rather serious cut-back in governmental spending but for now; the spacious sound of nothing.
In Europe it is even worse. The ECB may well be the only functioning institution on the Continent and they promise and they bray and they talk of an unlimited response that is firmly tied to the political part of the equation, the European Union, making up its mind and deciding and approving and blessing the enterprise but with the lack of this divination; the spacious sound of nothing.
China, the growth engine of the world for so many years and the bringer of manna and other bread leavened and unleavened, faces the shutting down of its almost mystical ovens. The end was due to come, the manufacture of cities and the cheap labor that built them would inevitably halt. It was always when and how and by how much and I believe we are witnessing the drawing of the curtain on a fabled age. Perhaps it was complicated by the change of guard in China or perhaps it is as simple as nothing else left to do; but steel and raw materials and an almost 20% decline in exports to Europe also echo with the spacious sound of nothing.
A very macro view of the world leads me to suggest that it is not one nation or another or even one continent or another but the totality of them all together that is leading the globe into what may be quite a serious slowdown. It is nice to think that the Central Banks will solve all of the world problems just as it is nice to think that ever increasing debt paying off old debt will right the ship before it falters in the storm but the very acts of the Central Banks are part of the problem if not the cause of the problem as the accompanying structural reforms that should be taking place do not and so liquidity is provided but it is not the solution for the problem and hence we find an answer but it is not the correct response to the question.
Liquidity, it must be said, has casual effects such as inflation, ratings downgrades, decreasing valuations and, ultimately, a lesser value of goods and services as ever more capital is necessary to purchase what is desired to be bought. This Central Bank liquidity also produces ever higher and higher levels of debt and, aside from the interest rate, the principal must be paid back by economies such as America that are flat-lining or by economies in Europe that are in distinct decline. You may applaud at the opening act but the second act may produce quite different results. The $2.2 trillion balance sheet now at the Fed is going higher and there is not even a cap or a limit in place. Perhaps it is the “it worked for the ECB and maybe it will work for us” play but it is rife with danger. The ECB pledge of ad infinitum funds is clearly bound by the conditions of the pledge and those that must approve may never approve given the political infighting between the haves and have-nots that is currently taking place in Europe.
Europe and America face fiscal cliffs of their own making and what anyone can afford is generally the needle that breaks both a camel’s and a union’s back. The firewall in Europe, heralded by the IMF and every institution in Europe, has been revealed to be a wall of translucence as Spain is settling into the frying pan and dredging itself with oil for the fire. The firewall notion was ill conceived and poorly orchestrated and as demonstrated by reality, a firewall does nothing for those that live inside it except defend it from outside enemies when the enemies were always within.
Finally, liquidity does accomplish one other major factor; it provides a tremendous amount of leverage. Liquidity provided must be paid back and if the banks and nations that receive it do not provide structural changes, reduce their deficits, decrease their borrowings then, ultimately, the gods of chaos are unleashed. At this point it is no longer the interest that is paid but the return of capital that must be paid that becomes the number one issue. Liquidity has its price and I submit to you today that the time is fast approaching when a world awash in liquidity overwhelms the barriers and the dike is breached. The applause of today may become the tears of tomorrow if the current course continues.