mezzo toscano's Library tagged Ponzi →  View Popular

Not long ago the Securities and Exchange Commission reportedly looked into Madoff's operation and found nothing wrong!

This last great credit bubble grew since 1980 until its peak in 2007 when nearly US$5 of new debt was needed to fund a single dollar of US national income growth up from US$1 a generation before.



It started when the US abandoned the international gold standard in 1971, replaced with a global monetary regime based on dollars that the US could issue in unlimited supply. Nations outside the US created dollar demand and value not as a reward to the US for a positive balance of trade but for lack of other international pricing and transaction options. As demand for dollar denominated financial assets grew, the market price of finite global commodities, such as oil, was distorted downward, interest rates declined, money became cheap.



Cheap money funded asset bubbles. The LBO bubble of the late 1980s. The 1990s technology bubble. The 2000s housing bubble.



The era of cheap credit to fund asset price inflation ended with the crash of the securitized debt market in the spring of 2007.

In a decade, after our economy recovers, the history books will echo the age-old refrain “what were we thinking?”

A severe spike in home equity lines of credit (HELOC) delinquencies is the smokin’ gun that points directly at Ponzi finance as the culprit in the whole Emperor wears no clothes edifice.

The data released on Ponzi lending of only resort is rather stunning. In effect what is happening is that another market failure is being set up. By “market failure”, I mean that the prices on capital are being artificially set, and severely so. These approaches are doomed because real wealth has to be created from productive activities. And productive activities generally come about best, when markets at least closely resemble reality and are transparent.

The survey of 56 major firms, mostly manufacturers, also found that nearly a third are trying to shift their production bases away from China to countries like Vietnam. Another survey jointly, conducted by the U.S. Chamber of Commerce in Shanghai and U.S. consulting firm Booz Allen Hamilton Inc. late last year of 66 foreign companies in China, found more than half perceived a decline in China’s competitiveness. Some 20% of the respondents said that they have already decided to move part of their Chinese operations outside the country, citing foreign exchange concerns as China’s yuan appreciates, rising wages and difficulty in retaining employees.