16 October 2008

Whence this lack of confidence?

Well, after a brief rally, the market is heading down again. The Dow is at 8,556.33 (down 21.58), the NASDAQ at 1,641.28 (up 12.95 from yesterday’s close of 1,628.33) and S&P at 900.80 (down 7.04) -- and falling.

Typically, what would be behind a crash is lack of confidence. Not surprisingly talk, especially as it relates to the bailout, has centered around restoring confidence in the market.

But the bailout moves have failed to restore this confidence, so far. But is the lack of confidence a lack of confidence in the market, or a lack of confidence in the government’s ability to affect the market? I happen to think the latter and said so to a friend last week. My friend was skeptical.

Thorsten Polleit, however, agrees with me, to some extent. Confidence is leaving the government; but more specifically, argues that this confidence is leaving the fiat money system.

Were it not for ever-greater increases in central-bank money and the market expectation that governments are about to make taxpayers shoulder commercial banks' huge losses, the fiat money systems would presumably collapse right away.

International interbank short-term lending rates say it all: the latest drastic increases in yield spreads between money-market rates and official central-bank rates are indicative of the growing reluctance among banks to extend loans to each other, for fear that borrowers could default on their payment obligations.

Under today's fiat-money regime, banks, under governments' auspices, increase the money stock "out of thin air" whenever they extend loans. The money supply is built on credit, which, in turn, hinges on peoples' confidence in banks and banks' confidence in their borrowers' ability and willingness to service their debt.

As confidence leaves the system, banks refrain from extending loans and demand repayment of outstanding loans, and the money stock contracts. Economies that have for decades been fuelled by ever-higher doses of credit and money fall into depression — that is, declining production, employment, and prices.
(Okay, Polleit doesn’t really agree with me. He doesn’t even know me. But it does seem clear that the lack of confidence, as it relates to the market is directed towards the government and its role in the market. I mean so far, nothing the government has done, or promised to do has had any lasting effect on the market.)

Speaking of government intervention, I mean bailouts…

Apparently the capital injection banks received was an offer they couldn’t refuse.

Uncle Sam? …or, Don Corleone.

One question very few people, especially in the news media, do not seem preoccupied with is this: Since the money’s leaving the stock market, where is it going? Into safes? Savings accounts? Some of it is going toward the payment of debts, in which case it’s still in the market, though not on the stock market. Of course, even if all of the money leaving the stock market is going to debt payment that isn’t an unqualified evil: the money is still in the market, somewhere – just not in the stock market. Even if it’s going into savings accounts, that isn’t an unqualified evil: if banks are going to resume lending money, they’ll need deposits.

The money isn’t vanishing into thin air. It’s leaving the stock market, yes. But it’s going somewhere.

I have my ideas, one of which was confirmed by some news I heard about where Bloomberg has his money.

Oh, yeah. The debate last night. What’s to say? More mini-campaign speeches by believers in the omnicompetent state. Big government liberal. Big government conservative. Big deal.

Yes, I'm settling once again for the big government conservative: smaller mess to clean up when the libertarian revolution comes. :)

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James Frank SolĂ­s
Former soldier (USA). Graduate-level educated. Married 26 years. Texas ex-patriate. Ruling elder in the Presbyterian Church in America.
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