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2008-10-09 | 谢国忠：只有减息是不够的
Rate cuts are not enough/谢国忠 （点击查看译文）
谢国忠搜狐博客 http://xieguozhong.blog.sohu.com/
Major central banks coordinated rate cuts for maximum psychological impact. I am afraid that the impact would indeed be psychological. Markets may stage a significant bounce soon. If this round of rate cuts isn't enough for a bounce, the central banks will come back with more, because they are targeting stock prices. In the short term, they will win.
But, central banks cannot cure the problem. A hard landing of the global economy is unfolding before our very eyes. The reason is, of course, credit contraction. The credit system doesn't function because there isn't enough equity capital in all components of the western economy. Households, at least Anglo-Saxon bit, have borrowed against inflated house values. Now, property prices are falling. They have to de-lever to stave off bankruptcies, let alone borrowing more to sustain consumption.
Western financial institutions have warehoused credit derivatives backed by inflated house values. The bursting of the property bubble has destroyed their capital base. Western governments are injecting capital into them through share expansion or buying toxic assets at inflated prices. This process is under way. But, unless households have restored their equity capital, by increasing savings sufficient enough to offset house value decline, they cannot borrow from banks. Even if they want to, banks cannot lend to them for lack of collaterals.
The western business sector is least levered. But, they won't borrow and invest when the consumer sector is comatose. Besides, a significant part of the business sector is highly levered. Private equity funds have spent trillions of dollars on leveraged buyouts ('LBOs'). These highly leveraged businesses are vulnerable to an economic downturn. A major crisis in the LBO sector is coming soon, I think. It will cut capex spending considerably.
Western countries are all now relying on government borrowing to recapitalize their financial system. The equity capital that they create is genuine, I think. It is just shifting debt from one part of the economy to another. In the end, how could their governments pay off their debts?
I think that the west is moving towards an Inflationary Solution. As debts shift to governments and central banks keep pumping money, inflation will happen. It will inflate away their debts. That is essentially robbing the countries that have earned trade surpluses over the past decades and have kept their foreign exchange reserves in western government papers. Watch out for the biggest robbery in history.
I wrote ten years ago that globalization meant wage pressure in the West. A reduction of living standard for the middle or under class in the west was necessary. This pressure was hidden by borrowing to support their living standard. The property-cum-credit-cum-derivative bubble happened because there was this need to hide the truth.
As the bubble bursts, we need to face the balance sheet consequences like who would suffer the losses, how the financial institutions can be recapitalized, and how the household sector could save to repair its balance sheet. After all is said and done, the West still needs to face the reality that that the living standard for most of its population needs to decline. Their relative competitiveness against people in China and India cannot justify their living standard.
The political resistance to reduction in living standard will lead to inflation, I think. Western governments will pile up more and more debts to sustain unrealistic living standard. Their payment problems lead to monetary expansion and inflation.
I am still bullish on gold and energy, bearish on growth and leverage. The rate cuts are starting a bounce of growth and leverage assets. It is a selling opportunity.
谢国忠搜狐博客 http://xieguozhong.blog.sohu.com/
谢国忠搜狐博客 http://xieguozhong.blog.sohu.com/
Major central banks coordinated rate cuts for maximum psychological impact. I am afraid that the impact would indeed be psychological. Markets may stage a significant bounce soon. If this round of rate cuts isn't enough for a bounce, the central banks will come back with more, because they are targeting stock prices. In the short term, they will win.
But, central banks cannot cure the problem. A hard landing of the global economy is unfolding before our very eyes. The reason is, of course, credit contraction. The credit system doesn't function because there isn't enough equity capital in all components of the western economy. Households, at least Anglo-Saxon bit, have borrowed against inflated house values. Now, property prices are falling. They have to de-lever to stave off bankruptcies, let alone borrowing more to sustain consumption.
Western financial institutions have warehoused credit derivatives backed by inflated house values. The bursting of the property bubble has destroyed their capital base. Western governments are injecting capital into them through share expansion or buying toxic assets at inflated prices. This process is under way. But, unless households have restored their equity capital, by increasing savings sufficient enough to offset house value decline, they cannot borrow from banks. Even if they want to, banks cannot lend to them for lack of collaterals.
The western business sector is least levered. But, they won't borrow and invest when the consumer sector is comatose. Besides, a significant part of the business sector is highly levered. Private equity funds have spent trillions of dollars on leveraged buyouts ('LBOs'). These highly leveraged businesses are vulnerable to an economic downturn. A major crisis in the LBO sector is coming soon, I think. It will cut capex spending considerably.
Western countries are all now relying on government borrowing to recapitalize their financial system. The equity capital that they create is genuine, I think. It is just shifting debt from one part of the economy to another. In the end, how could their governments pay off their debts?
I think that the west is moving towards an Inflationary Solution. As debts shift to governments and central banks keep pumping money, inflation will happen. It will inflate away their debts. That is essentially robbing the countries that have earned trade surpluses over the past decades and have kept their foreign exchange reserves in western government papers. Watch out for the biggest robbery in history.
I wrote ten years ago that globalization meant wage pressure in the West. A reduction of living standard for the middle or under class in the west was necessary. This pressure was hidden by borrowing to support their living standard. The property-cum-credit-cum-derivative bubble happened because there was this need to hide the truth.
As the bubble bursts, we need to face the balance sheet consequences like who would suffer the losses, how the financial institutions can be recapitalized, and how the household sector could save to repair its balance sheet. After all is said and done, the West still needs to face the reality that that the living standard for most of its population needs to decline. Their relative competitiveness against people in China and India cannot justify their living standard.
The political resistance to reduction in living standard will lead to inflation, I think. Western governments will pile up more and more debts to sustain unrealistic living standard. Their payment problems lead to monetary expansion and inflation.
I am still bullish on gold and energy, bearish on growth and leverage. The rate cuts are starting a bounce of growth and leverage assets. It is a selling opportunity.
谢国忠搜狐博客 http://xieguozhong.blog.sohu.com/
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