econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 05 February 2016

Why We Won't Have A Lehman Moment In The Crash Of 2016

by Charles Hugh Smith, Of Two Minds

What the central banks cannot do is create productive places to invest the credit they've generated in such excess, or force qualified borrowers to swallow more unproductive debt.

One way to lose a war is to focus on preparing to fight the last war. Preparing to fight the last war is a characteristic of losing generals, militaries and nations. The same is true of finance and economies.

General Grant's difficulties in breaking the trench warfare around Petersburg, VA in the last year of the American Civil War (1864 to early 1865) telegraphed the future of trench warfare to astute observers. Few took heed of the lessons of the "first modern war," and many of the same strategies of 1864 (digging a tunnel under enemy lines and filling the tunnel with explosives to blow a hole through their defenses, for example) were repeated in the Great War of 1914-1918 fifty years later.

When a weapon system capable of breaking the stalemate emerged--the tank--its potential for massed attack escaped planners on both sides, and the new weapon was squandered in piecemeal assaults.

"The last war" in 2008-09 was a battle to save heavily leveraged centralized financial institutions from default and liquidation--commercial and investment banks, insurance companies, etc. The concentration of capital, leverage and risk in these behemoths rendered the entire system vulnerable to their collapse (or so we were told).

Saving imploding private-sector banks was no problem for central banks that could create $1 trillion in new money with the push of a button and offer essentially unlimited lines of credit to banks facing a liquidity crunch.

But the current financial meltdown is not like the last war. Central banks are ready to extend unlimited credit again to private-sector financial institutions, but this time around, the problem won't be a lack of liquidity.

By refusing to allow a house-cleaning of risk, leverage and mal-investment, central planners have simply pushed the risk into systems they don't control: foreign-exchange (FX) currency markets, shadow banking and the economy that depends not just on available credit but the willingness of qualified borrowers to take on the risks and costs of more debt.

Central banks have created abundant credit and liquidity, but no productive places to invest that ocean of nearly free money Creating abundant credit works to spur growth when growth has been restrained by a lack of credit.

But when credit has been abundant for decades, what's scarce isn't credit--it's productive investments that are scarce. Central banks are powerless to create productive uses for the credit they create.

The inevitable consequence of this failed strategic error is defeat. Central banks issued trillions of dollars, yuan, euros and yen in new credit to stave off defeat in the last war (the Global Financial Meltdown of 2008-09), but the problem wasn't a lack of credit. Now, seven years into the strategy of flooding the global economy with credit, the problem is a scarcity of productive uses for all that money sloshing around the global economy.

There won't be a "Lehman Moment" in the 2016 meltdown, because central banks can prop up or "save" any new Lehman with a few keystrokes. What the central banks cannot do is create productive places to invest the credit they've generated in such excess, or force qualified borrowers to swallow more unproductive debt.

The global economy is choking not just on an excess of debt, it's also choking on the consequences of an unprecedented mal-investment of the credit central banks have issued in such over-abundance.

Issuing more credit will only make the 2016 crash worse. Trying to stop the current crash with more credit and lower interest rates is like sending the cavalry on suicide charges against entrenched machine guns, artillery and tanks. The coming financial slaughter will be as senseless, wasteful and ineffective as any suicide attack in the Great War.


My new book A Radically Beneficial World: Automation, Technology and Creating Jobs for All is being published in China later this year.


>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Opinion Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Opinion


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
The Expected Effects of Petitions to Improve the Monetary System
Energy and Falling Productivity
News Blog
Durable Goods New Orders Unchanged in August 2016
90% Rally In Sugar Prices Since Late 2015
U.S. Real Wage Growth: Slowing Down With Age - Part 2 Of 2
Infographic Of The Day: Four Tips To Grow Wealth
Early Headlines: Asia Stocks Down, Yen Rises, Oil Soft, Wells CEO Gives Up Bonuses, Trump Didn't Want To Embarass Clinton, US Asset Bubbles, US Crime Rates Falling And More
What is Democracy, Anyway?
Transcript Of Elizabeth Warren Questioning Wells Fargo CEO John Stumpf
Documentary Of The Week: Elizabeth Warren Indictment Of Wells Fargo
Clinton Wins Round One
Why Alzheimer's Research Is Failing To Hit Treatment Targets
Voters Still Distrust Both Presidential Candidates
What We Read Today 27 September 2016
How To Get People To Exercise
Investing Blog
Banks Of Absurdity
Investing.com Technical Summary 27 September 2016
Opinion Blog
Trump Stumped In First Debate With Clinton - Will It Cost Him?
Why All Banks Should Be Federally Owned
Precious Metals Blog
War On Cash Turns To $20, $50, And $100 Bills
Live Markets
28Sep2016 Pre-Market Commentary: Wall Street Flat Again This Morning, Crude Prices Rise, US Dollar Down And Prospects Are Dim To Cut Oil Output, GS Says Crude Prices Going Down No Matter What
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved