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Paul van Eeden, on Bailout, Banks, Bonds, Gold
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This Link is located in the Public Channel Housing Bubble and Bear Links.
Posted by ian 1 year 178 days ago (mining-gold-stocks.com). Views: 78
Tags: housing bubble credit crisis dollar gold |
| Related Tags: inflation economics finance investing stock market commodities banks |
The solution on the table is not a total solution, it is stop-gap measure..Fed is bumping money into the financial system, and also swapping low-quality assets for high-quality assets, that’s going to help, but not solving problem . There are two problems not being addressed: the first and root problem is that debt and risk have been mispriced for many many years. There is nothing against giving someone a mortage on a house that it cannot afford but if you are doing it at 4% interest rate with 2% teaser for the first two years, then you are stupid. Now you may want to do it at 25% interest because if you do it enough you may make money..the second thing it doesn't address is the decline in quality and value of bank assets means that bank equity is being wiped out at an alarming rate. Bank liabilities are primarily deposit accounts to about 70-75% and the rest is borrowed money. Now the value of the liabilities are not declining but the value of the assets are declining..equity gets wiped out pronto..there is nothing in the current proposal that is putting new equity in the banks. Until new equity in the banks and until risk is priced properly, the problem is far from being solved.
My personal opinion is that interest rates are going to rise over the course of the next ten years. Interest rates peaked 1980-1981, fallen last 26-28 years. I think the next decade trade is short US bonds. If you look at true monetary inflation, US average 8%. The dollar is losing value and purchasing power at exactly that rate. Yet the 30-year bond yield is barely over 4% and the T-bill is under ½ percent. And the solution of the problem is ultimately going to come with money expansion. Ben Bernanke is one of the foremost students of the Great Depression and he is on record over and over saying that we will not go through a deflationary depression. But what the Fed is doing now is trying to bail the banks out by deflating the money supply. The Treasury will sell $100 billion bonds and give it to the Fed, sucking it out of the market and not in the money supply. The Treasury assistance program for the Fed is deflationary. I do not see how they can solve the problem with trickle of deflation. It’s going to be very hard. I suspect sooner or later we are going to see return to more inflationary solution and you are going to see a repricing of risk, much high interest rates, and that’s the time when gold will start performing better.
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