Recent months have seen an explosion of a multitude of bubbles simultaneously throughout the world: housing bubble, commodities, stock market, credit bubble Consumer, derivatives, CDOs, CDS, LBO, works of art, luxury market, football .... This makes the current crisis is unique in history. During the last decade, the world seemed to become the playground of a mad escapade of investors embarked on a frantic search of immediate income. The cavalcade was spilled on the market for technology stocks in the late 90s and the housing market, then passing through the stock exchanges of emerging countries and the market for raw materials to finish today in the market less lucrative vouchers Treasury. At each meltdown inevitable, our central banks have done a duty to rearm our lads credit costs and cheap. Yet today the feast seems to end with the resulting major economic crisis. Faced with the explosion of these bubbles, should at all costs revive the credit market as it exists or is it time to retire financial institutions to their weapons of mass destruction and favor policies that are more innovative?
The phenomenon is a constant bubble of capitalism over the past three centuries. It is distinct from that of inflation. Inflation is rising prices recorded an average across all services and consumer goods. A bubble is defined as it increases the price of a single asset. So the price of oil has been multiplied by 7 in 7 years or 100% increase per year while inflation increased by only 3% per year maximum in France. To understand how we arrive at prices completely disconnected of all reality, we must return to the formation of these bubbles. Initially, the new promises of profit that can provide a market attractive to investors. The rise of asset market then drew speculation, that is to say the attempt to capitalize on the upward movement by buying assets to sell soon after. Only the anticipation that another will be ready to buy more expensive assets in the near future that motivates the purchase and not an assessment of long-term price of the asset. Many speculators hoping for high yields indebted in part to buy the asset because if the performance of the operation is outweighs the interest of the loan, you earn money without having out of his pocket. The important thing to understand is that the bubble phenomenon owes its existence to this speculative debt. If speculation was made in cash, the money could be spent in other assets that eventually would be dumped and attract investors again. Here, the price increase is largely through borrowed money and penalizes few other assets.
Speculation is by definition a non-productive activity. It invests in an asset until the price goes up. What what is traded are shares of ownership of such assets or such. Nothing is invested in creating any wealth. Take for example a lifting action by a company. The sum raised will be used for an investment. Subsequently, the change in stock price will not change the amount of investment previously made. The euphoria generated by a massive debt bubble causes a totally unproductive. Now on this debt there is interest and this interest can not be reimbursed by the rising prices themselves fed by new debt. One day, the funds are drying up and the bubble bursts by liquidation Panic assets to repay debts.
This mechanism reveals the fundamental paradox of asset pricing. We consider now that the price of an asset takes into account the expected return of the asset and its volatility relative to the rest of the market. However, in times of euphoria, there is finally little risk of not finding a buyer at a good price a few months later. The investor with experience in several successful experiences in recent years perceived risk as relatively low. Everyone is afraid to miss the golden opportunities offered by the market and it therefore seems reasonable time to assess bubble these assets at unreasonable prices.
Human nature has not changed in literally a decade. Greed often invoked to explain recent phenomena can not explain itself. How then can we explain such a boil on the entire planet?
First, by irresponsible monetary policies of the ECB, the Fed, the Bank of England or the Bank of Japan. The Fed and the BoJ has kept rates very low for years. Adjusted with inflation and real interest rates were negative for several years. Thus, borrowing and speculating on just about any asset that can take 2, 3 or 4% a year, it was possible to make a profit without a penny out of his pocket. In addition, central banks have poured financial circuits of money during the past three years. In Europe, the growth rate of money supply was over 11% in 2007 while GDP growth was 2.5% and inflation of 2%. This influx of credit has been spilled on the asset market.
Second, the conversion of the debt capital markets in an asset more liquid, ie tradable in financial markets. Securitization ever more sophisticated bank debt has allowed financial institutions to sell all sorts of claims. The banks were able to borrow at low cost, lend money to private agents and immediately resell to others that claim with a profit. Taking advantage of growing demand for these assets at risk, this type of method, where the gain is immediate, prompting banks to make loans riskier still. The high and stable yields of these assets between 2002 and 2006 and the illusion that enabled new knowledge to prevent financial risk have prompted many institutions to buy and to inflate the various bubbles.
Third, globalization and liberalization of capital flows have allowed any investor to take advantage of a potentially far greater number of opportunities for speculation. No real global regulation, the world has become a sort of Wild West for daring investor.
Fourth point, the accumulation of foreign exchange reserves in dollars of oil-producing countries, China and Japan, both of whom have largely artificially undervalued their currency to maintain an export economy competitive. These countries undertake not going directly into foreign countries dumped on the market these reserves of liquid assets.
The last main cause seems to be growing disparities of wealth and income on virtually the entire planet. Indeed, a billionaire who is far more likely to place their savings in the asset market than would a middle class household. United States, the median real income has stagnated during the last thirty years is the ever increasing debt of households has enabled the country to increase its consumption and production.
The result of all this is the emergence of a kind of boiling on the entire planet. Prices began to rise in isolation of unimaginable proportions sometimes on very specific markets in specific locations on world markets sometimes critical. We could call it the economy Jacuzzi. This boiling may have initially positive effects apparently creating a resurgence of activity. Rising property prices will boost the construction sector, the explosion of stock prices will facilitate capital raising of large companies, the crowd of middlemen taking advantage of the effects of intense speculation this will support consumption spending the profits (30% of jobs created in the United States in the 2000s have been in the real estate sector). Yet the economy is facing Jacuzzi its first real crisis after just a few years of existence.
The results in terms of unproductive debt are absolutely frightening. Our standard will be the evolution of the total debt (government debt + debt + companies outside the financial sector of household debt) to GDP, as debt producing nothing will not increase the GDP in the long term but increase the amount of overall debt. In 2008, the United States, it represented 230% against 125% of GDP in 1981, France : 203% against 167% of GDP in 2002, Great Britain: 300% of GDP ... The financial sector debt also reached record highs. In 1981, the debt of U.S. financial institutions accounted for 22.9% of GDP. In 2008, we reached the 132%. British banks are in debt up to 4 times the GDP of the United Kingdom. All Western countries has been affected by this unprecedented wave of debt. The amounts to be repaid each year become increasingly important, increasing the risk of bankruptcy. This exponential trend to the accumulation of debt is not sustainable long term because the weight of debt gradually weakens the different economic actors be they banks, households, businesses or state. On top of that economy Jacuzzi, consisting of countless bubbles formed a huge bubble of credit that some say is exploding and on a sudden one day explode.
Given this fact, let's look at what the objectives of economic policies undertaken since the beginning of the financial crisis in western countries? The proposed solutions seem to be using again very policies that led our economy to the brink.
All central banks have lowered interest rates which in theory can encourage borrowing and investment. Yet this recipe has been used to address all the crises of the past decade and has led us to our current situation. In 1998, following the Asian crisis and the collapse of LTCM, the Fed has lowered interest rates violently causing the appearance and the implosion of the dot.com bubble in 2000-2001. To avoid a severe economic crisis following the September 11, rates were reduced to historically low levels for several years, inflating the housing bubble. The current rate of decline 2007-2008 and the massive influx of cash is largely responsible for the bubble in the commodities market. Despite the perverse effect is now evident that this type of measurement, all the major central banks have drastically cut rates and inject hundreds of billions in today accumulating excess reserves to revive credit market . If short term, this may help extinguish the fire and limit the damage, does it really meaning to medium term to recreate new environment for creating new bubbles destructive?
Rescue banks through the share repurchase program of distressed assets in the United States, at the entrance of the state capital in banks in the United Kingdom, the long-term loans from the French state is a major problem in capitalist economy. The survival of businesses profitable and well managed and the disappearance of others is a corollary of a capitalist economy efficient. But if some banks are just passing a bad pass, others have demonstrated an absolutely catastrophic management. In addition to saving banks irrespective of their management, states have encouraged the acquisition or merger between major banks (BNP / Fortis, Bank of America / Merrill Lynch, JP Morgan / Bear Stern). The phenomenon of "too big to fail" Is not one reason for the excessive fragility of the international banking system? Preservation businesses flawed from the inside can be a viable solution.
Western states in general have announced plans to raise several points of GDP to avoid too heavy fall in consumption and investment. Even Germany has decided to challenge his austerity budget. In the United Kingdom, the government deficit in 2009 will be 8% of GDP, U.S. federal deficit has grown at an annual rate of 39% in the last quarter of 2008. A key lesson of Keynesianism and the crisis of the 30s is that states must spend more than they receive in times of crisis. Yet such measures poses a number of problems. Western states are heavily indebted. The French government already practices of its chronic deficits Keynesian policy since more than thirty years. We must also realize that when the French government borrows at 3% of GDP, it is just sufficient to repay the interest on public debt. Every year, the state bleeds already the nation to the tune of 80 billion euro or 4.5% of GDP to repay creditors in most countries. Already engaged in a relentless pursuit of logic, the state with recovery plans can only aggravate the situation forward. Other forms currently share a real bubble world of bonds whose cause the nervousness of investors looking for investment in an uncertain environment. The price of these bonds, despite an offer exponentially increased very strongly. The 3-month rate of U.S. treasury bills are even fall below 0% for the first time since 1929. French government bonds followed the same trend from 4% for a year to less than 2%. These vouchers are far from being safe. In the event of rising interest rates or inflation due to the use of printing money, the paper may lose much of its value. This bubble this time is "too big to explode" and whether suspicion vis-à-vis the states were to appear, the result would be catastrophic.
policies initiated far from calling into question the trends of recent decades have led to this crisis are just worse. At all points of view, our economy acts as a kind drugged to the debt. We know that in the long run, it aggravates our situation, but at the time it feels so good. However, do not perform these steps would immediately sink our economies. If Lehman Brothers has clearly demonstrated that he was blissfully unaware of leaving a structure having such a role of pillar collapse. We know from Keynes that when consumers start to consume less and businesses to invest less, it is the role of the state to take over quickly. We also know that a company whose actors are indebted embarked on a massive deleveraging process can lead catastrophic deflation. The situation seems a desperate point of view. The credit bubble is present and push the explosion will not stop the inevitable.
Yet in 1935, the famous American economist Irving Fisher, also faces an exploding credit bubble has developed an ambitious and misunderstood today could well be the solution to our problems. This plan was later developed by the French Nobel prize in economics, Maurice Allais. In our economy, banks have a support role as an intermediary between those who save and those who lend. Yet it has another equally fundamental role but unknown, that of creating money. When you deposit 100 euros on your current account, the money belongs to you, is theoretically available at any time and is even guaranteed by the state. Yet, within the euro area, for example that money can be lent up to 98% or 98 euros per bank, the remaining 2 euros to be kept in reserve. The money will be spent by the debtor and will end on behalf of another individual who may have the money at any time. Through this mechanism when the central bank lends 1000 euros to a bank it can get 50,000 euros of credit and currency in circulation. Today, no credit, no money in circulation.
Irving Fisher and Maurice Allais later proposed to abolish the system and return to a system where all money deposited in the current account would be kept in reserve. Banks would be split between bank deposits and bank lending and savings only immobilized for a period agreed in advance could be construed by the banking system. The money created by the central bank would be loaned to banks to be used for state spending. The banks would retain their role as an intermediary but would lose their role in money creation. This change may seem insignificant and yet absolutely! This could help simply to deflate the credit bubble without catastrophic effect. Today our channels
stimulus inevitably require credit, lower interest rates, central bank lending to banks, government debt. Let's face it, this is awkward to fight a crisis of debt! If the state dares to use the board to note, the risk of hyper inflation enormous since each newly issued euro can be processed under the current system by 50 euro credit. In the system
Fisher / 1 euro Allais created by the central bank is 1 euro. If the state uses printing money, inflation risks are moderate but the risk of hyper inflation are nonexistent. It should be understood that the deleveraging process involves a decrease in consumption and investment officers indebted. Thus the State to compensate for this lack may finance additional spending simply by creating money and do not get into debt. And reviving the economy in time of crisis would be perfectly possible without additional indebtedness of the state or the artificial creation of conditions conducive to the emergence of new bubbles.
The adoption of such a plan would have the international impact of monetary and real revolution would require a political effort to pass an extremely complex system to a system fundamentally simple. Yet for the man in the street, it would not change in appearance not much, but our societies benefit from a strong economy finally.
This ambitious plan is of course not the only option for our governments. But we must realize one thing, we are facing a crisis of extraordinary dimensions and only measures of exceptional magnitude we can emerge unscathed from the current situation.
The phenomenon is a constant bubble of capitalism over the past three centuries. It is distinct from that of inflation. Inflation is rising prices recorded an average across all services and consumer goods. A bubble is defined as it increases the price of a single asset. So the price of oil has been multiplied by 7 in 7 years or 100% increase per year while inflation increased by only 3% per year maximum in France. To understand how we arrive at prices completely disconnected of all reality, we must return to the formation of these bubbles. Initially, the new promises of profit that can provide a market attractive to investors. The rise of asset market then drew speculation, that is to say the attempt to capitalize on the upward movement by buying assets to sell soon after. Only the anticipation that another will be ready to buy more expensive assets in the near future that motivates the purchase and not an assessment of long-term price of the asset. Many speculators hoping for high yields indebted in part to buy the asset because if the performance of the operation is outweighs the interest of the loan, you earn money without having out of his pocket. The important thing to understand is that the bubble phenomenon owes its existence to this speculative debt. If speculation was made in cash, the money could be spent in other assets that eventually would be dumped and attract investors again. Here, the price increase is largely through borrowed money and penalizes few other assets.
Speculation is by definition a non-productive activity. It invests in an asset until the price goes up. What what is traded are shares of ownership of such assets or such. Nothing is invested in creating any wealth. Take for example a lifting action by a company. The sum raised will be used for an investment. Subsequently, the change in stock price will not change the amount of investment previously made. The euphoria generated by a massive debt bubble causes a totally unproductive. Now on this debt there is interest and this interest can not be reimbursed by the rising prices themselves fed by new debt. One day, the funds are drying up and the bubble bursts by liquidation Panic assets to repay debts.
This mechanism reveals the fundamental paradox of asset pricing. We consider now that the price of an asset takes into account the expected return of the asset and its volatility relative to the rest of the market. However, in times of euphoria, there is finally little risk of not finding a buyer at a good price a few months later. The investor with experience in several successful experiences in recent years perceived risk as relatively low. Everyone is afraid to miss the golden opportunities offered by the market and it therefore seems reasonable time to assess bubble these assets at unreasonable prices.
Human nature has not changed in literally a decade. Greed often invoked to explain recent phenomena can not explain itself. How then can we explain such a boil on the entire planet?
First, by irresponsible monetary policies of the ECB, the Fed, the Bank of England or the Bank of Japan. The Fed and the BoJ has kept rates very low for years. Adjusted with inflation and real interest rates were negative for several years. Thus, borrowing and speculating on just about any asset that can take 2, 3 or 4% a year, it was possible to make a profit without a penny out of his pocket. In addition, central banks have poured financial circuits of money during the past three years. In Europe, the growth rate of money supply was over 11% in 2007 while GDP growth was 2.5% and inflation of 2%. This influx of credit has been spilled on the asset market.
Second, the conversion of the debt capital markets in an asset more liquid, ie tradable in financial markets. Securitization ever more sophisticated bank debt has allowed financial institutions to sell all sorts of claims. The banks were able to borrow at low cost, lend money to private agents and immediately resell to others that claim with a profit. Taking advantage of growing demand for these assets at risk, this type of method, where the gain is immediate, prompting banks to make loans riskier still. The high and stable yields of these assets between 2002 and 2006 and the illusion that enabled new knowledge to prevent financial risk have prompted many institutions to buy and to inflate the various bubbles.
Third, globalization and liberalization of capital flows have allowed any investor to take advantage of a potentially far greater number of opportunities for speculation. No real global regulation, the world has become a sort of Wild West for daring investor.
Fourth point, the accumulation of foreign exchange reserves in dollars of oil-producing countries, China and Japan, both of whom have largely artificially undervalued their currency to maintain an export economy competitive. These countries undertake not going directly into foreign countries dumped on the market these reserves of liquid assets.
The last main cause seems to be growing disparities of wealth and income on virtually the entire planet. Indeed, a billionaire who is far more likely to place their savings in the asset market than would a middle class household. United States, the median real income has stagnated during the last thirty years is the ever increasing debt of households has enabled the country to increase its consumption and production.
The result of all this is the emergence of a kind of boiling on the entire planet. Prices began to rise in isolation of unimaginable proportions sometimes on very specific markets in specific locations on world markets sometimes critical. We could call it the economy Jacuzzi. This boiling may have initially positive effects apparently creating a resurgence of activity. Rising property prices will boost the construction sector, the explosion of stock prices will facilitate capital raising of large companies, the crowd of middlemen taking advantage of the effects of intense speculation this will support consumption spending the profits (30% of jobs created in the United States in the 2000s have been in the real estate sector). Yet the economy is facing Jacuzzi its first real crisis after just a few years of existence.
The results in terms of unproductive debt are absolutely frightening. Our standard will be the evolution of the total debt (government debt + debt + companies outside the financial sector of household debt) to GDP, as debt producing nothing will not increase the GDP in the long term but increase the amount of overall debt. In 2008, the United States, it represented 230% against 125% of GDP in 1981, France : 203% against 167% of GDP in 2002, Great Britain: 300% of GDP ... The financial sector debt also reached record highs. In 1981, the debt of U.S. financial institutions accounted for 22.9% of GDP. In 2008, we reached the 132%. British banks are in debt up to 4 times the GDP of the United Kingdom. All Western countries has been affected by this unprecedented wave of debt. The amounts to be repaid each year become increasingly important, increasing the risk of bankruptcy. This exponential trend to the accumulation of debt is not sustainable long term because the weight of debt gradually weakens the different economic actors be they banks, households, businesses or state. On top of that economy Jacuzzi, consisting of countless bubbles formed a huge bubble of credit that some say is exploding and on a sudden one day explode.
Given this fact, let's look at what the objectives of economic policies undertaken since the beginning of the financial crisis in western countries? The proposed solutions seem to be using again very policies that led our economy to the brink.
All central banks have lowered interest rates which in theory can encourage borrowing and investment. Yet this recipe has been used to address all the crises of the past decade and has led us to our current situation. In 1998, following the Asian crisis and the collapse of LTCM, the Fed has lowered interest rates violently causing the appearance and the implosion of the dot.com bubble in 2000-2001. To avoid a severe economic crisis following the September 11, rates were reduced to historically low levels for several years, inflating the housing bubble. The current rate of decline 2007-2008 and the massive influx of cash is largely responsible for the bubble in the commodities market. Despite the perverse effect is now evident that this type of measurement, all the major central banks have drastically cut rates and inject hundreds of billions in today accumulating excess reserves to revive credit market . If short term, this may help extinguish the fire and limit the damage, does it really meaning to medium term to recreate new environment for creating new bubbles destructive?
Rescue banks through the share repurchase program of distressed assets in the United States, at the entrance of the state capital in banks in the United Kingdom, the long-term loans from the French state is a major problem in capitalist economy. The survival of businesses profitable and well managed and the disappearance of others is a corollary of a capitalist economy efficient. But if some banks are just passing a bad pass, others have demonstrated an absolutely catastrophic management. In addition to saving banks irrespective of their management, states have encouraged the acquisition or merger between major banks (BNP / Fortis, Bank of America / Merrill Lynch, JP Morgan / Bear Stern). The phenomenon of "too big to fail" Is not one reason for the excessive fragility of the international banking system? Preservation businesses flawed from the inside can be a viable solution.
Western states in general have announced plans to raise several points of GDP to avoid too heavy fall in consumption and investment. Even Germany has decided to challenge his austerity budget. In the United Kingdom, the government deficit in 2009 will be 8% of GDP, U.S. federal deficit has grown at an annual rate of 39% in the last quarter of 2008. A key lesson of Keynesianism and the crisis of the 30s is that states must spend more than they receive in times of crisis. Yet such measures poses a number of problems. Western states are heavily indebted. The French government already practices of its chronic deficits Keynesian policy since more than thirty years. We must also realize that when the French government borrows at 3% of GDP, it is just sufficient to repay the interest on public debt. Every year, the state bleeds already the nation to the tune of 80 billion euro or 4.5% of GDP to repay creditors in most countries. Already engaged in a relentless pursuit of logic, the state with recovery plans can only aggravate the situation forward. Other forms currently share a real bubble world of bonds whose cause the nervousness of investors looking for investment in an uncertain environment. The price of these bonds, despite an offer exponentially increased very strongly. The 3-month rate of U.S. treasury bills are even fall below 0% for the first time since 1929. French government bonds followed the same trend from 4% for a year to less than 2%. These vouchers are far from being safe. In the event of rising interest rates or inflation due to the use of printing money, the paper may lose much of its value. This bubble this time is "too big to explode" and whether suspicion vis-à-vis the states were to appear, the result would be catastrophic.
policies initiated far from calling into question the trends of recent decades have led to this crisis are just worse. At all points of view, our economy acts as a kind drugged to the debt. We know that in the long run, it aggravates our situation, but at the time it feels so good. However, do not perform these steps would immediately sink our economies. If Lehman Brothers has clearly demonstrated that he was blissfully unaware of leaving a structure having such a role of pillar collapse. We know from Keynes that when consumers start to consume less and businesses to invest less, it is the role of the state to take over quickly. We also know that a company whose actors are indebted embarked on a massive deleveraging process can lead catastrophic deflation. The situation seems a desperate point of view. The credit bubble is present and push the explosion will not stop the inevitable.
Yet in 1935, the famous American economist Irving Fisher, also faces an exploding credit bubble has developed an ambitious and misunderstood today could well be the solution to our problems. This plan was later developed by the French Nobel prize in economics, Maurice Allais. In our economy, banks have a support role as an intermediary between those who save and those who lend. Yet it has another equally fundamental role but unknown, that of creating money. When you deposit 100 euros on your current account, the money belongs to you, is theoretically available at any time and is even guaranteed by the state. Yet, within the euro area, for example that money can be lent up to 98% or 98 euros per bank, the remaining 2 euros to be kept in reserve. The money will be spent by the debtor and will end on behalf of another individual who may have the money at any time. Through this mechanism when the central bank lends 1000 euros to a bank it can get 50,000 euros of credit and currency in circulation. Today, no credit, no money in circulation.
Irving Fisher and Maurice Allais later proposed to abolish the system and return to a system where all money deposited in the current account would be kept in reserve. Banks would be split between bank deposits and bank lending and savings only immobilized for a period agreed in advance could be construed by the banking system. The money created by the central bank would be loaned to banks to be used for state spending. The banks would retain their role as an intermediary but would lose their role in money creation. This change may seem insignificant and yet absolutely! This could help simply to deflate the credit bubble without catastrophic effect. Today our channels
stimulus inevitably require credit, lower interest rates, central bank lending to banks, government debt. Let's face it, this is awkward to fight a crisis of debt! If the state dares to use the board to note, the risk of hyper inflation enormous since each newly issued euro can be processed under the current system by 50 euro credit. In the system
Fisher / 1 euro Allais created by the central bank is 1 euro. If the state uses printing money, inflation risks are moderate but the risk of hyper inflation are nonexistent. It should be understood that the deleveraging process involves a decrease in consumption and investment officers indebted. Thus the State to compensate for this lack may finance additional spending simply by creating money and do not get into debt. And reviving the economy in time of crisis would be perfectly possible without additional indebtedness of the state or the artificial creation of conditions conducive to the emergence of new bubbles.
The adoption of such a plan would have the international impact of monetary and real revolution would require a political effort to pass an extremely complex system to a system fundamentally simple. Yet for the man in the street, it would not change in appearance not much, but our societies benefit from a strong economy finally.
This ambitious plan is of course not the only option for our governments. But we must realize one thing, we are facing a crisis of extraordinary dimensions and only measures of exceptional magnitude we can emerge unscathed from the current situation.
