They say money makes the world go ’round. Yet with the recent collapse of Wall Street’s securitization business came the end of a largely unregulated, credit creating machine equipped with an infinite multiplier. Gone is capacity once possessed by investment banks, hedge funds and private equity firms to essentially create money out of thin air. Indeed, this capacity had been largely encouraged by Federal Reserve Chairman Alan Greenspan immediately following his appointment just weeks prior to the stock market crash of October 1987. Wall Street’s securitization business became a formal means by which the financial economy was almost effortlessly able to expand up until 2007. Securities once possessing a full measure of “money-ness” (not unlike a dollar bill) facilitated the financial economy’s unchecked growth until those securities tied to sub-prime mortgages became “toxic” — unable to be traded at any price.
The now dysfunctional credit creating machine which once was Wall Street’s securitization business — itself having been principally powered via City of London connected offshore financial centers (through OTC derivatives) — over the course of recent decades helped both build and mask all manner of financial and economic imbalances. With its seizure a huge, capital sucking hole has been blown into the global financial system, requiring all manner of extraordinary support. Truth is, however, these support arrangements do little more than buy time in which deep, long-delayed structural adjustments might be made. Sadly, though, practically nothing in this effort is being done. Rather, an attempt at perpetuating unsustainable global dependencies built up by the now-defunct credit creating machine are instead being promoted. In effect Wall Street’s deep-seeded troubles are being put off for another day. Furthermore, the fundamental problem the global financial system faces is being made only all the more vexing — and ultimately insurmountable — now that the U.S. Treasury has been drawn into the mix.
Most alarming is the fact this is occurring amidst a gutted physical economy 3-4 decades short of such necessary capital investment as every nation requires to maintain some semblance of economic competitiveness. So, with capacity to mask current financial and economic imbalances obliterated, exposed is a global arrangement presently incapable of generating such surplus physical output as is required to both maintain and expand the global economy’s productive capacity, as well as ensure the viability of finance existing to facilitate this functioning (let alone the viability of the mountain of financial side bets that have been created over the past decade or so via Wall Street’s securitization business).
The cold, hard reality we face is this: absent a global program coordinating low-cost capital investment in physical economy in measures dwarfing anything thus far put forward the United States of America, as well as every industrialized nation of the world, is at profound risk of suffering both financial and economic dislocations of unprecedented proportion, because the planet’s present physical capacity to generate such wealth as is necessary to service existing financial claims is woefully inadequate. This much is made painfully obvious by the past year’s parabolic increase in new financial claims created against a physical economy whose shrinkage likewise accelerated (as well as by the fact these claims were placed by the lender of last resort, i.e. the U.S. Treasury). The $800 billion stimulus package, were this actually being spent, is in fact a pittance in the grand scheme of the multi-decade deficit in economic infrastructure investment we are facing. Any economist worth his or her salt will tell you that, for several decades the United States has been postponing capital investment in infrastructure, such that, presently, sums on the order of trillions of dollars need be spent annually to upgrade the nation’s (and the globe’s) capacity for producing physical wealth necessary for servicing existing financial claims. Anything short of this investment is but exposing current liabilities to increasing risks of default.
Although we may have for a time succeeded in papering over this problem, and delayed the inevitable day of reckoning, we still face an enormous vulnerability requiring the thoughtful attention of millions of investors. Since most folks scarcely grasp the magnitude of this issue, they are well-advised these days to generally avoid risky investments like the plague.
The stock market presently might be seen, then, as too dangerous a place for uninitiated investors to be risking their savings. Given today’s growing financial vulnerabilities, prudence suggests most mom and pop investors might be better off simply staying away from stocks.
What really needs to be understood is this: the stock market is a place where capital can be quickly raised. Indeed, it was this feature that, in 2008 resulted in the stock market’s unraveling. So, with the volume of financial liabilities (debt) still exploding, and yet with risks of default in some key sector or another not diminishing one bit, it might only be a matter of time before the stock market once again is hit up for capital needed to plug holes somewhere or another caused by some debt security cratering. Of course, there is no such thing as a sure thing. However, there’s a compelling case for exercising extreme caution in what have already proven to be frightfully vulnerable times. If nothing else, now certainly is not the time to be throwing all caution to the wind.