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Trillion-Dollar Question, Part II
Forbes ^ | 9/5/2007 | Rich Karlgaard

Posted on 09/05/2007 4:11:05 PM PDT by bruinbirdman

In the July 2 issue of FORBES I posed these questions: What feeds the global liquidity surplus? On balance, is the global cash glut mainly the result of the U.S. Federal Reserve's loose money and the resulting lax loans? Or can it be explained by a new force--rapidly rising prosperity around the world?

The answer mattered, I wrote. "If loose money [lax lending] is causing the liquidity surplus, then both economic growth and the bull rally are resting on thin ice." That would be bad and guarantee a hard landing. But if the 25-year Laffer-to-Google (nasdaq: GOOG) boom in innovation, technology, "productivity, prosperity and profits have brought on the glut, then the boom is durable."

Seems laughable now, doesn't it? No one talks about a global liquidity s urplus. Now you hear words like "crisis" and "drought."

Take a deep breath. Did the world really change that much? In two months? So we are told. Be skeptical. Blame cable television peddling panic to keep our eyes glued to the TV, e.g., Jim Cramer's meltdown on CNBC. Or blame blogger Matt Drudge, who plays to American innumeracy by headlining a 387-point, one-day Dow drop with an animated ambulance siren. Drudge is a smart guy. He knows 387 points looks big, sounds grave. Calling it a 2.8% slip, well, that wouldn't really hold the eyeballs, would it?

Now, as this column goes to press, the Dow is down about 5% from its alltime high. Let me repeat: 5%. In comparison, on Oct. 19, 1987 the Dow blew up and lost 22.6%. In one day. Could 2007's investors handle an equivalent one-day drop? That would be 2,991 points. I have my doubts. Today's investors are wimps. We are whiners, à la Cramer. We take our bottled water into an office meeting lest we perish from dehydration. We wear bicycle helmets to fetch our double decaf, nonfat lattes. We are as fragile as china.

Could we handle a lesser drop? On Aug. 31, 1998-- smack in the middle of the greatest bull run in history--the Dow tumbled 6%. From 8,052 to 7,539 in one day. Maybe we could handle that. That is, if someone held our hands and gently told us what would follow.

There was plenty of fear in the air on Aug. 31, 1998. Here are excerpts from a transcript of The NewsHour with Jim Lehrer:

Michael Metz: "The American consumer, in my judgment, has been spending his unrealized capital gains. I believe that we're going to have a disappointing growth in personal spending. We're going to have some slowdown in growth in capital spending and a rather difficult environment for exports. This is not consistent, in my opinion, with a strong economy."

James Glassman (financial pundit) : "We also have an inverted yield curve. In other words, interest rates are higher on the short term than they are on the long term. That's also a bad sign. So we could be headed for bad economic times."

Metz: "The world is more dangerous now than it was before."

Sound familiar? Yet I don't recall any meltdowns like Cramer's.

Joe Battipaglia (the lone bull on the NewsHour panel): "If you go back over the history of this particular bull market, each and every correction, including the big one in '87, was sharp, deep and very short-lived, and we came out of the '87 crash, for example, saying that the real economy would be adversely affected. And, of course, it wasn't, and the market went on to sail to higher highs."

Battipaglia was right. During the next 161TK2 months, the Dow zoomed from 7,539 to 11,723--a 55% pop. It turned out that Aug. 31, 1998 was nothing more than a bull market hiccup.

So where are we now? The global economy is strong. There is no liquidity crisis. Okay, I'll concede there's a temporary credit crunch. But not a liquidity crisis. To believe that is to believe the 25-year U.S. and global booms were mirages or that all their profits were tossed into Miami and Las Vegas construction holes. You'd have to believe that no economic miracles had occurred in China, India, Southeast Asia, eastern Europe and Ireland during this time. That none of the wealth created, here and abroad, was saved and invested. That no new financial technology was invented to turn wealth into lendable resources.


TOPICS: Business/Economy; Culture/Society; Miscellaneous; News/Current Events
KEYWORDS: china; contagion; cramer; forbes; karlgaard

1 posted on 09/05/2007 4:11:06 PM PDT by bruinbirdman
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To: bruinbirdman
The only thing we have to fear is fear itself. And the only thing I fear is unforeseeable big blunders from central banks and neither a Mugabe "money printer" on one extreme or a gold bug deflater on the other is likely to get a chance.

The system is in place to keep small shocks from becoming big disasters.

2 posted on 09/05/2007 4:35:47 PM PDT by Colonel Kangaroo (Only Duncan Hunter would inspire a tagline from me)
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To: Colonel Kangaroo
“The system is in place to keep small shocks from becoming big disasters.”

“small” is a relative word. The economy of, say 1990, isn't’t the economy of today. Compared to the dot.com bubble burst of the Clinton era we’re on much better “grounds” today.

If there’s a problem, look to the mandate by the Feds that lenders lend to above average risky clients, that is, don’t be doing no redlining. Yeah, it makes good bidness sense, but it isn't PC!

3 posted on 09/05/2007 4:54:16 PM PDT by Smartaleck
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To: bruinbirdman
Well, here is my opinion, for what it’s worth.

Modern technology simply makes it possible to create unprecedented amounts of wealth. We can make more material goods, and grow more food, and build more houses than we could use. So uninvested money builds up as investment opportunities become scarce.

4 posted on 09/05/2007 5:14:26 PM PDT by proxy_user
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To: bruinbirdman

Credit. The whole world runs on credit. And increasingly we are borrowing and borrowing and borrowing. Its not going to end pretty.


5 posted on 09/06/2007 7:47:54 AM PDT by hripka (There are a lot of smart people out there in FReeperLand)
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To: proxy_user
uninvested money builds up as investment opportunities become scarce.

This is where it seems space development could become very attractive as a major investment once the 1967 Treaty has been repealed.

6 posted on 09/06/2007 7:50:03 AM PDT by RightWhale (It's Brecht's donkey, not mine)
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