all paper will burn

From: Forrest Bishop (
Date: Sat Oct 14 2000 - 14:50:06 MDT


  The Credit Bubble Bulletin - by Doug Noland

       October 13, 2000
"...What had been an unfolding financial dislocation took a dramatic turn for
the worst earlier this week. And despite today’s wild rally, it is my view
that we are now in the midst of a full-fledged financial crisis. Further, for
the U.S. financial system and economy, the Middle East crisis could not
have come to a head at a more inopportune time. In numerous
commentaries, we have written extensively on the issue of financial
fragility and we do not think one can overstate the critical importance of
this concept. Unfortunately, over this protracted boom cycle the U.S.
financial system has developed acute vulnerability to the point that it
hangs in a truly fragile balance – there is absolutely no room for error.
There is going to be an accident, it is only a matter of time and under what
circumstances. The amount of leveraged speculation is unprecedented..."

[The previous CBB has a chart of Xerox's practically overnight corporate
paper meltdown- spreads now at junk bond levels. Seems they ran off a few
too many copies of it. Spreads, e.g. between corporate bonds and 10-year
Treasuries, widen as credit quality deteriorates. They are an early indcator. ]



"...You always hurt the one you love. . . Even as I have chronicled the abuse
of the euro, I have cautioned that the dollar would have a problem some day
after the
 stock bubble burst. Colin Negrych made some observations this morning on this
subject that I agree with:

 The U.S. has $65.5 billion in reserves to defend the dollar. This is a
pittance relative to the value of U.S. assets held by foreigners, both
securities and
   business interests. When the dollar starts to fall against the euro, as it
has been doing for years against the yen, the "dollar crisis" mentality will
hold. The U.S. macroeconomic imbalances make a 25- to 40-percent adjustment in
the dollar the most likely outcome. This event will be resisted in
 every way possible, but the efforts will fail.

 The U.S. has sucked in massive amounts of foreign capital with captivating
tales of high returns and low risk bolstered by high growth and low inflation,
 all made possible by a surge in productivity resulting from the application of
technology. There is now plenty of evidence the foregoing is a fatal

and from:

ORO (10/14/2000; 6:35:27MT - msg#: 38999)
More thoughts on the Key assets and liabilities
ORO (10/13/2000; 17:00:58MT - msg#: 38967)
First the missing URL

"An open question:

"The Fed publishes a "key assets and liabilities" of the Federal Reserve System
which encompases bank assets and liabilities other than Money Market funds. The
assets less liabilities
balance among these has been falling steadilly from some $70-80 billion to
under $10 billion today, on a total of some $4.7 trillion in either assets or
liabilities. This would seem to indicate
some difficulty on the Fed's part in maintaining interest rates at these "high"
levels. They will have to lower rates so that it would be possible for banks to
play the carry margin/spread
between the Fed rate and the market rate of interest. Otherwise, if these
figures have any significance, insolvency of the system is just around the
corner. The key asset less key liabilities
figure has a loose relationship to the points at which the Fed decides to start
lowering interest rates in order to support the banking system.

"The above URL has on pgs 7-9 charts of spreads between corporates and
treasuries, that indicate heavy deflationary fear in the markets as they are at
the highest spreads recorded, and
at double their 1993-7 range. In terms of the originary interest concept, the
relative discount of future goods vs. current goods, it has risen to double its
prior rate and the expected long
term price inflation is at 6.8%, down from 7.5% at the end of spring. This is
still reflected in backwardations in a number of commodity futures markets,
particularly in energy."

If the Fed system is insolvent on its own, it does not mean that it is
illiquid. Meaning that the margin of available funds for settlement of
transactions is generally sufficient. However, such
conditions of insolvency are an invitation for some to speculative attack...."



International Perspective - by Marshall Auerback

[Meaning monetizing/intervening in the stock market.]

                                          13 October 2000
"...Fund manager William Fleckenstein, whose comments are quoted in the
 context of the recent joint intervention to support the euro and the
 concomitant announcement by President Clinton to sell 30 million barrels
 out of the nation’s Strategic Petroleum Reserve, had this to say:

 “Bubbleonians have become belatedly concerned about the euro and oil,
so in one fell swoop today the powers that be decided to intervene to try to
 fix those markets. My extraordinarily brilliant and pithy friend Colin
 Negrych described today’s action as an ‘S&PR release...and an
intel-vention.’ He went on to say: Stocks became the primary tool of
 economic policy in the G-22 many months ago, first and foremost in the
 U.S.. Whatever is harmful to stocks, the vehicle by which the greatest
 government confiscation of wealth ever is being effected, will be targeted
 for neutralization…"

John Crudele's NY Post article on Friday also called for Fed/gov intervention.
This will not work, except perhaps in the short term. The net result will be
than no intervention. There appears to have been such an intervention at 10:30
Oct. 12th. The melt-up on Friday appeared to have been institutionals -pension
funds, mutual funds making "f*uck it" puts.


And for the big picture, updated today, see

The only lasting impact the historic 70s dollar price inflation had was to set
off a search to create a replacement for the world's greenback reserve system.
A "political will" was created to
hold this reserve system together at any and all cost and for whatever amount
of time was needed to build said replacement. If the "will" was not strong
enough or "time" not long enough,
it was easy to see that gold would be the fall back reserve. Indeed, that would
be quite a fall back, especially for those people (governments included)
without gold.

[meaning if the Euro collapses then gold at free market rates is Plan B. The
point being to salvage world trade while allowing the dollar to find its
intrinsic value.]

 There is a huge difference between controlling an "ongoing price inflation"
and battling an ongoing timeline failure of your currency. The first is
controlled through printing restraint, while the second is managed to a bitter
end. Some would sarcastically say "it's manipulated for it's longest lasting

'...To date, Another's view and position has been and is continuing to be
right. The dollar paper system is on fire and the gold paper system is failing
from continuous supply. The dollar is
being forced upward as oil values rise, blocking all efforts of the Fed to
raise rates and contract the runaway system. Hyperinflation is directly in our

[E.g. a prediction that an oil country (Iraq, it turns out) would demand
payment in Euros was made by 'Another' about 2 years ago. Others (Iran in
particular) may follow soon, reducing external dollar demand. This on top of
the already collapsing external dollar debt will lead to a (competitive)
currency devaluation- the global race to the bottom.]

Forrest Bishop
Institute of Atomic-Scale Engineering

This archive was generated by hypermail 2b30 : Mon May 28 2001 - 09:50:17 MDT