Monday, August 20, 2007

Nope, that's not money...

John Rubino, author and editor of the DollarCollapse website, has written an article that examines the rise of the "debt-as-money" financial system.

In, "Nope, That's Not Money", Rubino recounts Doug Noland's ideas on the ever-expanding definition of money and finds that recent turmoil in financial markets has shown certain money substitutes to be suspect.

Here's an excerpt:

With a few months of hindsight, it’s now clear that debt-as-money was not one of humanity’s better ideas. When the U.S. housing market—the source of all that mortgage-backed pseudo money—began to tank, hedge funds found out that an asset-backed bond wasn’t exactly the same thing as a stack of hundred dollar bills. The global economy then started taking inventory of what it was using as money. And it began crossing things off the list. Subprime ABS? Nope, that’s not money. BBB corporate bonds? Nope. High-grade corporates? Alas, no. Credit default swaps? Are you kidding me?

No longer able to function as money, these instruments are being “repriced” (a slick little euphemism for “dumped for whatever anyone will pay”), which is causing a cascade failure of the many business models that depend on infinite liquidity. The effective global money supply is contracting at a double-digit rate, reversing out much of the past decade’s growth.

Rubino goes on to add that while the central banks are attempting to add liquidity to the banking system by lending money in exchange for plumetting bonds, "the process of debt reclassification has a momentum that a few hundred billion new dollars won’t stop."

There you have it. The deleveraging is underway and the resulting drop in asset prices may not be as short-lived or as well-contained as many would have hoped.