Planet Ponzi by Mitch Feierstein

Author:Mitch Feierstein [Feierstein, Mitch]
Language: eng
Format: epub, mobi
Publisher: Glacier Publishing
Published: 2012-10-11T23:00:00+00:00

Figure 13.3: The price of gold, 2000–2011

Source: ThomsonReuters.

We’re just about done on equity markets. The simple truth, once again, is that the assets promised by a Ponzi scheme are worth vastly less than they purport to be. Your house is worth less than the Ponzi-sellers suggested. Your equities and pension are worth less too. They were always worth less. It’s just that for a long time there were enough Ponzi-ish buyers to keep the whole merry-go-round moving.

If you own any shares, either directly or via a pension fund, the thoughts contained in this chapter have probably done little to brighten your day. It wasn’t you who led us into this mess, but you seem to be among those of us asked to pay for it all. Yet I wouldn’t want these personal woes to conceal some of the policy implications that will follow from further falls in the equity market.

The most obvious issue is that people will feel poorer. People who feel poor tend to cut their spending. So firms will find it tougher to sell their goods. Profits will be under pressure, employees will be laid off. There’s a vicious circle building there, emphasis on the word ‘vicious.’

Secondly, of course, every decline in the equity market means a bigger hole in government and private pension funds. Those holes need to be filled. Corporations, which account honestly and openly for their pension funds, will need to dig into profits to find the necessary cash. Governments, which prefer to manipulate their figures, will simply find that their ever-swelling pool of commitments has just gotten deeper.

Thirdly, though, almost everything in Planet Ponzi traces back to the banks. If the banks were sound and strong, the economy could start to get going again. If the banks are little better than zombies, the economy is years from recovery. Japan’s economy is still on intravenous support twenty years on from its crisis. And though banks operate through the markets for credit rather than equity, the equity markets are crucial to them nevertheless. We’ll look closely at the financial sector in a future chapter, but for now you can just take it for granted that banks are hemmed in between their mountains of crappy assets and their oceans of excessive debt. Those mountains and those oceans aren’t about to disappear.

In some crisis situations, governments have simply relieved banks of their bad debts. In others, banks have gone to the equity markets and raised capital. Either way, their balance sheets become freed up and capable of working once again.

Today, however, neither option looks at all easy. Governments simply aren’t in a position to incur any more debts, to take on any more problems. Equally, however, declining equity markets make it fearsomely hard (and expensive) to seek capital. In September 2011, Bank of America announced a $5 billion investment by Warren Buffett. The market greeted the news with a surge of relief‌—‌which, however, faded rather quickly once the terms of the deal sank in. Buffett bought preferred stock, which paid an annual dividend of 6% (at a moment when the yield on ten-year Treasuries was just 2.

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