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Simon Johnson’s Sense on Cents Classic

Posted by Larry Doyle on September 17, 2013 9:15 AM |

On a daily basis we now get fed less than comprehensive if not fully distorted views of the last 5 years by an array of politicians, industry sponsored economists, and assorted other puppets.

While the airwaves and other outlets are filled with much of this noise, let’s take a step back so we can get the wide-angled view as to what has really transpired within our nation and the global economy. To do so, lets check in with Sense on Cents Hall of Famer Simon Johnson who provided a prescient view as to what was — and is — really going across a wide swath of our economic landscape.

In a Sense on Cents “past is prologue” classic, Johnson wrote back in 2009 in The Atlantic: 

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises.

If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform.

Nails that.

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again).

In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay.

This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse.

No doubt about that recap and in a display of prescience not often seen, Johnson foretold us what would play out in stark terms.

More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

BINGO!! The 5 year recap in two short but totally accurate sentences.

We can dispense with the sound bites and clanging of cymbals by Wall Street’s sycophants. We have ourselves an under performing, rent-seeking economy that works for those enmeshed in the crony capitalist system that has been on display for all to see.

Simon Johnson nailed it.

Navigate accordingly.

Larry Doyle

Please pre-order a copy of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy, that will be published by Palgrave Macmillan on January 7, 2014.

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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • fred


    All one has to do is look at the growth in M1 money supply, oh wait this number is no longer reported by the Fed, (how convenient). Where has all the QE gone and how will the Fed ultimately mop it all up?

    Let me back up a bit, since M1 is not being reported, how else can we measure how much excess QE (or potential inflation) is out there? Look no further than the size of the Fed’s balance sheet for a good estimate.

    Where did the other side of the transaction go? Look no further than corporate America’s balance sheet (overseas cash holdings) as well as the balance sheet of global “too big to fail banks” (bank reserves).

    Can this all end with taper? No way, taper will probably just stem the flow and prolong the pain. But why no massive inflation?

    Well it depends on how you measure inflation (gas prices are close to all time highs, as are (don’t look now), real estate and most other asset prices).

    The uneasy feeling of stabilty we have achieved depends on all the cash staying right where it is. Once this cash starts moving thru the system, watch out?

    What could be a triggering event? How about excess dividends/bonus paid or more recently with Steve Balmer’s termination notice, the exercising of massive amounts of stock options by retiring execs or how about the retirement of the baby boomers as they draw down on pension and retiremnt plans.

    In any case, it is imperative that this liquidity not find it’s way to the “masses of minions”, the only way the gov’t can stop this from happening is through the tax collection mechanism, targeted/limited gov’t spending programs, sovereign debt repayment and controlled asset price inflation.

    So the best we can hope for is more of the same, a slow growth global economy and steadily rising unreported inflation for the forseeable future and of course continuing BMIR. Ahhhhh, maybe we would have been better off taking the quick hit back in 2009!

    Of course, the wildcard in all this is Obamacare (Medicare) spending, and interest rate levels (higher rates can turn past monetary policy into future fiscal policy).

    LD, can we do better than more of the same!

  • LD


    Your points here are well taken.

    Having taken these paths, the Fed certainly knows that if the spark is lit the “inflationary engine” will explode.

    So how to make sure that does not happen? Tax, tax, tax … and provide no programs to motivate meaningful investment and spending.

    Can we do better? Most assuredly.

    The capital should have been directed to the community banking system, credit unions, and local S&Ls. Simultaneously, the rule of law should have been practiced with rigor so that real confidence could have developed not the faux form we have now.

  • Jim

    Great piece Larry, it seems, very few people seem to remember that the utility of money and credit are based on their soundness.

    When money can’t be trusted the whole system collapses. I’m convinced that in time this is happening and believe that hard small/unleveraged assets is the play.

    I hope I’m wrong.

    I bought your book, how do I get it autographed?

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