Iron Sunrise

| September 13, 2007

Iron Start Implosion

Avid readers of this blog will remember earlier this year the warning calls that went out about the impending new phase of our national and global finance. The part that surprised me was that it has taken this long to get this far. The stones are all lined up for the avalanche, but some of the strongest forces in the market (Federal Reserve, Goldman-Sachs, Merrill Lynch and others) are doing everything they can to hold it back, or at least force it to unfold slowly.

The way I like to look at it is the analog of the life cycle of a star. Your average star is an unimaginably huge ball of gas that is undergoing continuous nuclear fusion due to its enormous size – that is to say a huge, ever exploding hydrogen warhead just 93 million miles down the road. When a star like our sun runs out of fuel hydrogen, it starts to burn other elements, each stage the fusion core produces heavier and heavier elements as the start keeps swapping to whatever it has to burn to stay “lit”. Each stage produces heavier and more complex atoms starting at Helium up through elements such as Carbon and Oxygen. In fact every atom of you, I and everything around you was created this way untold millennia ago.

The end of the road for the largest and most powerful stars is the element Iron. When the star reaches that phase it literally only has a few days before it ends, usually in a collapse into a neutron star, black hole or a super nova.

So now – our economy. For the last 10 years at least, the unprecedented times of prosperity most of us have enjoyed has come from some rather creative, and in hind sight dangerous, monetary policy from most of the major world powers and financial institutions. The tool of prosperity has been to increase the velocity of money and elasticity of debt. As a result people across the world have taken on amounts of debt that would have been un-thinkable a decade ago.

In the US economy the gross trend has been clear. Savings has been decreasing while debt has exploded. For many people, especially young adults who have come of age in this time or doggedly hedonist types we tend to cultivate in Southern California, credit is the way they manage their finances. Deciding what can be spent is a function of how much credit is available, rather than how much money is budgeted. In other words, for many folks – debt is the new money.

On the macro scale, the key to what happens next is liquidity, or access to massive amounts of money via new debt. This is not the kind of debt that people use, but the billions of dollars used to all manner of things: building new merchant ships, purchasing new aircraft, opening new factories, and for some companies even keeping enough spending money around to purchase office supplies for the 200 or so locations.

For the last few weeks, access to these enormous blocks of credit has all but been eliminated as the entities that might offer them recoil in fear from the credit markets. The problem here is that so much bad paper (debt) was sold as good debt over the last 4 years that no one knows who to trust any more. As a result there are some strange and unprecedented events. Leverage buy outs (recently re-coined “private equity”) have frozen up in mid-deal. In some cases the banks who agreed to provide the cash and then sell the debt on the open market are left holding a multi-billion dollar bag.

As a result, even solid corporations are now wanting for the basic fuel of business – money. This could be seen as the same hydrogen a star normally burns. Lacking money, they could use debt (helium), but now even that is hard to come by.

Recently the US Federal Reserve and European Central Bank (ECB) have been “injecting money into the system”, billions of Dollars and Euros worth. You may wonder how this happens. One thought is that (Fed Chairman) Bernanke loads up a big yellow Rider truck full of $1000 bills with the ink barely dry and drives around to the banks dropping off pallets of cash. In reality this money is loaned into existence. This loan comes from the Fed to its big client banks. To grant these loans the Fed must take some form of collateral to secure these loans, and charge interest.

Normally the Fed would only take high quality debt instruments such as vouchers for gold, US Treasuries or other items of known worth and durability. In the last few weeks the Fed has been willing to take almost anything as security – including large blocks of near worthless sub-prime loans and Leverage Buyout Debt – as collateral.

This garbage debt is the tail end of the bright burning prosperity cycle that will soon be a fond memory. It is the Silicon and Iron of our economy. It may be the fact that this is all that is currently left to use as fuel for the global engine. We as a planet are in some new financial territory, and there is no good prediction or model of how this will unfold. The biggest players on the world stage are committing huge resources to slow down the collapse that the laws of math say must take place before we can clear out the dead wood and usher in the next age of prosperity.

One has to wonder if these giants see things much more clearly than we do, as they act as if they are in a fight for their very existence.

Check out this article for more on the end of life for massive stars and the Silicon / Iron cycle

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Category: Credit Backlash, Economics, Main, Recession Watch

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.