• Dem Phones, Dem Phones, Dem Dry Phones

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    "By
    the same definition, the overbuilding of industry beyond any probable
    demand for the product represents devoured credit. Here the spirit
    of aggrandizement acts as if it were a biological law, each separate
    organization trying to outgrow all the others of its kind in the
    industry of one country, and then that industry as a whole trying
    to outgrow the competitive industry of another country, and this
    going on with the benefit of more and more credit, until at last
    – what is the problem? The problem is that so much credit,
    that is to say labour, is trapped, frozen, locked up in the worlds'
    industrial machine that people cannot afford to buy the whole of
    its product at prices which will enable industry to pay interest
    on its debt. This is perhaps the most involved form of pyramid that
    human ingenuity has yet devised."

    Garet
    Garrett in Anatomy
    of a Bubble
    , 1932

    Have
    you every read a more nearly perfect description of the Telecom
    industry seventy years on?

    Western
    Governments to this point have been laughing, reaping the usual
    benefits of an inflationary episode to pay down their debt in a
    very New Millennium fashion.

    This
    time, as a result of the encouragement of a prolific expansion of
    the global money supply, most of the rise in prices this last five
    years has occurred in assets. This, by helping absorb the extra
    money substitutes, coupled with the fortuitous firesale of goods
    which resulted from the Asian credit implosion, kept product prices
    relatively well-behaved – up until last year, at least – and so
    allowed the fiction to be maintained for much longer than usual
    that exploding levels of credit were acting as a benign influence,
    rather than wreaking their age-old havoc upon the free market's
    price mechanism.

    Soaring
    stock prices and heady appreciation in the real estate markets of
    the West have made people feel wealthier (confused as most are in
    the modern age between u2018money' and u2018wealth') and thus encouraged
    them to embark on a consumptive binge which makes the Prodigal Son
    look like Ebenezer Scrooge, boosting tax revenues in the process.

    Moreover,
    the stock Bubble itself has been of inordinate assistance in the
    US, for one, with the unprecedented levels of stock turnover catching
    a greater proportion of the notional profits in the capital gains
    trap. Other exchequers have gratefully gathered in extra stamp duty
    monies, a Tobin tax on you and me, rather than Soros and Robertson.
    If you doubt this, pull up the monthly US federal budget receipts
    chart and see how non-April months are on a smooth trend, while
    April's year-end is on an exponential path.

    Finally,
    European government has become rapacious with its extortion racket
    over UMTS phone licences. Making over-eager Telco's compete in a
    bidding system which would have made game theory pioneers Morgenstern
    and von Neumann proud has extracted untold bounties from this multi-billion
    winner's curse. Or, perhaps we should say, has generated a massive
    down payment against any future default on the part of their victims
    which might then require a socialization of the problem (read: a
    return to plundering taxpayers directly).

    Anticipating
    and diverting returns from Techmania share holders to the public
    fisc for a totally non-productive capital levy is one thing, degrading
    the credit worthiness of the rest of the public's pension funds
    by substituting junk for the now wildly-expensive remaining government
    debt is another. Confiscation is what government is about, after
    all. None of this would have been possible, however, without the
    inflation-driven New Era hunger for the equities in the first place.
    None of it would have been possible without the inflation- driven
    availability of credit, enabling vast bond issues and even more
    vast syndicated lending to finance this high bandwidth Canal Boom.

    Now,
    however, with Telco stocks leading the declines in most indices,
    with their bonds becoming tainted with toxicity, the regulators
    are looking askance at the exposure of the banking sector to this
    welter of potential malinvestment.

    Very
    rich indeed since central bank-sanctioned credit expansion has been
    behind the whole process! But then Austrians know that business
    depressions result from the banking authorities deciding to forestall
    the potential hyperinflation, whose seeds they alone have sown,
    by belatedly withdrawing the oxygen of easy money, thus asphyxiating
    the boom and precipitating a crash instead.

    The
    FT says the financial stability chiefs have u2018launched inquiries'
    into Telco lending, saying variously that matters are u2018of great
    concern' because of the risks the banks are taking with one sector.
    Others likened the concentration of debt to the run-up to the 1992
    property crash and the 1998 hedge fund crisis, both of which caused
    major problems for banks. Naturally, what they do not say is that
    such a move, even if it does not stretch beyond u2018moral suasion'
    (bullying), could easily trigger the very disaster they are supposedly
    keen to avert.

    European
    banks could do without this. We have noted on www.capitalinsight.co.uk
    that the US FDIC was expressing anxiety over the growing illiquidity
    of commercial banks there, pointing out a loan:deposit ratio approaching
    95% at larger institutions. In Europe, using the ECB monthly report
    as a rough guide, for Euro-residents alone and stripping out interbank
    transactions, loans:deposits stands at 128%. Total assets are a
    lofty 18 times capital and reserves and loans to private, non-financial
    corporations (roughly, C&I loans) alone are 2.8 times capital
    and nearly 50% of non-MFI deposits. With real estate lending accounting
    for another 34% of such deposits, the vulnerabilities are patent,
    even without beginning to sweat over an equity portfolio equal to
    some 76.5% of equity, 44% of it acquired in the last 18 months.

    So
    much for banks, but look at another little case of the-thigh-bone's
    connected-to-the-hip-bone.

    Telcos
    are a weather vane for the whole Tech fantasy. They need fibre optics
    (JDSU et al). They need chips (INTC's pals) and handsets (NOK and
    co). They need software (ORCL and the like), hardware (SUNW &
    friends) and infrastructure (CSCO and its ilk). If they find financing
    more difficult, much less impossible, these suppliers will be squeezed
    (especially if current revenues are in Euros and billings in USD).
    Moreover, heavy capital investment in Tech has been a feature of
    much of the rest of industry, or so Mr. Greenspan keeps telling
    us. Now correct us if we're wrong, but a major slowdown usually
    impacts CapEx very heavily as cost-cutting takes over and projects
    revealed to be sub-marginal by the end of the boom are postponed
    or scaled back. Not much solace for Tech there, either.

    Oh
    and guess which sector has had Dollars, Euros and Yen in mind-boggling
    amounts to spend in recent years on systems? That's right, the Bubble-blowers
    themselves – Financials. Whether equipping Star Trek bridge dealing
    rooms or launching online banking and stockbroking services, not
    to mention retooling for the great Y2k hoax, a lot of revenue has
    been derived from this source. Any impairment of the worth of banks
    and brokers, or a dimming of their prospects, will see the shutters
    slam down on the cashier's window, blocking off another channel
    for Silicon Valley's finest, thus exacerbating the problems for
    the bottom-line once again. Oh and so making the bank lending look
    all the more intemperate! Round and round and round she goes and
    where she stops nobody knows.

    October
    2, 2000

    Sean Corrigan writes from London on the financial markets, and
    edits the daily Capital Letter and the Website Capital
    Insight
    .

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