G'day all,

On the matter of tolling bells, who's read Robert Shiller's *Irrational exuberance*?
He reckons shares are the last place to put your pension money - that when the bubble
goes we're in for a decade of depression; and that we're in the worst bubble ever
(lotsa stuff on the charts of the 1901, 1929 and 1966 'booms' and ensuing droops),
with a DJI up 200% in five years as opposed to real personal income and GDP
increases of 15% and a corporate profit increase of thirty.

Strikes me as just the sort of thing that'd make baby-boomer punters
nervous. A lot of them won't have the time to ride this droopy decade,
after all. If they did pull out (and they're a mightily significant
demographic for the next fifteen years), that'd make a big difference. The
question which occurs is, if these people were to take their dough out of
the share markets, is there anywhere for 'em to put it? Shiller wants a
host of new investment products out there quicksmart, so punters can hedge
their asset values, come the bear charge. Which implies there ain't too
many options right now.

So have we a sustained bubble because there's nowhere else to put people's
retirement money? And wouldn't that militate against institutions offering
hedging products? And how would Bush's social security plan play out on
this underlying question mark (he wants to stick public funds on the
markets, no?)? And, should he become president, wouldn't the republican
Houses pass his plan? And wouldn't that all combine to feed the bubble for
another few years, or would people just take the appreciations after that
big inflow, and then get outa town before the fans hit the shit?

Irksomely full of questions, I know, but the West's demographics, the Shrub
in the white House, combined with a long-blown bubble, fragile national
accounts, and unprecedented personal debt - well, it does look like one
helluva confluence of portents, doesn't it?

Oh, and in case Yoshie hasn't posted the following here (I do get confused
with all these lists), here's a bed-wetter from Paul Krugman, who notes bond
investors are much less enthusiastic about the world economy (US included)
than the pundits, and that interest rates to 'developing' economies are already
on the rise. A bit of necessary discipline to keep all those brown folk on the
righteous path, no doubt ...

The New York Times
November 22, 2000, Wednesday, Late Edition - Final
SECTION: Section A; Page 27; Column 6; Editorial Desk
HEADLINE: Reckonings; The Shadow Of Debt
BYLINE: By PAUL KRUGMAN

If Argentina were a first-world country, its debt wouldn't be a
problem. Both its budget deficit and its national debt are about the
same fraction of G.D.P. as those of the U.S. eight years ago, and
compared with Japan the country is a paragon of fiscal prudence. But
global bond markets aren't equal-opportunity lenders, and third-world
countries don't get the benefit of the doubt. In a recent debt
refinancing Argentina had to pay an interest rate of 16 percent -- 10
percentage points more than the U.S. Treasury pays.

Some of this premium reflects the country's unique problems. Not
long ago Argentina's "currency board" monetary system, which fixes
the value of the peso permanently at one dollar, was lauded as a
model for other countries. Now that monetary system has become a
trap; tied rigidly to a strong dollar while neighboring Brazil has
devalued and the euro has slumped, Argentine producers find
themselves priced out of world markets. The country has gone into a
slow but dangerous tailspin. A depressed economy has led to budget
deficits; the need to reassure skittish investors has forced the
government to cut spending and raise taxes, further depressing the
economy; and rising unemployment has led to growing social unrest,
making investors even more nervous.

For now, a deal with the International Monetary Fund has staved off
the imminent risk of default. There is considerable irony here: the
loudest praise for Argentina's currency board came from the Wall
Street Journal / Forbes / Cato Institute crowd, who saw it as the
next best thing to a revived gold standard. Those are the same
people who have been howling for the abolition of the I.M.F. and
other international financial institutions. The irony gets deeper
when you notice that Malaysia, which was supposed to have been cast
into the outer darkness after it imposed controls on foreign
investors two years ago, has had no trouble selling its bonds on
world markets.

In any case, the situation is far from resolved. While the I.M.F.
loan buys time, it is not at all clear how time will improve the
situation.

Still, if this were a story only about Argentina, it would be an
object lesson but not an omen. What makes the story ominous is that
Argentina isn't the only debtor finding that markets are demanding
much higher interest rates. In fact, around the world bond investors
have been fleeing from anything that looks even vaguely risky.
Interest rates on the debt of emerging-market nations like Argentina
have risen by 1.5 percentage points just since September. And
interest rates on high-yield corporate debt -- what we used to call
junk bonds -- are at their highest levels in nearly a decade.

These soaring interest rates on risky debt are, in effect, a prophecy
of future troubles for the world economy. All the official forecasts
for the next couple of years are cheerful; budgeters and
international organizations are increasing, not reducing, their
estimates of future growth. But bond investors seem to think it
likely that many overextended borrowers, countries and corporations
alike, will not have enough revenue to meet their obligations.

As the financial crises of the 1990's taught us, such pessimistic
prophecies can be self-fulfilling. A scenario for the next world
financial crisis is already obvious: a default by a big debtor --
maybe a country, maybe a big corporation (say an overambitious
telecom company) creates a bond market panic. And the unwillingness
of investors to buy risky bonds forces countries into drastic
austerity programs, forces companies to cancel investment plans and
leads to a slump that validates investors' fears.

Of course, it doesn't have to happen. We could be lucky; or we could
act quickly to limit the damage when financial disruptions appear. A
couple of weeks ago it seemed that an Argentine default might trigger
a crisis; for the time being, at least, the I.M.F.'s loan package has
averted that danger.

What worries me is this: The bond market is warning us of turbulence
ahead. That would be O.K. if the world's largest economy were being
run by experienced, open-minded officials like the ones who got us
through the last crisis. But who will actually be in charge? If it
turns out to be knee-jerk conservatives who are opposed to any
government intervention in markets, you'll be amazed at how badly
things can go wrong. *****