Let's Play Monopoly

October 19, 1998

Can an ad hoc committee of international bankers make the tremors stop?

Investors haven't been this jittery since the early 1970s, when a quadrupling of oil prices triggered a two-year selloff that devastated stocks almost as severely as the Crash of '29.

Since July, multitrillion-dollar markets have gyrated like shares of some thinly traded company whose books have been seized by the bunko squad.

The dollar has plunged to multi-year lows against European currencies, long-term Treasury yields have spiked to Himalayan peaks on the intraday charts, and the Japanese yen has vaulted nearly 18% in mere days.

All of which has caused U.S. stocks to swing wildly during the last several months.

The unprecedented volatility has only recently begun to hit Americans where it hurts. Home buyers have been walloped by a huge jump in mortgage rates, and junk bonds have been priced beyond the reach of all but the most cocksure and well-connected borrowers.

To hear Mr. Greenspan tell it, however, there's nothing wrong that a little ignorance wouldn't cure.

Here's the Fed Chairman recently, in his own words:

"For those of you who want to get an objective view of what is going on in the world, it's probably wise to put your newspapers in your in-box and leave them there for about a week."

Like a medic on the battlefield, Mr. Greenspan is just doing his job as he clamps a hemostat on a 20mm wound. Might he also be looking for a priest?

Regardless, he'll need all the ignorance and blind faith the world can muster if he's going to calm the markets, for the lingering smell of financial carnage remains strong. And neither have investors stopped reading newspapers.

Although the panic abated somewhat last week and markets surged on Thursday after the Fed cut short-term rates by a quarter-point, scary rumors continued to swirl like vortexes in the world's financial centers.

Some said the easing was triggered after two New York City banks were pressured to go to the discount window for short-term cash. Others said the Fed had loosened because Brazil was about to devalue its currency.

There was also talk that the "plunge protection team" -- known officially as the Working Group on Financial Markets -- was lining up credits that include a blank check from the Fed to buy leveraged contracts on U.S. stock indexes.

Others had Treasury Secretary Robert Rubin cajoling one of the world's largest gold dealers into lending out its inventory at no interest in order to hold down the price of bullion, which can register the nervous sweat of investors with the sensitivity of a polygraph.

Rumors aside, confirmed sightings have been unsettling enough, and they largely corroborate mounting suspicions that the central banks are about to undertake a massive gamble.

The apparent strategy is to electro-shock Japan's flatlining economy with enough voltage to cause the Nikkei average to leap and tight-fisted consumers to binge.

Call it Operation Godzilla, since the plan rivals Hollywood's script in scope and daring. Japan's reflationary machine lurched into the fray last week with a $600 billion offering of 20-year government bonds yielding 1.5%.

Short-term rates reacted as one might have predicted, with a precipitous upward skew that officials presumably hope will draw money back into Japan from U.S. Treasuries.

This may have quieted the palpitating hearts of Japan's bankers for the time being and pushed stocks higher here and abroad, but one must doubt whether it can overcome a global deflation that has already squashed the economies of Asia and Russia and now threatens to throttle those of Latin America, Canada, a marginally recessionary Europe, and even the U.S.

It is well nigh appropriate to ask whether a gargantuan dose of easy credit can conceivably cure a global sickness that itself was caused by loose money.

The rescue plan is just Parker Brothers' "Monopoly" on a grand scale. If you've played the game aggressively, you'll see some obvious similarities.

Competitors start with about $1,500 apiece, from a bank with $15,000 in it. Monopoly can be pretty sluggish for those who follow the rules, since the only cash inflows are the occasional $200 from passing "Go" and some piddling sums from the Community Chest.

To quicken the pace, experienced players often make exorbitant deals on the side: "Give me $3,000 and I'll sell you Park Place plus a free pass on North Carolina with a hotel." Thus can the endgame pivot on sums substantially exceeding the resources of the bank.

International financiers have been playing essentially the same game. While global trade in goods and services amounts to about $22 trillion, the notional sum of leveraged credit instruments may exceed $70 trillion, according to some published estimates.

And now the central bankers plan to boost that amount with a blank check to compensate for the billions of dollars that have been wiped off the books recently by the liquidation of errant hedge funds and other super-leveraged players.

This will no more settle the markets than the rich uncle who drops in on the Monopoly players in their hour of need and plunks down $25,000 lifted from another Monopoly set.

One Princeton-based economist, Martin Armstrong, has estimated that even if the Fed were to double the money supply it would barely make a dent in the problem.

In a world where financial risks are largely ignored, as they increasingly have been throughout this decade, each new dollar of deposits can be multiplied roughly 16 times by subsequent borrowers.

But now, with investors diving for the safety of money-market funds, T-bills and other near-cash instruments, money's "velocity" has begun to slow. If so, the multiplier could easily fall from 16 to 10 , according to Armstrong, and that would negate the reflationary effect of a deluge of easy credit.

The conventional wisdom is that one should never buck the stock market when the Fed is easing.

True enough, as Thursday's explosive rally in U.S. stocks demonstrated. But neither should you believe that a multitrillion-dollar gamble by the central banks could be a lasting cure for the deflationary problems that have beset producers and sellers around the world.

Prices will continue to fall faster than productivity rises, and no amount of artificial stimulus will help -- especially if all the newly printed money flows into Treasury Bonds and German Bundesbonds, rather than into consumables.

A final, crushing irony is that the attempt at stimulus will be at cross-purposes with current fiscal policy.

The economist John Maynard Keynes would have prescribed massive deficit spending by the government in times such as these, when private consumption is flagging.

In fact, the hubris and amazement in Congress over our budgetary surplus has yet to die down.

Expect securities markets to gyrate violently in the coming months, notwithstanding the Fed's efforts to calm them. It is high drama now, and without intending it, Mr. Greenspan has turned the spotlight on himself. The drum roll will continue to build.

The problems the central bankers would deign to confront are by now transparent to all: global deflation, undercollateralized banks and dangerously leveraged speculation in financial markets.

The question on everyone's minds is whether printing-press money can remedy them all.

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