avalanche

The ever-useful patrick.net brought my attention to an article by Matthew Warren entitled Banks and the Avalanche of Deflation . Matthew writes:

As anyone who has seen an avalanche in person or on the big screen knows, it seems to come out of nowhere, gain downhill momentum in a flash, and inevitably run its course. Just as in the Rocky Mountain high country, many of the agents in our global economy--financial intermediaries as well as overleveraged individuals and institutions--had come to resemble a thick unstable slab of new snow resting atop an eroded base, ready to sheer off with the slightest adverse rumble.

The underlying dynamic is quite simple and resembles so many similar sad stories from history. Not just in U.S. housing, but in many real estate and financial markets around the world, we are now watching the unhappy outcome as a rigid pile of leverage rapidly crumbles, hideously exposing overvaluation across various asset classes. It is a classic bubble and bust.

I have just returned from a visit to northern Italian Alps, where I saw, more snow than I have ever seen in my life, including many examples of "thick unstable slab of new snow resting atop an eroded base", just waiting to avalanche, and so this metaphor struck a real chord with me.

So far, as global economic winter depression sets in, we have just had a snowfall or two. But the big avalanches are yet to come, as is the flood damage caused by the subsequent meltdown. And there is no reason to expect that the snow has stopped or will stop falling. I should not need to reiterate here in detail what form these snowfalls and avalanches will take - many other writers are already doing an excellent analysis of this - try patrick.net or Ashes Ashes All Fall Down as starting points. The action will have names like "Alt-A", "CDO", "credit card debt", "commercial real", "redundancy", and so on, to add to those blizzards that we have already seen, such as "sub-prime" and "credit crunch", and their resulting minor avalanches in housing and stockmarket prices. The rescue services seem hideously ill equipped (or perhaps that should read "incompetent") to cope with the emergency. They are trying to dam up the snow, instead of trying to control the slide. The result can only be even bigger and badder avalanches when the dams break.

The winter will not last forever. As always in nature, spring will come. with sunshine and new growth to replace the devastation of the winter storms. This winter may be the mother of all winters, and we have a long way to go before we are through it, but this too will pass.

I am looking forward to the spring. I hope that many others will join me in sowing the seeds of a better human civilisation, which will rise out of the ashes of this dying one. It is time to forget this old paradigm - its time is past and it is now passing away. We must look to the new world and how and we are going to shape it. We must look with optimism to the spring and summer ahead.