In a recent edition of Credit Bubble Bulletin, Doug Noland, the long-time critic of contemporary monetary policy, writes about the odd times in which we live from a financial perspective. “Such a precarious time in history,” he laments. “So much crazy talk has drowned out the reasonable. Deficits don’t matter, so why not a trillion or two for infrastructure? Our federal government posted a $691 billion deficit through the first six months of the fiscal year – running 15% above the year-ago level. Yet no amount of supply will ever impact Treasury prices – period. A Federal Reserve governor nominee taking a shot at ‘growth phobiacs’ within the Fed’s ‘temple of secrecy’, while saying growth can easily reach 3 to 4% (5% might be a ‘stretch’). Larry Kudlow saying the Fed might not raise rates again during his lifetime. Little wonder highly speculative global markets have become obsessed with the plausible.”

In that essay, Noland goes on to note having been influenced by the highly regarded Dr. Kurt Richebacher (1918-2007). Although he actually worked directly with the Austrian economist/banker, my connection came only as an appreciative reader of the Richebacher Letter (in pre-internet times) and his Wall Street Journal editorials. Richebacher concerned himself regularly with the interplay between financial market credit leverage, ordinary investors and the real economy. Please see International Precious Metals & Commodities Fair – Munich, Germany Transcript of Dr. Kurt Richebächer’s Lecture (USAGOLD, November 19, 2005). In re-reading that lecture, I am struck with how much of Richebacher’s analysis at the time can be applied to the present and a very similar set of circumstances. Now that Noland has acknowledged Richebacher’s influence, it explains to a large degree why his writings – like the snippet above – strike a chord with those of us concerned with the financialization of the markets.

In this context, we reproduce at the top John Exter’s famed Inverted Pyramid of Global Liquidity. Exter, who was an economist at the Federal Reserve and highly-respected analyst, made a fortune by purchasing gold just before Richard Nixon’s devaluation of the dollar in 1971 and its rapid ascent in the ensuing decade.

“His pyramid,” explains Capital Wealth Advisor’s Lewis Johnson, “stands upon its apex of gold, which has no counter-party risk nor credit risk and is very liquid. As you work higher into the pyramid, the assets get progressively less creditworthy and less liquid. For instance, paper money here means cash, which is recognized everywhere but is ultimately dependent upon the creditworthiness of the U.S. government. Farther up the pyramid, we find longer-dated U.S. government debt, which like cash is dependent upon the full faith and credit of the U.S. government – but on a longer time horizon. The next level is debt of municipals and corporations, whose value is more safely assured than that of more junior claims, such as investments in stocks, the junior tranche of a corporation’s capital structure. A rough estimate of the global liquid financial markets would place their value close to $100 trillion. This number grows further still as less liquid assets are added, such as private businesses, real estate and ultimately bank derivatives, the largest and murkiest of all assets.”