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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Doug Noland
June 7, 2011
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I have drawn parallels between Greece and U.S. subprime – as the initial cracks in respective Bubbles.  I expect the global sovereign debt crisis to unfold over months and, likely, years.  Studying the unfolding European debt crisis is imperative both from the standpoint of crisis contagion as well as to garner early insight into how an American debt crisis might unfold.

Thus far, we’ve received important confirmation of the thesis that there's no simple prescription for resolving sovereign Credit busts.  They will surely prove incredibly expensive, controversial, and be resolved over many difficult years.  The conventional view that a recapitalization of the banking system will go a long way towards sustainable recovery is proving overly optimistic – and much too simplistic.  Indeed, inadequate bank capital is not the greatest source of system fragility.  Instead, the key issue is the amount of ongoing additional system Credit required both to stabilize inflated price levels and to ensure expenditures sufficient to hold economic collapse at bay.  I would argue that this amount is dictated by the scope (and duration) of previous boom-time Credit excesses and economic maladjustment.

Instead of the initial $150bn or so bailout resolving the Greek crisis, as had been expected, there’s growing recognition that it’s little more than an initial down-payment.  A “drop in the bucket” and “seeming black hole” are perhaps too pessimistic.  Importantly, expectations that early resolution to the Greek crisis would thwart contagion effects throughout the periphery have proven miscalculated.   Many European policymakers must now wish that Greece had been cut loose a year ago.  But just saying “no” becomes only more difficult – more political, the consequences more uncertain, and possible outcomes increasingly dangerous.  Unfortunately, it is the nature of the way these things unfold that the stakes seem to only rise year-to-year.  Somehow, next thing you know, it’s the classic dilemma of open-ended financing for insolvent borrowers – the dreadful trap of “throwing good money after bad.”

The scope of the Greek debt problem is proving much greater than was appreciated not long ago (recall that Greece enjoyed 2-yr yields of about 2% in early 2009 vs. today’s 24%).  The problem in Portugal is much larger, and ditto for Ireland.  I expect, over time, the marketplace to come to appreciate similar dynamics for Spain, Italy and others, including the U.S.  Ominously, stabilization here at home has required zero rates, massive Fed monetization, and double-digit-to-GDP federal deficits for going on three years now.

Think of it this way:  prolonged booms in private-sector Credit inflated both asset prices and nurtured maladjusted Bubble economies throughout the “developed” world.  This unprecedented expansion of household and corporate debt fueled a bonanza of tax and other receipts for the government sector (which, in Bubble economy fashion, was extrapolated and spent lavishly).  When the Bubble burst in 2008, federal finances - in Washington, Athens, Madrid and elsewhere – seemed, fortuitously enough, in good shape.   This Bubble distortion emboldened policymakers – and emboldened policy emboldened the markets.  And we jumped head first right back into Bubble Dynamics.

Going unappreciated was the extent to which previous Bubble excess had inflated receipts and distorted the true underlying fiscal situation of most governments – along with the extent to which Bubble Economy structures had become Credit gluttons.  Unbeknownst to policymakers at the time – and remaining unappreciated, especially here at home – is how aggressive (fiscal and monetary) stimulus packages set a course for severely impairing the creditworthiness of the underlying sovereign debt.  What was thought to be a couple of years of elevated spending to resolve post-Bubble issues has evolved into ongoing public-sector borrowing and spending that does little more than hold the next crisis at bay.

The unprecedented expansion of sovereign debt throughout the “developed” world is all that sustains the entire private and public debt pyramid.  I see overwhelming support for the Bubble thesis, with (Minsky) “Ponzi Finance” footprints all over Credit systems, the markets and real economies.  Fortunately for the Eurozone, Germany and other “core” economies have powerful manufacturing and export sectors that tend to underpin system stability.  Unfortunately, the “core” is now seemingly trapped in costly ongoing subsidies to the European “periphery.”  Here at home, the “core” is the problem.  There is no credible plan to get runaway federal deficits under control – and the markets are for now just fine with it.