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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
Decmber 09, 2011
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I believe the European debt Bubble has burst – and this would no doubt be a momentous development.  For years, European debt was being mispriced in the (over-liquefied, over-leveraged and over-speculated global) marketplace.  Countries such as Greece, Portugal, Ireland, Spain and Italy benefitted immeasurably from the market perception that European monetary integration ensured debt, economic and policymaking stability.  Similar to the U.S. mortgage/Wall Street finance Bubble, the marketplace was for years content to ignore Credit excesses and festering system fragilities, choosing instead to price debt obligations based on the expectation for zero defaults, abundant liquidity, readily available hedging instruments, and a policymaking regime that would ensure market stability.  Importantly, this backdrop created the perfect market environment for financial leveraging and rampant speculation – in a New Age global financial backdrop unsurpassed for its capacity for excess.  The arbitrage of European bond yields was likely one of history’s most lucrative speculative endeavors.

The year 2011 – following by three short years the so-called “hundred year flood” of ‘08 - should put a dagger in the heart of The Mythological Great Moderation.  Instead of lower inflation and enlightened policymaking nurturing greater financial and economic stability – they’ve done precisely the opposite.  Today’s extraordinary uncertainty and financial instability are not conducive to financial leveraging, a circumstance posing a serious dilemma for a global system having grown dependent upon ongoing Credit excess.  European bond markets have suffered the inevitable effects of de-risking and de-leveraging.  And while policy measures, including those from this week, can exert rather dramatic risk market rallies, there is little politicians and central bankers can do to alter the market’s re-pricing of the region’s debt obligations.  Don’t count on the ECB, IMF, or Fed to stabilize such a generally unstable financial, economic, social and political backdrop.

Policymakers in Europe have little flexibility and capacity to alter the dynamics of their bursting debt Bubble, and the markets are understandably dismissive of most measures and pronouncements.  If only there were Eurobonds and an ECB committed to unlimited “buyer of last resort” support, Italian and other yields could drop back to previous manageable levels.  But it’s past the stage where gimmicks will work, as the re-pricing of debt throughout the region has fundamentally altered the capacity to leverage, speculate and insure sovereign debt risk.  Focusing on Italy, the re-pricing of Italian debt has made its debt load unmanageable.  And if Italy is insolvent the European banking system is in serious trouble - and monetary integration is in serious jeopardy.  The risk backdrop has changed profoundly, and a historic debt and speculative Bubble is bursting.

At the same time, the markets remain quite responsive to coordinated measures and, in particular, policy moves from Washington and Beijing.  Importantly, ongoing U.S. and Chinese Credit Bubbles provide policymakers from these two powerful countries considerable firepower and flexibility.

The financial world has changed profoundly – and all nations should today be keenly focused on getting their respective Credit systems, fiscal positions and economies in order.  And while I don’t expect policy measures to have much more than a fleeting impact on the European debt situation, the crisis is prolonging Credit excess and related imbalances in the U.S., China and much of the “developing” world.   Dangerous Bubble dynamics see Treasury debt increase by about $100bn a month and Chinese lending grow about $100bn a month, and in both cases its late-cycle debt of dubious quality.

I was again this week reminded of the 2007/08 dynamic whereby policy responses to heightened systemic stress for months fostered market volatility, heightened speculation and an increasingly fragile backdrop.  It would be a much healthier situation if U.S. financial asset prices were adjusting to new global financial realities.  Instead, the U.S. government debt Bubble goes to only greater degrees of excess, with market participants anticipating only more extreme policy measures to come.  Meanwhile, our stock market is priced as if recent growth and corporate earnings trends are sustainable.  Looking at the world and the rising tide of debt revulsion in the marketplace, I would not extrapolate our nation’s recent debt trajectory.

My hunch would be that the underlying structure of an already maladjusted Italian economy suffered from more than a decade of mispriced finance and associated distortions.  Only time will tell if years of excessive government spending and deindustrialization, along with poor demographic trends, have fashioned an acutely vulnerable and Credit-dependent economic structure.  What we’ve learned about the Greek economy over the past two years is quite troubling.  I fear for the Italian and U.S. economies.  I agree with the German view that there is no solution to structural debt problems other than structural reform - and that the problem is global and not just European.

I’ll conclude with a couple quotes extracted from Otmar Issing’s insightful op-ed piece from Wednesday’s Financial Times, “Moral Hazard Will Result From ECB Bond Buying:”  “Stressing the role of the central bank as the ultimate buyer of public debt should be seen as an indication of the pathological state of public finances not as a sign of strength…  Pressing the ECB into the role of ultimate buyer of public debt of individual member states would create the biggest conceivable moral hazard.”