I think it was almost two years ago that I was in Cyprus. Cyprus had just come through its crisis and was still in shell shock. I was there to get a feel for what it was like, and a number of my readers had courteously arranged for me to meet with all sorts of people and do a few presentations. A local group arranged for me to speak at the lecture hall of the Central Bank of Cyprus in Nicosia.
There were about 50 people in the room. I was busily working on Code Red at the time and had money flows, quantitative easing, and currency wars at the front of my brain. As part of my presentation, I talked about how countries would seek to use currency devaluation in order to gain an advantage over other countries – that we were getting ready to enter an era of currency wars, which would be disguised as monetary policy trying to create economic growth. Which is exactly what we have today. Every now and then I get a few things right.
After my short presentation, during the question and answer period, I pointed to a distinguished-looking gentleman to ask the fourth question. Before he could get his question out, my host stood up and said, “John, I just want to give you fair warning. This is Christopher Pissarides. He recently won the Nobel Prize in economics and is a professor at the London School of Economics, as well as being a Cypriot citizen.”
Professor Pissarides preceded his question by citing a great deal of literature, some of it his own, which showed that a country could not gain a true advantage by engaging in currency manipulation. “So why do you think there would be currency wars? What would it gain anybody?” he asked.
We proceeded to have a conversation that basically boiled down to the old Yogi Berra maxim: In theory, theory and practice are the same thing. In practice they differ.
Dr. Pissarides was of course absolutely right. Beggar-thy-neighbor policies end up making everybody worse off at the end of the day. However, there is a short-term first-mover advantage. In a short-term world, people do things to show they are being “proactive.” And in a world of “every central banker for himself,” where central banks are essentially trying to position their countries to prosper, you wind up having multiple iterations of tit for tat.
And that is just one of the points that our old friend Lacy Hunt of Hoisington Management makes in this week’s Outside the Box:
In our review of historical and present cases of over-indebtedness, we noticed some overlapping tendencies with less regularity that are important to mention.
First, when all major economies face severe debt overhangs, no one country is able to serve as the world’s engine of growth. This condition is just as much present today as it was in the 1920-30s.
Second, currency depreciations result as countries try to boost economic growth at the expense of others. Countries are forced to do this because monetary policy is ineffectual.
Third, devaluations do provide a lift to economic activity, but the benefit is only transitory because other countries that are on the losing end of the initial action retaliate. In the end every party is in worse condition, and the process destabilizes global markets.
Fourth, historically advanced economies have only cured over-indebtedness by a significant multi-year rise in the saving rate or austerity. Historically, austerity arose from one of the following: self-imposition, external demands or fortuitous circumstances.
I’m increasingly convinced that central banks have distorted the entire macroeconomic landscape to such an extent that we have entered uncharted waters. That will be the theme of my letter this upcoming weekend, but Lacy’s quarterly serves as a good introduction.
The weather has turned exceedingly nice in Dallas, Texas. The trees have filled out, the flowers are blooming, and we have had enough rain (thank goodness) to make everything green.
I pretty much enjoy all sports, and Dallas is generally blessed with having one or two of our teams actually play well in any given year. I think I like professional basketball the most. At the professional level it is the most beautiful of all sports. For a brief time in their life, these young gods of the court can do things that mere mortals can never experience. But it is such a joy to watch. I’ve had season tickets for 32 years, and in the last few years have finally have been able to work my way down from the very top-corner row to where my seats are now “most excellent.”
Tonight is the unofficial beginning of the NBA playoffs for the Western Conference. I say “unofficial” because, technically, the playoffs start this weekend; but only two teams in the West actually know their seed positions. Dallas is locked in at number seven, but there are still four mathematical possibilities for the number-two seed to face us. It all comes down to who wins and loses tonight. This is the closest basketball race that I can remember. Two or three teams vying for a playoff spot, sure, that’s common. But there are seven or eight teams in the conference this year that could get hot during the playoffs and make it to the top. The Mavericks have the deepest bench of any team in the NBA, but there are a lot of new players who have been added recently, and it sometimes feels like you want to introduce them to each other. We could be one and done or go all the way. It’s just really hard to figure this team out from night to night. But that’s what makes it fun.
Have a great week, and I wherever you are, I hope your weather is treating you well, too. I guess we should be grateful that a group of 12 people don’t get to sit around a big conference table and vote on what the weather should be like and then try to adjust it. Actually, that’s a good analogy. Think about it.
You’re hoping to be watching playoffs in late May analyst,
John Mauldin, Editor
Outside the Box
Hoisington Quarterly Review and Outlook – First Quarter 2015
Characteristics of Extremely Over-Indebted Economies
Over the more than two thousand years of economic history, a clear record emerges regarding the relationship between the level of indebtedness of a nation and its resultant pace of economic activity. The once flourishing and powerful Mesopotamian, Roman and Bourbon dynasties, as well as the British empire, ultimately lost their great economic vigor due to the…