Outside the Box

Random Europe

August 13, 2012

It is a lazy summer day here in Texas, and the market and investment news front is rather quiet as well. But that will change before too long. We should enjoy the relative calm while we can, because Europe will soon be back in full crisis mode, coming off the summer. In today's Outside the Box we'll look at three brief pieces that may give us a preview of the near future, as well as an incisive retrospective on the recent past.

The first is from Roubini Global Economics. It's part of a longer piece by Megan Greene, looking at what lies ahead in Europe. The fun & games there promise to ramp back up all too quickly. Then we have another extract from a longer piece by Kiron Sarkar, looking at Germany, that echoes some of the themes from last week's Thoughts from the Frontline. The German leadership has not really been transparent with their people, but then you can't hide trillion-dollar commitments very easily.

Finally, we wrap with Ambrose Evans-Pritchard's latest column, which I think is one of the better ones he has done in years. I would call it a must-read. Under the title "Five years on, the Great Recession is turning into a life sentence," he concludes with:

"As for our [the developed world's] debt mountain, we have barely begun the great purge. Michala Marcussen from Societe Generale says the healthy level is around 200pc of GDP for advanced economies. If so, we have 100 points to cut.

"This cannot be achieved by austerity alone because economic contraction would tip us all into a Grecian vortex. Such a cure is self-defeating.

"Much of the debt will have to be written off. Whether this done by inflation (1945-1952) or default (1930-1934) will be the great political battle of this decade. Pick your side. Pick your history."

When you come to the Endgame of the Debt Supercycle, something must indeed be done with all the excess debt that has been accumulated. Different countries will choose different options, but no matter the choice there will be pain. It remains to be seen how that pain is spread around.

In the US, Romney has evidently decided to stop playing small-ball politics and turn the discussion into a referendum on the direction of the country. Both sides think this discussion will be to their advantage, which, if it were not my home country with consequences for my kids, I would find somewhat entertaining. But, as I wrote almost two years ago, this is a national discussion we absolutely must have. The issues are complicated, and there are no easy answers when you have to move out of the realm of theory and into the messy real world. Workable solutions to our big fiscal problems will be a much harder "sell" to the American public than either side currently thinks, as the majority of Americans, according to the polls, would like to eat their cake without paying for it. It is not clear what our choices will be when the true consequences are understood. I will comment further on this topic on Friday.

In the meantime, have a great week. My congratulations to my British friends on a marvelous Olympics.

Your getting ready to kick back a little analyst,

John Mauldin, Editor
Outside the Box

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EZ: The Drama Ahead in September

By Megan Greene, Roubini Global Economics (www.roubini.com)

As usual, this has been a lazy August, but we do not expect the quiet to last. Indeed, for the second September in a row, developments in the eurozone (EZ) have the potential to be highly dramatic.

Greece: The troika is due to return to Athens in September and make a ruling on whether to release additional…

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Bill Mayben

Aug. 14, 2012, 9:46 p.m.

I agree with Bob Nielsen. Making loans without assets to back them, is the same as printing money. There are other more synthetic methods of virtually expanding the money supply these days. The repeal of the Glass-Steagall Act was the beginning of the end of a regulated financial market in the US.

Bill Mayben

Aug. 14, 2012, 9:38 p.m.

We will choose inflation. We have always been more comfortable with the illusion that our houses are going up in value, than with the fact that our currency is going down in value. Monied interests are too impatient to allow long for this adjustment. We will be facing at least three steep inflationary pitches. We have done this before. It will certainly have the effect of bringing all that cash back into our markets. If our money is not backed by anything but our belief, then we might as well sing kum by ya as speculate about it at this point. As unbelievable as the dollar is, it appears that it is the best illusion we have. Macro economic processes can create a lot of fear, and paralysis, and we shouldn’t give them power over us. The Boomer Generation is about to drop all pretense and start to party, for soon we die. 70 million people partying will provide a stimulus that doesn’t have to be paid back!

thomas unger

Aug. 14, 2012, 7:52 p.m.

Why does the Euro get stronger every time the ECB says that they will print whatever it takes to save the currency?

mark thompson

Aug. 14, 2012, 7:31 p.m.

The Evans-Pritchard piece is brilliant. Such an economical summary of where we are.

lawrence stirtz

Aug. 14, 2012, 1:53 p.m.

A different lens might view it as wealth redistribution, the write offs are the contribution by those who accumulated the wealth and the debt forgiven benefits those who lost it in the process. We seem to have to experience this process every so often to rebalance and once more have a health society and economy. Good article.

Bob Nielsen

Aug. 14, 2012, 12:38 p.m.

Ambrose Evans-Pritchard makes the same mistake as most other keynesian economists (bernanke is another) in blaming a savings glut. Richard Duncan in his book ‘The New Depression’ clearly maps the arrival of the debt fuelled growth economy. The glut of money was created by central bank printing and financial institutions astronomical leveraging. The PBOC created $460 billion worth of Yuan in 2007 to manipulate its currency by buying dollars - that $460 billion was not saved - it was created to hold down its currency’s value to perpetuate its low-wage trade advantage. The various banks etc financed the sub-prime scam by leveraging up their small stock of savings. When a bank moves from ‘investing’  $1 billion against its $100 million in capital to ‘investing $2 billion against its $100 million in capital there has been no increase in savings! There was and is no Savings glut! There is a savings shortage and a leverage glut run by central banks and financiers! When a Govt prints more QE but its income (taxes) stay the same it is also playing the leverage game and gambling with the future. Now the Ponzi scheme of the global economy is collapsing thanks to this game of borrowing (via leverage) from the future to afford luxuries for today.

Sigmund Silber

Aug. 14, 2012, 5:23 a.m.

Some attention should be paid to NeoMarxist Crisis Theory that predicts Capitalism will have periodic crises when there is too much capital and the rate of return gets too low and there are unwise attempts to increase returns. The solution is the detruction of some fraction of this excess capital.

Unfortunately the response has been to protect capital and even manufacture it. So we end up not being able to reset.