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Economics in the Age of Deleveraging

Guest Author — Wed, 01 Feb 2012 16:00:05 +0000

Clearly, economic policy is now far more complex than it appeared to be before the GFC. As we enter this Age of Deleveraging, the worst thing we can do is apply policies that appeared to work during the preceding Age of Leverage—but were in fact predicated on ever-rising private sector indebtedness. Politicians should be sceptical of conventional economic advice at this time; it would be much wiser to study the history of the 1930s instead

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Banking Wasn’t Meant to Be Like This

Michael Hudson — Mon, 30 Jan 2012 02:00:36 +0000

the banks now browbeat governments – not by having ready cash but by threatening to go bust and drag the economy down with them if they are not given control of public tax policy, spending and planning. The process has gone furthest in the United States. Joseph Stiglitz characterizes the Obama administration’s vast transfer of money and pubic debt to the banks as a “privatizing of gains and the socializing of losses. It is a ‘partnership’ in which one partner robs the other.” Prof. Bill Black describes banks as becoming criminogenic and innovating “control fraud.” High finance has corrupted regulatory agencies, falsified account-keeping by “mark to model” trickery, and financed the campaigns of its supporters to disable public oversight. The effect is to leave banks in control of how the economy’s allocates its credit and resources

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Stephen Roach on US, the Fed, China, and Europe

Edward Harrison — Fri, 27 Jan 2012 15:00:02 +0000

Stephen Roach says the Fed is going all in in support of QE and I agree. But what else are they going to do? Look at Europe, for example. The ECB there has a hydra-headed problem with sovereigns and banks on the brink of insolvency and they too have expanded the balance sheet like mad. China faces many of the same challenges with excess credit growth and fragile financial firms in the face of asset price deflation

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[PREMIUM] More on the Fed – Obama stimulus plan

Edward Harrison — Fri, 27 Jan 2012 13:00:55 +0000

My last weekly said the hand-in-hand Fed activism and fiscal activism via Obama's mortgage proposal is bullish. Let me add a bit of colour here

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[PREMIUM] The Fed’s Rate easing and Obama’s Mortgage refi plan are bullish

Edward Harrison — Thu, 26 Jan 2012 19:30:41 +0000

Investors must still be worried about the fallout from the European meltdown. However, the situation in the US is looking much better than it did last week because of this aggressive policy response

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On building debt

Michael Pettis — Tue, 24 Jan 2012 14:00:00 +0000

I am glad to say that the overinvestment thesis is much more widely acknowledged today than it was even two or three years ago, but one myth, I think, is that most of the overinvestment excesses in China are concentrated in the real estate sector. I have always argued that it is infrastructure where the most amount of investment has been wasted

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Why bank deposits are piling up at the ECB

Guest Author — Thu, 12 Jan 2012 15:24:08 +0000

Central Banks, whenever they buy any asset create new reserves. Commercial banks and people do NOT have the capacity to destroy those reserves. Once the Fed or ECB wires the money or creates that asset line item on its spreadsheet, there is an equal and offsetting liability on its spreadsheet called reserves. This spreadsheet cannot be broken

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Brief Note on Big Surge in US Consumer Credit

Marc Chandler — Tue, 10 Jan 2012 13:44:57 +0000

Late yesterday the US reported the biggest jump in consumer credit in a decade. It reinforces the signal of the gradual healing of the labor market and the resilience of the US consumer. The report increases the risk that the November personal consumption expenditures are revised higher from the initial 0.1% estimate

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China: Lots of news, signifying nothing new

Michael Pettis — Sun, 18 Dec 2011 02:24:51 +0000

I don’t think there is a whole lot to say about this week’s numbers beyond what I have been saying for the past several months. Nothing substantial has really changed. China’s external account is worsening, and will continue to worsen since global imbalances have no choice but to adjust. Growth in China is slowing but remains relatively rapid, and as unhealthy as ever, but there is little likely to be done to improve the quality of growth until 2013. Beijing will continue veering back and forth between stomping on the credit accelerator and stomping on the credit brakes as the only way they can manage the economy

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Michael Hudson on the erosion of democracy

Edward Harrison — Thu, 08 Dec 2011 13:40:01 +0000

Michael Hudson was on RT's Capital Account with Lauren Lyster, speaking about the loss of democracy that has accompanied the global financial crisis. The video is below, but recently Michael also wrote two articles for the Frankfurter Allgemeine Zeitung in which he gives one a more in depth view of his perspective

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Debt and Democracy: Has the Link been Broken?

Michael Hudson — Tue, 06 Dec 2011 13:00:00 +0000

Debt and Democracy: Has the Link been Broken

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Charts of the day: Understanding the latest economic data out of China

Win Thin — Wed, 23 Nov 2011 21:30:23 +0000

The weak November HSBC PMI for China has added to market bearishness. This is not the official PMI but we do note that while the HSBC measure has been below 50 for 4 of the 5 past months, the official PMI has yet to fall below 50, but it was reported at 50.4 in October, the lowest since February 2009. A further drop in the official PMI below 50 seems hard to avoid. Slowing in the Chinese economy is inevitable given the deteriorating external environment as well as PBOC tightening measures taken in 2010-

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Predicting the future of policy making

Edward Harrison — Tue, 22 Nov 2011 02:47:39 +0000

Predicting the future of policy making has been and will continue to be key to understanding where this economy is headed – and by extension what your investment portfolio will do

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News Links: BofA Clash With Fannie Mae Escalates Over Loan Buyback Stance

Edward Harrison — Mon, 21 Nov 2011 14:30:46 +0000

BofA Clash With Fannie Mae Escalates Over Loan Buyback Stance – Bloomberg Bank of America Corp. (BAC) told Fannie Mae it refuses to cooperate with the U.S. mortgage firm’s new stance on loan buybacks, setting the lender up for a potential surge in claims and penalties. EU’s Barnier: Tougher rules must precede euro bonds |

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Chart of the Day: China’s Credit Bubble

Global Macro Monitor — Mon, 21 Nov 2011 13:00:00 +0000

This chart from the IMF illustrates how China was able to skirt — in relative terms — the deep economic contraction by generating a huge expansion in domestic credit and increase in its money supple. This, while credit was contracting in the rest of the developed world

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Adjustment Needed Now

Claus Vistesen — Sun, 20 Nov 2011 21:30:50 +0000

By Claus Vistesen (see source of image at end of post) I have recently spent a few days in New York talking to clients as well as sneaking in a bit of marathon watching and a visit to the Guggenheim museum. Flying across the big pond also means that there is plenty of time to

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Debt Deflation on the rise

Michael Hudson — Sun, 20 Nov 2011 02:00:53 +0000

“Without consumption, markets are going to shrink. Companies won’t invest, stores will close, “for rent” signs will spread on the main streets and local tax revenues will fall. Companies will lay off their employees and the economy will shrink more. Why aren’t economists talking about these effects of debt deflation, which are becoming the distinguishing phenomenon of our time? They advocate giving more money to the banks, hoping that somehow everything will be okay, as if the banks would lend out the money to fund new production and employment. Mainstream economics and political leaders in both parties are failing to ask why the banks are using these giveaways to speculate abroad, pay their managers bonuses and high salaries or to pay dividends rather than to lend to small businesses or do other things to actually get the economy moving again. This phenomenon cannot be explained without seeing that debt service is siphoning off revenue into the financial sector, which is not recycling it back into the production-and-consumption economy.”

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“Germany is the core, everything else is secondary”

Edward Harrison — Thu, 17 Nov 2011 15:23:52 +0000

The Wall Street Journal's Matt Phillips describes the turmoil in European sovereign bond markets. He says some traders tell him that they now consider countries like France a part of the periphery and are pricing it as such. This risk-off sentiment has spread throughout the euro zone to countries like Finland which is the only country in the euro zone except Luxembourg which is both AAA-rated and meets all of the Maastricht Treaty requirements. Video below

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EU: Democracy Incompatible with Debt Collection

Michael Hudson — Fri, 04 Nov 2011 02:00:20 +0000

"Yesterday, the headline in the Frankfurter Zeitung was “Democracy is Junk.” The meaning was the financial sector was saying that democracy is incompatible with collecting debts and, when debtors can’t pay, with foreclosing on the public domain and privatizing a country. You can’t have democracy when debts grow beyond the ability to pay and the IMF imposes austerity, like it used to do in third world countries."

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1930

Edward Harrison — Mon, 03 Oct 2011 17:00:24 +0000

An excerpt from "The World In Depression" by Charles P. Kindleberger

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Hungary: Controversial Swiss franc loan law goes into effect

Edward Harrison — Thu, 29 Sep 2011 12:30:32 +0000

Central European borrowers loaded up on cheap Swiss franc and euro loans (mainly from Austria and Switzerland) in the lead up to the credit crisis because of higher nominal rates in central Europe. When the crisis hit, these loans became expensive overnight. In Hungary, one of the hardest hit due to currency depreciation, the government has legislated a fix that goes into effect today

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More on Private Lending Woes in China

Edward Harrison — Wed, 28 Sep 2011 18:43:37 +0000

I see this private mending market as a bit like pay day loans in the US. The goal, however, is to get around lending restrictions imposed by the state. The lesson is clear: once bubble psychology takes over, it is difficult to dislodge it. People will resort to all manner of imprudent and even illegal behaviour to keep the gravy train going

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Solyndra: Liar’s Loans

William Black — Tue, 27 Sep 2011 12:00:00 +0000

This column comments on Joe Nocera’s September 23, 2011 column entitled: The Phony Solyndra Scandal. Nocera’s column compares the statements of Solyndra’s controlling managers to Dick Fuld’s statements to the public about Lehman’s conditions and asserts with minimal explanation that neither could have been criminal. I have testified before the House Financial Services Committee at some length as to why Lehman was a “control fraud” so I disagree with Nocera

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Private Lending: Disintermediation in China’s Banking System

Global Macro Monitor — Tue, 27 Sep 2011 11:45:32 +0000

The consequences of negative real interest rates and financial repression. We know how this story ends. Keep this one on your radar

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How the Federal Reserve came into being

Edward Harrison — Fri, 23 Sep 2011 12:30:48 +0000

The question after the frightful period in 1907 was what to do to prevent another panic from causing a severe depression. Benjamin Strong, a senior executive at Bankers Trust and later the first President of the Federal Reserve Bank of New York, played a prominent role in the creation of the Fed and in its disastrous policy that led to the second Great Depression

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China: no hard landing, but no solution

Michael Pettis — Mon, 01 Aug 2011 13:55:44 +0000

I have been arguing for a while that as long as the Chinese government retains its capacity to raise debt we are not going to see a sharp slowdown in economic growth – at least until 2013. Any indication that the economy is slowing too quickly will be met with a relaxation of credit controls, and the concomitant rise in investment will spur growth

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Gary Shilling expects a hard landing in China

Edward Harrison — Thu, 14 Jul 2011 22:30:10 +0000

Gary Shilling sees a hard landing in China as they try to deal with the bad debt problem there. But note, when he says 'hard landing', he says this would "knock their growth rate in half." That's still almost 5% annualised GDP growth. Video below

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Italy owes German banks 116 Billion euros

Edward Harrison — Mon, 11 Jul 2011 14:45:25 +0000

The problem is if “markets become skittish about Spain or Italy, which cannot be bailed out. So EU leaders will cut Greece loose” and indeed, there is talk about doing just that – allowing Greece to default. The policy of extend and pretend may have reached the end of the line

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Contrarian data point to downside risk

Edward Harrison — Fri, 01 Jul 2011 13:22:24 +0000

The mitigating factors are the recent manufacturing data and the pickup in small business credit. I especially like to see small business with access to and take up of credit because that could mean renewed hiring. The jobless claims numbers are not moving yet though. Overall, the data are still soft and the surprise index is still saying that earnings estimates will be cut. In my view that means the risk is still to the downside

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Small companies feel pain as China tightens

Michael Pettis — Tue, 28 Jun 2011 19:30:00 +0000

Michael Pettis writes that in the current environment is that small and medium enterprises (SMEs) are hurting, and last week’s minimum reserve hike – which came out the same day as the CPI number – will undoubtedly make things worse since any withdrawal of credit is unlikely to affect the top customers (SOEs and local governments) and will fall disproportionately on marginal borrowers

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Chart of the Day: China’s Money Market Lending Rate

Edward Harrison — Wed, 22 Jun 2011 15:00:47 +0000

The Chinese Seven Day Repo Rate has skyrocketed to a 3-year high, suggesting a cash shortage as credit tightens

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Remember when I said banks were under-reserving?

Edward Harrison — Fri, 27 May 2011 03:00:39 +0000

Listen to what Jeffrey Gundlach has to say about subprime bonds -- yes subprime. Hint: he thinks banks will have to take more credit writedowns

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Michael Panzner: regional banks in trouble 10 Jun 2008

Looking for debt

Michael Pettis — Thu, 26 May 2011 17:00:04 +0000

An unsustainable rise in debt is, for me, one of the key indicators that the investment-driven model has passed its useful life and is generating negative growth while posting positive growth numbers. This is why I spend so much time trying to understand debt levels and the structure of balance sheets

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US Financial Institutions Make Accounting Gain of $29 Billion

Edward Harrison — Tue, 24 May 2011 15:00:39 +0000

You should notice that the title of this post is “make accounting gains” instead of “earned” because it is not clear at all that US banks earned $29 billion. After all, the FDIC has indicated that these accounting gains are driven by lower provisions for loan losses.

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More on the China-bearish ‘factor mobilisation story’

Edward Harrison — Mon, 16 May 2011 21:30:21 +0000

There is a difference between economic growth from mere factor mobilisation and economic growth from increased productivity. One requires a lot more capital investment and debt than the other. If and when capital investment growth slows, expect a lot of losses and then we will have to see how these losses get socialised and whether policy makers double down on the capital investment story

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