Looking for debt

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

US Financial Institutions Make Accounting Gain of $29 Billion

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.

More on the China-bearish ‘factor mobilisation story’

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

In an Undercollateralized World

Frederick Sheehan argues that we are overleveraged, undercollateralized, and accentuating these unsustainable imbalances through economic policy to smooth out volatility

The Myth that the Banks are Solvent

As James Galbraith has argued, the problem is said to be no more serious than some clogged plumbing. A bit of Drano in the form of government handouts and guarantees should be sufficient to get credit flowing again. Nonsense. Private debt loads remain too high, income and employment continue to fall, and delinquencies and foreclosures continue to rise. Assets are overvalued even at current depressed prices. Many financial institutions (probably including most of the big ones) are hopelessly insolvent, holding mountains of toxic waste that will never be worth anything

Is There A Eurozone Credit Cycle?

One of the key premises underpinning the establishment of the Euro as a common currency to be shared by a number of individual national states rather than one single nation was the central idea that the several economies of the participating countries would eventually converge to one common typology. That is to say, even if the individual nations would not be dissolved into one single superstate, then the idea was that the difficulty this could obviously create would be overcome by the generation of a number of different, but to all-important-economic-effects identical economies, each one a replica (in miniature or “a lo grande”) of the other. Absent this, it is hard to see how people could have convinced themselves that having a single currency and a single monetary policy could possibly work in the longer term

Sidelights to 1994

LURING THE UNSOPHISTICATED into the stock market was considered a risk by Federal Reserve Chairman Alan Greenspan in 1994. So much so, that protecting the individual investor was a mandate of the Fed. (The Fed advertises and then omits new mandates faster than spring fashions. My favorite is the brainstorm of former Fed governor Frederic Mishkin in 2007: “The modern science of monetary policy proceeds under the assumption that the central bank’s purpose is to maximize the well-being of households in the economy; the objective function specifies exactly what should be maximized.”) On May 27, 1994, Greenspan told the Senate Banking Committee it was for this very reason that he – his FOMC – had started raising rates in February, 1994: “Lured by consistently high returns in capital markets, people exhibited increasingly a willingness to take on market risk by extending the maturity of their investments.” The People had shifted assets out of bank deposits and the like. The avuncular Fed chairman, by raising rates, was shepherding his sheep: “[S]ome of those buying the funds perhaps did not fully appreciate the exposure of their new investments to the usual fluctuations in bond and stock prices.”

Given this acknowledgement, the Fed later violated its Investor Protection Mandate when it did not raise margin requirements: a means to reduce credit to the stock market, but, as much so, a warning of forbearance to those who do “not fully appreciate the exposure of their new investments.” The Federal Reserve has absolute authority to raise margin requirements at any time. The Dow rose from 3,757 on May 27, 1994 to over 11,000 in early 2000; the Nasdaq from 733 to over 5,000. During these manic years, households served as sacrificial lambs to finance an economy that was funded by rising stock and bond prices

Too much finance?

Over the last three decades the US financial sector has grown six times faster than nominal GDP. This column argues that there comes a point when the financial sector has a negative effect on growth – that is, when credit to the private sector exceeds 110% of GDP. It shows that, of the advanced countries currently suffering in the fallout of the global crisis were all above this threshold

Video: Australia on China’s property market and ghost cities

You have seen a few of these videos on ghost malls and ghost cities in China. This one from an Australian broadcast is quite good. It reinforces what I have been saying about the magnitude of non-performing loans and how this constrains Chinese economic policy.

Very sobering

Hard landing possible as Chinese inflation spirals ‘out of control’

On Saturday I wrote about the Scylla and Charybdis of anchoring inflation expectations, geared toward developed economies in North America and Europe. You tighten too aggressively and you get unwanted disinflation or deflation. You remain too loose and inflation rises. Inflation expectations are rising but they are still anchored in large part due to labour market slack. China faces a completely different macro environment. The PBoC is well behind the curve and may have to become very aggressive in tightening and revalue their currency. That risks a hard landing

Capital Offense

By Marc Chandler A disproportionate amount of mind share has been devoted to the financial aspects of the crisis. Investors and policy makers alike may be distracted by this over-emphasis and thus leaving them vulnerable to other aspects of the crisis. More specifically, the underlying challenge is sustaining aggregate demand in the face of a

Chart of the Day: Excess Reserves

Since the financial crisis hit in 2008, excess reserves have piled up in the U.S. financial system. There were almost no excess reserves in the system during the period of recorded data from 1959 onwards. But after the post-Lehman Brothers panic and the Fed’s zero interest rate policy, reserves piled up. The build up of