Credit Writedowns

This is just a quick follow-up to the last post on debt deflationary dynamics in Europe and the contrast to policy in Japan. I think Yanis Varoufakis has it right that Europe is on the same path as Japan but just not as far along the path. And I would say the same is largely true of the United States.

Some recent data out of Canada points to a slowdown in growth of consumer indebtedness. According to RBC, the non-mortgage consumer debt has grown at the slowest rate in 20 years. This is clearly a positive development, but when taking mortgage debt into account, Canadians still represent some of the most indebted households in the developed world.

In the short term, though, a continuation of the currently lax monetary policy is likely to lead to higher assets prices. The investor mindset is very much in risk-on mode at the moment, as documented by the surprisingly calm reaction to the crisis in Cyprus. Mind you, none of this incorporates the risk of an outright war between the two Koreas or an escalation of hostilities between Israel and Iran, just to mention two wild cards. Barring a Black Swan event, though, we are on relatively firm ground for now, but the seeds of the next crisis have already been sown.

Yesterday I said that, given the housing rebound, it seemed ever more likely that the US economy would be able to power through the budget cuts from the sequester and the fiscal cliff. This is the asset-based economy at work. There is nothing sustainable about it over the long-term.

Today I thought I would try a little experiment by beginning to write a daily commentary. I have been thinking about doing this for a while and decided I needed to give it a go here because I don’t have an in-depth article I am working on. So now seems a good opportunity to make some general comments on the markets and the economy. I have a few topics in mind but let’s start with this one: housing. And then we will move on to the economy and ‘reaching for yield’.

The US trade figures for Q4 2012 came out this morning and they surprised analysts by showing a trade deficit that shrank 21% to $38.5 billion in December. According to Bloomberg News this was a lower deficit than any of 73 economists estimated prior to the release.

Raghuram Rajan has an interesting post now up on Project Syndicate. The overall tone of it has an Austrian feel as it stresses the failure of stimulus to allow developed economies to attain higher GDP growth a full five years after a financial crisis because of supply side problems. I would like to add a few comments to what Rajan says.

Let’s talk about deficits for a second. The term deficit has some pretty serious negative connotations. So when we use that word, usually the implication is that the deficit is bad. Here’s the thing though; as I have written here a number of times, any economic agent’s net deficit is offset by another economic agent’s net surplus. So in the context of trade, current account or budget deficits, these all net to zero. This is accounting 101.

Last year I was complaining about people not getting this. But we have shown this to you for the US (more than once), for Italy, for Ireland and France, for the Eurozone (more than once). So by now, I imagine you understand the concept.

Here’s Japan’s version of the same chart.

This is a brief follow-on to the last post on whether we should be optimistic, in particular now that the US housing market is improving. If you think about it, the problem now is that all debtors – public and private – are taking the deflationary route to reducing debt in attempting to increase net savings. This is the hallmark of [...]

Ray Dalio spoke with Maria Bartiromo at the Council on Foreign Relations this morning about a number of economic and financial topics. Dalio covered a number of topics including deleveraging the euro crisis and alternative investments like gold. On the whole, Dalio is cautiously optimistic. For example, he believes that Greece has a 60% chance of remaining within the euro [...]

The real solution has nothing to do with the Fed because the constraints are demand side and not supply side. But people will continue to exhort the Fed to do more and so they will do more.

I was on RT’s Capital Account last night talking to Lauren Lyster about the euro zone debt crisis. At the end of the show, we came up against the deficit problem and the question about how it should be solved. I get frustrated by this topic because the whole framing of the problem presented in the media is wrong because it gets cause and effect totally backwards. The question the media asks is “how can government cut the government deficit?” The real question is “why are deficits high to begin with and what should we do about it?” And it’s this question that gets people into trouble.