Credit Writedowns

One of the reasons that it is been so hard for a lot of analysts, even trained economists, to understand the imbalances that were at the root of the current crisis is that we too easily confuse national savings with household savings. By coincidence there was recently a very interesting debate on the subject involving several economists, and it is pretty clear from the debate that even accounting identities can lead to confusion.

I don’t think it’s a big secret that I believe Greece will eventually leave the eurozone. I have said this repeatedly. But I have also written that I do not believe that Greece would attempt to do so while Europe’s economic crisis is ongoing. Instead I believe that Greece will exit once things have stabilized but it becomes clear that it faces an interminable jobless recovery.

Earlier today I wrote a post on the free blog site about blaming Germany for the problems in the euro zone. I ended up defending the German political response and blaming the euro. Let me just add a bit of colour to that here.

Europe’s GDP numbers have just been released today and they are miserable. They show the Netherlands and France in recession along with the rest of the periphery. And even outside the euro zone, we got some pretty dire numbers out of the Czech Republic as well. A: What’s going on? and B: why I am still bullish despite this?

When I see the chart for Euro zone NPLs and look at the numbers, I think debt deflation. And this is exactly the problem with the euro zone’s policy mix.

ECB President Draghi suggested last week that the central bank was taking a fresh look at the deposit rate. There does not appear to be any economist that thinks it is a good idea. The reasons vary, but the two main reasons are that it would likely prove ineffective in boosting lending and would be potentially disruptive to the money markets and financial institutions.

These are the words of European Commission President José Manuel Barroso in a recent interview with Die Welt, a German newspaper. Rather than translate this article in full, I want to put it in context given Barroso’s outburst about austerity hitting its social and political limit in response to journalist Matina Stevis. As I indicated at the time, Barroso was not denouncing austerity, as was assumed in the media. Barroso was calling for backloaded austerity instead of the front-loaded variety. And the Die Welt interview makes this clear.

The first thing that jumps out at me is the interview with Marco Buti, who says point blank that austerity must end as it is “pointless”. That’s huge because he is Olli Rehn’s right hand man. And Rehn has just confirmed that the EC is relaxing timetables for France along with the Netherlands, Slovenia, and Poland. After the Draghi presser yesterday, in which, Draghi repeatedly pointed only to medium-term consolidation, the relaxed timetable on France and the Netherlands and Macro Buti’s upcoming comments make it clear that we have entered a new era of EU policy, as I remarked yesterday.

ECB President Draghi confirmed the decisions made today to cut the main refi rate by 25 bp to 50 bp and cut the lending rate, the ceiling of its rate corridor, by 50 bp. Most importantly he seemed more open to a cut in the deposit rate and it is this that drove the euro lower after trading choppily initially.

This is a second daily commentary today to give some weight to what’s happening in the US after a slew of European-themed posts. I have three or four topics to cover here and I want to begin with the US economy including some thoughts on the housing market, demand for credit, and the Fed’s policies and regulations. I also want to connect this back to the 2013 variant of the global growth slowdown where Europe is leading the way. I have a bunch of links at the end that highlight most of these issues.

Earlier in the week, ECB German board member Jörg Asmussen delivered a speech on the challenges of the economic crisis for countries in Central and Eastern Europe. The part which caught most people’s eyes was his commentary on Latvia and its use of austerity as an economic model for the euro zone. Latvia really is not the model though. I have covered this ground before. However, I would like to re-visit it due to some numbers coming out of Ireland, the country I believe is most similar to Latvia within the euro zone.

I am not going to say a whole lot here in this post because I have been writing non-stop about Europe of late. I just want to share the European links with you. I think what the links show is that the European paradigm is in transition from front-loaded austerity to back-loaded austerity. This is something I have remarked on at length in the past. What I would like to know is what impact this move is going to have on bond and stock prices.