As the days of Extend and Pretend lurch toward their inevitable catastrophic End, the Smell of Fear grows thicker by the moment...
Somehow, I missed this recent article by two of my favourite fantasy story-tellers - Niall Ferguson and Paul Krugman.
The gist of the article is that like Bernanke, Soros, TheEconomist and every other denialistic comfort seeker, these two desperately cling to the fantasy that there is a straightforward and "clear" way out of a 30 year borrowing binge - i.e. more Extend and Pretend, with just enough structural reform to give everyone an unwarranted sense of confidence that this time will be different. And who cares if "normal, calm economists" are just now making a comparison to 1931. How about the comparisons that should have been made to the roaring 1920s before we got to this dire situation? Of course "normal, calm economists" are getting stains in their underwear, they've been asleep at the wheel for the past decades as the imbalances accumulated on their watch.
Ferguson, Krugman et al. are Ignoring the Lessons of Reality i.e. there is NO free lunch
The theme of the underlying piece is that Germans are ignoring the lessons of the 1930s i.e. these guys know everything, and the man in the street knows nothing. Without going line by line through their convoluted and recycled logic- the basic premise (as always) is that one country can bail out all of Europe without any adverse consequences to its own economy or financial condition. Again, they never question how these indebted countries accumulated all of this debt in the first place and whether or not the structural welfare state is sustainable longer-term, as more and more Baby Boomers leave the workforce for retirement. Already German Bunds were selling off last week (until Merkel just now intervened), on the prospect of a joint Eurobond issuance. The German Bund is the European equivalent of the risk free rate. What happens if the risk free rate doubles or triples? Don't ask one of these academics because they are clueless to reality. What happens is that ALL risk assets are immediately revalued - substantially lower.
This is not 1931, this is 2012
Unfortunately, we don't get the 'dream' do over of a 1931 scenario, this time done right. The globalized debt Ponzi that we have created this time is orders of magnitude larger and more leveraged than anything that obtained in the 1930s. The notional value of the derivatives market alone is in the hundreds of trillions - dwarfing global GDP - a market policymakers and regulators can't even comprehend much less manage properly.
Meanwhile, again, the assumption of all these backward looking pundits is that we can continue to grow the debt Ponzi inexorably - deficits as far as the eye can see, with no adverse consequences. That's the specious Krugman Assumption i.e. that we just need to continue borrowing long enough (aka. indefinitely) for the economy to 'recover'. Unfortunately, at this point, borrowing is the economy. In the U.S. that means a deficit equal to 10% of GDP just so that policymakers can pretend to have a 2% 'growth' rate v.s. the reality of an 8% recession. Had policymakers since WWII been willing to borrow on that scale, there would have been no recessions in the past 60 years. Lastly, why stop at 10% of GDP? Why not borrow 12% and have a real booming 'economy'? I can hear them now: 12%? Don't be ludicrous !
The True History Lesson: The only cure for too much debt is called Bankruptcy
Contrary to what the above sophists would tell us, there is no way to borrow oneself out of a debt problem. There has never been a country in history that borrowed its way to prosperity and there never will be, no matter how much historians and economists think they learned about the 1930s. Only when we eliminate all of this debt, can we start over again with a basic economy.
More Supply-side Collapse-o-nomics
And as always these days, it's not what is said that matters so much, but what is not said. How can these self-nominated experts present a plan for a sustainable European future and say nothing about how to create jobs and rebuild a sustainable economy? Once again, their entire plan is predicated upon further propping up of the lenders - deposit insurance to support the banks, debt mutualization to bring in more (German) taxpayers, direct capital injections into banks...all programs designed to support the ultra-wealthy while the Middle Class is dissolving with each passing minute. I said it before, and I will say it again - The days when the ultra-wealthy are bailed out on the backs of the Middle Class are over - In Europe, in the U.S. - everywhere. These Ivy League stooges are somehow oblivious to society's seething rage, lurking just beneath the surface...
Regardless of the historical debate, commonsense and reality dictate that there IS a maximum amount that can be borrowed, and shifting that amount from the private sector to the public sector or from one country to the next or from banks to sovereigns and back again (Spanish style), doesn't fool the markets. At this juncture, we don't need Ph.Ds to tell us what happens next. When an election in Greece can move world markets, then the tail is indeed wagging the dog and we are already well beyond the point of no return.
Careful what you wish For
The general consensus at this juncture is that things are bad, but not bad enough to force true structural change. Therefore, the overriding LEAP OF FAITH (barely) holding together global market confidence is that when things do get truly bad enough to force major change, that policy-makers will be ABLE to react quickly enough to forestall global financial collapse a la Lehman x 10. Given that these Eurocrats can barely agree where to meet and what type of wine to have with dinner, that is a delusion of the tallest order. Once the global credit Ponzi begins to unwind in real time, it will do so with a force and velocity that is beyond the capacity of ANYONE to manage.
