"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Friday, November 19, 2010

We're Running Out of Balance Sheets to Stuff With Growing Worthless Debts

Nouriel Roubini was on CNBC today urging that European debt restructuring is the only remaining option.  He speaks plainly here:

"So now you have a bunch of super-sovereigns, the IMF, the EU, the Eurozone bailing out these sovereigns, and there's this much you can kick the can down the road.  There's not going to be anybody coming from Mars or the Moon to bail out the IMF or the Eurozone.  So at some point you will need the restructurings you need the creditors of the banks to take a hit.  Otherwise you put all this debt on the balance sheet of the government... you break the back of the government, then the government is insolvent."

"The next one in line [to ask for aid] is going to be Portugal... they're going to need an IMF and EU program"

"The big elephant in the room however is the case of Spain..."

"But if Spain falls off the cliff there is not enough official money in this envelope of European Resources to bail out Spain.  So the whole strategy is to kick the can down the road... and hope that things are better three years from now."
Roubini also covers QE, China, and the debt problems of the US and its states.

Here is the other problem:  There are too many other variables that even a brilliant economist like Nouriel Roubini can not address.  What about EU internal geopolitics?  What about the ongoing currency war?  What about trade imbalances that nations such as Germany and China do not want to address?  How do all these ongoing crises interact with each other?

The debt clock is ticking...  We are running out of time, and there is no clear leadership to handle this debt disaster.  When tough choices have to be made, and there are multiple self interested parties (governments) involved, don't expect too much.  No one wants to take the hit, to make a sacrifice.  And then, it's too late.  The decision is made for you by chaotic default, not by calm planning.  Hence the "kick the can down the road" policy the EU has been implemeting to date.

I often say that the current global debt-based fiat model is ending.  The question is, does it end with a bang or a wimper?  And what replaces it when the one thing that credit money relies on - TRUST - is gone?  My conclusion is still gold by default, in a chaotic environment.

Here's the full interview:


Dave Narby said...

I think it was Rickards who first brought up (for me, anyway) that for the global economy to expand, it needed to inflate a hard currency. Now what does it inflate against?

BTW, here's more Rickards, great stuff IMO http://www.cnbc.com/id/15840232?video=1652514816&play=1

Misthos said...

I saw that interview too. Great stuff. I like the way Rickards integrates realpolitik with his economic analysis. Too many economists ignore this variable.

As for the global economy, my fear is that the wage imbalances that arose by adding a few billion Asian workers overnight into basically western trade treaties (GATT, WTO) that work for nothing compared to Western workers will not go away anytime soon - regardless of currency/monetary system.

The great rebalancing will not go smoothly, there will be high unemployment for maybe a generation. That's my worst fear.

US policymakers can't support the Chinese product/WalMart model and ignore US wages, and then be surprised that real estate values can't hold up anymore. They didn't think this thru.