Cyprus Will Be The First Inmate To Escape The Eurozone Prison [View article]
Redenomination for the smaller peripherals is desirable and manageable. This is not the case for Spain and Italy, because they are so big. On a combined basis they have EUR 3-4 trillion in debt. They can only leave the euro by either repudiating or redenominating this debt (which they can do because it was issued under domestic law). This would bankrupt the global banking system, which would be a problem. The same thing happened in 1931, and it took a few years to sort out.
Yes, you could allow Citi to default on its uninsured deposits. All you would have to do would be to freeze all bank deposits for an indefinite period. The payments system would stop, the stock market would have to close, and payrolls would not be met. This would not pose a problem for survivalists and disaster preppers. The rest of society might break down, but the experiment would be useful nonetheless.
European Crisis Marathon Is Only Halfway [View article]
I will observe that the Cyprus banks were book solvent as of September, at the same time that the troika said that they needed EUR 10 billion in new capital. You can't achieve that level of insolvency without writing down the entire balance sheet. If you take a look at Bankia and Banca MPS, you will find institutions with equally doubtful accounting. Eurozone banks represent a black hole in which accounting and economic reality have sharply diverged. Enron was a rounding error compared to the Club Med banking system.
The Fed's Private Market Value: Fun With Numbers [View article]
The Fed is just another of the many valuable items on the left-hand side of the FedGov's balance sheet. Another nice one is Alaska, 90% of which is owned by the Dept. of the Interior, and Nevada, ditto. What annoys me is the propensity of the US to give away its most valuable assets without even a thought given to sale. Recent examples are the Presidio and Governor's Island, each of which was worth multibillions. It escapes me why the OMB is unable to compile a balance sheet for the US. It could change behavior.
Falling Down The Economic Elevator Shaft [View article]
There is nothing wrong with the fiscal situation that 6% nominal growth won't solve. It will grow government revenue, balance the budget, stabilize the debt level, and steadily reduce the debt/GDP ratio by holding debt constant while growing nominal GDP.
I'll take a 6.5% earnings yield over a 2% treasury, a .5% MMF or a 0% gold coin. There is nowhere else to go but stocks until the ERP falls considerably lower. As far as I'm concerned, we are still in value territory.
Ideally, the BoJ would buy all those JGBs from the banks and insurers, and the banks could replace them with floaters. Then the capital loss can be taken by the central bank instead of by the "private" banking system. The only way to deal with a debt overhang of that size is to inflate it away and deal with the consequences. Any kind of default would be much more complicated.
Stocks Will Go Higher As Reflation Gains Credibility [View article]
Commodity prices such as oil will fluctuate due to exogenous events. High prices are a tax on the economy, but a modest one. The price of gasoline has no statistical relationship to the stock averages. Indeed, if the Fed succeeds in creating higher inflation, commodity prices will rise in relation to the dollar's devaluation. That is not a problem.
Stocks Will Go Higher As Reflation Gains Credibility [View article]
It is true that we are in a liquidity trap and that the Fed's efforts have been stymied by very low velocity. But the Fed retains the power to inflate the currency; it ultimately controls M2. That is why QE is required: to offset low velocity.
The stock market is the present value of future corporate profits discounted at an appropriate risk rate which includes inflation. A good measure of that value is expected future real GDP growth. The CBO has said that the sequester will raise real long-term growth, and that failing to cut the budget will result in an unsustainable debt trajectory. This is why the sequester and the record Dow have coincided. Obama, Pelosi and the NYT believe that the higher the level of spending, the better for the economy. This is kindergarten Keynesianism that Keynes would not recognize.
Stocks Will Go Higher As Reflation Gains Credibility [View article]
1. Increasing expected inflation is supposed reduce the real ST interest rate; i.e., to make money cheaper to fuel real activity. The evidence that expectations are rising is found in the higher LT rate. 2. The goal of inflation is to discourage bondholding and encourage investment in the real economy, and also to increase nominal growth which raises the potential level of real growth. You can't have 5% real growth with 3% nominal growth---something the ECB, the BoJ and the GOP simply do not understand.
Stocks And Inflation: The End Of An (Abnormal) Affair? [View article]
Coincidentally, I wrote about this same phenomenon today ("Stocks Will Go Higher As Reflation Gains Credibility"). I think there is a "sweet spot" for nominal growth around 6-7% which facilitates maximum sustainable real growth, which is good for stocks. Right now we are stuck at 4% nominal growth, which is too low for optimal real growth. If the Fed can get inflation up by an additional 1-2%, real growth will accelerate and equities will benefit. (I am a Sumnerist.)
Cyprus Will Be The First Inmate To Escape The Eurozone Prison [View article]
Cyprus: It's Not Over Yet [View article]
Cyprus: It's Not Over Yet [View article]
European Crisis Marathon Is Only Halfway [View article]
The Fed's Private Market Value: Fun With Numbers [View article]
Falling Down The Economic Elevator Shaft [View article]
P/E Ratios Creeping Higher [View article]
Kuroda To Meet 'Wall Of Reality' [View article]
Stocks Will Go Higher As Reflation Gains Credibility [View article]
Stocks Will Go Higher As Reflation Gains Credibility [View article]
Does GDP Drive Market Returns? [View article]
Stocks Will Go Higher As Reflation Gains Credibility [View article]
2. The goal of inflation is to discourage bondholding and encourage investment in the real economy, and also to increase nominal growth which raises the potential level of real growth. You can't have 5% real growth with 3% nominal growth---something the ECB, the BoJ and the GOP simply do not understand.
Stocks Will Go Higher As Reflation Gains Credibility [View article]
Stocks And Inflation: The End Of An (Abnormal) Affair? [View article]
What Moody's Downgrade Of The U.K. Means: Nothing [View article]