Christopher Mah...'s  Instablog

Christopher Mahoney
Send Message
I spent eight years at Bank of America in New York (1978-86) covering Wall Street, then moved to Moody's Investors Service where I worked for 22 years, covering banks, sovereigns and corporates. I chaired the Credit Policy Committee for four years. I retired in 2007 as vice chairman.
My blog:
  • Early Readouts From The Cyprus Experiment 0 comments
    Aug 16, 2013 2:39 PM

    "The no bail-out principle means that everyone should face the consequences of their own actions."

    --Jens Weidmann, president of the Bundesbank


    Thank goodness for Cyprus. We don't want to perform economic experiments using the entire population of Europe: what if it went wrong? But tiny, powerless Cyprus is a perfect laboratory for testing theories such as the "no bail-out" principle.

    Europe plans to implement the "no bail-out" principle on a continental scale in a couple of years. From then on, eurozone governments and banks will be allowed to default on their liabilities. Wonderful. But luckily, Europe can play with the Cypriot economy for a while before it rolls out the policy for everyone else.

    Here is the Cyprus experiment: What are the economic consequences of a banking collapse unmediated by external forces? (This is the same game that Hoover played in the early thirties, but it's a good idea to rerun these exercises every eighty years or so. People have short memories, on both sides of the Atlantic.)

    The Cypriot experiment just occurred this spring, and it takes time for the experiment to play out. It will take a full year for us to have definitive data, but we are already starting to get some early telemetry. My data sources are the Bank of Cyprus, the ECB and TradingEconomics.

    Bank deposits have fallen from 70 billion to 50 billion, a decline of 30%. I can only imagine that the money supply has declined by a similar proportion. As we know from the quantity theory, a big decline in M usually results in a big decline in output. RGDP is declining at a 5% annual rate, but I expect that to accelerate. Industrial production is declining at a 17% annual rate, which is more like it. Unemployment is 17% and rising. The twin deficits (budget and current account) are both running at 6% of GDP (uh-oh!). Prices are declining, as we would expect.

    So there you have it. The economy is in free-fall. Isn't this a fun experiment? Just imagine if we could do this to all of Europe.


Back To Christopher Mahoney's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers


More »

Latest Comments

Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.