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Christopher Mahoney
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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. PLEASE... More
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Capitalism and Freeedom
  • Europe's Depression Is About To Get Worse 0 comments
    Sep 5, 2013 11:18 AM

    Thesis: Eurozone growth is about to turn sharply negative because credit growth has turned sharply negative.


    Can an economy grow when credit is contracting? I really don't think so. Credit growth in Zonal Europe is now sharply negative. Here are the stats as of June, courtesy of the excellent Market Daily Report:

    EZ: (3.5%)

    Ger: (6.3%)

    Fr: (1.1%)

    Belg: (3.0%)

    Neth: (1.0%)

    Aus: (5.6%)

    Fin: (4.4%)

    It: 0%

    Sp: (9.3%)

    Ire: (13.2%)

    Gr: (20.4%)

    P: (4.7%)

    Cyp: (17.0%)


    A plot of EZ credit would look like the trajectory of an airplane which takes off, achieves cruising altitude, and then runs out of fuel: a scarey parabola. The inflection point, or Minsky Moment, occurred this winter. Something happened which resulted in a decline in zonal credit; I don't know what it was.

    But now zonal credit is declining--not the growth rate, but the actual stock. A credit contraction always and everywhere results in negative economic growth. I don't see how the eurozone can avoid an acceleration of the double-dip recession that began at the beginning of 2012. I'll be honest: I expect zonal credit to contract for the next decade. It will take at least that long for the European banking system to digest its Matterhorn of toxic waste. The banks will have to simultaneously charge-off bad loans, mark government bonds to market and raise capital--in the face of declining core profitability. This is the definition of a debt-deflation depression.

    May I remind you of the eurozone's official strategy: (1) weak banks should be allowed to fail; (2) weak governments should be allowed to default. This predicts that the weak zonal governments (the PIIGS) will default, and that the weak zonal banks (of which there are many) will be allowed to default on their bonds and deposits. That's a death-spiral: market prices will decline, especially the price of labor, while the real value of debt will rise. A repeat of the whole 1930-33 thing, which we know all about.

    It is almost as if the entire product of the economics profession since 1933 has been erased. We have learned nothing. We will once again experiment with liquidationism. Prices fall and real debt grows until it is extinguished via default. Why not do it again? Maybe it will turn out differently this time. Perhaps the laws of economics will suspend themselves for the benefit of the European unemployed. Maybe this time starving people won't turn to political extremism. I am reminded of Christopher Hitchen's aphorism: The connection between cruelty and stupidity is very close.

    My advice: Keep your eye on the DMB's eurozone credit growth statistic. Should it continue to decline, as I predict, we will enter Phase III of the eurocrisis. I would not own any security denominated in euro.


    Themes: euro, europe, eurozone
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