Talin

The Erroneous Credence of the Efficient Market

Like most investors I do not pay much attention to EMT. Still, in the hands of competent people... late Fisher Black p.e., makes you think.
Anyway, I have always thought the 100 dollars bill history a funny way of conveying the idiosincracy of (some) economics professors beleiving EMT and their detractors... but for other reasons: the theory states that you will not find 100 dollars on the street. As far as economics theory goes it is pretty close to reality: I have never found a 100 dollar bill on the street. ¿How many -dear fellow bloggers- have you found?

So Just When Does Spain's Twin Deficit Problem Become Unsustainable?

Your analysis and numbers (forecasts) of the situation we are facing in Spain I Think are correct. If only I am a bit more pessimistic than you on the improvement of the current account deficit you mentioned.
With a 10% CA deficit average in the next years, and the inability of the private sector to absorb more debt it is pretty clear that budget deficits are going to escalate to plug the gap. The spanish government it is the only actor capable ot taking more debt. But how long and in what conditions? Even the very moderate debt we have may raise doubts under the present financial turmoil.
In the meantime we will observe a lot of selling of assets to foreigners. The contemplated Repsol deal and others we have just witnessed are just signals of the inability of the spanish private sector to mantain control of the assets by lack of finance. We will see many more... kind of strengtening the equity side of the balance sheets with foreign shareholders. Foreign assets will have to be sold also. All this is clear.

As for the future we need strong measures that this governement seems incapable of taking, more if you know the intellectual leanings of the policy makers on stabilization matters. The radical change in relative prices that the spanish economy needs it is not even contemplated.

Thanks for your analysis. Not in a single blog in Spain we find something remotely similar. But you must know this already.

This Recession Will Be Anything but Deep

Thanks, Mr. Peng. Sorry I was misunderstood... what you say is what I mean. Too tragic what we are witnessing.

This Recession Will Be Anything but Deep

I enjoyed and had a good laugh... be bubbly. Peng is a genius... it is true; today real estate firms in Spain were finalizing debt restructurings. No more debt problems... be bubbly. We will choke in these exhilarating moments.

Welcome to the Google Economy

Good post, full of suggestions, but very dangerous idea. If America Googles-up, as suggested it should, things will deteriorate sharply. "Atoms are a drag" "Stuff stinks" and things like that are old currency in current strategic thinking in America. Faced to increased competition in world markets, the only plausible strategy that American business strategists have developed -and that nobody contradicts- is to follow the "mental", "intellectual property" road. We do the "thinking", sell the thinking, and with that we buy the "stuff" the not so clever people in the rest of the world needs to supply. That´s the general idea. Now, improving on that, the "networks" will also do the "thinking".

To sell profitably intellectual property not attached to specific goods is not a very good business proposition. You do not get much money out of it, perhaps in a few of the successful projects, but taking the losses in the unsuccessful ones. Biotechnological companies that do not develop final products are discovering that.

At the national level is, obviously, worse. You cannot survive selling 20 billions of car "technology" and importing 200 billions of cars. And nobody pays for Google (final consumption); as at now the income of Google in intermediate consumption (companies’ money). This difference is vital, but nobody see it.

We have to network, invest in "technology" and make good use of it, which means creating something that (mainly) final consumers will really pay, which means they really value. And to keep the value added in America.

The Euro Shows Its Real Colors

Monetary authorities in Europe, whatever our ideas, have not done so bad with a single central bank and multiple governements. At least they have not originated this mess created by a Central Bank and a SINGLE government. As for the future who knows, perhaps the world will forget and the dollar can recover a little of the total lost of credibility. Funny that at 1,35 to the Euro people talk of the strenght of the dollar.

Big Troubles for the Euro

Tou are right, Reinko. But I am not thinking the US will make money, or could or should. The problem is big. I was just stating that there is an argument going on about how to limit the exposure and how clever all can be devising solutions. The sooner the government spends the money -reasonably- the better. They will not do it all bad.

Big Troubles for the Euro

One thing is theory about coordination, or lack of it... the other is practice about support. Until the end of this crisis, whenever it ends, the European governments are going to inject a staggering ammount of money to bail out the financial system flushed with the toxic waste of american foreign debt. At the rate they are going 1 triillon euros looks just the ammount. And, apparently, without recourse to the debtor.

In Europe they tax heavily and do not have the capitalistic mentality applied to their governments. To imagine Europeans calculating if in the end, after spending 700 billion of dollars, the government may end up making money, or investing in preferred shares in banks with warrants attached, so in case there is latter an uspwing in share values the "taxpayer" benefits, is unthinkable. That is why they will spend heavily and debtors will have a free ride.

As at now Governments in Belgium, Germany, France, UK, Iceland, Holland have already paid. This crisis is going to cost a lot of taxpayer money. If the US governement really spend real money salvaging the mortgage backed bonds, finishing this chicken game of who foots the bill, the crisis will end soon. The rest of the world are already paying more, and in the end, they know, they will have the largest loses. That is why the euro looks week.

America's Real Wealth

Writing from Europe I would say that some coments gloating in the sorry state of the American economy are as the author says, but I have read similar coments in this blog, so there is not much difference.

As for the situation of the respective economies I would say that now Europe has a enormous problem because most of the toxic debt lies as assets (worthless) of the european banking system (and Asia). That is the equivalent of the financing of the current account deficits of the US in the past decade, a great chunk of US foreign debt.

Now that debt is worthless. Nobody says it clearly in Europe, but most people consider this as the default of US foreign debt, the equivalent of similar defaults of foreign countries in the past years, if only this time much bigger. They feel cheated as they trusted the American financial system, only to find now that the niceky packaged (with plenty of beautiful As) mortgage backed bonds that US were exporting were just thrash. I am not blaming anybody, this is just past history, I am just stating what I consider aroung here the general feeling. The main concern about all now is to ascertain the willingness of the US to pay in the end anything (if just a little) to foreign creditors. In my opinion creditors do not have the slightes chance. They will suffer losses of 3 Trillion dollars, and the financial meltdown outside America is going to be horrendous. In US things will be better; with no more debt to worry about it is very logical that the US dollar is getting stronger.

Speculating on the Future

Curbs-in gives a good point. What is happening now is basically the repudiation of a big chunk of America foreign debt. Congress decision on the TARP bill is the nearest statement institutionally made endorsing the repudiation. With al bonds worthless America will write off 3 trillion of foreign debt, most of the current account deficits of this decade. Now we know how the sustainability of the current account deficit and the external debt gets "solved". All of us were wondering in the past years how all this was going to turn up. How the "reserve money" country handles all this. Now we know the "trick" works. Not that all of this was cleverly masterminded -nobody is so clever to devise such a perfect scheme- but the end result is what eventually matters. America has now joined the nations that have defaulted on the external debt and it will join in the text books the likes of Mexico, Russia, Thailand, Argentina... only that the amounts are one order of magnitude higher that the combined repudiated debts of the former countries.

What will happen in the future I do not have a clue. If the current external default gets clouded in the total mess that is has created in the international market, camouflaged as a credit crisis o liquidity crisis (or greed crisis or whatever) perhaps foreign creditors will blame themselves and forget soon. Dollar of course will be higher (no more debts), America will continue importing, current account deficits accumulating again...exporting countries will be pretending they are selling and the US pretending they are paying. Till next round. In fact this is the third time since 1985 that the "trick" has worked; only that now is too obvious.