Whip Deflation Now

Includes: EU, EUBK
by: Dana Blankenhorn

I was listening to Stan Roach of Morgan Stanley on “Squawk Box” recently and most of what he said made sense.

We could use global financial regulation. Going from crisis to crisis doesn't make sense. Then he mentioned what he'd do with that power – eliminate “ridiculously stimulative” policies.

Until then, he had me. But turns out he just wants a global version of Andrew Mellon, the Treasury Secretary who famously said "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system."

Mellonism does sound moral and sound. But there are two sides to every transaction, and Mellon's solution only takes care of the creditors. There were two names on that bad loan, Mr. Banker, and yours was one of them.

Bankers have lots of excuses for bad loans. The government made us, they usually whine. We had to give that person with no income a jumbo mortgage. We had to buy those Greek bonds.

Sorry, but you did it. The purpose of a bailout, whether American or European, should be to give bankers the opportunity to make new loans. Instead bankers on both sides of the Atlantic are hanging on to their old loans like they're fine art. They're not. They're junk.

If current policies were “ridiculously stimulative,” as Roach believes, we would be seeing inflation on an epic scale. We're not. Inflation in commodity prices is being matched, sometimes more than matched, by drops in wages and technology costs, by productivity that keeps prices stable. What's happening in the real economy isn't inflation, it's deflation.

The real answer here is simple. Print money and get it into the economy. Bankers can help by finding good loans with that new money that will bring a return. Bridges bring a return. New forms of energy bring a return. Lots of great new technologies bring a return. Real estate, in a time of glut, does not bring a return.

My conclusion is that the real problem in our economies is not Greece, it's not debt, it's not even government. It's bankers. Until they throw in their hands, write off debt equal to the cash government injected into them, and start writing new loans that can pay off, we'll remain in the doldrums. Alternatively we could take the banks that are bankrupt and capitalize new ones. Let Mr. Roach join the 99%.

What we need, in the end, is money in new hands. At this point I don't even care if they're Chinese hands. All I ask is that, whoever gets the money, they put it to work on the opportunities all around us.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.