At the risk of wearing my readers down, I would like to return to this recurring thread of our macroeconomic scenario today, which remains as controversial as ever, although we have hardly invented anything new. This concept is based on the debt deflation process, as explained by Irving Fisher in … 1933.
Check out this simple explanation: 9 steps that occur during debt deflation.
Or the St Louis Fed's original text: The Debt-Deflation Theory.
And while I'm at it, here is a link to an equally pointed article on the matter from my friend, Steve Keen, who is undoubtedly one of the best post-Keynesians since Hyman Minsky: The Economic case against Bernanke.
The more curious can also check out the other points raised in his juicy site. And donations, even modest ones, for his research work are gratefully accepted (and encouraged)!
While people are still concentrating on the Greek problem and the Mr Obama banking system reform, which renders any tactical investment bias toward financial assets more than hazardous, I would like to draw your attention to two examples of the current process:
This article explains the debt default ($4.4bn!) of the Tishman-BlackRock consortium, which led to the reversion of the 56-building New York property, bought in 2006 for $5.6bn and appraised today at $1.8bn, to creditors.
The case is typical of the debt-to-equity swaps phase so familiar to our Spanish friends.
Check out the analysis published in the WSJ Friday by Capital One Financial (-12%). The article raises some troubling issues, and highlights a striking lack of loan demand by clients!
The situation looks all the gloomier, when you add the surge in unemployment in 2009 and the new regulation on credit cards, which will take effect 22 February
And once again, another typical step in the process.
In this context, and given the fact that the eurozone is surely not immune to this phenomenon, we can only welcome the latest comment by Mr Nowotny that banks that they will continue to have access to liquidity this year.
He further stated that China must adjust its currency policy to the macroeconomic reality of its gargantuan current accounts surplus.
And the exhortations of German Economy Minister, Bruederle, who criticised banks for their reticence to lend, make little sense.
Honestly, how can anyone expect money velocity to pick up once again, when banks are told to de-leverage, are confronted with new regulatory restrictions, when part of their potential profits are erased by pushing their best staff to leave (bonuses) and when credit-worthy clients just have no appetite for borrowing?
Mr Bruederle also said he was prepared to deal with urgent situations as part of his reaction to the deterioration of lending conditions.
He is indeed right to prepare himself…
No change in investment biases, favouring fixed interest rates on government debt (mainly 3-10 year eurozone) and continued reticence toward risky assets.
Disclosure: Long 20 years OAT 0% Coupons, EDF Corp 5 Years 4.5%.