Simon Johnson

How The U.S. Will Become a 3rd World Country (Part 2)

The United States increasingly resembles a 3rd world country in terms of unemployment, lack of economic opportunity, falling wages, growing poverty and concentration of wealth, government debt, corporate influence over government and weakening rule of law. Federal Reserve monetary policies and federal government economic, regulatory and tax policies seem to favor the largest banks and corporations over the interests of small businesses or of the general population. The potential elimination of the middle class could reshape the socioeconomic strata of American society in the image of a 3rd world country. It seems only a matter of time before the devolution of the United States becomes more visible. As the U.S. economy continues to decline, public health, nutrition and education, as well as the country’s infrastructure, will visibly deteriorate. There is little evidence of political will or leadership for fundamental reforms. All other things being equal, the U.S. will become a post industrial neo-3rd-world country by 2032.

Frontrunning: November 21

  • China Fears Lasting Worldwide Recession (FT)
  • Grand deficit-cutting effort ends with whimper (Reuters)
  • Global Economic Outlook Grim, China Tells U.S. Trade (Reuters)
  • U.S. Billionaires Avoid Reporting Gains to IRS (Bloomberg)
  • Deutsche Bank Could Transfer Contagion (Simon Johnson)
  • Some BOJ Members Warned of Lehman Crisis-Type Shock (Reuters)
  • Spain's Rajoy Triumphs With Big Election Majority (Reuters)
  • Commission Proposes ‘Eurobonds’ (FT)
  • Greek PM Heads for Brussels to Try to Secure Cash (Reuters)

Guest Post: Facts Don’t Equal The Conclusion in Europe

Very simply, the facts of the current environment in Europe don’t equal the conclusion that a coordinated effort will restore confidence.  The fact of the matter is that European Sovereigns are massively indebted and European banks are massively under-capitalized.  The proposed solution of raising capital and issuing fresh debt to solve this issue is a joke.  If I walk away from a home I owe $200k on and its fair market value is $100k (a 50% haircut), does a loan to my bank for $100K from the institution overseeing it change the impairment?  No.  You’re shuffling the cards.  Instead of taking a $100k loss, they now have an asset worth $100k and a new liability of $100k.  The asset is still worth $100k. Even though their little maneuver technically gives them an asset of $100k and cash of $100k, my bank now has $100K less to lend against.  Thus, their leverage increases.  This analogy applies to European banks holding sovereign paper... and for that matter the countries themselves (ie Italy voting on whether Italy's debt should be purchased by the ECB/IMF/EFSF, etc).  At this point, any 'plans' are only slightly more creative than card shuffling tricks from a clown at an 8 year old's birthday party. 

Random Thoughts From David Rosenberg

Instead of tackling any specific and highly volatile high frequency macroeconomic data points today (which will most likely be diametrically inverted in the next update iteration), today David Rosenberg focuses on sundry items and flights of fancy that are worth noting, such as that "the S&P 500 has recorded 62 consecutive days in which it has swung by 1% or more in intraday trading. The Dow has also closed 1% higher or lower 38 times since the beginning of August (compared with just 25 in the first seven months of the year)." Additionally, Rosie shares some views on the Paradox of thrift, i.e., that "spending on appliances, jewellery, watches, air travel, recreation vehicles, cameras, gambling is actually lower today than in 2005", on credit unions whose customers don't want to borrow money, " "Too few of its 95,000 members, most of whom live or work in five counties in the San Francisco Bay Area, want to borrow money. And too many are making extra payments on mortgages and car loans — or paying off personal loans ... Provident's loan portfolio has shrunk by 25% since the end of 2008, including a 5% drop in the first nine months of this year" but most notably concludes with the observation that while the 2008 "Great Financial Crisis" was quite memorably, "I wonder whether we'll say 2008 wasn't the real crisis — it was a warm-up, but the real crisis was the sovereign debt crisis in Europe....It is clear that the situation in Greece has deteriorated markedly and that the scope for any further fiscal restraint without triggering some sort of revolution is small. The only way toward fiscal sustainability — to get the sovereign debt/GDP ratio down to 110% by 2020 — is for investors to grant the country a jubilee of sorts and accept a 60% write-down." Naturally, France will throw up over any proposal that sees a 60% haircut Greek haircut, not so much due to Greek losses per se, but due to imminent losses when Portugal, Ireland, Italy and lastly Spain (to which four countries France has exponentially more exposure) decide to do the same as Greece and start underreporting data, striking daily, and overall just shut down their economies.

Simon Johnson On Where The TBTF Cutoff Line Is And Other Observations On Dodd-Frank's One Year Birthday

"CIT Group, which is the largest institution we let fail since the class of Lehman and since those really crazy days of before 2008. That was about an $80 billion bank in terms of assets, 8-0. Goldman Sachs fluctuates between $800 billion and $1 trillion. And I don’t think we’d let Goldman Sachs fail. So somewhere between $80 and $800 billion. Where exactly is that line? Great question. I hope we don’t have to find out. But we should know and we should know how to handle it."