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One of the notable things about Doug Nolan's weekly PrudentBear Credit
Bubble Bulletin is his measured language. Noland will, like a lot of
commentators these days, say apocalyptic things, but he usually makes his
points with data rather than hyperbole.
But this Friday's Bulletin is more emphatic than
usual, which could be a sign that Noland sees the edge of the cliff
approaching. An excerpt follows. The full article is here.
It's been my long-held view that, in the grand scheme
of major Credit busts, calculations of necessary additions to depleted bank
capital basically become meaningless. The critical issue is not some
quantifiable (and "plugable") hole in
banking system capital but, instead, the overall Credit needs of maladjusted
Bubble economic structures and inflated system-wide prices levels and
spending patterns. This is a critical distinction. In the U.S., for example,
I have argued that a period of prolonged Credit excess created a financial
and economic structure requiring in the neighborhood of $2.0 TN annual net
non-financial Credit growth - to keep the economic wheels rotating and
(speculative) asset markets levitating. Post-2008 crisis bailouts threw
hundreds of billions (Trillions?) at the financial sector, although this
changed little with respect to the economy's requirement of massive Credit
creation on an ongoing annual basis. This is an enormous festering problem
that goes unnoticed with attention fixated on European carnage.
From the European experience, we now appreciate that
the little, almost inconsequential Greek economy is quite an impressive
financial black hole. And as things have progressed, critical Credit Bubble
Dynamics have been illuminated for all who want to see. The market has
witnessed how the "money" from Greek Bailout One was soon vaporized.
Dexia's 2008 bailout: vaporized. Greek Bailout II,
when it arrives, will be similarly vaporized. European bank capital: poof.
The potential amount of "money" to be vaporized if Italy succumbs
to the highly contagious path of Greece, Portugal and Ireland: Unfathomable
Black Hole. Well, everyone knows this is not an option. So incredible effort
will be exerted to present the European crisis in terms of some quantifiable,
manageable, solvable problem - some quantifiable cost that might, with the
euro at risk, be tolerable to, say, the German voter.
The markets are somewhat relieved to see policymakers
now completely engaged. Yet I don't foresee an increasingly enlightened
marketplace really buying into any notion that policymakers are getting their
arms, minds or pocketbooks around the problem. Seeming at times in lonely
isolation (and I'm not referring to either their AAA debt rating or
manufacturing-based economy), the Germans appreciate the unfolding
"financial black hole" and monetary "slippery slope"
nature of how things are progressing. Meanwhile, on a more daily and hourly
basis, the market focus seems to be whether policy pronouncements are
sufficient to engender another "rip your face off" short squeeze.
Despite stringent austerity measures, Greece will run a
deficit this year of at least 8.5% of GDP. Without a massive and open-ended
commitment from a rapidly depleting European "core," the situation
is utterly hopeless. In a microcosm of the predicament shared by other
developed economies, Greece for too long depended on the creation of new
financial claims (Credit) and consumption at the expense of investment in
real wealth creation (is this type of analysis sounding any less archaic
these days?). As much as policymakers will never admit it, impaired economic
structures are at the heart of an unquantifiable global Credit crisis of
confidence. And as de-risking and de-leveraging empowers contagion effects
worldwide, the scope of the unquantifiable grows only more unfathomable.
And it all seems to boil down to this: Credit cannot be
stable within a backdrop of such extraordinary uncertainty. And, I would
argue, no amount of central bank liquidity ("money") and bank
capital is going to engender sufficient certainty to stabilize global Credit,
financial flows and asset markets. Not with the large number of dangerously
maladjusted economies; not with such well-entrenched global economic and
financial imbalances; and not with today's unbelievable Credit, derivatives,
and speculative leverage overhang. The issue is certainly not a lack of
"money" - but rather a lack of confidence and trust - the bedrock
of Credit.
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