Friday, January 31, 2014


Krugman has it figured out in his Times column today.  Beginning with a brief history of crises starting with Mexico in 1982, which was apparently caused by the onset of deregulation and banker aggressiveness (his words, not mine) that led to the "sudden stop" of lending in 1982 and to economic implosion.  From this explanation all else follows in a logical pattern, for Paulie is nothing if not logical.  Unfortunately, as if too often the case, Paulie is dishonest and incorrect in his assessment.

Prior to 1982, and right at in the middle of the real estate bubble of the early 70ies, we had this new event called OPEC and the great oil shut off to which the West capitulated resulting in a massive increase in oil prices and unheard of new wealth throughout the middle east and in certain countries in Latin America.  It also led to massive amounts of liquidity flooding American and international banks, unusable at home, creating a need for it to be "recycled."  The recycling went through many of the very countries producing the bonanza whereby future revenues were targeted for repayment of present loans designed for infrastructure development.  Make no mistake, this lending was greatly encouraged by governments both here and overseas and banking regulators.  Remember, "Countries don't go broke."

The second most important thing to remember is that not all of this liquidity could be sopped up in this manner.  There was no capital market for sovereigns in the emerging markets; all the lending was done by banks.  There remained A LOT of liquidity.

The third thing to remember is Jimmy Carter was President and Jimmy Carter was an idiot.

The fourth thing to remember is inflation went through the roof and to combat it Jimmy did the only smart thing he did in four years…he appointed Paul Volker as Chairman of the Fed, and finally,

The fifth thing to remember is Paul killed inflation, stone, cold, dead with interest rates north of 15% but at the same time he killed Latin America as well.

Now little Paulie wont tell you all that because his solution to everything is for western governments to engage in huge amounts of deficit spending which will create demand which will cure all things otherwise we will face bubbles and recessions forever.  Unfortunately, near history--not theory--seems to suggest that improper fiscal management is what buggers things up and nothing has proven worse than the nonsenses of the Carter years and the economic disincentives of the present administration coupled with fiscal mismanagement over the past dozen years that encourages…nay, almost forces--investors to seek yield in places most really shouldn't be. 

Why should I worry?  Well, because I don't think this emerging market thing is over nor do I think it's a mere blip.  This could get worse and as I said the other day who cares about Turkey or the Venezulus or Argentina as stand-alones.  But throw in India, the weak guys in Euroland and certainly Brazil, and you have the makings…of…something.   Don't look for leadership from Uncle; The Leader and his party are in full election crisis mode not that anyone would listen to them in the first place.  Unfortunately, though unavoidable on the international stage we command absolutely no credibility. So do us all a favor, Paulie Bubbala, go sit in a corner somewhere and play with your Nobel which you  earned when you used to be an economist rather than a political enabler.  Crap like your latest effort we don't need.

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