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.
