Testing My Understanding

Today, US markets are rallying strongly (Dow up 400 points or so at the moment) on news of coordinated central bank action that, that .... that what?  It looks to me like the US and European banks are merely building up liquidity in preparation for potential bank runs.  I would have considered this bad news, kind of like news we just went to DEFCON 2, but for some reason the market is rallying (though there was also an ADP report saying hiring was way up last month, which is certainly good news).

As I wrote yesterday, there only appear to be 3 solutions to the European debt crisis and this is not one of them.  If I am right and patterns hold, the markets will wake up in a day or two and say, "wait, there is still trillions of Euros of deteriorating sovereign debt sitting on bank balance sheets with 40:1 leverage ratios" and fall back.  I am thrilled that our economy shows signs of life and I know that corporate profits have been good, but I don't see any way a European debt crash won't have substantial negative effects on the US.   If I am wrong, the market will continue up, up and away and you should stop ever listening to me because I clearly don't understand squat.

Update:  Yesterday I posited that real solutions were going to be a combination of 1) default/haircut 2) Make someone else pay back the debt and 3) print money.  I have heard it argued this morning that today's announcement may be evidence of #2 (ie, US taxpayers will bail them out) or more likely #3 (since the ECB can't print money, but the Fed seems to be doing a lot of it, lets get the Fed to print more money for the Europeans .... I don't understand the mechanics well enough to pinpoint who would bear the inflationary consequences of this, but betting on the US to be the world's patsy is never a bad bet).

20 Comments

  1. Matt:

    I guess being prepared for bank runs is better than being unprepared for bank runs, when the time comes that bank runs happen whether or not you prepared for them. :)

  2. me:

    Yup. Markets are full of the same kind of idiots that thought leveraging their shelter needs into power of 4 territory was a splendid idea (after all, historical data from the last three years proved that housing only ever goes up and even the agent said it was the best time ever to buy!), so you get a good reading on collective intelligence of mankind here... oh, and if this doesn't demonstrate that markets are a flawed allocation mechanism as well (they just happen to be the least flawed), read this :)

    http://cscs.umich.edu/~crshalizi/weblog/841.html

  3. Jens Fiederer:

    Not my area of expertise - but the only thing I can think of is maybe this is actually a sort of currency speculation....an expectation that stocks denominated in dollars will rise due to coming inflation?

  4. gordon-bennett:

    Suppose somebody in your family was a spendthrift and left a trail of debts all over town.

    You may or may not feel obliged to pay off the debts, as matter of family honour, but it would be pointless so to do unless you also cured the family member of his irresponsible spending habits.

    Similarly, it is pointless to pay off Greece's debts until it's government is cured of its propensity to live beyond its means by spending more than it collects in tax.

  5. Captain Obviousness:

    For the last couple years the only "fundamentals" that matter are when the next bank bailout is and how big it will be. And make no mistake, they like to use phrases like "providing liquidity to European governments" but it boils down to giving free money to European banks (who are counterparties to US banks to whom the Fed is beholden).

  6. Griffin3:

    [SUB] A company controlled by a longtime political donor gets a no-bid contract to supply an experimental remedy for a threat that may not exist. --> http://www.latimes.com/news/nationworld/nation/la-na-smallpox-20111113,0,6456082,full.story

    I calculate this at 0.87 Solyndras. Although we need to adjust the formula to weight for politcal funny-dealing.

  7. Andrew:

    So, remind me of the definition of insanity again?

    Throwing more money down the same rathole that Europe is, again, into the same insolvent ratholes the banks are who bet on being bailed out for investing in government bonds (since governments NEVER go broke of course), we have MF Global times a lot.

    I recall an article about Zimbabwe, how the locals started using the currency to fertilize their fields as it was pointless to even burn the stuff.

  8. Ted Rado:

    We seem to be trying to trying to avoid the laws of thermodynamics, the first of which states (my version to fit current case): you can't take out that which you didn't put in. We are not creating wealth with these money shuffles. We are simply rearranging the deck chairs on the Titanic. Nothing will improve until government budgets fall below income and we start paying down the debt. The idea that there is some magic paper shuffle out there that will save the situation without curing the basic problem is a total hoax. Judging from the gyrations on Wall Street, there are apprently many who believe otherwise.

    What is amazing is the number of financial "experts" that dream up all sorts of financial instruments (derivatives, derivatives of derivatives, on and on ....) which seem to accomplish nothing other than to skim more off the top for the Wall Street folks. This sort of nonsense is what caused the housing bubble. People were given the notion that you can shuffle paper around and create wealth.

    Wealth is created by producing something of value. Apparently we now believe this isn't so and by dreaming up new sorts of paper "wealth" we can all get rich by producing nothing at all.

    In the old days, you only got a loan if you had good credit and a down payment. To suggest that today makes you a racist or a hater of the poor.

    I live within my means and have no money problems. Why can't the USG (and others) do the same? Why should I pay high taxes to pay for some other person's (or government's) stupidity?

    Everyone needs to get back to basics. There is an old Hungarian saying "If I don't have money, I don't spend it". First law of thermo!

  9. Don:

    " I don’t understand the mechanics well enough to pinpoint who would bear the inflationary consequences of this, but betting on the US to be the world’s patsy is never a bad bet"

    Actually, I'm thinking this sort of ties all out lifeboats together. If we sink, we're dragging them down with us.

    In reality, that's largely the way it is already, but by putting USDs in everybody's hands (in Europe), it makes this fact abundantly clear to everyone over there.

    It's also a poison pill for a Ron Paul-style fiscal conservative, because even if we get our house in order, we STILL will be bound to the socialists in Europe.

    I'm reminded of the Charlie Brown episode where Lucy explains that mountain climbers chain themselves together, so if one falls, they all fall.

  10. Don:

    Oh, and the implication if I'm right, is that we (the US) believe that Europe will leave us holding the bag on ALL their debt, a move that wouldn't surprise me. Of course, that's assuming that the people making the decisions on our side of the Pond are rational (a bet I wouldn't take).

  11. Mark:

    Glen Beck is roundly called a crank, blowhard fraud ...

    He is actually very prescient. I can't listen to him any more on the radio, but I remember in 2007 he was saying Germany will have to bail out Greece, and we will have to Bail out Germany, but then who will bail us out. Ding - and this is one of several things he was telling us about markets about to collapse, that all came out true. But now no-one wants to believe the "hysterical fool."

    Segue to advert: Buy gold, buy seeds, buy food ...

  12. steve:

    "So, remind me of the definition of insanity again?"

    I don't think this response is insane at all. The FED prints money. The first receivers use the freshly created money to purchase real things (like companies). The money slowly percolates through the economy causing asset bubbles and/or commodity inflation (it has to go somewhere, but exactly where is hard to predict in the short term.) eventually culminating in consumer price inflation.

    Sure, it is disastorous for the economy and basically anyone who isn't in the short line of early recipients. But, for those in on the early game it is a bananza and not insane at all.

    The only thing I can't quite figure out is who is really in control, and therefore most to blame? Is it the big banks? Maybe, they are certainly on the short list, and benefit enormously. It is not unreasonable to assume that these interventions are a result of their lobbying.

    Is it the government? Maybe, each financial crisis results in a larger more musculuar FED and regulatory government in general. If you assume that government's primary goal is to simply consolidate all power into itself then creating one crisis after another justifying more government power to defeat terrorists or punish Wall Street would appear to be a very succesful strategy. Not the least bit insane.

    My conclusion. I tend to lean toward's it being governments fault. It is obvious that some very important and powerful Wall Streeters will likely go to jail eventually while no one in government will. I would tend to think that given a choice, the main potential scapegoats and/or real criminals as the case may be (i.e. CEOs of large banks) would choose to put a temporary halt to the shenanigans for public relations purposes (i.e. when under close scrutiny stop pissing everyone off until the heat blows over.) That this is not happening suggests to me that they are not really making the decisions.

  13. Matt:

    Mark,

    Just buy the seeds and the food. If things actually get that bad they will be worth more than the gold.

  14. steve:

    @Mark

    For the most part, I like Glenn Beck. The only thing that really turns me off about him is his occasional war mongering. Plus, I find his sermons on various liberal connections (Soros, SEIU, etc.) boring. I believe they are true, but I find the fact that the opposition is organized, interconnected, and funded with cash unenlightening. So are the Republicans, so are the Libertarians. While I wouldn't quite call Glenn Beck a libertarian he is closer then most big time media. The fact that a true Rothbardian libertarian in the person of Judge Napalitano occassionally filled in for him speaks volumes.

  15. caseyboy:

    Stock market is reacting to the inflationary pressure this will exert.

  16. IGotBupkis, Sailing the Economic Seas Betwixt Scylla And Charybdis:

    >>> betting on the US to be the world’s patsy is never a bad bet

    I would say it is in reality. One thing that has held true so far for well over a century is that OUR Rich Bastards are much more savvy than THEIR Rich Bastards. Just look at Japan, and SE Asia, after they both got a lot of excess financial buildup in a short time. I somewhat suspect the same will happen with China, which may well be our saving grace --- that or a kickoff to WWIII.

  17. IGotBupkis, Sailing the Economic Seas Betwixt Scylla And Charybdis:

    >>> you get a good reading on collective intelligence of mankind here

    No, this is more a wisdom thing than an intellect thing. You don't learn caution from books, you learn it from experience.

    And when you're raising people to not make critical analyses of experiences, then the WQ of the nation gets steadily lowered, at least temporarily.

    ...And OWS shows that for *som*, it never recovers.

  18. IGotBupkis, Sailing the Economic Seas Betwixt Scylla And Charybdis:

    *some*.

    LOLZ.

  19. Will:

    It won't necessarily have an inflationary affect in terms of CPI. The money is needed to repair the banks balance sheets, there not in a position to be making tons of new loans and even if they were there aren't many people/organizations who are actually a good credit risk.

    If the PIIGS debt was marked to market instead of fantasy, it would be incredibly deflationary. The money there providing in terms of short term financing would be a drop in the bucket compared to the write off they would have to make.

  20. Chris:

    Scott Sumner is saying that this is a monetary easing and has been arguing for some time that money has been too tight, which is the underlying cause for the extended recession (or near recession).

    Not sure if that's what is going on, but he has been pretty consistent with his analysis.

    http://www.themoneyillusion.com/?p=12142