Ladies and Gentlemen! Introducing...A NEW ECONOMIC TERM!

I've coined a new term for unstable, one trick pony financial economies like Iceland and Cyprus: A Bank Branch Republic.

And how about that Malta? From Wikipedia:

Lombard Bank is one of Malta's major banks. Today, Cyprus Popular Bank of Cyprus is the largest shareholder with an equity stake of about 49%. Over 1,200 shareholders, including investment funds, hold the remaining shares. The Bank has a 60% stake in Maltapost plc., the Maltese postal service.


Yowsa!


Now that banks no longer offer interest OR security, they have basically just become mattresses with fees...

The Paradox of Theft

When central banks cause bubbles, they leave a trail of broken dreams and broken bank accounts in their wake. Many of the newly rich find they are less rich than they thought, and many of those who bought in expecting to become rich find that not only are they not rich; they are much poorer than they were before. The bottom line: these bubbles induce people to speculate more recklesslessly and spend more in aggregate than they otherwise would have.
Then comes the crash. And what happens? Central banks cut interest rates, sometimes drastically. This induces those with any savings left to save less, and continues the dislocations caused by the original bubble.
And when some unsophisticate from outside the central bank priesthood points out that abnormally low interest rates might be harming saving (thereby limiting the pool of funds that would reliquify lending) and are thus keeping household balance sheets in peril, the reply comes that we can't hike interest rates now; after all, the economy is still recovering from the collapse of the bubble!
It is like saying to someone who's been on a merry-go-round too long and is now neckdeep in dizziness and nausea that he shouldn't get off the merry-go-round just yet. After all, he's not ready to be on his feet! Much better to stay on a lurching, spinning apparatus until he is no longer dizzy...

A Monetary History of the European Union

When the smoke clears, here is what the “World Is Flat” droids will say about the failed European experiment…

It will be said that the European Union fell apart because we didn't have enough "political integration." That is, we had monetary union without fiscal union. In other words, this grand experiment in democracy failed because the individual nations had too much democracy.

They will blame Trichet for not easing soon enough or for not printing enough money. The collective wisdom will be that he made the same "mistakes" (insufficient money printing) the Fed made in the 1930s. They will say he gave in to the inflation hawks. They will blame Germany’s “irrational” memory of the Weimar hyperinflation for preventing Trichet from becoming Helicopter Trichet (should the Reichsbank President who oversaw that hyperinflation be nicknamed Dirigible Havenstein?).

Ireland, one of the darlings of the European experiment, is now among its worst off. That "Celtic Tiger" is now a paper tiger, paper as in debt. It has incurred unconscionable liabilities because it jumped headfirst into the modern blarney of “growth” through skyhigh leverage. Remember, modern economies run on paper shuffling and asset bubbles, and anyone who questions this just doesn’t “get it.” Well, those who expected to be made whole on Irish debt aren’t going to “get it” either.

For all their worship of progress through psychiatry, one thing these brain trusters don’t do is self-actualize.

The world is round. Greece isn't Germany. Technocratic global democracy is a scam.

Why This Economic Dip Will Be Even Worse

Many financial commentators are assuring me that despite all the bad economic news, the US economy should not double-dip, and that we will not see a replay of 2008. I agree that it won't be a replay, because I think it is going to be worse.

A few reasons:

Last time the crisis was in the banks, who ultimately wound up getting backstopped by governments. Now those government "safe havens" are the cause of the crisis. Who is going to backstop the backstops?

Going into 2008, the decoupling story was still a bright spot for the bulls. Many thought that while the developed world might slow down, emerging markets like India, China, and Brazil were going to boom enough to keep the rest of the world sputtering along. Now India and China are dealing with serious inflation hazards, and EM stock markets like Brazil's are performing much worse than those in the developed world. Unless "To the moon, Alice" suddenly becomes a viable export model, there aren't going to be any markets frothy enough to tug the rest of the world into prosperity.

In 2008 there was still room for interest rate cuts, and central banks all sliced with abandon. Have you seen today's interest rates? There ain't much to cut.

What about "quantitative easing?" There may be less appetite for it now, but that doesn't mean central bankers are suddenly going to abandon their diet of counterproductive actions. We probably will see more QE measures, but all they will do is further stoke the corosive inflation that already has people wincing. That extra inflation will leave folks with even less money to spend on, well, anything.

And let's not ignore the psychological component. In 2008, many were caught flat-footed because events they had previously thought to be impossible (US home prices falling, major banks going under) happened again and again. 2008 wasn't that long ago, so those "impossible" shocks are still fresh in people's minds. Consequently, they will act much more urgently to avoid getting buried in the collateral damage of the impossible. This means capital will flee more rapidly at early signs of trouble, making the shockwaves even worse. This might explain why European stock markets have sold off so brutally at every fresh bearish peep out of Greece, Spain, and the like.

Perhaps it is time to coin a new investment phrase: The end is your friend!



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