Mortgage-meat scandal

Nothing to report from Wall Street. Dow down a little yesterday. Gold up peanuts. But the most telling stories are coming from the world economy, not its manipulated markets.

The price of copper is collapsing. The Baltic Dry Index is dragging on the bottom. Seven years after the beginning of the debt crisis, and the economy is still struggling. And George Soros says Europe could be in for a 25-year slump. Bloomberg reports:

Billionaire investor George Soros said Europe faces 25 years of Japanese-style stagnation unless politicians pursue further integration of the currency bloc and change policies that have discouraged banks from lending.

Europe “may not survive 25 years of stagnation,” Soros said in the interview with Francine Lacqua.

The first crack appeared in the spring of ’07 – in the weakest part of the debt structure, subprime. In March of ’07 the value of subprime mortgages had risen to $1.3trn. Mortgage interest rates were rising. Defaults and foreclosures followed.

The following autumn, the rate of mortgage delinquencies had tripled from the year before. By January ’08, it had quadrupled, and by May it had quintupled.

It was a classic debt deflation. Homeowners had taken on more debt than they could afford. Now, the debt was going bad and investors were getting queasy.

Defaults were bad news to marginal homeowners who lost their houses. They had to move. They were bad news to the people who owned the mortgages too. This mortgage debt had been cleverly sliced and diced and sold all over town. But the sellers seem to have forgotten what was in this sausage. They didn’t seem to realise that it was about to make them throw up.

First, Bear Stearns ran running from the room, holding its stomach. Then, it was Lehman Bros. At that point, the Feds came in with every quack cure they could think of. Bailouts, cash for clunkers, ZIRP, QE – one estimate put the total cost at more than $10trn, about three times the cost of WWII.

The problem with the cures was always a fundamental one. The crisis was caused by too much debt. And all the feds had to offer was more debt.

As Bloomberg  reported last week, the world’s stock of toxic sausages has exploded to $100trn:

The amount of debt globally has soared more than 40 percent to $100 trillion since the first signs of the financial crisis as governments borrowed to pull their economies out of recession and companies took advantage of record low interest rates.

The jump in debt as measured by the Basel, Switzerland-based BIS in its quarterly review is almost twice the US economy.

You cannot lose weight by eating more. And you can’t reduce debt by borrowing more. The whole approach was clearly futile from the get-go. Instead of letting the debt wash out of the system, the feds added to it. Instead of cleansing the economy, the feds made it dirtier than ever.

Debt is an obligation laid upon the future by the past. The larger it gets, the harder it is for the future to happen. Growth rates slow. This has been demonstrated by several studies, most prominently the one by Rogoff and Reinhart. There were some errors in their maths, that critics rejoiced in, but the conclusion was solid: when government debt/GDP increases, growth slows.

That is what has happened in Japan for the last 23 years, and in Europe and America for the last seven. All of these economies are still fighting deleveraging, resisting debt deflation, and pretending that they can continue to add debt forever, and that somehow this will get them out of their debt traps.

But they are doomed. Without growth they can’t pay the debt. With so much debt, they can’t grow.

  • Wotan

    George Soros has never been a great economist; these days his pronouncements are those of an intellectual pygmy. Firstly, why England and an independent Scotland should not be able to share the Pound is a mystery. This would be no problem at all and Soros should stop dreaming up problems that do not exist. His ideas on the EU and the Eurozone in particular are absurd. The last thing Europe needs is more currency integration. The Euro will turn the Eurozone into an economic wasteland, which is already happening. The Euro is only beneficial for Germany. As the most competitive and economically strong country it totally dominates the other Eurozone countries, which are simply unable to compete. Their leaders apparently lack the intellect to understand that any economic dynamic requires not merely competition between companies, but also between countries. This means that unless these countries regain their financial sovereignty, i.e. a national currency and control over their interest and exchange rates as well as their expenditure, they will find it impossible to compete in general and with Germany in particular. Under no circumstances should anybody listen to Mr. Soros.

  • Ellen12

    European union is not just an economic convenience for the majority of its participants, it is a political ideal. So many in Britain focus on measuring what we put in compared to what we get out without recognising the political and economic power a united Europe has outside of European borders. Of course, how the euro works well for some countries and not for others has been a failure of EU officials and how the Greek population were forced to keep a high value currency while the US, Japan and the UK confiscated their populations wealth to pay down debt left the Greeks impossibly exposed, as it did a great deal of other countries in the euro. Germany was the main out-of-step country and maybe it is they thst should temporarily leave the euro to allow the rest of the eurozone compete in the same way the US, UK and Japan do, as overleveraged countries.

    I think it is unfortunate how Scotland is being treated by England as they explore the question of their independence. All the assumptions on currency seems to be that sterling belongs to England and England are allowing Scotland use sterling so long as they remain united. This can only re enforce Scotlands belief they are a very junior partner. One strange oddity among a great deal of the right wing in England is how opposed to federalism they are on Europe and yet fully signed up to federalism on the United Kingdom.

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