重庆文化服务:2012: A Year of Choices (7)

The Time for Hard Choices

Most nations in the “developed world” are coming to, or are already at, the end of their Debt Supercycle. They will soon lose their ability to borrow money at low rates, absent a demonstrated ability to control their budgets. （这种状态在国内也出现了）An ability that almost none has shown. And when you look at the cost of the promises made to an aging population for healthcare and retirement benefits, the future costs are staggering.（这里面有个债务久期的问题） There is no way such promises can be kept. And one by one, with increasing frequency, countries will find their interest rates, the cost of servicing their debt, of getting people to buy their bonds, will rise to the point where, absent a central bank willing to print money in massive quantities, their budget and economy will collapse. Banks that have “invested” in huge amounts of sovereign debt will see their capital wiped out, seemingly overnight.（作为一种情景这种可能性存在）

In Europe in the past few weeks, almost €500 billion has been deposited at the ECB for a return of 0.25%（参见：http://finance.sina.com.cn/stock/eurostock/roll/20120109/180911160377.shtml）. The interbank market, when it functions, will pay 0.40%.（见附文） Why would a bank take less money from the ECB? Because they can’t get other banks to lend them the money. Banks no longer trust the ability of other banks to pay them back. UniCredit in Italy is raising money at a 40% discount to their already depressed stock price.（UniCredit这家银行配股价折价40%，当天消息披露后，欧洲市场大跌） They will not be the last to be forced into such choices. The credit markets are telling us there is a crisis in the making, on the scale of Bear Stearns or Lehman in 2008, except that now governments have less ability to step in and salvage the banks. Now, government debt is the problem.

Just as you can’t solve the problem of being drunk with more whiskey, you can’t solve a debt problem with more debt.

But that means hard choices. And the choice right now, is how long should this letter be? I think we are at a good breaking point, so next week we will look at why the choice in Europe is between recession now or depression later. We will take a look at periods of deleveraging in the US in the 19^th century, and see what happened. While there were indeed massive dislocations of the economy and huge investor losses, a few good lessons were learned and applied, until recently. We will look at what choices countries can make. Some, like the US, still have a viable path to control their bond markets and avoid a depression or major recession; but there will be pain. Think Volcker. Others simply will get to choose between what type of depression they want: short and deep or long and exhausting.

Will the Greeks become debt slaves, working for an entire generation at reduced wages to pay their debt and remain in the eurozone, or will they leave and suffer very large currency losses and the loss of access to the credit markets? Not a very good set of choices, but that’s all they have, unless they can convince German taxpayers to fund their deficits and rising costs ad infinitum. Good luck on that one.

We will find that the European crisis will create serious problems for the rest of the world. Global growth is set to slow rapidly. By the end of this year, we may be happy that there was any growth.

And next week we must address Japan, China, and the US. So much for the quick, easy forecast. But those you can get anywhere. Google “economic forecast 2012.” There are 2.8 million hits. I’m sure you can find several that fit whatever mood you’re in.