Mauldin, the EU, and the credit crisis

by Byron on September 15, 2011

I reread John Mauldin’s piece on a possible coming credit crisis.  I read it on Cullen Roche’s pragcap, where I read much of what I process.  I think it’s a well written, astute piece.  It digs into what Europe might actually look like with countries exiting the Euro.

He cites a UBS piece about a possible Euro breakup.  One particularly frightening line is, “It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.”

Another frightening thought, from Mauldin himself: “…Bank runs, sovereign default, corporate default, and what may be euphemistically termed ‘civil unrest’ [could be coming].”

And today, there were reports the situation is “improving,” because the EU power countries will keep the aid flowing, as Greece keeps the austerity going.  Mauldin’s best point is: Austerity means you won’t hit your revenue targets.

The EU related questions are endless right now.  Fiscal union?  Who exerts the power?  What pain is endured along the way?  Who wins?  Who loses?  How do the losers move forward?

I once heard Bob Doll say, “You make the most money when things go from terrible to bad.”  It’s just another version of “When there’s blood on the streets, buy property.”  Would I buy European assets right now?  Probably not.  But the only reason I wouldn’t is because of the possibility that this time actually is different.  The possibility that (part of) Europe fails and endures a prolonged depression.  The possibility that the ECB, without a corresponding “treasury” can’t just “print” the money and fix the problem.

But those are questions for Europe.  I don’t understand why or how a credit crisis happens here.  Our 2008 is too recent, too fresh in our minds.  I’m not suggesting that it won’t hurt us in some way, but why does it cause a credit crisis?

I simply don’t get it.  Here is our list of trading partners.  And even if you have no confidence in the banks, are they really that exposed to Europe?  It goes against self-interest too much.  And it has since 2008.  Unlike subprime, I don’t believe we financed Europe’s debt explosion.  By and large, they did.

Mauldin’s piece is good, in its analysis of Europe.  But all he does is loosely link the United States, briefly discussing our “debt” problem.  How is this related?  If we have some kind of “debt problem,” then doesn’t Japan have a similar one at over 225% of GDP?  Why aren’t we talking about the coming credit crisis in Japan?  Just because we have theoretical debt, and a slowing economy, and are still deleveraging and might go into recession, doesn’t mean we’re going to have a credit crisis.

 

Leave a Comment

Previous post:

Next post: