Saturday, July 21, 2012


Una de las virtudes de los estadounidenses es "to speak the truth" públicamente en forma que a los europeos-no digamos a los españoles- nos resulta insólita.Así lo hace aquí Pettis en un comentario económico que trata a la vez la crisis española y europea y la situación china, utilizando la "inestabilidad de balance de Minksy" como hilo conductor.

El juicio europeo y español, que continua otros previos aquí reflejados, no puede ser más crítico ni negativo, considerando la realidad :

 Because yet another agreement for a temporary bailout of Spain will do little to address Spain’s real problems, which are its massively insolvent banks, its uncompetitive economy, and the fact that the country is caught in the downward spiral typical of debt crises in which every sector of the economy, not least its political elite, are acting in ways that systematically undermine growth and creditworthiness.  The continued deterioration in Spain and elsewhere is now part of a fairly mechanical process that operates under its own dynamic, and it will take a lot more than exhortations to reverse the process 

Unfortunately there isn’t much that can be done in a big enough or credible enough way to reverse the downward spiral, and this is why I don’t pay too much attention any more to the proposals and counterproposals that are on offer in Europe.  I think it is probably too late for that, but certainly by continuing to behave as if this is all about trust, or lack of trust (or, for the more conspiratorially minded, about underhanded actions by speculators hoping to bring the system down), policymakers are building in their own disappointment and extending the crisis.

At this point the only thing that can save the euro is a combination of moves in which the European banks are guaranteed by a credible institution and in which Germany takes steps to stimulate its economy quickly and dramatically.  Until Germany is willing to boost domestic spending enough to run a deficit that allows Spain to run a surplus, it is impossible for Spain to repay its debt. This is just basic balance-of-payments arithmetic.

 Given all the excitement over the speed of the deterioration in European markets, I suppose we are going to see urgent new measures announced and a temporary respite in the crisis, but ultimately I think this will be little more than a blip on the way to sovereign debt restructuring and the break-up of the euro.  Nothing has changed fundamentally in Europe in the past few weeks and there is no reason to assume that the crisis is on its way to being resolved.

 Any attempt to predict the likelihood and extent of a breakdown in an economic system – country, region, or company – that starts only from the asset/operational side of the economic entity (what Galbraith refers to above as real economic activity), without taking into account the feedback mechanisms inherent in the relationship between the asset and liability sides, is pretty useless.

What’s more, the recent history of disturbances in that economic entity tells us nothing about the future impact of similar disturbances – as long as the balance sheet structure is changing, and as Galbraith reminds us, the lack of instability during previous disturbances will itself change the structure of the balance sheet.  Stability is itself destabilizing, as Minsky warned us, because it changes the nature of the relationship between the two sides of the balance sheet.

 This is what I referred to as an “inverted” capital structure in my 2002 book, The Volatility Machine.  An inverted structure is the opposite of a hedged structure – when the asset/operational side of your balance sheet does well, your liability side also does well, but when the asset/operational side does badly, the liability side does too.

Inverted balance sheets exacerbate volatility – good times are automatically better than they otherwise would have been and bad times are automatically worse.  Countries (or companies) with inverted balance sheets are more volatile than countries with hedged balance sheets, and unless you can get all your speculative bets right, this higher volatility lowers growth over the long term. Inverted balance sheets, I argued in my book, are one of the key differences between countries that are able to recover successfully from crisis and countries that aren’t, and I would propose that this may be one of the differences between countries that can escape the middle income trap and countries that can’t.

Or to take two more obvious examples, first, asset based lending – for example against real estate – is also a source of balance sheet inversion.  When asset prices rise, the value of debt collateralizing the assets also rises, but when asset prices drop the debt becomes less credible and its implicit cost to the economy rises.  Second, borrowing short term, or borrowing in a foreign currency, has the same risk profile.  When the country is doing well, the real cost of short-term or foreign currency debt declines, only to surge when the economy gets into trouble.
Sometimes inverted capital structures are inevitable, but liability management consists, in my opinion, of identifying ways of eliminating inversion when you can and embedding as much hedged liability structures as you can, so as to make the overall economy less, not more, volatile.  In the case of China, stockpiling commodities is exactly the wrong thing to do – but of course it is hard to convince anyone that this is the case when we are in the “good” part of the volatility cycle.

EconoMonitor : EconoMonitor » The Unacceptable Behavior of the Market

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