Wednesday, 27 February 2013

What they said, Bang!

I continue my Tuesday reading day, with Endgame.  There follows a brief summary of Chapter 5 of the Endgame book.  "What they said;  Bang!"  That's about the height of Mauldin and Tepper's value added in this chapter.  They merely parrot Reinhart and Rogoff.  In slightly more detail. We're part way through an 8 year de-leveraging process.  If this started in 2008, then perhaps we're already at the stage where the real GDP begins to quicken even as the de-leveraging continues for a further five years.  A key retrospectively clear signal was a housing boom accompanied by a sharp rise in debt.  The distal cause is human psychology - greed and fear, as per Keynes's animal spirits.  In short, irrationality, together with institutional failings (the Fed's excessive efficient markets perspective which denies the spotting and pricking of bubbles; housing sector policy changes; foreign inflows form China as the workforce came on-line post communism).

The R&R ceiling kicks in somewhere between 90-100% debt/GDP ratio, at which point the bond markets bolt in an instant, at some indeterminate, un-knowable triggering event.  These debt/GDP ratios move like economic super-tankers, very slowly.

Each developing nation faces a game-theoretic timing issue on when is best to deal with their de-leveraging burden.  I'd say this chapter was slight.