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April 05, 2008 – Comments (4)

You know how the autofill shows titles you previously used... I already used "Changing the Rules..."

John Mauldin has a very good piece that gives though and comparisons to the banking losses from the Latin American crisis in the 1980s when banks were essentially insolvent like they are today.

I really don't know the size or magnitude of this crisis to have any kind of sense that it is a reasonable comparison.  I am not going to argue one way or the other about the fed enabling banks to spread out the losses.  It is clear this is happening.  What isn't clear to me is the magnitude of today's problem compared to the 1980s. 

Generally, you need some kind of measure of relative value to process this kind of information.  My immediate instincts are that yes, the fed is going this path, but this is a much bigger problem.  A quick look at the GDP of Latin American countries compared to the US suggests that the sum of their economies combined today is about 1/4 the US economy.  Would it have been much different in the 80s?  I don't know, but it is a reasonable starting place.

It suggests that home grown problems can be about 4 times as big as that problem.

I remember the hyper-inflation in Mexico as I had a friend in university that was her family's conduit to get their money out of Mexico through that crisis. 

Mexico experienced a hyper-inflation because of their debt, which is what many think can happen in the US and is providing support for gold.

But, now we are looking at this problem as a domestic one rather than an international one.  You had the hyperinflation where some countries owed another more than they could repay.

Seriously, I think my friend's family's strategy of moving wealth in Canada was good move then, and longer term, it is probably a good move now.  I say longer term because Canada and the US will most likely have the economies mirror each other to a certain degree, meaning recessions all around, however, our debt is recoverable and repayable.  Our banks won't take the same losses from a deflating housing bubble because our home owners have more skin in the game.  Our government is say no to business bailouts so our government debt will stay under much better control.  We do have rising unemployment, but we have a more solid foundation. 

Longer term, Canada will do far better because we have about 10 times more natural resources per person than the US.  Short term I'd be shocked if any economies escape a fairly serious slow down.

4 Comments – Post Your Own

#1) On April 05, 2008 at 2:29 PM, Tastylunch (29.50) wrote:

I thought this part of the article stated our situation stateside about as well as I've seen

"So, let's sum it up. The problem is so severe with the financial companies assets that the SEC is going to allow some of them to "cook the books" so they can survive " Report this comment
#2) On April 05, 2008 at 9:02 PM, nuf2bdangrus (< 20) wrote:

They tried that trick in Japan.  Just look where they are today.  Unintended consequence of cowardly governments too unwilling to face the problem and rather throw cheap $ by the bucketful?  USD will be the new currency of the carry trade.

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#3) On April 06, 2008 at 1:54 PM, StockSpreadsheet (69.08) wrote:

dwot,

I think that the Latin American  economies were much smaller than the U.S. economy in 1980 than that 1/4 number suggests.  The PCI for Mexico in 1980 was about $1.3k, versus about $20k for the U.S., and Mexico had about 1/3 our population, (about 65 million as compared to the U.S.'s 217.871 million).  In 1984, the GDP of Mexico was about $158 billion.  The GDP of Brazil was about $218 billion.  The GDP of Venezuela was about $50 billion.  Considering that Mexico and Brazil are the two largest economies in Latin America, and its two most populous nations at that time, (and still today), and that Venezuela was and is one of the largest oil exporters for the region, I think that totalling those three countries and doubling the number would come close to the GDP of the region.  That would give you a number about $426 billion.  The GNP of the U.S. in 1985 was about $3.855 trillion, or about 9 times the above total.  Therefore, just to be conservative, I would say that the U.S. GNP in 1985 was about 8 times the GDP of the Latin American nations, and not the 4 times that you stated above.  

If I am right, then the comparison to the 1980 problems is even worse when extrapolated than you state.  This will be ugly.  I might be overly optimistic, but I don't think we will see 1,000% inflation in the U.S. now like some of the Latin American countries experienced in the 1980's.  We might hit 20% though, with the falling dollar and the rise in commodities.  It could get interesting.

There is an old Chinese curse which goes "May you live in interesting times".  Well, I would say we are currently living in interesting time.

Best of luck to you.

Craig 

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#4) On April 06, 2008 at 8:41 PM, dwot (46.63) wrote:

I thought that probably the US economy had outgrown the latin american countries, but I figured what I could find today was a good reference point for comparison regardless.  Also, we also need to know how much debt there was to be more "exact" in a comparison. 

I agree, the problem is much worse then this 4 fold comparison. 

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