More Changing the Rules
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.
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