He and Nouriel Roubini were both interviewed at CNBC recently, but soundbite journalists are incapable of handling their views sadly.

I am relying partially upon numbers as presented by Susan Wachter in the Yale seminars entitled “Subprime Lending and the Procyclical Production of Risk” shown in two of her graphs at the end of 2006. I also looked in Eurostat statistics to look at the same categories for Europe. The results are shown below:

Gross Debt as % GDP USA 2006 EU 2006

Financial Institutions 118% Not found
Households 100 66
Non Financial Companies 75 266
Government 52 66
Total 345% 398%

Questions:
1. Can anyone confirm these numbers?
2. Greenspan, in his latest speech to the Economic Club in New York, says that debts of the financial sector on a global basis, cancels out. That is debts owed by financial institutions have been utilised to provide loans to the other sectors, i.e. Households, Non-Financial Institutions and Government – and so we need to eliminate double counting. Is this a valid assumption/approach? In any case, following this approach, Gross Debt as % of GDP – excluding Financial Institutions – is 227% in the US while it is 398% in Europe. Do we agree that Europe has the bigger problem? Europe also has a lower long term economic growth potential than the US – caused by many factors including demographics.
3. Everyone seems to agree that we are entering a period of deleveraging. Households, Financial Institutions and Non-financial companies – everyone, except of course for Governments, is trying to reduce their debt. I am trying to figure out what this means for the cost of capital. What will this mean for the expected return on equity? What will this mean for interest rates – government and corporate? Strictly speaking, all things being equal, if non-financial companies deleverage, the return on equity will decline, unless of course borrowing costs drop commensurately. (A long term reduction in expected equity returns is probably being priced into the stock market now, as is expected growth.)
4. However, equity capital will still require a risk premium over and above the expected return on government and corporate debt. So what will happen with interest rates on a long term basis? In the short term the US government will continue to try to keep down US bond yields through interest rate policy and also by buying longer term treasuries. This, they hope, will bring down mortgage rates and of course other consumer and corporate lending rates. Longer term we can expect more inflation. Presently the differential between 10 year US Treasuries versus AAA corporate is about 3%.

Love your blog. Has any of this crisis and it’s causes led you to question the value of central banking and consider the Austrian position of eliminating it? How can any of us trust government with discretionary money creation after this 20 year double-bubble-double-trouble disaster? Even if the arsonists are able to put out the fire, shouldn’t we still put them in jail and throw away the key for starting it in the first place?

Nominations are now being taken for the Nominating Committee.

Preliminary nominations for the Core Group, are as follows:
1. Jim Grant
2. Mohammed El Ehrian
3. Bill Gross
4. Charles Morris
5. Niall Ferguson
6. Peter L. Bernstein
7. Lawrence Lessig
8. E. O. Wilson
9. John Steele Gordon
10. Amity Shlaes
11. Robert Prechter
12. George Soros
13. LiaQuat Ahamed
14. Joseph E. Stiglitz
15. Robert Shiller
16. Martin Feldstein
17. Charles Morris

Rules of the Road
1. Core Group is nominated and each C.G. participant allowed to bring in 2-3 additional players.
2. Group meets and uses open outcry method to hammer out consensus.
3. First Report-Day 1
a. What got us into this mess.
b. Tragic flaws in current approach
c. Requirements for new system
d. Recommendations on where to bury the dead dinosaurs and elephants.
4. Lunch

Gentlemen and/or Ladies: Imagine you are Davy Crockett and his Kentucky indian fighters arriving at the Alamo. Col. Travis and Jim Bowie give you an assessment of the situation. You look over the walls and see the campfires of 5,000 Mexicans assembled to deal with the Gringo situation. There is a line drawn in the sand. You must decide what to do.

There’s a wonderful tv commercial where this guy Rodger, who has the old analogue telephone service is calling his tatoo artist,complaining that he wanted a tiger on his body, not tiger stripes all over it. He thinks that merely by having new digital phone service he can explain the mistake and by virtue of communicating the problem will be resolved. The tatoo artist tries to tell him that tattoos are permanent. Just before exhausting himself the artist says, “Roger, you tiger now”.

Anyone who expects a bunch of R.E.M.F.s’ to suddenly turn on a light bulb in their head and create the 21st century global financial system is nuts. This endeavor will be the lengthened shadow of a single man leading a team. I would suggest that a convention be held, not in Washington, DC or New York, but someplace like Denver. Have the top 25 guys who know what they are talking about convene and begin to draft a declaration and constitution–that is, a framework document for what is necessary. Keep the ass-holes away. I believe that if pulled together the best minds and got it down on a website energy would develop behind it faster than Obama’s campaign. Maybe BaseLine Scenario can be the catalyst for something pragmatic.

If you’re an EE, say, in Germany or France and you speak passable English, are you going to stick around as the bill comes due for $2.6T, the working population shrinks, the country ages and your savings are destroyed by inflation?

When you attack the productive people, they either stop producing or they leave.

As for inflation not being a boogieman, what you’re really saying is let’s stick it to the people who saved and invested and planned for the future. That’s fine if you want less of that. Why save money if the stuff is going to be inflated away?

Finally, you’re missing a much bigger picture here. Europe is quickly aging and will have no chance to pay this back. Their birth rates are well below replacement levels. Unless you expect a pack of Eurogeezers to get back to work in the factories and mines, your $2.6T or whatever number you want to pull out of the air is just going to end up being printed.

In the end, wages and standards of living will fall and there’s nothing you can do about it. You can either do it through inflation and discourage prudent behavior or you can do it through deflation and economic wreckage and watch the profligate people get creamed.