Ambrose Evans-Pritchard Says End of the Financial World is Nigh

One of the good things about those of the Austrian persuasion is that they serve to protect the flanks of the merely skeptical like me.

I am not exactly keen Ambrose Evan-Pritchard’s prescription, which is greater monetary easing with more fiscal restraint. I put banking industry reform (of the root and branch sort) very high on the list, but the sort needed will never happen in the absence of another breakdown. So we patch the system with duct tape and see how long it holds together. Failing that, I have doubts of the efficacy of monetary measures.

But that aside, I do agree with his more general points, that the current policy mix is not a good one, and that too many people are making the dangerous and often self serving assumption that we are out of the woods.

The financial system it is still vulnerable to shocks. We have maybe a 20% odds of a disorderly fall in the dollar. I was at a McKinsey presentation earlier this week. McKinsey advised the Treasury on the stress tests and is now advising the Fed. Given those roles, the firm is going to play risks down. But even they peg the odds of the dollar hitting an air pocket and causing serious collateral damage at 10-20%., pretty certain to be a systemic event,. There are also serious problems with the Euro banks . I don’t have a good enough sense to put odds on it, but I would hazard at least 10% odds of a systemic event emanating from some nasty blowups.

Nearly 30% probability of serious bad stuff happening is NOT in any mainstream scenarios. Yes, odds favor us muddling through with very weak growth, but the downside is considerable, and is being ignored because taking the right measures will be bad for “confidence”

From the Telegraph (hat tip reader Don):

Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.

A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go….Nobody is spared. Social welfare payments must be cut 5pc, child benefit by 20pc. The Garda (police), already smarting from a 7pc pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc….

No doubt Ireland has been the victim of a savagely tight monetary policy – given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

As the International Monetary Fund made clear last week, Britain is lucky that markets have not yet imposed a “penalty interest” on British Gilts, given the trajectory of UK national debt – now vaulting towards 100pc of GDP – and the scandalous refusal of this Government to map out any path back to solvency.

“The UK has been getting the benefit of the doubt, both in the Government bond market and also the foreign exchange market. This benefit of the doubt is not going to last forever,” said the Fund.

France and Italy have been less abject, but they began with higher borrowing needs. Italy’s debt is expected to reach the danger level of 120pc next year, according to leaked Treasury documents. France’s debt will near 90pc next year if President Nicolas Sarkozy goes ahead with his “Grand Emprunt”, a fiscal blitz masquerading as investment.

There was a case for an emergency boost last winter to cushion the blow as global industry crashed. That moment has passed. While I agree with Nomura’s Richard Koo that the US, Britain, and Europe risk a deflationary slump along the lines of Japan’s Lost Decade (two decades really), I am ever more wary of his calls for Keynesian spending a l’outrance.

Such policies have crippled Japan. A string of make-work stimulus plans – famously building bridges to nowhere in Hokkaido e_SEmD has ensured that the day of reckoning will be worse, when it comes. The IMF says Japan’s gross public debt will reach 240pc of GDP by 2014 e_SEmD beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan’s bond market will blow up.

Error One was to permit a bubble in the 1980s. Error Two was to wait a decade before opting for monetary “shock and awe” through quantitative easing.

The US Federal Reserve has moved faster but already seems to think the job is done. “Quantitative tightening” has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak. The M2 money supply has stagnated since January. The Fed is talking of “exit strategies”.

Is this a replay of mid-2008 when the Fed lost its nerve, bristling over criticism that it had cut rates too low (then 2pc)? Remember what happened. Fed hawks in Dallas, St Louis, and Atlanta talked of rate rises. That had consequences. Markets tightened in anticipation, and arguably triggered the collapse of Lehman Brothers, AIG, Fannie and Freddie that Autumn.

The Fed’s doctrine – New Keynesian Synthesis – has let it down time and again in this long saga, and there is scant evidence that Fed officials recognise the fact. As for the European Central Bank, it has let private loan growth contract this summer.
The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.

My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.

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  1. Todd Wood

    Dean Baker sounds grim:

    Article: "The Politics of Stinginess Stimulus Arithmetic"

    "In short, we badly need another very big dose of stimulus. Unfortunately, the politicians and pundits in Washington are either too ignorant, dishonest, or scared to talk about the $2 plus trillion stimulus that this economy needs. As a result, tens of millions of people will lose their jobs and/or their homes because of continued economic mismanagement."

    Did he just say ten's of millions of lost jobs…?

  2. Anonymous

    Interesting post; as a perma-bear Roubinite I was beginning to think that it might be safe to emerge from my den and even put a couple of chips on double zero. But it occurred to me earlier today that the Second Law of Thermodynamics likely applies to economics as well. The above article highlights a potential outcome of the massive intervention and ongoing Public/Private corruption. While it could be argued that the current recession is that outcome (e.g. "equilibrium"), I am not sure its severity is commensurate with the level of intervention and corruption that has taken place (and continues to take place).

    The world has, economically speaking, fallen down the rabbit-hole and the way out is not what it might appear. To mix metaphors; the piper still needs to be paid.

  3. Anonymous

    Somehow, I can't imagine that I am alone.

    Ambrose Evans-Pritchard writings are of such quality that I seek them out, even though I am a Southern Californian.

    Still, it's taken untill now that I've learned he is an "Austrian" inclined economic blogger, yet advocates fiscal prudence (and it wasn't even learned from him…. it was from another site).

    Jesus Ambrose…why haven't you made this clear previously?

    In the past I've stumbled over your words. At times there seems to be wisdom, then suddenly you advocate opening the floodgates of money printing.

    Ambrose, while I acknowledge you're a skilled writer, nevertheless— there's a need on your part tp work harder on communication skills and express your stance more clearly.

  4. Anonymous

    From the post:

    The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.

    Of course, by "us" he means the conservatives and banksters that caused this whole mess. And what he proposes is more wealth transfer to "us".

    I never particularly agreed with Grover Norquist, but here's a guy I could get behind "dragging into the bathroom"…

  5. Yves Smith

    Anon of 11:50 PM,

    Evans-Pritchard is not a hard-core Austrian. In particular, he does not have the gold fixation that most of them do, Indeed, his call for monetary easing would be anathema to them. But he does base that on readings (given in other articles) of contracting money supply.

  6. Anonymous

    hate to ask this here as it is not directly relevant to the post: Is it possible for non residents to open bank accounts in Canada? If and when there is a disorderly run on the dollar, would the loonie do much better?

  7. Anonymous

    The Austrian School handles economics like an algebraic ideology. They have their equations and they squeeze bits of the real world into each variable. They sound like idealistic fundamentalist.

    You read their work and it blows you away. You keep reading it and it starts to repeat itself. Finally, you read it and it tells you nothing.

    His last two paragraphs show that the solution is to cut social services, privatize the commons and leave the market free. Where have we heard that before?

    Theirs is the economics of anomie.

    anomie: social instability resulting from a breakdown of standards and values ; also : personal unrest, alienation, and uncertainty that comes from a lack of purpose or ideals

  8. Doc Holiday

    For those playing the verification and second opinion card (on bad times ahead) look here:

    Some Inconvenient Truths — Invictus

    Our 25 year experiment with debt and leverage is over. Done. Finished. Not coming back any time soon. As you read what follows, read it in the context of the fact that the US consumer has, for the past 8 years, represented approximately 70% of our nation's GDP (roughly $10 out of $14 trillion).

    Great blog here and there!

    FD: Chocolate covered peanuts and Fleetwood Mac (oh, yah never gonna make it baby…. you can love me but you can't walk out).

  9. Doc Holiday

    Ok, one last one for me too:

    Last night, I posted the $20 oil by XMAS thing and then from where I sit, it looks like deflation and Great Depression stuff coming our way soon along with Swine Flu.

    That said, I'm thinking the chocolate covered peanuts are increasing my insulin levels and shooting my cortisol higher and really kicking up my estrogen and I'm getting a little freaked out when I read, "My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn".

    Like what's that all about? What am I to think, how can I sleep? That's it, no more sugar ….. I gotta prepare for this thing that's coming.

    FD: Drinking lots of water; deep breathing.

  10. Anonymous


    1st I want to thank you for allowing us technically lazy folks to us anonymous….psychohistorian here.

    2nd I want to know where the 20% and 10% numbers for potentials for failure are substantiated. I would say the odds are much higher and more likely than not.

    3rd I want to add support to the structural root and branch reform group that you forward as necessary for REAL and positive change we can believe in.

  11. Yves Smith


    The 10-20% was not an official McKinsey view, just an off the cuff remark by a plugged in but conservative guy. The fact he puts it as that high does suggest odds are higher.

    The big item against is that a lot of other countries want and need the dollar high. So there would probably be firepower directed against any serious dollar decline. That most certainly does not mean it will ultimately succeed, but it might delay the inevitable and (in theory) make it more gradual.

  12. Anonymous

    Take a position in precious metals like silver or gold (availability?) wait for the next popular paper-anything to emerge from the ashes before converting back.

    Govs. playing 'how much can we get away with?' will be tested, the backstop is printing more debt. Ruins the currencies but holds back the burgeoning meltdown.

    Enjoy this site if only for its take on China. As I see it, a bunch of thugs like Russia.

    Where to put your confidence when all else fails?

    Situation critical.

  13. Anonymous

    "hate to ask this here as it is not directly relevant to the post: Is it possible for non residents to open bank accounts in Canada? If and when there is a disorderly run on the dollar, would the loonie do much better?"

    If you are in the United States, you can open an account with HSBC denominated in Euros, Canadian Dollars, and several others. Everything beyond the initial paperwork can be done online.

    You will need to file with the IRS about these accounts, but such accounts are entirely legal and in no way shady.

    My guess would be that the Canadian Dollar will share a similar fate the the US Dollar given the close relationships of their economies. I would consider the Yen or Euro, or maybe the Swiss Franc – not sure if HSBC does the last, can't remember. But please don't mistake me for someone you should be taking that sort of advice from – the specific features of a systemic crash of some kind will probably surprise everyone, which is a roundabout way of saying I haven't a clue which fiat to bet on.

  14. Anonymous

    Thanks for the information. I have no issues with the IRS if that's possible to say. I don't trust the Eurozone, sorry, it's my personal take, I wonder how they would handle a stressful environment. HSBC being in the US as well can be pressured by the US gov. I simple wonder if after a situation when a Treasury short term dept rollover would fail at what point they would limit capital flows.

  15. Richard Kline

    A-P: "But the deeper truth is that Britain, Spain, France and Germany, Italy, the US, and Japan are in deepening states of fiscal ruin." It is Ambrose-Pritchard's hallmark to conflate fundamentally different contexts to support the point he wishes to make regarding one of them—usually with evicence from the others to serve where he wishes it was but where it's lacking. Britain, Spain, Italy, and Japan are in states approaching fiscal ruin, or will be soon. In France and Germany, things are merely bad. In the US things are bad, with the manifest ruin in the banking system concealed with unknown but likely quite dangerous consequences. For A-P, France and Germany must, _must_, MUST be doing as badly or worse than Britain: this is simply an untruth. Ah well . . . .

    A-P: "Error One was to permit a bubble in the 1980s. Error Two was to wait a decade before opting for monetary "shock and awe" through quantitative easing." Error Three was to inflicte queasing rather than fix their banks. Error Four was to triple down with queasing in 20009 in the face of a catastrophic collapse of exports. I don't know when Japan is going to blow up; I'm not certain that I should care. But assuming that I or you do care, I'd be worried indeed regarding their macroeconomic disregard for reality. By exporting their deflation, Japan has kept from sliding into the sea for 15 years. Now with the rest of the world sliding into the pit on top of them we'll see how long their economy can hold its breath. I don't like this but I didn't create it . . . .

    A-P: "The US Federal Reserve has moved faster but already seems to think the job is done. "Quantitative tightening" has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak." The Fed's job IS done: Goldmans and JippyMorg are in the black 'n' roarin' back. Mission Accomplished. The rest of the economy, the citizenry, the country, and the world can eat their dust or just Go to Hell on the hurry up. This is like the Titanic going down, one lifeboat being lauched with the managing diretors within, and everyone else left to swim for it.

  16. Anonymous

    While one can advocate for critical thinking around the social agreements underpinning the economic and financial systems we have, to me it is more important to consider how to insure that critical thinking and democratic processes are used when the inevitable other shoe of this worldwide crisis hits the ground.

    I am an idealist that wants critical thinkers from all over the world that believe in the post enlightenment view of the American democratic structure to build socio-political constructs that balance capitalism which provides true equality of opportunity with respect for the variety of cultures within some mutually agreeable social norms, freedoms and limits.

    We just need the will to move forward in more pro-societal ways.


  17. re16

    All this talk about "we" and so forth is made along with a critical mistake of presuming, that somehow, "we", the peasants are in somehow in control of the destiny of the banks of the world, which is a wrong theory. It is correct in the sense that the people are the borrowers from banks, so they are in power of the rate of consumption, but they do not own the banks, nor make the decision which direction the banks take.

    This illusion is made more clearer by the presumption that somehow the banks have come under national leadership in some countries – but only the losses of the banks have been nationalized, the profits – the decisions – the application of pressure or not applying it are in the hands of some very old customs, disciplines and understandings – also very old ignorance and laziness as well.

    The notion of banking for the people comes after the end of the thirty year war in the 17th century. That is actually that all the big banks starting using the number zero in the western europe. The notion of modern banking in general comes from the reign of Charles the First, in the 8th-9th. century common era. The notion of banking at all in terms of coinage comes from the Athenian Republic in the 6th. century before the common era (they also invented the zero – not the Indians but that is not important here) . In 50 years it spread to Persia, India, China – you name it. Before that money/banking was a tool of measurement of weights and sizes and a religious concept, after the Athenian Republic it became a tool of politics and media. During the time of Athenian Republic there was a moment when the people were taking control of the banking but they failed with their mission to Southern Italy in one of their wars and bankrupted their state of affairs. Also created with one stroke the entity called the dark nobility as well.

    So, "we the people" have never been in control in banking, even through they tried it about 2600 years ago and almost succeeded. If the people want control of banking in the future, remains to be seen whether they will be worthy enough – however it can only be done through media and science not politics (think Bush/Obama/Brown/Sakrozy/Michelle Obama/Carla Bruni/The Chinese/The russians) or religion (think: Islamic Banking, micro-financing based on minor buddhism, rich chrisitans or templars/freemasons etc..)

    You have to use a combination of the best arguments/mediums (maybe music – concerts) and scientific tools (maybe regenerative environmental science) in order to protect yourself from the terrible dangers of taking on the worlds banks if you really want to change them and not daydream. I mean, daydreaming is just fine with me but a little bit of gentle but real discipline will only make it better.

    The pressure is on, chaps.

  18. Anonymous

    @anon: "The Austrian School handles economics like an algebraic ideology. They have their equations …"

    Orwell would be double-plus proud. If there's some hallmark of Austrian Econ, it is the lack of equations.

    There is the subjectivism, monetary theory, entrepreneurship. And on top of it, Austrian capital and business-cycle theories are better than anything else available.

    "Idealistic fundamentalist"? Sure, lacking any real arguments, that kind of attack is about the only one left. Feel free to go on.

  19. Stuart

    The financial system it is still vulnerable to shocks. We have maybe a 20% odds of 1) a disorderly fall in the dollar. … There are also serious problems with the Euro banks. I don't have a good enough sense to put odds on it, but I would hazard at least 10% odds of 2) a systemic event emanating from some nasty blowups.

    To conclude from this, as you do, that there is a

    3) 30% cumulative probability of serious bad stuff happening

    is invalid reasoning, if by 3) you mean "there is a 30% probability of serious bad stuff happening".

    The following discussion is based on that interpretation of mine: namely that you are here using the word "cumulative" merely to indicate "I've added the two values together", and what you are saying is also expressible by "there is a 30% probability of serious bad stuff happening". In other words, I am assuming that the technical term "cumulative probability" is not being applied here (because if it were, your argument would still be invalid, though for different reasons).

    Cumulative probability is a technical term with a specific meaning relating to a single random variable, which we don't have here: A cumulative probability refers to the probability that the value of a random variable falls within a specified range. "Cumulative" in the sense of "a bunch of numbers added together" is not what is meant by "cumulative" in the technical term "cumulative probability".

    My interpretation is thus that we can concentrate on this "adding of values", and ignore the technical term "cumulative probability".

    I've marked the two events you're talking about with 1) and 2) in the above quote. Your reasoning relies in no way on the particular values 20% and 10%: you do not indicate anywhere that it is applicable only when the values are exactly 20% and 10%, or only when the values are less than 50%, or stand in some particular proportion or relationship to each other, or meet any other condition. One of your commenters even suggests that the values should be higher than those you chose. In fact, it seems you are implicitly assuming that 1) and 2) are "completely independent of each other" and that this is somehow the reason why they can be added together in a meaningful way, to get "the probability that one or the other will happen".

    So, to see that there must be a mistake in this "add the odds" reasoning pattern, we can apply the reasoning pattern to any two odds. Let's assume that the odds of 1) happening are 50%, and the odds of 2) happening are 50%. Then, on this reasoning pattern, there would be a 100% probability of serious bad stuff happening.

    Let's imagine that a person X, who is a bit more pessimistic than you, argued exactly as you did but with the more pessimistic values of 50% odds for each event, at the same time as you put up your post yesterday, on July 18. Today one of these serious bad things must have happened, because of the 100% probability. But it didn't. Sometime in the near future, maybe: both you and X think that, it's just that he is more pessimistic than you.

    But how can the odds of something's occurring be 100%, when that thing doesn't occur? There must be something wrong with X's reasoning. But the same thing must be wrong with your reasoning too, because it is the same reasoning, just with different numbers.

  20. Stuart

    Correction to one of my sentences:

    .. why their probabilities can be added together in a meaningful way, to get "the probability that one or the other will happen".

  21. Anonymous

    'You will need to file with the IRS about these accounts, but such accounts are entirely legal and in no way shady.'

    Actually, that is not really accurate – if the value is under 10,000 dollars (in total), there is no need to file a Treasury Department Form 90-22.1.

    For more information, this seems a good overview –

    The U.S. government is way ahead of the curve in terms of dealing with capital flight by average American citizens – and large financial and industrial corporations have long since done the necessary groundwork.

    That constant background noise that 'government' is incompetent? A lot of smug people are about to find out that when it comes to guarding its own interests, 'government' tends to be very effective. The problem, to the extent that it exists, is how those interests are defined. Companies receiving government funds offshoring themselves to avoid paying the taxes that finance such contracts are an example of a system that functions well for those steering and receiving the revenues, at least in their short term perspective.

    A lot of Americans are increasingly turning to a fantasy world to avoid looking at what is really going on. Your money in an account is a statement of faith, regardless of the currency chosen. Faith is fine, as is attempting to avoid a total loss – just look at the history of currency controls to understand how simple such would be to implement in a digital financial world.

  22. Purple

    That the West (G7) is debt bloated , is a symptom not a cause. Without massive deficit spending since Reagan (at least, in the US) depression would have already come.

    The car industry, with its weak profitability and massive excess capacity is the canary in the coal mine for industry throughout the developed world.

    The state of the developing world is more murky, but those who don't think China has massive debt problems in its near future should read Michael Pettis.

  23. Yves Smith


    I appreciate the correction, but I am also extremely tired and barely have the energy to keep the blog going, so belaboring the issue is not conducive to having me invest time in the blog and be more careful in the future, But I may be mistaken in assuming that is your main concern.

  24. Kevin

    The Western economies have reached the outskirts of Stalingrad and Field Marshall Evans-Pritchard (A E-P), along with most other leading economists, is counselling the same mistakes that lead to the doom of the German 6th Army.

    The reason for this strategic error is the inability to correctly identify and engage the enemy. In A E-P's analysis, deflation is the enemy. In military terms this is equivalent to identifying retreat is the enemy. Retreat of course is not an enemy but a tactic. The true enemy of the Western economies has been the debt bubbles that were required to offset the the anti-growth tendencies of the radical globalization that has erupted since the 1980's.

    A E-P correctly points out the unsustainable nature of the government spending (spraying bullets faster than we can produce them). The limiting factors here are high interest rates driven by the threat of sovereign default. But he refuses to confront the obvious limits to his preferred alternative, quantitative easing, which is of course hyper-inflation and currency collapse. In either case, sovereign default or currency collapse, the result is the same, policy makers in the face of the real enemy: economic collapse but armed only with empty promises.

    What is clear is that the debt-driven Western economies have reached their culminating point. The way to fight this enemy is to retreat, to fall back to a defensible position and rebuild based on producing real goods for a real economy. In other words to allow GDP to drop. Naturally this should be an organized retreat not a panicked rout. There should be three overriding strategic goals to this retreat. The first goal should be to protect the fragile fabric of economic life by as much as possible during the retreat by imposing pay cuts in lieu of lay-offs. The second goal should be the ruthless pruning of the financial industry by freeing the major players from their protective government cocoons so that they too may be able to feel the unadulterated love of direct market forces. The third goal should be to allow (even encourage) the failure of consumers and home-owners who have over-extended themselves on debt. Only after these conditions have been met will a proper fall-back position have been found from which to rebuild the Western economies.

    Of course the countries (Anglo-Saxon) that gorged themselves on debt will suffer more (retreat further) than those countries (mainly in continental Europe) who promoted more responsible growth patterns over the past several decades. Consumers who are on the edge will be wiped out. But this is a feature not a bug. People have to learn the hard way that economic growth should come slowly from improvements in efficiency and not fast and easing by simply maxing out the credit cards or through cheap central bank balance sheet gimmicks.

    The choice is not really between retreating or not; the choice is between a disciplined Dunkerque now or a rout (30's style depression) later. The problem is that the power/money nodes like Goldman Sachs and Citibank have everything to lose in a retreat and have amazing resources in government and the media to help prevent such a policy from even being discussed.

  25. Anonymous


    You are being a pedant. The cumulative probability is 28% (.2 +(.8x..1)). Given the imprecision of the original estimates, rounding it to 30% is a truer to the fuzziness than suggesting the estimates are accurate to a single percent.

  26. Stuart

    I made unmistakably clear my assumption that the technical "cumulative probability" was not what was meant. You're saying that was in fact what was meant? So be it. In any case, my argument had nothing to do with rounding, or degrees of numerical accuracy.

  27. Stuart


    You're quite right, my point was a more general one, but it appears that my assumptions were wrong. I wouldn't presume to press you to "invest time in the blog and be more careful in the future".

  28. Ataman Siemenov

    Indeed, the austrians tried to think instead of using complex math with highly suspect and irrelevant statistical inputs. As is the case with all of the very few "economists" who are worth reading, the list ends with JM Keynes.

    But among the Austrians the only one really "adding value" is Schumpeter, whose work has been predigested and translated into Biz school jargon by a Michael Porter who acquired a certain fame in the 1980's with "Strategic Planning" (I have not the slightest idea of his current market value).

    As for von Mises, there's lots of hermetic argument about money, banking, a.s.o that I duly skipped, rememgering only a couple of interesting ideas. #1 is that free trade, being a substitute for autarky, would eventually, make war useless. Obviously it doesn't really seem to work.
    #2 is that there should be no dicrimination in free-trade, for example against some illicit processed natural products. This one looks much more promising than the first, but I don't think it's on the Libertarian Agenda and as far as I know the only man of influence who is discreetly promoting the thing through his foudation(s) is a Mr. G. Soros.

  29. Kevin Smith

    Open an account in Canada:

    No problem, our banks welcome your deposits, and are highly rated.

    Universal health care [while not that great in a lot of cases] at least makes sure that less people become bankrupt and/or unemployable because of illness; and universal health care improves labor force mobility [you are not tied to your job to get health insurance: everyone is covered, all the time.] Canada's health care system also deals more effectively with broad problems like pandemics and AIDS.

    Canadian home owners collectively own about 70% of the equity in their homes, as compared with US home owners, who own maybe 40% of the equity in their housing stock. [Mortgage interest is not tax deductible in Canada, so the internal rate of return is very high if you pay off your mortgage quickly, and many Canadians do that.]

    Bottom line: Canada is a pretty stable place, but is still vulnerable to what is going on in the rest of the world.

    Don't put all your money here, but putting some of it here might be a reasonable thing to do.

  30. Dan Duncan

    Hey Stuart,

    I'm trying to calculate the probability that anyone actually read your unsolicited tutorial on cumulative probabilities and I need your help.

    If a person only makes it through one sentence, does that count towards the "cumulative probability" that your unsolicited tutorial was actually read?

    Also…and this is a bit off topic…but your work does look familiar to me. You don't happen to write warranty guides for toaster ovens, do you? Or maybe I'm thinking of a Life Insurance Prospectus….

  31. Anonymous

    My money is on deposit with a Canadian Bank. Unfortunately, being British, it is in British Pounds. I am thinking of switching to the Polish Zloty and/or agricultural land.

  32. Anonymous

    I am tired of listening to the same silly stories of "Japan's lost decade(s)", "Japan's famous bridges to nowhere", "Japan (will be) beyond the point of recovery" again and again ad nauseam.
    Let's jump out of Alice' mirror-land of fiscal and monetary imbalances just once and take a look at Japan's reality.
    They have done surprisingly well after their hilarious real estate bubble popped.
    Thanks to their enormous infrastructure investments they now have one of the best (if not the best world wide) networks of high-speed highways and trains. I have never seen one of those infamous "bridges to nowhere", so while I do believe that they exist somewhere, they seem to have no significance at all.
    But I have seen hundreds of bridges and tunnels in very difficult terrain (steep hills and valleys, earthquake imperiled, not comparable to anything in the US) which are certainly worth the effort.
    Instead of throwing trillions of dollars after broken banks in order to keep them just gambling along Japan effectively created real wealth for their citizens. Americans would be glad to live in such a well functioning society, if merely for the sake of an incredibly low crime rate.
    Is Japan broken?
    I don't think so, given the mountain of T-bills they own. But even if these dollars may eventually melt away, the Japanese will still own a brilliantly organized country and face no mass poverty.

  33. Brian's Blog

    Stuart is spot on with his comments. I applaud his efforts to apply some critical thinking to the matter at hand. Not only should we question the cumulative probability estimate of 30%, but also the probability figures given in the post of 10-20% for the disorderly fall in the dollar and the 10% figure attributed to "blowups" of "Euro banks". I would like to see how those probabilities were arrived at. Assigning probabilities to guesses – educated or otherwise – to arrive at a desired conclusion doesn't offer any more insight into the crisis than astrology offers to our daily lives.

  34. Brian's Blog

    Stuart is spot on with his comments. I applaud his efforts to apply some critical thinking to the matter at hand. Not only should we question the cumulative probability estimate of 30%, but also the probability figures given in the post of 10-20% for the disorderly fall in the dollar and the 10% figure attributed to "blowups" of "Euro banks". I would like to see how those probabilities were arrived at. Assigning probabilities to guesses – educated or otherwise – to arrive at a desired conclusion doesn't offer any more insight into the crisis than astrology offers to our daily lives.

  35. Stuart


    in contrast with the hotshot guess-tistical solemnity that often passes for economic commentary, your post about mine is patently and refreshingly frivolous. If I understand you correctly, you are in the business of evaluating the quality of warranty guides for toaster ovens. In that case, our careers would not have crossed.

  36. Anonymous

    Anon of 3:38

    You are right. I was just name calling. I'll try to fix that in the future.

  37. Frank

    yves, thank you for all you do! I appreciate all your efforts to inform and educate all us Joe plumber types out here, no critique here, you do much good for many for free, the most precious thing any of us can give is our time. I understand what tired Is, you are definately human and an asset to your people. Thanks, Frank

  38. Hugh

    "The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus."

    I have no idea how this would work. My understanding is that he is saying that government should not take more debt on to its balance sheet. The Fed should just print more money. But if this were true, the government and Fed's massive injections of liquidity (which might have negative impacts down the road) should nevertheless have positive effects now. And we just aren't seeing any evidence of that.

    "The West cannot support its gold-plated state structures from an aging workforce and depleted tax base."

    Why is it that the social safety net is always described as "gold-plated"? That is what I assume is being referred to here. Or is it perhaps a bloated military, unnecessary wars, welfare for the rich and corporations? Yeah, I didn't think so either. Does A E-P really think that the "aging workforce" is going to applaud having services taken away from them, which they have been supporting most of their working lives at precisely the time they need to use and rely on them more? To be blunt, E-P's ideas are cockamamie.

  39. Anonymous


    I sincerely doubt you have the foggiest idea how much work it takes to put out a blog, especially one with multiple daily posts. It's cheap and easy to make snarky comments, and quite ungrateful, since this is a free service. If you don't like it, no one is forcing you to read it. You nitpicking, both in tone and substance, is petty.

    Or if you care about the quality of the blog, contribute to a fund for Yves to have a copy editor. She has said repeatedly she is working on a book. I'd rather have her posting than not during this time.

    While the substance of your comment might have been helpful, your attitude leaves much to be desired, You are clearly more interested in proving your supposed intellectual superiority and scoring points than in making helpful contributions.

    Brian, as for your comment, Nouriel Roubini and tons of economists assign probabilities to future, inherently unknowable or difficult to assess outcomes. If you are going to use a formal decision process, assigning probabilities to various possible scenarios is a necessary part of the operation. And Taleb warns against using past data in a mechanical fashion to predict likelihood of future events.

    John Kenneth Galbraith said the point of economic forecasting was to make astrology look good. The whole forecasting business suffers from the failings you complain of. Yet the odds are high you do read economics and political forecasts of various sorts. Do you rail against them too?

  40. Stuart

    I've already said that my original post now has no point, because apparently my assumptions were wrong. Nowhere have I made snarky comments, except in replying briefly to a snarky post by "Dan Duncan" about my post. Whoever responded to that reply admitted to "name calling", and that was the end of the matter for me.

    I don't see what the problem is. I always take statistical figures in articles seriously, especially when they are deployed in support of predictions – but I don't always succeed in convincing myself that the figures are serious, and the arguments valid. Is there something wrong with that? Has it occurred to anyone that the problem may be that I am naive about certain matters, rather than eager to demonstrate "intellectual superiority"?

    Perhaps you are now taking offense, either yourself or on someone else's behalf, at the expression "hotshot guess-tistical solemnity" in my reply to "Dan Duncan"s snarky post. Do you imagine that was a snide reference to Yves Smith's article?? Of course it wasn't. What could I gain by making such a personally offensive suggestion on this very site? I already politely rejected Yves' suggestion that I might be trying to tell her how to run her site.

    I think you know very well the general kind of thing I mean by "hotshot guess-tistical solemnity that passes for economic commentary" without naming any names. Some commenters on this site accuse Evans-Pritchard and others, by name, of just that kind of solemn waffling. So my vague, general criticism is taken to be personally offensive per se, but particular criticisms ad hominem by others are not, just because Evans-Pritchard et al. are not among the present company? I don't get it.

    Can't we let these things rest? I have no investment in them.

  41. Anonymous

    Here are some observations from Ireland as it featured in the article quoted above.

    Irish banks are getting loans from the ECB at 1% interest rate,then purchasing Irish sovereign bonds(the last medium term issue a few weeks ago yielded a coupon of 5.9%) ,they then repo the bonds at ECB at a discount thereby gaining cash to capitalise the banks balance sheets.

    The trick here is the Irish government gets cash to run the country through the back door as purchase of these bonds by the ECB (Quantative Easing) is prohibited by the Maastricht treaty.
    Therefore the profile of Bond Investors conceals the fact there is a cleverly constructed and false closed market for many of these bonds.
    There is therefore no true market price for them and consequently the Irish State is insolvent.The ECB is tolerant of the above as they are terrified of default by a Euro Zone member which could destroy the Euro as a currency.

    The Irish economy is deflating at a rapid pace.Improved Competitiveness in the economy is being achieved through high unemployment and persistent lowering of wages.The only economic tool available to the Irish government is fiscal.
    The ECB controls Interest rates and the supply of money.
    They are taxing the hell out of the middle classes and leaving in place social welfare expenditure which in 2009 is estimated to reach 80% of all tax revenues.

    We are one bond auction failure from economic armageddon.There is literally no other revenue stream at the moment.A bond failure would mean supermarket shelves would be cleared in a few days .

    The Irish population is starting to comprehend the enormity of our situation and the blame is laid firmly at the ruling FF party who have been in power 19 out of the last 20 years.They are now viewed as extremely corrupt and incompetent.
    In recent weeks people are talking more and more of payback ,of social unrest and of revolution.
    Hatred of the political classes is palpable.This weekend a government minister was attacked by a mob of protesting farmers.

    No one knows what will happen but what you may miss in MSM in the USA is the strength of the fear in Ireland and the rage and anger of the populace.
    Do not be surprised if major civil conflict erupts here in Ireland within the next year.

  42. michael

    @Richard Kline:
    A-P: "But the deeper truth is that Britain, Spain, France and Germany, Italy, the US, and Japan are in deepening states of fiscal ruin." […] In France and Germany, things are merely bad. […] For A-P, France and Germany must, _must_, MUST be doing as badly or worse than Britain: this is simply an untruth. Ah well…

    I lived most of my life in Germany and can tell you: Sorry, but Germany is just hiding its problems better.
    German big banks have crazy leverage. And German "State" banks had jumped head first into the US subprime mess:
    And the German demographic situation is a complete disaster. Even *without* this economic crisis starting in about 5 years from now the government will go into increasing deficit just from social security retirement payouts. They will need to heavily cut pensions (again) or raise Social Security further (already at 20% of income), or raise *real* retirement age above 70.
    It may remain to be more like an orderly demolition instead of a sudden implosion, but Germany is moving downwards big time in 2015-2040.

  43. michael

    Ignore the hair-splitting commenters.
    I also like to put some probability numbers on certain events, for example I now put a 95% on being in a depression (defined as >10% drop in GDP before all this is over).

    I am grateful for your sharing of your percentages on possible shocks, where I not feel knowledgeable enough myself. And that even McKinsey people don't put it much lower is somewhat distressing, and an important bit of information to me.
    Keep up the great work!

  44. Anonymous

    Your comment about those of the Austrian persuasion is quite strange Yves. Pritchard is not an Austrian at all. His prescriptions are purely Keynesian, or perhaps neo-keynesian.

    Being apocalyptic is not the defining characteristic of Austrian economics, even if some students wax that way.

    It might help to study some Austrian economics to understand its key differences with neoclassical economics, which are mostly methodological.

  45. Yves Smith

    Anon of 2:58 PM.

    Evans-Pritchard is most assuredly not Keynesian. Keynesians are not alarmed by large fiscal deficits IF there is a large demand shortfall. In fact, the kinds of alarms E-P has been sounding would be justification for large fiscal deficits. Tight fiscal and loose monetary policy is just not in the Keynesian playbook.

    The Austrians tend to demand strict doctrinal compliance, but I have readers who see themselves as Austrian, but are no where near as extreme (no gold fixation, basically agree with Austrian take on instability but think the remedies are too costly socially, risk political upheaval, so are willing to consider more intervention than classic Austrians). I see E-P in that came, Austrian orientation on analysis, but more willing to have less drastic remedies.

  46. Eagle

    Why is confidence presented in quotes? Are you implying that public confidence is not a worthwhile thing to worry about?

Comments are closed.