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John Mauldin's Outside the Box

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  • Three Competing Theories

    Long-time readers are familiar with the wisdom of Lacy Hunt. He is a regular feature of Outside the Box. He writes a quarterly piece for Hoisington Asset Management in Austin, and this is one of his better ones. Read it twice.

    “While the massive budget deficits and the buildup of federal debt, if not addressed, may someday result in a substantial increase in interest rates, that day is not at hand. The U.S. economy is too fragile to sustain higher interest rates except for interim, transitory periods that have been recurring in recent years. As it stands, deflation is our largest concern …”

    As I write, Europe is starting to unravel. This is going to be much worse than 2008, at least as far as Europe is concerned, and odds are high that it will be very bad for the US. And the markets are still acting as if the problems in Europe can be resolved. The recent bank stress tests were a joke, as they assumed no Greek or Irish defaults. This simply can’t be. There is a banking crisis of massive proportions in our future.

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  • The Stark Choice for Europe

    This will be one of the more controversial Outside the Box posts in a great long time. Indeed, I debated with myself at some length. It will make some readers mad, but I decided it is more important to make most readers think. And, as it happens, there are parts of this week’s essay that I rather aggressively disagree with. That being said, there is a great deal of truth here. This represents a serious body of thought that is being debated, and we need to hear all sides, rather than just the ones we like.

    Michael Hudson is a research professor of economics at the University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College, which is a serious place, so this is no ill-informed screed. I generally like their stuff.

    Hudson first lays the European crisis at the feet of banks and the institutions (ECB, IMF, and the EU) that are taking the Greek (and other) bank debt and putting it into public hands. He has a very real point. Then he points out that Greece is far better off just walking away, a la Iceland (at least read the last part of this post, on Iceland). And in polls he cites, 85% of the Greek people are against taking on the debt and paying the banks.

    As I wrote last week, there is a revolution going on all over Europe, slowly building up as people realize that the “solution” being offered benefits banks and not German taxpayers or Greek creditors. Ireland will be watching. There is no easy way out. If there is a referendum on this new “troika” proposal, it is likely to lose. This is not over.

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  • Macro E.U. — D.O.A.

    I am attending the Global Interdependence Center’s latest conference here in Philadelphia, writing you from the Admiral’s Club on my way to Boston. The chatter last night at dinner and between sessions was focused on the risks in Europe. I did an interview with Aaron Task on Yahoo’s Daily Ticker, where I noted that European leaders are starting to use the word containedwhen they talk about Greece. Shades of Bernanke and subprime. This too will not be contained.

    And that brings us to this week’s Outside the Box. Greg Weldon has graciously allowed me to use his latest missive on Europe’s woes. A teaser:

    “The EU, like the US, suffers from what we might call the 'Cyrenaic Syndrome', a dynamic linked to the ancient Greek philosophers Aristippus and Hegesias of Cyrene, who, in 3rd and 4th Centuries BC, hypothesized that the goal of life was the avoidance of pain and suffering. Addicts accomplish this thru substance abuse. The EU is trying to accomplish this thru pure denial, and an outright refusal to accept that austerity, like sobriety, is the ONLY way to actually deal with the problems it faces.”

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