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Tuesday, October 07, 2008

Sanford Grossman / Deleveraging society

Last night got to listen to Sanford Grossman (
speak on the current financial/economic situation. It wasn't anything
groundbreaking, if you've been reading the paper over the last 12
months, but nevertheless, it was good to hear it distilled into a
couple main themes. Namely, his distillation is that what's happening
is (1) deleveraging everywhere, and (2) the return of risk premia.

His concluding thought was that while deleveraging
is happening at the level of financial institutions and individuals,
"the last shoe to drop" is the leveraged US economy itself--we've been
relying on foreign investors buying our debt, in order to finance our
current account deficit (trade deficit + fiscal deficit)..I googled
"current account deficit deleveraging" for a writeup--first hit was
this article from last week which summarizes it pretty well:

(Incidentally, 2nd hit was this "naked capitalism" post from late July,
which I think I'd actually skimmed at the time (maybe Krops pointed it
out to me?)...the rather worrisome title there is "Has deleveraging
even begun?"..I'm not sure whether he was trying to make the same point
as Grossman, but seems of a piece: )

Grossman's point: while the Fed/Treasury can bailout overleveraged
financial institutions or homeowners, as they get squeezed in this
"systematic deleveraging" (a phrase I saw in another article this
morning), it can't grow the economy, which is what's necessary to
deleverage our whole society. That will take a real readjustment of
our savings & consumptions patters, reallocations of capital and
labor--the sign of the latter being high unemployment.

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