This is verbaitim from page 5 of Dave Rosenberg’s daily newsletter on 6/25/2010 (available free at www.gluskinsheff.com):
I have to admit that I’m a bit dumbfounded by the complete lack of understanding of bad economics; not only by investors but by many governments. I was asked at a client meeting last week as to what caused this next leg of the global financial crisis and again, like the mess Wall Street got in, it’s about bad short-term decisions over good long-term solutions, which is burying the world. While U.S. banks have recapitalized themselves and written off debt, this cycle has been dominated by governments socializing the losses and taking the bad debts from the private sector and transferring the liabilities to the public sector balance sheets. For the entire OECD countries, general government debt as a share of GDP alone has ballooned from 73% when the recession started in 2007 and will climb to a record 104% next year. It took 15 years for this ratio to go from 63% to 73%, but just four years to get to 103% from 73%. Total claims in the OECD countries at all levels of society just broke above 360% of GDP and that is clearly unstable. Suffice it to say, many of these debts will not be serviceable; identifying where the defaults and haircuts take place, across countries and sectors, will require a tremendous level of skill.
People have to understand that 80% or higher debt-to-GDP ratio is a new dynamic and a game changer in Europe and in the United States. The bottom line is that all levels of society, and across most countries in the industrialized world, have far too much debt and far too much debt-servicing costs in relation to income. In fact, tally it all up and the world is awash with $222 trillion of total liabilities, or the equivalent of 362% of global GDP. Extinguishing this debt will be deflationary as central banks will be forced to print money as an antidote and we are really in the early stages of this deleveraging cycle. As a result, all of us have to stop thinking that all recoveries are the same and all selloffs are buying opportunities because of what happened in the past. If my reading is accurate, this next wave of debt restructuring will be extremely painful.
At this point, the market is losing confidence on our leaders’ ability to steer the world in the right direction. There is an argument to be made that the “nanny state” in Europe is going parabolic and this is completely unsustainable. Tim Geithner telling Europe what to do is scary at best — to re-stimulate economies via fiscal largesse at a time of explosive debt ratios is dangerous. The fact that you have CDS on Greek sovereign debt blowing out to new highs despite the EUIMF rescue package is the most telling sign there is now a growing distrust of government spending, manipulation of information, and demagoguery. The only way to regain confidence is to come clean and to then do something about it.