1/ GREAT NUGGETS of wisdom from Doug Noland's post...gets me thinking on Saturdays☕️. FIRST, is #coronavirus just usual media fearmongering or a tragedy that could prick the huge credit bubble? Just
as banks can stay liquid LONG after they're insolvent... creditbubblebulletin.blogspot.com/2020/01/weekly…
as banks can stay liquid LONG after they're insolvent... creditbubblebulletin.blogspot.com/2020/01/weekly…
2/ ...entire economies can stay afloat long after their balance sheets are used up too, as long as credit keeps flowing. Credit capacity for most of the developed world is mostly used up (it's why interest rates are negative in many places), but they're still afloat. Why?
3/ ...Because no event has yet triggered a reckoning that reveals the insolvency. (Again, banks can stay in biz for a long time after they're insolvent.) Markets clearly worry that #coronavirus might be such a trigger--Doug details the huge mkt moves this week in reaction to it.
4/ ...I spent much of my career in&around the life insurance/pension biz, so am v familiar w/ the epic 1918 Spanish flu pandemic's actuarial characteristics. #coronavirus is FAR FAR from that, for now (Spanish flu esp hit kids & elderly, but adults generally had better immunity).
5/ ...So, is #coronavirus the trigger that pricks the world's credit bubble? It's FAR TOO EARLY to say & depends on how the virus evolves. But Doug's piece got me thinking about connections. Airplane crashes are never caused by just one event--always a confluence of several...
6/ ...So, what causes economies to fail? It's always a confluence but there's usually a precipitating event that triggers dominoes to fall--dominoes that were obviously unstable (sometimes for years or decades), but obvious only to those who got curious & studied them...
7/ ...For example, Soviet Russia's economy was obviously unstable for decades (obvious to those who studied it), before the Chernobyl disaster finally pushed it over the edge--tho even that took time to play out. Gorbachev rightly agreed Chernobyl was the precipitating event.
8/ ...It was a human tragedy of epic proportions, but until past few years I didn't realize how thoroughly it crippled the Soviet economy too. (Side note--I wrote abt why Russia's economy has historically been so counter-cyclical to that of the West here:) caitlin-long.com/russias-trans-…
9...So, is #coronavirus akin to Russia's Chernobyl for China's credit bubble-weakened economy, analogous to how widely it could disrupt an entire economy? Again, not yet--but mkts are clearly worried & Doug gives plenty of evidence of that. Next, Doug turns to central banks...
10/ ...It's worth noting central banks WILL be called to act if #coronavirus worsens bc so much global credit originates out of Chinese economic activity--if that's deeply disrupted for a long period central banks will backfill the credit decline by expanding their balance sheets
11/ ...Doug's choice of posting these quotes definitely got me thinking... 
12/ ...and this one too, including Doug's analysis of it:
13/ ...The seemingly unconnected topics in my thread come together here, in the question we should all be asking (quoting Doug): "The critical question: Can runaway booms descend into busts without a tightening of monetary policy? The answer seems a rather obvious “absolutely”."
14/ ...Yep, I agree. Credit shocks don't need to come from central banks themselves--they can also come from the big banks, whose balance sheets are way too leveraged to absorb a major economic disruption. #Repo mkt probs have been signaling that the big banks are too leveraged..
15/ ...since the 2008 crisis--this is not new to those who've actually studied it all along. I'll close by reiterating--big banks should be raising equity capital instead of being allowed to run to central banks for bailouts when disruptions happen (eg, #repo mkt probs last Fall)
16/ ...This is definitely a contrarian view! But it's clear the global financial system isn't strong enuf to handle a widespread economic disruption in China, which would translate into a credit contraction. #coronavirus is a human tragedy. No one knows if it will become one of..
17 ...epic proportions, as 1918 Spanish flu was (it infected 500m ppl). But then again no one knows how leveraged the global financial system really is--that cannot be measured accurately--we just know it's way too leveraged to absorb "a big one." Just how big remains to be seen#
ADDENDUM: @howroute also referred to #coronavirus as "China's Chernobyl." Per my tweetstorm today abt its economic impacts (incl comparison to how widespread Chernobyl was for Russia's econ), let's pray not. More importantly it's a terrible human tragedy🙏
