Barron's Nonsense

Barron's weekly newspaper printed some nonsensical thoughts from MRG Institutional Update.


The focus on debt is useful. Austerity (budget cuts) must be part of the solution.

Austerity's Not the Answer
Total Debt's the Problem MRG Institutional Update, by MRG
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June 15: Cross-European contagion risk...threatens the very existence of our banking system. European bank balance sheets are stuffed with nonperforming loans that should have been written off in 2009. European regulators, however, allowed the banking industry not to come clean, in a repeat of the policy mistakes made by Japan in the 1990s.

Austerity measures will only exacerbate the banking-system problems, by leading to defaults in the massive private-sector debts of troubled countries. Attempts to use rapid and large fiscal retrenchment to avoid public-debt defaults virtually assure an escalation in private-debt defaults.

It is total debt which matters, not just public debt, something which European Union authorities seem to not yet grasp. In fact, the rapid rise in public debt in recent years is not so much the cause of this crisis as it is the result of excessive growth in private-sector debt over the last decade or so. (Note: private debt excludes nonfinancial corporates).

Greece and about 10 other euro-zone members desperately need a cheaper currency, but a falling euro doesn't necessarily do the trick, as much of Greece's exports go to other euro-zone members. Alternatively, the Greeks may choose to go for an "internal devaluation" by cutting salaries On the order of 20% to 25%. [But remember that] people died in the streets of Athens following a decision to reduce salaries by 5%.