The 3 Most Overrated Risks in 2013

This is a pretty good summary from Ian Bremmer at Eurasia Group regarding some of the risks in 2013.  If you read annual outlook reports you’ll inevitably hear about these three.  I largely agree with his conclusions here.  These three risks are probably overrated heading into 2013:

Eurozone breakup 

This is probably the single most overrated risk of 2012. It’s driven in large part by European observers (especially in Britain) who don’t much like the eurozone.

The political will to maintain the eurozone remains strong among all the major political parties in the core eurozone states, almost across the board in the European periphery and, just as importantly, among eurocrats in the ever-growing European bureaucracy. To be sure, this could change over time. We’ll see what happens if Europe’s leaders totally fail to restructure the institutional machinery of the eurozone. But that’s not a story for this year.

Further, there is no effective political mechanism for a eurozone breakup. It’s conceivable that an individual country might voluntarily leave the eurozone without such a mechanism, but for a real dissolution scenario to have any plausibility, a formal process would have to be created. If you think expanding funding for the European financial stability fund is hard, try organizing a breakup mechanism.

China’s hard landing

A substantial number of market observers and some China analysts believe that some combination of overheated growth and the proliferation of bad loans in the Chinese banking system will lead to a major financial blow-up or a sharp contraction in 2012 that takes Chinese economic growth down to 5% or even lower for the year. Don’t believe them.

There are signs of overheated growth in China—in urban real estate in Beijing and along the coast, especially. And infrastructure has been overbuilt compared to growth in consumption. But there’s no chance that the government will fail to pull out every stop to prevent a meltdown—or even a serious bump—especially in the middle of a major political transition. The Chinese banking and financial system is a mess, but it’s also a fundamentally closed system. In a closed system, preventing such a crisis becomes a matter of fiscal capacity and political will. There will be no shortage of either in 2012. In short, China has more of what it needs to kick the can down the road than any other country out there, and in a challenging 2012 environment, look for Beijing to use it.

Mayan apocalypse  

Just isn’t happening. And if it does, well, sorry.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Cullen,

    Since a government is not revenue contrained, is it possible to use pre-emptive stimulus to avoid a financial crisis? Of course, this could lead to distribution distortion, a risk to the exchange rate and inflation.

    Seems to me that this is what China is doing. In the US the financial crisis turned out quite well for the rich as well.

    • Yes, in theory the govt is not revenue constrained. But in reality, it is constrained. In other words, the govt is a user of inside money (bank money). That’s how our system is designed. The important thing to understand is that the govt can always (well, 99% of the time) procure funds via its banking system. This is a more nuanced understanding of our current design than simply stating that the govt can print money, which is not technically accurate. The govt redistributes money and adds net financial assets in the form of t-bonds.

      The answer to your question is yes. The govt could, today, spend a bunch of money in anticipation of a downturn.

      • Thanks for the answer.

        Mosler seems to think that bank loans in China is like deficit spending, since they will never be repaid. Then it could like the S & L scandal on massive scale, with corrupt bank officials making loans for a kickback.

        I must admit I do not fully understand your argument that the primary dealers in certain cases could refuse to buy government bonds. I remember in earlier posts you wrote that a action would never fail because the treasury would never try to borrow an amount bigger than the bank reserves.

        • Well, the money system is designed around the value of its output ultimately. That is, the money system is only useful to the extent that it gives us access to valuable goods and services. So, in a very extreme environment like a hyperinflation (where the value of money is collapsing), the banks would not likely bid at auctions because it would not be in their best interests to do so since the value of the bonds would be collapsing. This has occurred in other parts of the world where bond buyers revolt. Now, the USA would implement what I call “true monetization” and the Fed would directly create the new money (as opposed to the Tsy obtainging existing inside money for redistribution as it normally does). In this case, the Fed would be directly crediting bank accounts. It’s true money printing. All of the pre-existing inside money would still exist AND the govt would be printing new deposits into the private sector. As opposed to the redistribution we have now. So, the fact that the govt can print its own money in this sort of a scenario is a pointless thing to claim. The govt is designed as a user of money. Specifically so it can’t do the above and just dominate or monopolize the money creation process.

          • Ok. That makes it much clearer. I tought that MMR was centered around the specific system in the US, however from the above I Infer that MMR is applicable to other constructions of monetary systems as well. That is, other monetary systems is just special cases of MMR, as is the US system. With systems I think of no reserve requirements etc.

  2. Cullen,

    I believe this excerpt is from Ian’s 2012 Top Risks report, not 2013. That said, some of these topics/questions are still in play in 2013, but the variables have changed.

  3. Fiat money can be created at will in endless amount. Public debts and even a lot of private debts are not made to be repayed but rolled and expanded. The next crisis will be a resource crisis because when the deleveraging cycle will be in a more advanced state, there will be much more money competing for a smaller pool of real resources. Now electronic money is just competing with other forms of electronic money to catch a pure virtual gain.

  4. Anyone who consider those as “risks to worry about” are not worrying about the right risks. For one thing, the fact that the Eurozone will not break up does not mean that the risk will abate. Similarly, the “hard landing” in China is another obsession of people who keep thinking that the economy drives the stock markets. You do not need a “hard landing” for the stock market to provide disappointing results.

    So, for anyone who thinks the above events are something to worry about, then I would agree that they are overrated. However, there are many other risks one should be really worried about instead.

  5. China hard landing thesis is a joke. The old “…they won’t ever have a nasty recession because they won’t let it happen.”

    I guess by this logic every period of financial misery experienced in the past was simply a choice. I’m very respectful that governments can help in times of stress, but to say they can simply “choose” not to ever have any meaningful economic weakness is just plain stupid…