as the debt world turns

The UK Telegraph has an interesting article(tx pat) on the thoughts of Mr. Dimon of JP Morgan:

Mr Dimon told investors at the Wall Street bank's annual meeting that "there could be contagion" if a state the size of California, the biggest of the United States, had problems making debt repayments. "Greece itself would not be an issue for this company, nor would any other country," said Mr Dimon. "We don't really foresee the European Union coming apart." The senior banker said that JP Morgan Chase and other US rivals are largely immune from the European debt crisis, as the risks have largely been hedged.

Oh California! The state and local governments are going to soon run out of things to sell, what then? Of course, the more interesting note is Mr. Dimon says their risk on Europe is hedged. We saw how that worked over the past two years, you dear tax payer are the final hedge. Now Goldman has taken a lot flack, but Morgan is more culpable. They are the derivatives factory that helped pump the debt bubble to its greatest girth. I did like how a couple weeks ago at the Financial Commission, Mr Dimon sat back and let Mr. Blankfein do all the talking, "You tell em LLoyd!" Smart.

Meanwhile, Bill Gross has his latest financial outlook up and he writes:

Twenty years of accelerated globalization incrementally undermined the real incomes of most developed countries’ workers/citizens, forcing governments to promote leverage and asset price appreciation in order to fill in what is known as an “aggregate demand” gap – making sure that consumers keep buying things. When the private sector assumed too much debt and asset prices bubbled (think subprimes and houses, or dotcoms/NASDAQ 5000), American-style capitalism with its leverage, deregulation, and religious belief in lower and lower taxes reached a dead end.

People like Bill Greider and others have been writing this for twenty years, while people the debt peddlers have been advocating the win, win, win situation of corporate globalization. Now the writing is on the wall and PIMCO and the rest of the debt aristocracy want all the debt they sit on and they no business peddling in the first place made good.

Mr Gross' piece does a good job in laying out the parameters of the current debate on debt. Simply, one side says its time for the profligates to meet austerity and repent by spending the next twenty years working to pay their debt down, good for our financial aristocracy anyway. The other side says simply more debt will allow the economy to grow again and eventually make good on the debt. Neither side is very palatable.

Right now we are spiraling down to an ever more simplistic debate on this that will in the end serve no one well. The debt reveals imbalances in the global economy that must be addressed. Mr. Gross is right that the American and global economy of the last several decades is unsustainable, it makes no sense to pile up more debt continuing the status quo. The pro-debt folks are also correct that it makes no sense to simply cut off the blood supply and lose a few limbs to save the body.

We need to split the difference. Call it the new centrism. We need to destruct a great deal of the debt created in the past ten years, we can start with all the derivatives sitting at JP Morgan and write down mortgages, lowering payments to keep people in their houses. Secondly we can create more debt, but it needs to go in transforming the economy down a sustainable path, for example not more money to buy cars, but to build public transportation. The debate right now is about cutting or spending to sustain an unsustainable status quo.