Show me the money, honey

Buttonwood, The Economist, via Ritholtz via Cashin (link not provided):

It is three years since Bear Stearns was pushed into the arms of J P Morgan and the fundamental debt problem has not been resolved. The debt has been moved around but not eliminated. This has undoubtedly bought time and I quite understand the point made frequently by my colleague on Free Exchange that governments and central banks have acted to protect workers from losing their jobs and to prevent consumption from collapsing. In this, they have had a fair degree of success.

But the debt is still there. It must be eliminated by growth, inflation or default.

This is what I do not get. Yes, debt has been moved around. I’m not even clear that it has been eliminated from balance sheets, since my understanding of the Federal Reserve’s actions is that it swapped a lot of good debt for bad, but that the originating institutions remain responsible for whatever the Fed holds. The whole point of the bailout was to give the banks time to earn their way out of the debt overhang. Then there’s debt that has been moved from the Treasury’s balance sheet onto the Feds’. That would include, for example, defaulted mortgages held by Fannie Mae and Freddie Mac, but also the deficit created by 9% unemployment and the ongoing wars, which is most of the deficit. This debt has to get moved back onto the Treasury’s books, but–assuming that the country has a will to raise the necessary revenue in taxes– there’s no rush.

The problem arises not so much because of the current situation but because of how it limits the federal response in case of a further crisis and because the wealthy have made it clear that they are not willing to pay off the deficits that their actions created.

Now, I haven’t made a lot of money lately, because I see a lot more risk in the market than most participants. As I see it, the risk is not, as the gold bugs would have it, of inflation in the near term, but of a second, deeper dip to the recession brought on by a renewed crisis. In such a situation, interest rates could rise even as prices of gold, silver, and other commodities tanked. The rise in interest rates would not be brought about by inflation, but by fear that there would not be any repayment. In such a situation, cash becomes king, and stodgy stocks like utilities become queen. Stocks and bonds in trade surplus countries are also desirable holdings. Inflation could come later, as desperate steps are taken to address the crisis, but probably not until the crisis had at least stabilized.

I’ve been wrong for 18 months. Is there something that I am not seeing?

Projection: It’s Not Just for Movie Theaters

The Detroit Free Press reports that a demonstration planned for Good Friday outside a mosque in Dearborn, Michigan was organized by Frank Fiorello, who calls Islam a “perverse ideology [that] just preaches violence”.

On his Facebook page, Fiorello talks about violence, saying “danger and death are but my playthings.” A rock band he plays guitar in, Crude Legacy, has anti-Muslim rock songs he posts on his group’s Web site.

In one song, the band declares, “We’ll hack through Turkish flesh and bone, watch the minarets fall down.” In another, “Mosque of terror, minarets in flames, they bring the horrors, so we’ll do the same.”

Fiorello also says he’s peaceful and doesn’t want to see Muslims attacked. I’d kind of like to know how hacking through flesh and bone and setting minarets on fire aren’t attacks — for that matter, how exactly he explains that the planned protest outside the mosque isn’t an attack on the worshippers there.

The encouraging aspect of this story is that a coalition of Christian, Jewish, and Muslim religious leaders plan to counter the hate by staging their own rally outside the mosque on Thursday.