The US as The Next Argentina, Not Japan

Earlier this week, on Tuesday, I happened to catch Larry Kudlow's program on CNBC. Among his guests were: Bob McTeer, retired Dallas Fed President, Brian Wesbury, one of my favorite, and a well-regarded economist, and Rick Santelli, the Chicago-based futures and options market reporter for CNBC.

What I heard struck real fear into me.

Kudlow began a debate by relating a sort of 'thought experiment' he had done regarding the Fed's recent actions. He told a story about his days at Bear Stearns, where, every time the Fed cut rates, Larry would joke that he saw palm trees growing on the trading floor- a reference to so-called banana-republic economies. Specifically, Argentina.

McTeer chimed in to agree, as did Brian Wesbury. They all believe that Argentina, not Japan, is the potential role model for what may happen to the US economy and dollar in the years ahead.

This incited a fierce debate with other guests on the segment.

In a related argument, Wesbury noted something genuinely novel and elegant. He opined that, with the Fed pushing rates to nearly zero, there was no way bank lending could expand.

He pointed out that, at a time when risk in the economy, among borrowers, is still so high, and rates are now so low, there is absolutely no way lending can be cost-justified. The risk-adjusted returns to ultra-low interest loans are negative. Wesbury thus observed that the problem isn't a lack of borrowers, but a lack of lenders willing to effectively take a loss on new loans.

He then pointed out how ludicrous was the situation in which banks have been placed by Treasury and the Fed. They are pilloried if they don't lend out the new, unwanted TARP-based 'capital' bestowed upon them by Hank Paulson.

But, if they do make loans at market rates in this environment, those loans will surely go bad, too, resulting in even more balance sheet damage and reprimands from regulators.

Wesbury then reiterated his concern that 'mark-to-market' had not been modified or rescinded, thus causing needless damage to bank and fund balance sheets by overly-severe writedowns of still-performing instruments. McTeer agreed.

Santelli did, as well, picking a fight with a guest, who argued that mark-to-market isn't relevant to the problems at hand. Santelli challenged the guest to buy some of the toxic waste, whereupon the guest said, 'no, because they will eventually be marked down further.'

Santelli then smiled and said that this was exactly his, and Wesbury's and McTeer's point- that because everyone is worried that these structured instruments will ultimately be written down further, nobody will invest in a bank, nor a fund holding such instruments.

Thus, markets are frozen, awaiting the needless writedowns of performing, or even semi-performing assets, due to the self-fulfilling prophesy of a lack of trading markets for said assets.

It was a very informative and densely-packed 15 or so minutes of economic and financial debate. One of the best I've seen in ages.

McTeer continued to back Bernanke's flooding of markets with credit, believing that, at the first sign of inflation, Ben will withdraw said liquidity soon enough to avoid hyper-inflation down the road.

What I took away from the exchanges that evening is that we are, truly, for the first time in ages, in new economic territory. A hideously over-supplied dollar, interest rates too low to be consistent with responsible lending, collapsing asset values now, with a concern over hyper-inflation later.

All very similar to Latin American monetary and economic policies, rather than the Japanese variety. A very chilling prospect for our economic future.