Since first responding, I have tried to catch up on some reading and in the course of doing so have read various weekly letters I either receive or subscribe to, including Mauldin's Thoughts From the Frontline.
In this week's issue Mauldin devotes much time to German contingency planning for a possible default by Greece, which I previously commented on, and a UBS paper examining the process and estimated costs of a country (rich or poor) the leaving the eurozone. The numbers are huge.
Were Greece to leave the zone it's likely it would default on a minimum of 50% of its sovereign debt and possible as much as 75% to 90%. Since we have seen the 50% figure frequently in the context of Greece remaining in the zone, I'm inclined to believe in the higher estimates. Additionally, Greek's GDP could contract by as much 40% to 50% in the first year according to UBS.
It's my guess German financial officials are busily developing alternative economic scenarios and working out likely financial costs for each outcome, understanding that in the long term their interests are best served by preserving all of most of the zone but in the near term decisions must be guided by maximizing the return on finite resources. It's crunch time.
The following is from Mauldin's letter:
Welcome to the Hotel California Such a lovely place Such a lovely face They livin’ it up at the Hotel California What a nice surprise, bring your alibis
Last thing I remember, I was running for the door I had to find the passage back to the place I was before “Relax,” said the night man, “We are programmed to receive. You can check out any time you like, but you can never leave!”
- The Eagles, 1977
You can disagree with the UBS analysis in various particulars, but what it shows is that there is no free lunch. It is not a matter of pain or no pain, but of how much pain and how is it shared. And to make it more difficult, breaking up may cost more than to stay and suffer, for both weak and strong countries. There are no easy choices, no simple answers. Like the Hotel California, you can check in but you can’t leave! There are simply no provisions for doing so, or even for expelling a member. The costs of leaving for Greece would be horrendous. But then so are the costs of staying.
The data I quoted is for the first quarter while what you cite is for the second quarter which is more current and better illustrates the precarious conditions within Greece.
With each day there is mounting concern that Greece will default and Germany is now preparing for that eventuality by preparing a Plan B under which banks would take 50% haircut on Greek debt should Greece not receive additional tranches from the second bailout due to breach of contract and failure to make promised spending cuts, institute labor market reforms and sell public assets.
I have no sympathy for Greece but I do believe the austerity measures are so severe that they will bring about serial economic contractions which will reduce tax receipts, deepen the deficit and lead to fresh calls for further cuts. We can already see this playing out as Greece’s economy is simply as mess. GDP growth is minus 5.5%; debt to GDP is 160%; and the fiscal deficit is in the 8% to 9% range. All of this is leading to further calls for spending cuts and growing doubts whether Greece can be saved with some viewing the country as a black hole in which money is wasted and vaporized.
Greece must either default or leave the eurozone and these are precisely the measures being discussed within the inner circle of policy making. Der Spiegel reports:
German Finance Minister Wolfgang Schäuble, who is reportedly doubtful that the country can be saved from bankruptcy, is preparing for the possibility of Greek insolvency. Officials in his ministry are currently reviewing scenarios for handling such a situation, exploring what it might mean for the rest of the euro zone. Under the first scenario for a Greek bankruptcy, the country would remain in the euro zone. Under the other, Athens would abandon the common currency and reintroduce the drachma.
Volker Bouffier, the governor of the state of Hesse, which is home to Germany's financial capital Frankfurt, is a member of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) party, as is Schäuble. Bouffier is now urging that the possibility for countries to leave the euro zone be created quickly. Current European Union treaties provide no provisions for a country to abandon the currency.
"If the savings and reform efforts of the Greek government aren't successful, then we need to ask the question of whether we need new rules to make it possible for a euro country to leave the currency union," Bouffier told SPIEGEL.
The truth of the matter is that Ireland is already being bailed out by the ECB through purchases of Irish bank bonds. When a bailout is formally announced, it will simply introduce a facade of transparency while publicly acknowledging that Ireland faces severe sovereign and banking system solvency issues. From Market Watch:
Analysts say Ireland’s insistence that it can go it alone belies the dependence of Irish banks on wholesale funding from the European Central Bank. Data released Friday showed Irish bank funding from the ECB rose to more than €130 billion as of Oct. 29, up from €119.1 billion at the end of September.
Ireland-based banks accounted for just under 25% of total outstanding euro-system operations at the end of October. “The data clearly show the extent to which increasing concerns over Ireland is impacting banks’ funding,” said Nick Matthews, European economist at Royal Bank of Scotland, in a research note.
If the ECB limits the amount it lends to commercial banks next year, as expected, Irish institutions may struggle to repay maturing debts, said Ben May, European economist at Capital Economics. If the government was forced to cover the resulting shortfall, its cash balances would be depleted long before summer, he said
Renminbi Going Down, Eurozone Borrowing Requirements Going Up [View article]
I would like to add an additional thought. Most of the leaders of the EU and ECB tell us things are great and the modest fiscal consolifation underway will cure all fiscal ills. Obviously, there are people who doubt this assertion.
Anyway, if all things are great why would Merkels's proposal that investors share in soveriegn defaults undermine the euro and investor confidence when all things are looking up.
It seems inherently inconsistent and raises the posibility we are trying to put a pretty face on something somewhat ugly.
Renminbi Going Down, Eurozone Borrowing Requirements Going Up [View article]
Interesting snippets John.
After reading the three pieces I was struck by the fact these developments have much in common: incompetent, deceitful and corrupt leadership.
Each time I read the Jobs release I am reminded of manure and this time was no different. How can we keep creating jobs while employment remains at the level it was in 2000?
Propaganda, lies and canards have been used by politicians for decades to placate the masses so that they can remain in power. This time is no different and even though the party in power took an ass kicking in the mid-term elections they are looking forward to 2012 and doing everything in their power to create an illusory recovery supported by lies swallowed by MSM and regurgitated as news.
The Chinese yuan is probably overvalued but it is not the principle reason for our ongoing trade imbalances. When a country persistently runs massive budget deficits it is more than likely spending more than it produces and this incremental demand must be satisfied through additional imports. And it becomes more complicated when we take into account expansion of debt as this introduces further demand and purchasing power without necessarily increasing production.
I don't know who knows what but I have a very low estimate of Geithners capacity to grasp complex issues and pointing our finger and blaming China for our hollowed out and unbalanced economy is simply a political expediency. We have allowed and encouraged unsustainable policies but do not wish to either acknowledge this or change our course. Just blame China; It's always easier to blame others for difficult problems that must be addressed from within.
Similarly, Ireland is having a difficult time reducing its deficits and will more than likely have to draw upon the European Stabilization Fund but is telling the world that it is solvent and that it will be able to make the necessary budget adjustments. Meanwhile, the IMF, ECB and the EU are all releasing panicky and conflicting statements with some pressuring Ireland to take cash as uncertainties in Ireland are roiling much of the euro area. The truth, of course, is Ireland is insolvent but does not want to be systematized for drawing upon the fund and limiting its access to fund unsustainable policies.
The height of this folly was seen most recently in the G20 meeting when Angela Merkel suggested after the Stabilization Fund expires it be replaced with a permanent mechanism (yet to be defined) with provisions for investors to take losses in the event of sovereign default, hoping to shield the German public from bailing out corrupt and bankrupt sovereigns.
Bloomberg recently reported Cowen as saying Merkel’s proposal to involve debt restructuring with losses for private holders of sovereign bonds hasn’t “been helpful". You cannot make this stuff up; the world is a global comedy show.
Ireland in Decline, Or, What Austerity Looks Like [View article]
Krac is correct and if we are going to pillory Hoover let's do it for the right reason. Between 1929 and 1932 federal expenditures increased 48% and increased another 50% between 1935 and 1940- over three times the level in 1929. There was never a lack of spending notwithstanding claims to thecontrary.
And all of this spending led Roosevelt's Treasury Secretary, Henry Morgenthau, in 1939 to describe things thusly:
"We have tried spending money. We are spending more than we have ever spent before and it does not work. ...We have never made good on our promises... I say after eight years of this Administration we have just as much unemployment as when we started... And an enormous debt to boot."
Both Hoover and Roosevelt, however, share the dubious distinction of increasing taxes in a stressed economic environment; in 1932 Hoover raised the top rate from 25% to 63% and Roosevelt, not wanting to be outdone, increased the top personal income tax rate to 79% in 1936.
Obama, not being able to differentiate between investment and consumption and not wanting to waste a crisis and shuffle about resources to favored constituences, will surely persist with policies of wasteful spending and then join Hoover and Roosevelt and increase taxes. And to add insult to injury, he and his crack economic team will do this with the benefit of hindsight.
Ireland in Decline, Or, What Austerity Looks Like [View article]
The timing of your article is a bit unfortunate as it follows a report that Ireland's economy grew at 2.7% rate in 1Q10, undermining most, if not all, of what you press for; Ireland's rate of growth is exactly that of the US' which is suggested to have benefitted from stimulus.
Problems remain in Ireland as the employment level remains unacceptably high but there is nothing to suggest greater public spending will create more jobs unless such spending is directed towards investment. If not, you end up funding consumption with public debt.
And this brings us to the crux of the matter: as long as Ireland wishes to remain with the eurozone it must adhere to the provisions of the Maastricht treaty and other agreements.
This indeed is becoming a crisis of confidence with 62% of the people saying the country is on the wrong course with a majority opposed to the strip mining of our medical system in the name of reform. Most fear further reform, increased taxes and sweeping changes in the nation’s economic landscape.
What is conspicuously missing from public discussion of the economy is the miserable and divided political backdrop against which the economy is functioning and reported to be recovering. As long as households and business view the administration as bent on destroying traditional values and lifestyles and fiscal policy as a predatory tool to channel resources to special interests, confidence will remain low and spending constrained; politics and economics are inextricably linked.
What Krugman and others fail to grasp is that most people loath the dystopian ideals embraced by the current administration and a $trillion here or there will not change this mindset and produce a durable economic recovery built upon faith in the future. And beyond this huge disconncet there remain structural issues as noted by an unnamed author at the Von Mises Institute.
The current economic disaster is the result of the combination of negligence, hubris, and wrong economic theory. For decades, an economic and monetary policy has been practiced based on the illusion of, "It doesn't matter." At first it was, "Deficits don't matter." From that, the policy of "it doesn't matter" got extended to money creation, the credit expansion, the stock-market bubble, and the housing boom. Now, we're being told that buying financial junk by the central bank to beef up banks and brokerages also doesn't matter.
The current financial crisis is not of a cyclical nature. The financial turmoil is the symptom of the structural imbalances in the real economy. Over decades, expansive monetary policy has gone hand in hand with implicit and explicit bailout guarantees, and this has distorted the process of capital allocation. Under such perverted conditions, those investors will win most who cast away the restraints of prudence. It is a game that can go on for a long time — up to the point when the irrationality has become systemic.
The simple fact is that the US economy is burdened with a highly lopsided capital structure as the consequence of a wide discrepancy between consumption and production, which, in turn, is the result of monetary policy. Persistent trade imbalances are the symptoms of this discrepancy. This means for the US economy that lower interest rates and government incentives aimed at boosting consumption work as pure poison. Instead of more consumption, more savings, less consumption and fewer imports are needed.
The current financial crisis reflects that many debtors have reached their debt limit and that creditors are lowering that limit. From now on, business and consumers, governments and investors must work under the restraints of lowered debt ceilings.
Why Ireland Is No Different From Other PIIGS [View article]
Ireland is differnt from the other PIIGS because to it's advantage "exports to countries outside the euro zone account for more than half of gross domestic product, according to Capital Economics, compared to around 20% to 25% for Germany and around 10% for southern European economies."
This means Ireland is better positioned to exploit the devalued euro but to accomplish this there will a need for further internal devaluation through wages cuts, aggravating fiscal austerity. It's a high wire act.
Compared to U.S. Bailout, Euro Bailout Is Nothing [View article]
Don't think for a second that the EU is done; they are simply using a top down approach to financial rescue by first bailing out insolvent states. As they drill down further and peel back the onion, they will start bailing out individual banks and businesses. Yesterday, the FT reported that European banks are far behind their US counterparts in writing down impaired loans and they could be looking at a $trillion or more of writedowns. It's too early to call the winner of the bailout race.
The PIIGS Problem: Maginot Line Economics [View article]
Eloquent, convincing and beautifully written.
And I understand the thrust of your thinking, which is to reflate the EU, but let me ask when do we deal with the underlying problems which created the crisis In Greece?
1) Extended involvement of the state within the economy
2) Borrowing to fund spending
3) Falling productivity and rising wages, leading to diminished competitiveness
4) Unsustainably generous social benefits, wages and retirement plans
Galbraith, Stiglitz, Soros on Resisting the Inevitability of the Greek Debt Crisis [View article]
Edward, I'm not sure you would fit in with that crowd as, like Soros, their thinking is set and they are busy looking for facts and theses which reinforce those views. Those there are all out of the same mold characterized by liberal, progressive thinking and great concern for economic justice and the environment; to my knowledge Martin Felstein was not invited.
They believe themselves to be cerebrally gifted and know what direction society and economics should move; the challenge is develping and IMPOSING policies to move us towards this dystopian destination. It's like central planning without titles hinting of commissar.
Without watching the video, I suspect the collective view of INET is that Greece is a hapless victim; needs financial assistance with low interest rates; budget cuts should not be too draconian as this would be deflationary; and we do not want to occasion civil unrest. The fact that Stiglitz suggests it is Germany which is the free rider here – that Spain and Greece would have seen their exchange rates adjust without the euro such that the build up of external imbalances would never have reached this scale - conveniently overlooks that the fact deadbeat Greece has been able to borrow on the back of the euro' strength.
I would like to better understand the downside to simply imposing conditions upon Greece designed to force their exit from the EU, which is what I believe Germany would like to see. There might be embarrassment; the euro might fall; Brussels would have one less country to oversee and there could possible be staff cuts; and Greece would default on some of its debt. But, as I have said before, I believe Germany would prefer to help its banks rather continually funding an ongoing trainwreck.
Eurozone Unworkable in Present State [View article]
While the European Central Bank sets interest rates for the region’s 16 economies, the practice until now has been that each country has to steer its economy and can set its own tax and spending plans according to what is politically expedient.
Free from rising interest rates and currency fluctuations, there’s too much incentive to run up big deficits; there’s no feedback loop until there is a crisis. It can easily be argued that the situation in Greece would not be as bad had it not joined the euro zone as its ability to access debt markets would have been curtailed earlier.
Southern European countries are trapped in an overvalued currency and suffocated by low competitiveness; even if governments could institute durable reform and slash their fiscal deficits, the lack of competitiveness within the euro zone would needs years of relative deflation. The only way out is some form of debt forgiveness.
And unlike Japan or the US, Europe has an unfortunate tendency towards civil unrest when subjected to extreme economic pain or sacrifice. Reforms will prove short lived and any help given to Greece or others, simply prolongs the break-up of the euro zone.
Germany Breaks Stability and Growth Pact Terms [View article]
It would appear as if the zone countries have quite a bit in common: a currency, a penchant for violating treaty terms and an unbridled willingness to pursue deceptive practices to secure and retain membership in the zone.
Rather than questioning many of the original premises of the EU, Herman Van Rompuy (President of the EU) believes further concentration of fiscal authority within the EU bureaucracy is the obvious answer. This would be accompanied by loss of sovereign power while increasing the power of the bureaucrats in Brussels.
Greece: The First Of The Dominoes? [View article]
In this week's issue Mauldin devotes much time to German contingency planning for a possible default by Greece, which I previously commented on, and a UBS paper examining the process and estimated costs of a country (rich or poor) the leaving the eurozone. The numbers are huge.
Were Greece to leave the zone it's likely it would default on a minimum of 50% of its sovereign debt and possible as much as 75% to 90%. Since we have seen the 50% figure frequently in the context of Greece remaining in the zone, I'm inclined to believe in the higher estimates. Additionally, Greek's GDP could contract by as much 40% to 50% in the first year according to UBS.
It's my guess German financial officials are busily developing alternative economic scenarios and working out likely financial costs for each outcome, understanding that in the long term their interests are best served by preserving all of most of the zone but in the near term decisions must be guided by maximizing the return on finite resources. It's crunch time.
The following is from Mauldin's letter:
Welcome to the Hotel California
Such a lovely place
Such a lovely face
They livin’ it up at the Hotel California
What a nice surprise, bring your alibis
Last thing I remember, I was running for the door
I had to find the passage back to the place I was before
“Relax,” said the night man, “We are programmed to receive.
You can check out any time you like, but you can never leave!”
- The Eagles, 1977
You can disagree with the UBS analysis in various particulars, but what it shows is that there is no free lunch. It is not a matter of pain or no pain, but of how much pain and how is it shared. And to make it more difficult, breaking up may cost more than to stay and suffer, for both weak and strong countries. There are no easy choices, no simple answers. Like the Hotel California, you can check in but you can’t leave! There are simply no provisions for doing so, or even for expelling a member. The costs of leaving for Greece would be horrendous. But then so are the costs of staying.
Greece: The First Of The Dominoes? [View article]
The data I quoted is for the first quarter while what you cite is for the second quarter which is more current and better illustrates the precarious conditions within Greece.
Greece: The First Of The Dominoes? [View article]
I have no sympathy for Greece but I do believe the austerity measures are so severe that they will bring about serial economic contractions which will reduce tax receipts, deepen the deficit and lead to fresh calls for further cuts. We can already see this playing out as Greece’s economy is simply as mess. GDP growth is minus 5.5%; debt to GDP is 160%; and the fiscal deficit is in the 8% to 9% range. All of this is leading to further calls for spending cuts and growing doubts whether Greece can be saved with some viewing the country as a black hole in which money is wasted and vaporized.
Greece must either default or leave the eurozone and these are precisely the measures being discussed within the inner circle of policy making. Der Spiegel reports:
German Finance Minister Wolfgang Schäuble, who is reportedly doubtful that the country can be saved from bankruptcy, is preparing for the possibility of Greek insolvency. Officials in his ministry are currently reviewing scenarios for handling such a situation, exploring what it might mean for the rest of the euro zone. Under the first scenario for a Greek bankruptcy, the country would remain in the euro zone. Under the other, Athens would abandon the common currency and reintroduce the drachma.
Volker Bouffier, the governor of the state of Hesse, which is home to Germany's financial capital Frankfurt, is a member of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) party, as is Schäuble. Bouffier is now urging that the possibility for countries to leave the euro zone be created quickly. Current European Union treaties provide no provisions for a country to abandon the currency.
"If the savings and reform efforts of the Greek government aren't successful, then we need to ask the question of whether we need new rules to make it possible for a euro country to leave the currency union," Bouffier told SPIEGEL.
Will Ireland Be Bailed Out? [View article]
Analysts say Ireland’s insistence that it can go it alone belies the dependence of Irish banks on wholesale funding from the European Central Bank. Data released Friday showed Irish bank funding from the ECB rose to more than €130 billion as of Oct. 29, up from €119.1 billion at the end of September.
Ireland-based banks accounted for just under 25% of total outstanding euro-system operations at the end of October. “The data clearly show the extent to which increasing concerns over Ireland is impacting banks’ funding,” said Nick Matthews, European economist at Royal Bank of Scotland, in a research note.
If the ECB limits the amount it lends to commercial banks next year, as expected, Irish institutions may struggle to repay maturing debts, said Ben May, European economist at Capital Economics. If the government was forced to cover the resulting shortfall, its cash balances would be depleted long before summer, he said
Renminbi Going Down, Eurozone Borrowing Requirements Going Up [View article]
Anyway, if all things are great why would Merkels's proposal that investors share in soveriegn defaults undermine the euro and investor confidence when all things are looking up.
It seems inherently inconsistent and raises the posibility we are trying to put a pretty face on something somewhat ugly.
Renminbi Going Down, Eurozone Borrowing Requirements Going Up [View article]
After reading the three pieces I was struck by the fact these developments have much in common: incompetent, deceitful and corrupt leadership.
Each time I read the Jobs release I am reminded of manure and this time was no different. How can we keep creating jobs while employment remains at the level it was in 2000?
Propaganda, lies and canards have been used by politicians for decades to placate the masses so that they can remain in power. This time is no different and even though the party in power took an ass kicking in the mid-term elections they are looking forward to 2012 and doing everything in their power to create an illusory recovery supported by lies swallowed by MSM and regurgitated as news.
The Chinese yuan is probably overvalued but it is not the principle reason for our ongoing trade imbalances. When a country persistently runs massive budget deficits it is more than likely spending more than it produces and this incremental demand must be satisfied through additional imports. And it becomes more complicated when we take into account expansion of debt as this introduces further demand and purchasing power without necessarily increasing production.
I don't know who knows what but I have a very low estimate of Geithners capacity to grasp complex issues and pointing our finger and blaming China for our hollowed out and unbalanced economy is simply a political expediency. We have allowed and encouraged unsustainable policies but do not wish to either acknowledge this or change our course. Just blame China; It's always easier to blame others for difficult problems that must be addressed from within.
Similarly, Ireland is having a difficult time reducing its deficits and will more than likely have to draw upon the European Stabilization Fund but is telling the world that it is solvent and that it will be able to make the necessary budget adjustments. Meanwhile, the IMF, ECB and the EU are all releasing panicky and conflicting statements with some pressuring Ireland to take cash as uncertainties in Ireland are roiling much of the euro area. The truth, of course, is Ireland is insolvent but does not want to be systematized for drawing upon the fund and limiting its access to fund unsustainable policies.
The height of this folly was seen most recently in the G20 meeting when Angela Merkel suggested after the Stabilization Fund expires it be replaced with a permanent mechanism (yet to be defined) with provisions for investors to take losses in the event of sovereign default, hoping to shield the German public from bailing out corrupt and bankrupt sovereigns.
Bloomberg recently reported Cowen as saying Merkel’s proposal to involve debt restructuring with losses for private holders of sovereign bonds hasn’t “been helpful". You cannot make this stuff up; the world is a global comedy show.
Ireland in Decline, Or, What Austerity Looks Like [View article]
And all of this spending led Roosevelt's Treasury Secretary, Henry Morgenthau, in 1939 to describe things thusly:
"We have tried spending money. We are spending more than we have ever spent before and it does not work. ...We have never made good on our promises... I say after eight years of this Administration we have just as much unemployment as when we started... And an enormous debt to boot."
Both Hoover and Roosevelt, however, share the dubious distinction of increasing taxes in a stressed economic environment; in 1932 Hoover raised the top rate from 25% to 63% and Roosevelt, not wanting to be outdone, increased the top personal income tax rate to 79% in 1936.
Obama, not being able to differentiate between investment and consumption and not wanting to waste a crisis and shuffle about resources to favored constituences, will surely persist with policies of wasteful spending and then join Hoover and Roosevelt and increase taxes. And to add insult to injury, he and his crack economic team will do this with the benefit of hindsight.
Ireland in Decline, Or, What Austerity Looks Like [View article]
The timing of your article is a bit unfortunate as it follows a report that Ireland's economy grew at 2.7% rate in 1Q10, undermining most, if not all, of what you press for; Ireland's rate of growth is exactly that of the US' which is suggested to have benefitted from stimulus.
Problems remain in Ireland as the employment level remains unacceptably high but there is nothing to suggest greater public spending will create more jobs unless such spending is directed towards investment. If not, you end up funding consumption with public debt.
And this brings us to the crux of the matter: as long as Ireland wishes to remain with the eurozone it must adhere to the provisions of the Maastricht treaty and other agreements.
The Third Depression? [View article]
What is conspicuously missing from public discussion of the economy is the miserable and divided political backdrop against which the economy is functioning and reported to be recovering. As long as households and business view the administration as bent on destroying traditional values and lifestyles and fiscal policy as a predatory tool to channel resources to special interests, confidence will remain low and spending constrained; politics and economics are inextricably linked.
What Krugman and others fail to grasp is that most people loath the dystopian ideals embraced by the current administration and a $trillion here or there will not change this mindset and produce a durable economic recovery built upon faith in the future. And beyond this huge disconncet there remain structural issues as noted by an unnamed author at the Von Mises Institute.
The current economic disaster is the result of the combination of negligence, hubris, and wrong economic theory. For decades, an economic and monetary policy has been practiced based on the illusion of, "It doesn't matter." At first it was, "Deficits don't matter." From that, the policy of "it doesn't matter" got extended to money creation, the credit expansion, the stock-market bubble, and the housing boom. Now, we're being told that buying financial junk by the central bank to beef up banks and brokerages also doesn't matter.
The current financial crisis is not of a cyclical nature. The financial turmoil is the symptom of the structural imbalances in the real economy. Over decades, expansive monetary policy has gone hand in hand with implicit and explicit bailout guarantees, and this has distorted the process of capital allocation. Under such perverted conditions, those investors will win most who cast away the restraints of prudence. It is a game that can go on for a long time — up to the point when the irrationality has become systemic.
The simple fact is that the US economy is burdened with a highly lopsided capital structure as the consequence of a wide discrepancy between consumption and production, which, in turn, is the result of monetary policy. Persistent trade imbalances are the symptoms of this discrepancy. This means for the US economy that lower interest rates and government incentives aimed at boosting consumption work as pure poison. Instead of more consumption, more savings, less consumption and fewer imports are needed.
The current financial crisis reflects that many debtors have reached their debt limit and that creditors are lowering that limit. From now on, business and consumers, governments and investors must work under the restraints of lowered debt ceilings.
Why Ireland Is No Different From Other PIIGS [View article]
This means Ireland is better positioned to exploit the devalued euro but to accomplish this there will a need for further internal devaluation through wages cuts, aggravating fiscal austerity. It's a high wire act.
Compared to U.S. Bailout, Euro Bailout Is Nothing [View article]
The PIIGS Problem: Maginot Line Economics [View article]
And I understand the thrust of your thinking, which is to reflate the EU, but let me ask when do we deal with the underlying problems which created the crisis In Greece?
1) Extended involvement of the state within the economy
2) Borrowing to fund spending
3) Falling productivity and rising wages, leading to diminished competitiveness
4) Unsustainably generous social benefits, wages and retirement plans
5) Tax avoidance
6) Corruption
Galbraith, Stiglitz, Soros on Resisting the Inevitability of the Greek Debt Crisis [View article]
They believe themselves to be cerebrally gifted and know what direction society and economics should move; the challenge is develping and IMPOSING policies to move us towards this dystopian destination. It's like central planning without titles hinting of commissar.
Without watching the video, I suspect the collective view of INET is that Greece is a hapless victim; needs financial assistance with low interest rates; budget cuts should not be too draconian as this would be deflationary; and we do not want to occasion civil unrest.
The fact that Stiglitz suggests it is Germany which is the free rider here – that Spain and Greece would have seen their exchange rates adjust without the euro such that the build up of external imbalances would never have reached this scale - conveniently overlooks that the fact deadbeat Greece has been able to borrow on the back of the euro' strength.
I would like to better understand the downside to simply imposing conditions upon Greece designed to force their exit from the EU, which is what I believe Germany would like to see. There might be embarrassment; the euro might fall; Brussels would have one less country to oversee and there could possible be staff cuts; and Greece would default on some of its debt. But, as I have said before, I believe Germany would prefer to help its banks rather continually funding an ongoing trainwreck.
Eurozone Unworkable in Present State [View article]
Free from rising interest rates and currency fluctuations, there’s too much incentive to run up big deficits; there’s no feedback loop until there is a crisis. It can easily be argued that the situation in Greece would not be as bad had it not joined the euro zone as its ability to access debt markets would have been curtailed earlier.
Southern European countries are trapped in an overvalued currency and suffocated by low competitiveness; even if governments could institute durable reform and slash their fiscal deficits, the lack of competitiveness within the euro zone would needs years of relative deflation. The only way out is some form of debt forgiveness.
And unlike Japan or the US, Europe has an unfortunate tendency towards civil unrest when subjected to extreme economic pain or sacrifice. Reforms will prove short lived and any help given to Greece or others, simply prolongs the break-up of the euro zone.
Germany Breaks Stability and Growth Pact Terms [View article]
Rather than questioning many of the original premises of the EU, Herman Van Rompuy (President of the EU) believes further concentration of fiscal authority within the EU bureaucracy is the obvious answer. This would be accompanied by loss of sovereign power while increasing the power of the bureaucrats in Brussels.
What a great idea.