Comments on: Pick your side. Pick your history.

Pick your side. Pick your history.

vidur — Mon, 13 Aug 2012 19:42:37 -0800

"Some date the crisis to August 9 2007, the day it became clear that Europe's banks were up to their necks in US housing debt. The ECB flooded markets with €95bn of liquidity. It seemed a lot of money then. The term "trillion" was still banned by the Telegraph style book in those innocent days. We have since learned to swing with the modern dance music from central banks." [Five years on, the Great Recession is turning into a life sentence]

By: humanfont

humanfont — Mon, 13 Aug 2012 19:50:41 -0800

If most everyone has finally given up, things are probably going to start to get better.

By: maxwelton

maxwelton — Mon, 13 Aug 2012 20:18:32 -0800

Has anyone lit the Gold Bug signal? This seems like a fairly astute summary of the current situation, but would love for Mutant to weigh in with his thoughts.

By: jaduncan

jaduncan — Mon, 13 Aug 2012 20:20:03 -0800

If most everyone has finally given up, things are probably going to start to get better. No, we're still on course for a very high risk of Greek, Italian or Spanish Euro exit. Nobody has enough money to bail out Italy or Spain if things go too wrong, and if there's a default in one of those two it's full cats sleeping with dogs financial armageddon. There's a long process of de-leveraging going on, and it isn't finished yet. The resultant pain *certainly* isn't finished yet.

By: Jimbob

Jimbob — Mon, 13 Aug 2012 20:25:25 -0800

If most everyone has finally given up, things are probably going to start to get better. I find it hilarious that the pre-2008 wisdom that no financial crisis of this magnitude could ever occur in Europe / US is now being applied to China...

By: Talez

Talez — Mon, 13 Aug 2012 20:25:58 -0800

would love for Mutant to weigh in with his thoughts.

You should be adding this to your RSS reader seeing as it's Mutant's blog.

By: unSane

unSane — Mon, 13 Aug 2012 20:27:43 -0800

As the article points out, it's not over untiil either defaults or inflation happen. There is no other way out. That's why gold is up, in anticipation. Junior mining stocks FTW, if you have the balls.

By: allen.spaulding

allen.spaulding — Mon, 13 Aug 2012 20:28:10 -0800

The author believes that the Oklahoma City Bombing was an FBI sting and that Clinton's killed Vince Foster for some reason. So yeah, maybe that's an ad hominem attack and we should treat all texts with equal validity or maybe the guy with tin foil viking helmet and the Lyndon LaRouche face tattoos may not be the most likely to understand complex things.

By: unSane

unSane — Mon, 13 Aug 2012 20:51:23 -0800

Or he may be reliable in some areas and not in others.

By: JackFlash

JackFlash — Mon, 13 Aug 2012 21:11:59 -0800

And therefore not worth my time figuring out which is which.

By: unSane

unSane — Mon, 13 Aug 2012 21:12:52 -0800

A quick perusal of his op-eds for the Telegraph suggests that he knows his onions when it comes the the Eurozone.

By: kernel_sander

kernel_sander — Mon, 13 Aug 2012 21:29:06 -0800

I've been reading Evans-Pritchard's Euro-economics pieces for a few years now and I've found him to seem fairly prudent after-the-fact. It's also possible he's just a pessimist and this is a good time for pessimistic prognostication, but I tend to cautiously trust him. Especially since, as an American, I have trouble finding reliable writers about eurozone economics (i like fistfulofeuros, but cant help but find them naive about the breakup-or-full-fiscal-union odds).

By: allen.spaulding

allen.spaulding — Mon, 13 Aug 2012 21:30:35 -0800

A quick perusal of his op-eds for the Telegraph suggests that he knows his onions when it comes the the Eurozone. A quick perusal of this one seems like he's in thrall to stringing together random thoughts on the subject and hoping it hangs together. Like this: Western central banks -- in thrall to inflation-targeting -- cut short-term interest rates ever lower. They set the price of credit too low, forcing pension funds and insurers to hunt frantically for yield to match their books. That's a bizarre read of the 2000s and I'm being nice. It's spoken authoritatively, but it's not really reflective of reality. That's not why interest rates were cut in 2008. It also sounds vaguely conspiratorial - and ungrounded - like the author's totally crazy nonsense he's never disowned. The whole article seems this way. I'd trust a flat-earther over this guy.

By: H. Roark

H. Roark — Mon, 13 Aug 2012 21:32:27 -0800

Pritchard is supposed to be some kind of authority on the EU? okay. This guy has been 'the glass is completely empty' forever.

By: unSane

unSane — Mon, 13 Aug 2012 21:37:48 -0800

Pritchard is supposed to be some kind of authority on the EU? okay. This guy has been 'the glass is completely empty' forever. There is a possibility that the glass is completely empty.

By: Malor

Malor — Mon, 13 Aug 2012 21:41:52 -0800

He's on the right track, but what he's missing is that government spending is completely disjoint from the ability of the economies underneath those governments to support it. Just printing money doesn't fix the problem. You can't inflate away your debts when you're running the kind of deficits we're running. When you are a perpetual borrower, trying to inflate out of your past borrowings eventually leads to hyperinflation. And the destruction in a hyperinflation is epic -- if it's sufficiently severe, the entire economy can be wiped out. This is why I've been arguing for years that we need to just take our lumps and let the system deflate. Money printing is what got us in this problem in the first place. We didn't have 'a savings glut', we had a money glut. Every time we've had an economic problem over about the last twenty years, the Federal Reserve has stepped in and aggressively made damn sure we didn't fix it, and they did it by flooding the world with dollars. We didn't really have an excess of wealth we didn't know what to do with -- we had an excess of wealth tokens, of claims on wealth. Issuing all those extra tokens hid the pain, but the pain was sending an important message that we were doing bad stuff, and needed to stop. By suppressing those messages, we made, and continue to make, the underlying problems worse. We will not be able to avoid any pain by printing money. All we can do is defer them, and make them more severe. The more printing we do, the problems become. The economy is shifting to serve the people who print money (Wall Street) instead of the people who create wealth (Main Street). All that supposed 'growth' is fake, false prosperity built on illusion, and much or all of it will have to be unwound, once the Ponzi scheme can't be supported any longer. Liquidity injection, in the environment we're in now, is treating an addiction problem by taking more drugs. Hey, we feel better, it's got to be the right solution!

By: Malor

Malor — Mon, 13 Aug 2012 21:46:06 -0800

Western central banks -- in thrall to inflation-targeting -- cut short-term interest rates ever lower. They set the price of credit too low, forcing pension funds and insurers to hunt frantically for yield to match their books. That's a bizarre read of the 2000s and I'm being nice. It's spoken authoritatively, but it's not really reflective of reality. What on earth are you talking about? Rates all through the 2000s were crazy low by historic standards. How do you think the housing bubble got so enormous? The Fed cut rates to an insane degree to buoy the economy, and the ridiculously cheap rates set off the borrow/buy/borrow more/buy more bubble that the housing market turned into. And now? They've been at zero for, what, three years now? Four? This is insane behavior. We are so wildly out of adjustment that we can't make money any cheaper, all we can do is create it against poorer and poorer collateral.

By: Damienmce

Damienmce — Mon, 13 Aug 2012 21:47:03 -0800

I suspect everything is going to be fine and the markets will soon soar SOAR like an eagle. Mainly because during the boom everyone said everything would be great forever that it wouldn't crash and if it did it would be a soft landing. And none of this happened. Now everyone is saying we're doomed DOOMED. For often perceptive Eurozone stuff I quite like David McWilliams. Although he can be annoying he is a engaging speaker.

By: unSane

unSane — Mon, 13 Aug 2012 21:51:24 -0800

We will not be able to avoid any pain by printing money. No, but deflation isn't the solution as it doesn't get rid of the debt -- in fact it exacerbates it. There are only two solutions to the debt -- default or inflation (which erodes the debt). They amount to the same thing in the end, since default drives up borrowing costs and leads to inflation, and inflation erodes the ability to borrow, and causes default. It comes down to the question as to whether we (or rather the US and the EU) will honor the debts of the past or pass on the costs of them to those who benefited (mostly China and the far east). The current crisis is a consequence of continually deferring pain. Someone, somewhere, has to take the pain eventually. On the current tack, it's Joe Blow and he'll be taking it up the ass for another decade or so.

By: allen.spaulding

allen.spaulding — Mon, 13 Aug 2012 21:51:40 -0800

And now? They've been at zero for, what, three years now? Four? This is insane behavior. We are so wildly out of adjustment that we can't make money any cheaper, all we can do is create it against poorer and poorer collateral. Re-read that section. They were insanely low and got lower, but not due to inflation targeting. It was a desperate attempt to prop up an economy, not due to fears of inflation. And the idea that the main result was that institutional investors searched for better yields? Sure, there were knock-on effects, but the main result of cheap money was that we kept pumping up a housing bubble where properties were turned into hot potatoes that kept getting flipped and inflated and subsidized all the way - while we were writing more and more paper on top of it.

By: unSane

unSane — Mon, 13 Aug 2012 21:53:44 -0800

the main result of cheap money was that we kept pumping up a housing bubble where properties were turned into hot potatoes that kept getting flipped and inflated and subsidized all the way Not after 2008.

By: unSane

unSane — Mon, 13 Aug 2012 21:55:28 -0800

There are only two solutions to the debt -- default or inflation (which erodes the debt). Well, obviously there's a third, which is PAY THE FUCKER OFF, but I suspect we're beyond that politically.

By: Ivan Fyodorovich

Ivan Fyodorovich — Mon, 13 Aug 2012 21:56:43 -0800

He gets some things right and is confused about others. The bigger problem is that he's basically making a weird version of the morally bankrupt structuralist argument for inaction. That is to say, he's telling us that there's all these endemic problems that all work together and that preventing or correcting any one of them wouldn't help and therefore unless we could correct all of them (which of course we can't) then the only thing we can do is what for it all to work itself out on its own. Which is total bullshit and also repugnant. The fact is that while all these things are interconnected and solving one of them wouldn't have prevented the others, the sum total of the clusterfuck we have would be much less than it is were any one of those various factors not present. And some of those things are past events which we can't change, but others are ongoing or future events which we can change. Put another way, since we're concentrating on what he has to say about the Eurozone (and he's pretty much right on that topic, as far as I can tell), in the long run the systemic problems that created the crisis today must be corrected for this crisis not to happen again, or continue at a persistent low-level. That is to say, for a common currency to work, you need fiscal integration (Euro-wide control of spending) or roughly equivalent balance-of-trade. That is, all regions can't be net exporters to each other, like Germany is, which isn't logically possible. They can't all be net importers from each other, either, which also isn't logically possible. If there's not fiscal integration that can act as an offset for trade-imbalances, then all the regions have to roughly be in trade-balance with each other. Which would be great, really, but there's no way to get to this outcome by fiat, and so it's no more likely in the near future than is fiscal integration. Which means that the systemic problems with the Euro aren't going to go away anytime soon. What this means is that there's kicking the can down the road and then there's kicking the can down the road. Kicking it down the road is the only "solution" now which avoids a breakup (or partial breakup into a northern nucleus rump Euro) but you can just give it a kick as if you're actually doing something but not really doing something, hoping that that appearance of activity will temporarily stave off disaster, or you can do something substantial which really will stave off disaster for, say, a few years while you plod ahead trying to accomplish those much more difficult systemic reforms that are so politically unlikely. Can you guess what the Europeans have done so far? All this applies to the global problems this writer discusses, as well. They are all real problems and need long-term global solutions. They can't be solved now. But some things can be solved now and, most importantly, many of those things affect real people's real lives right this very minute. Keynes famously said that in the long run we're all dead and this was exactly the context in which he wrote that. To whatever degree to which a depression represents long-term systemic problems, yes, those problems should be addressed. But in the long-term, we're all dead. What matters most to us is solving the problem that affect us while we're alive, those of us now who are unemployed and hungry, and not putting out the fire in front of you because of long-term worries is just as foolish in its own way as is not saving for the winter. It's certainly a piss-poor excuse for what is often either simple laziness or an indifference to the suffering of others.

By: unSane

unSane — Mon, 13 Aug 2012 22:04:51 -0800

What matters most to us is solving the problem that affect us while we're alive, those of us now who are unemployed and hungry, and not putting out the fire in front of you because of long-term worries is just as foolish in its own way as is not saving for the winter. But this really does just kick the can down the road. The 'much more difficult systemic reforms that are so politically unlikely' will never happen. To act as if they will is madness, and coninues the current transfer of wealth to the banksters.

By: Ivan Fyodorovich

Ivan Fyodorovich — Mon, 13 Aug 2012 22:10:27 -0800

Malor wrote: "He's on the right track, but what he's missing is that government spending is completely disjoint from the ability of the economies underneath those governments to support it. Just printing money doesn't fix the problem. You can't inflate away your debts when you're running the kind of deficits we're running. When you are a perpetual borrower, trying to inflate out of your past borrowings eventually leads to hyperinflation. And the destruction in a hyperinflation is epic -- if it's sufficiently severe, the entire economy can be wiped out." Here's one simple example for you can just ignore whatever Malor and those like him write on this topic: Spain. Malor would have you believe that the underlying problem that has caused this mess is "government spending". Except that there's a very poor correlation between deficit/debt and who has suffered the worst of this recession and who has recovered from it the most quickly. Spain was running a budget surplus while Germany was running a deficit, and its debt as a percent of GDP was lower than the UKs'. And yet Spain is in deep trouble. Also: if someone uses the word "hyperinflation" in the context of this discussion, you can also safely ignore them as cranks. Many, many people who are like-minded with Malor predicted three years ago that by today the US would be suffering from "hyperinflation" and I'd be willing to bet, as he just told us that he's been preaching this message for a long while, that in his comment history you will find him making exactly such a prediction that have subsequently not only been proven false, but laughably false. The hard money people have confidently made a cluster of predictions on the basis of their moral certainty about how money and economics works, and they've been proven wrong. Ignore them.

By: Damienmce

Damienmce — Mon, 13 Aug 2012 22:12:55 -0800

Balance sheet recession. Debt for equity swap for PIGS bank bonds held by German banks. Job done.

By: Ivan Fyodorovich

Ivan Fyodorovich — Mon, 13 Aug 2012 22:17:50 -0800

"To act as if they will is madness, and coninues the current transfer of wealth to the banksters." You are thinking about something different than what I wrote. I'm not even sure how to answer your comment because this is only peripherally about "the banksters". And, specifically, in the case of the Euro, the effective short-term solutions are pretty much the opposite of what the banksters prefer.

By: T.D. Strange

T.D. Strange — Mon, 13 Aug 2012 22:20:27 -0800

Debt for equity swap for PIGS bank bonds held by German banks. Equity in Spain, Italy and Greece?

By: unSane

unSane — Mon, 13 Aug 2012 22:21:15 -0800

Many, many people who are like-minded with Malor predicted three years ago that by today the US would be suffering from "hyperinflation" and I'd be willing to bet, as he just told us that he's been preaching this message for a long while, that in his comment history you will find him making exactly such a prediction that have subsequently not only been proven false, but laughably false. The hard money people have confidently made a cluster of predictions on the basis of their moral certainty about how money and economics works, and they've been proven wrong. This is absolutely true. But is also true that in economics, what you expect to happen always happens, just not when you're expecting it. There are only three ways out of the current crisis -- inflation, default or growth. Growth is currently only possible if it'sf fuelled by printing money, which leads to inflation. Default is infeasible in countries with a sovereign currency, since they can always print money in the denomination of the debt. And that leaves...? It hasn't happened yet. Doesn't mean it won't happen. Own real things.

By: jaduncan

jaduncan — Mon, 13 Aug 2012 22:42:00 -0800

Spain was running a budget surplus while Germany was running a deficit, and its debt as a percent of GDP was lower than the UKs'. And yet Spain is in deep trouble. In fairness, given that a lot of that surplus was predicated on property taxes and the construction sector that provided a glut of both residential property and hotel rooms it's hard to see that it would ever have been that sustainable. The Spanish property collapse was very predictable given the degree of leveraging going on and the "this time it's different" assumption of continued growth for more and more property at high prices. It's not impressive to have a surplus at the top end of the Keynesian cycle combined with terrible economic fundamentals and an economic dependence on a continuing housing boom; tulip traders had rather impressive amounts of money too until they didn't. Once the banks hit trouble, they had to choose between letting their financial system suffer extreme damage or paying off the risk on the state level.

By: the man of twists and turns

the man of twists and turns — Mon, 13 Aug 2012 22:52:06 -0800

What Happened to Europe? : Democracy and the decisions of bankers.

By: stbalbach

stbalbach — Mon, 13 Aug 2012 22:59:01 -0800

There are only three ways out of the current crisis -- inflation, default or growth. What about some deflation without default. Or inflation without hyperinflation. Or some combo of these in an up and down sideways muddle through it sort of way until real growth finally catches up. Does everything have to be an end of the world cathartic cleansing by violence sort of prediction? Long chronic pain seems the real nightmare we are living. Chronic pain you feel boxed into a corner unable to handle stress every little problem magnified the future seems black.

By: the man of twists and turns

the man of twists and turns — Mon, 13 Aug 2012 23:12:19 -0800

We could always try stagflation. Everything old is new again.

By: GeorgeBickham

GeorgeBickham — Mon, 13 Aug 2012 23:14:16 -0800

Ambrose Evans-Pritchard's transformation from a proto-Tea Party conspiracy theorist into a sober economic analyst seems as symptomatic of recent history as does other kinds of credit bubble.

By: Skeptic

Skeptic — Mon, 13 Aug 2012 23:15:49 -0800

Trusting Evans-Pritchard's opinion on Europe is like trusting Hannibal Lecter's opinion on veganism.

By: wierdo

wierdo — Mon, 13 Aug 2012 23:27:45 -0800

jaduncan: "It's not impressive to have a surplus at the top end of the Keynesian cycle combined with terrible economic fundamentals and an economic dependence on a continuing housing boom;" Impressive is your word. Ivan Fyodorvich merely stated they were in a better position than other countries who are now pointed to as paragons of fiscal respectability. I have a podcast for you. Just be sure to ignore the ideological tripe about fiscal stimulus and blah blah blah. (maybe I'll write down my thoughts on the delusional thinking of the right sometime that this podcast sparked, but not now) The economic arguments he makes for further action from the Fed, on the other hand, are solid.

By: wierdo

wierdo — Mon, 13 Aug 2012 23:29:45 -0800

Oh, and I missed something: stbalbach, how exactly do you plan on deflating the currency without triggering another wave of defaults? Perhaps you've gotten used to it as the new normal, but you might note that default rates are still sky high. The last thing we need to do is turn a liquidity problem into a structural one.

By: KokuRyu

KokuRyu — Mon, 13 Aug 2012 23:46:28 -0800

Funny that no one has mentioned that it's no surprise that the Telegraph has printed an anti-Europe column.

By: panaceanot

panaceanot — Mon, 13 Aug 2012 23:49:34 -0800

would love for Mutant to weigh in with his thoughts. You should be adding this to your RSS reader seeing as it's Mutant's blog. Eek... Crazy graph overload. I'd prefer he was constrained to text here on metafilter. The word ruminator that I am.

By: the man of twists and turns

the man of twists and turns — Tue, 14 Aug 2012 00:09:09 -0800

Political trouble bubbles in Italy and Spain Reason: German Politician Threatens a Veto on Future Bailouts For Greece

By: jaduncan

jaduncan — Tue, 14 Aug 2012 00:57:16 -0800

Impressive is your word. Ivan Fyodorvich merely stated they were in a better position than other countries who are now pointed to as paragons of fiscal respectability. I think you're thinking that I disagree more than I do; I'm just pointing out that was largely because Spain wasn't paying the price to deal with large and systemic risk in the banking and construction sectors. Given that both depended on a property boom, the positive position was largely illusory if Spain had the position that ultimately it would support the domestic banking sector.

By: jaduncan

jaduncan — Tue, 14 Aug 2012 01:02:28 -0800

And yes, the Euro fundamentally doesn't work because the German and French companies can outcompete the perhipery. Considering there's a free market without the possibility for currencies to float or the compensating flows of government money under fiscal union, that's hugely problematic. Germany's allegedly great fiscal position and the periphery's structural requirement to take on debt cannot be easily separated. It has a great fiscal position that is contingent on the same European export markets that it is destroying.

By: maxwelton

maxwelton — Tue, 14 Aug 2012 01:28:02 -0800

During a time of prosperity, lots of people have money, spend it, borrow against the future value of it. Then rentiers move in, take most of the money, and the economy goes into a tailspin. The thing is, the money isn't gone, it's just been removed from the many to the few. And then the solution inevitably these days is to let the rentiers keep the money, and force everyone else to suffer. Why do we not take back a fraction of the often obscene profits from the rentiers? Obviously this is a gross simplification, but the solution is always to try and squeeze the last drop from those with nothing, rather than taking a small amount from those who have everything.

By: Skeptic

Skeptic — Tue, 14 Aug 2012 01:47:13 -0800

And yes, the Euro fundamentally doesn't work because the German and French companies can outcompete the perhipery. But, why? The Greeks, Italian, Spanish, Irish, etc. aren't fundamentally more stupid or less hard-working than the Germans and French. Lack of competitiveness didn't drive the bubbles in Spain and Ireland. On the contrary, it was the bubbles that drove the loss of competitiveness. Spain and Ireland were quite competitive until about a decade ago. Germany outsourced a lot of its manufacturing to those two countries at the time. But the property bubble sucked up all the available capital and even human resources that were needed to remain competitive in other fields. Nobody invested in industry, which offered "paltry" returns of 5-10%, when the real estate market offered returns of 15-20%. Likewise, many schoolkids dropped out at 16 to start working as builders, rather than complete their education to work in badly paid jobs in other sectors. The result was a huge diversion of capital and human resources from productive economic sectors to purely speculative ones. Spain and Ireland, at least, were hit with a "resource course", the "Dutch disease", without having any actual resources. The good thing is that, as Holland comprehensively showed, the "Dutch disease" can be cured. Considering there's a free market without the possibility for currencies to float or the compensating flows of government money under fiscal union, that's hugely problematic. People keep pointing at this, without bothering to consider two things: First, the crises in Spain and Ireland, on one hand, and in Italy, Portugal and Greece, on the other, are rather different. Spain and Ireland were driven to the rocks by reckless private spending and credit, following the Anglo-American model, whereas Portugal, Greece and Italy's problem is a lumbering public sector. Secondly, the situation in Spain and Ireland isn't at all unlike that in Britain, which is outside the eurozone. British politicians keep blaming the "euro crisis" as the reason for their own economic problems, but, side-by-side, their numbers aren't all that different (in some aspects, they are even worse) than those of Spain and Ireland. Despite all of the Bank of England's quantitative easing, and sterling's "floatability", Britain's growth figures are just as dismal as those of Ireland and Spain, and this although the British property bubble remains basically un-popped. Spain has much higher unemployment figures, but Spain's job market has long been a rather curious (and sick) beast. When reading British comment on the eurozone, especially from conservative sources such as the Telegraph, one can never avoid the impression that there's a transparent attempt to divert outsiders from Britain's own economic troubles.

By: Skeptic

Skeptic — Tue, 14 Aug 2012 02:08:25 -0800

In fairness, given that a lot of that surplus was predicated on property taxes and the construction sector that provided a glut of both residential property and hotel rooms it's hard to see that it would ever have been that sustainable. Actually, the surplus wasn't all that based on property taxes, which are relatively low in Spain (arguably, high property taxes would have prevented such a ridiculous property bubble). Local authorities are very dependent on property taxes, but the central government far less so. And as mortgage payments were tax-deductible, the property bubble also funneled money out of the public treasury. What has nuked the surplus and turned it into a deficit is that the general slump has decimated all tax income, while driving up expenses (all those unemployment benefits). But even so, Spain's public sector deficit isn't all that high compared to other countries, and its public debt remains lower than that of Germany. What is scaring investors away is the state of finances in Spain's banking sector, and the prospect that the public treasury will be ultimately saddled up with its banks' bad debts, as in Ireland. The Spanish property collapse was very predictable given the degree of leveraging going on and the "this time it's different" assumption of continued growth for more and more property at high prices. Oh, I kept predicting it, and shaking my head at the foolishness of it for a decade. Arguably, Spain's government could have saved up even more, but I don't think that would have helped much. Instead, the government should have worked harder to pop the property bubble before it reached its preposterous size, for instance by ending the tax-deductibility of mortgage payments and taking away the local authorities' incentives to propel property prices ever upwards. It wasn't done because there were too many vested interests involved, not least the parties' and politicians' own finances.

By: jaduncan

jaduncan — Tue, 14 Aug 2012 02:17:36 -0800

Actually, the surplus wasn't all that based on property taxes, which are relatively low in Spain (arguably, high property taxes would have prevented such a ridiculous property bubble). Local authorities are very dependent on property taxes, but the central government far less so. ...which is the next bailout requirement for the Spanish state: the regions are already queuing up. Structural dependencies on a continued boom. I don't think one can easily separate that out from the central state though. It's not like Madrid can just let Valencia or Andalusia default. Instead, the government should have worked harder to pop the property bubble before it reached its preposterous size, for instance by ending the tax-deductibility of mortgage payments and taking away the local authorities' incentives to propel property prices ever upwards. It wasn't done because there were too many vested interests involved, not least the parties' and politicians' own finances. And scrolling down, we fundamentally agree. I prepared a position paper on the similarities of the Irish and Spanish property crashes to the UK. I can't post it on the web for confidentiality reasons, but it pretty much pointed to the same trend lines that the UK saw in the 80s and tsked at the political power of financial services and the intertwining of mutual interest with local elites. So, yeah. Plus ca change, eh?

By: jaduncan

jaduncan — Tue, 14 Aug 2012 02:18:51 -0800

I also apologise if the above is somewhat incoherent, I've been up for 36 hours working on a completely different position paper. *sighs*

By: Skeptic

Skeptic — Tue, 14 Aug 2012 02:41:54 -0800

...which is the next bailout requirement for the Spanish state: the regions are already queuing up. Local authorities != regional governments. Spanish local authorities are largely self-financed through property taxes, but they have relatively few competences. During the boom times, many of them splurged in vanity projects, and are now broke, but their impact is limited. Spanish regional governments, on the other hand, are the opposite. They are in charge of most social services (including, quite preposterously, education and the health service), but they don't collect many taxes themselves (except for the Basque Country and Navarre, which have special fiscal compacts linked to feudal privileges going back centuries). Instead, they get their money from the national treasury after some protracted haggling. Their fiscal troubles are thus not directly linked to the decline in income from property taxes, but to the decline of all tax income (plus, in some cases such as Valencia, some pretty irresponsible spending as well).

By: nixerman

nixerman — Tue, 14 Aug 2012 02:54:09 -0800

You can't inflate away your debts when you're running the kind of deficits we're running. When you are a perpetual borrower, trying to inflate out of your past borrowings eventually leads to hyperinflation. It's somewhat amazing that people are still going on about hyperinflation. At what point does this bogeyman die? Or, will we still have to listen to this nonsense in another five years? And while it's interesting to see somebody like the author recognize inequality as a driving force the whole story is a bit too neat and a great deal is allowed to slip through the cracks. Absolutely nothing is said of how historically low taxes, financialization and deregulation are powerful enablers of the asset bubbles and rampant debt creation. Indeed it is arguable whether the entire crisis could've been averted had the governments of the West not succumbed to neoliberalism and effectively abandoned government-sponsored investment in the economy. The key question might be to ask why the "excess savings" were all directed into building houses nobody would ever need rather than real investment in infrastructure, wages, and innovation. Ultimately growth demands growth. Investment yields surplus profits that require more investment. But what is to be done when enormous surpluses have accumulated and they simply cannot (or, via corruption, deliberately will not) be directed towards proper new sound investments? Capitalism fails then, strangely enough, because it runs out of options, out of choices, out of imagination; a profound lack of competition for capital inevitably leads to tremendous malinvestment and then, ultimately, to real demand destruction. The market, which is supposedly the producer of choices par excellence, always fails to produce enough choice. And we are surrounded by market failures. In education, healthcare, politics, and even in in the day-to-day reality of living there are billions of people who are not happy, who are underserved, who are desperate and full of all sorts of demands, hopes and dreams. But this demand cannot or will not be capitalized and investors would rather pile in to CDOs and manufacture false demand -- ie inflate bubbles -- than try to address all the sincere demand and deprivation around them. Why is this? Ultimately it's clear that what plagues the economy isn't really the zero-bound or trade imbalances. On a deeper level it seems a profound lack of imagination combined with a severe ideological rigidity and a deeply fascist, overwhelming homogeneity has now made growth impossible. The crisis then, as Deridda understood, is that the future has disappeared. This is an awful turn of events and one can only hope that, in the presence of no future, such lacking articles are the worst of what's to come.

By: sfenders

sfenders — Tue, 14 Aug 2012 04:26:58 -0800

Well, obviously there's a third, which is PAY THE FUCKER OFF, but I suspect we're beyond that politically. That's generally what's happening in the US. Some large fraction of the continuing fall in household debt is from defaults, but iirc a larger part is from just gradually paying it off. It's keeping economic growth down, and I imagine it will continue for a long time, but it doesn't necessarily mean some kind of catastrophe. Just more of the same, for a while. It might make the next recession worse than it would otherwise be, but I don't think that's due for a while because of some very depressed industries bouncing back a bit, keeping things slightly positive for now. Europe, I dunno if they can generally manage that sort of outcome. Seems to me that sovereign debt is harder to manage than is household or corporate debt, due to politics. So many commentators seem certain of what will happen there, I don't trust any of them.

By: Skeptic

Skeptic — Tue, 14 Aug 2012 05:04:11 -0800

Indeed it is arguable whether the entire crisis could've been averted had the governments of the West not succumbed to neoliberalism and effectively abandoned government-sponsored investment in the economy. The key question might be to ask why the "excess savings" were all directed into building houses nobody would ever need rather than real investment in infrastructure, wages, and innovation. nixerman, the fact is that the governments of the West (and not just the West, see the current Chinese property bubble), far from abandoning government-sponsored investment in the economy, have been quite actively complicit in directing all that money into real estate speculation. In the US through Freddie and Fannie, in Spain through the cajas, in China through the public banking sector. Both right- and left-wingers like to see the public and the private sector as completely different entities, in order to denigrate one and laud the other. In fact, there are too many intertwined interests to separate them so easily. When government dominates, the politicians quickly become moneymen. When finance dominates, the moneymen quickly become politicians...and viceversa.

By: unSane

unSane — Tue, 14 Aug 2012 05:59:36 -0800

Seems to me that sovereign debt is harder to manage than is household or corporate debt, due to politics. Yes, that's my point. When a government has a choice between enforcing hardship and printing money, it almost always prints money, ie issues debt denominated in its own currency. Historically low interest rates have allowed the US to postpone its financial cliff year after year. The only thing that will provide the political will be a crisis. In my opinion, inflation is almost certain to be the 'solution', since it erodes debt without actually requiring legislators to agree on anything. Whether it's 'hyper' or not, who knows? I remember seeing a graph recently which showed what proportion of the US debt was due to revolve in the next couple of years. It's increased massively because short-term debt is so cheap. But of course that also means that if debt gets more expensive the impact on the US will be rapid and potentially catastrophic. Sovereign governments basically can't go bankrupt because they can always print money to pay their debts. And I think that is what the US will be forced to do at some point. And everyone else will be forced to follow suit to remain competitive. Basically, inflation doesn't happen until it does. That's my belief, anyway.

By: JPD

JPD — Tue, 14 Aug 2012 06:46:06 -0800

Inflation isn't simply about money supply. As long as the economy sucks you can print as much money as you want. The bet becomes your ability to reduce the money supply once you start to approach "normal". I mean, I have a big short treasuries position personally, but that doesn't necessarily mean I think the end result of the massive monetary easing has to be above normal inflation. sovereign debt is harder to manage than is household or corporate debt well no. Private debt can only be managed through fiscal means. Actually the best demonstration of the added difficulty of private debt is the current sovereign crisis because those sovereigns have surrendered their ability to use monetary policy.

By: immlass

immlass — Tue, 14 Aug 2012 07:14:19 -0800

Every time I see something like this, I think of David Hackett Fischer's The Great Wave, which makes no predictions but pretty clearly laid out a case that if the economic trends from the late medieval period forward in western Europe continued then we were/are in for a period of significant economic dislocation.

By: Talez

Talez — Tue, 14 Aug 2012 07:31:49 -0800

Inflation isn't simply about money supply. As long as the economy sucks you can print as much money as you want. The bet becomes your ability to reduce the money supply once you start to approach "normal". This. If the money isn't getting to the people who pay for the goods and services to chase after them (and by all accounts it's not) inflation is going to be completely absent. People don't watch the Fed like a hawk and increase prices in response to quantitive easing.

By: wierdo

wierdo — Tue, 14 Aug 2012 07:47:48 -0800

JPD: "The bet becomes your ability to reduce the money supply once you start to approach "normal"." There are lots of ways to do that. You could raise taxes. You could pay higher interest on reserves to keep the money from circulating. You could do the traditional thing and shrink the central bank's balance sheet. There's no way this Fed is letting inflation take hold. They've been allowing inflation to remain unhealthily close to negative for years now. There's not really any reason to expect that bias to change absent a radical change in the board.

By: sfenders

sfenders — Tue, 14 Aug 2012 07:49:15 -0800

By: unSane

unSane — Tue, 14 Aug 2012 07:50:30 -0800

Yeah, but it's still really an open question as to whether QE is inflationary or not. Most bankers, including Bernanke, will tell you it isn't. It's just swapping short term debt for long term debt. It also differs from conventional monetary policy in that the Fed is taking interest rate risk onto its balance sheet. If interest rates rise that could get messy.

By: Malor

Malor — Tue, 14 Aug 2012 08:58:37 -0800

Many, many people who are like-minded with Malor predicted three years ago that by today the US would be suffering from "hyperinflation" and I'd be willing to bet, as he just told us that he's been preaching this message for a long while, that in his comment history you will find him making exactly such a prediction that have subsequently not only been proven false, but laughably false. This is unfair and unjust. If you actually take the time to read what I've written, what I've said over and over and over again is that we must ultimately have one of two outcomes; a deflationary crash, or a hyperinflationary runaway, but that it will take a number of years for a runaway to happen. A deflationary crash can happen anytime, all it would take is the system realizing that the debts can't be paid back, but hyperinflation is going to take, well.... I was saying a decade in the 2010 timeframe, so let's call it another eight years. If you're not seeing serious inflation, or a deflationary crash, by 2020, then let's reconsider. But remember that you can't define inflation by governments statistics, because they are meaningless. Define inflation for yourself, in terms of the standard of living you can afford on a number of dollars, in your own life. I'm noticing very strong inflation in many of the things I buy. Some of these are attributable to weather, but not most of them. Gasoline comes to mind. It was $1.40 not too long ago.

By: JPD

JPD — Tue, 14 Aug 2012 09:13:42 -0800

Gasoline comes to mind. It was $1.40 not too long ago. Real Gas price inflation over the last 36 years is about 1.1% annually, and that's with the end point being cyclically high and significantly above the marginal cost of production.

By: notyou

notyou — Tue, 14 Aug 2012 09:24:07 -0800

You'd have to go back to 2004 to find gasoline at $1.40 a gallon. Or should we rely on your anecdata instead of government sources?

By: JPD

JPD — Tue, 14 Aug 2012 09:37:45 -0800

Is that directed at me? go to the EIA website. That's where I got my data from. Its a cyclical commodity.

By: doctornemo

doctornemo — Tue, 14 Aug 2012 10:04:02 -0800

This was cute: The ECB flooded markets with €95bn of liquidity. It seemed a lot of money then. The term "trillion" was still banned by the Telegraph style book in those innocent days.

By: notyou

notyou — Tue, 14 Aug 2012 10:23:45 -0800

Should have been clear. That bit of incivility was directed at this:

But remember that you can't define inflation by governments statistics, because they are meaningless. Define inflation for yourself, in terms of the standard of living you can afford on a number of dollars, in your own life. I'm noticing very strong inflation in many of the things I buy. Some of these are attributable to weather, but not most of them.

your logic doesn't make sense. The ERP derives from the riskiness of equities, it has nothing to do with the return on capital.

the man of twists and turns — Thu, 16 Aug 2012 00:31:26 -0800

Reason: Germany, Not Greece, Should Leave The Euro and The Euro Crisis Has Historical Parallels With Past European Crises Naked Capitalism: Spain Out Of Options

By: the man of twists and turns

the man of twists and turns — Fri, 17 Aug 2012 03:51:14 -0800

Capital levies for debt redemption

But all this naysaying does not bring the sovereign debt problems in some Eurozone nations any closer to an end. The crisis rolls on. If it lasts long enough, the problems may drag the Eurozone into a negative spiral of recession and debt that risks exacerbating the crisis and a possibly leading to the collapse of the Eurozone. In the face of these multiple dilemmas, governments should consider imposing one-off capital levies on the rich in order to refinance and bring down national debt