Is the end near?

by on November 25, 2011 at 8:33 am in Current Affairs | Permalink

I am seeing reports of 7.7 on the Italian ten-year bond, over eight percent on the two-year bond, 6.5 percent on the six-month note, and so on.  Here is one account.

Maybe these markets simply will shut down soon.  There is so much talk about what the Germans should do, but I don’t see the viable options.  With Germany’s own credit status now in doubt, eighty percent debt to gdp ratio, massive welfare state, and unfavorable demographics, are they supposed to endorse — going to endorse — ten or fifteen percent price inflation for a few years’ time, all with no guarantee of reforms in the economically weaker countries?  And is that inflation then followed by a subsequent deflation?  Or does it continue forever?  And would Germany have to move to a regime of wage flexibility for the professions too?  How politically feasible is that?  I don’t see how the Germans benefit from going down this road, even if you think, as I do, that the alternatives are quite dire.

Honduras is doing much worse than Portugal, and is a much smaller country.  I don’t see the United States even considering significant aid to Honduras.  If you’re going to play the “who is in a formal political agreement?” card, note that the current EU agreement explicitly specifies that, fiscally speaking, countries are pretty much on their own.

The motto “no monetary union without a fiscal union” isn’t wrong, but more to the point is “no fiscal union without a common electorate.”

I don’t see anybody who has put a successful reform option on the table.  I do see a lot of articles and Op-Eds trying to create a moral equivalence between Germany and the periphery, followed by proposals which ignore the question of what is a sustainable political equilibrium in Germany.  Germany can’t just plop down the money, or turn on the monetary spigot, and get back to where it was.

DW November 25, 2011 at 8:41 am

Unlike with NGDP targeting, the commentariat seems to not be converging on a good idea for Europe (how about the Euro-econoblogosphere? Any good ideas there?).

This probably means policy uncertainty which, ironically enough, could open the door to a true break-up of the Euro.

We’ve all talked ourselves out of its plausibility, so we’re ripe for the surprise.

Emily November 25, 2011 at 9:05 am

I am confident that the euro as currency, will soon disappear. Too many problems in Europe.

Michael G Heller November 25, 2011 at 9:21 am

The surprise will be the Germans are busy 24/7 working on the constitutional blueprint they will trade for money at the precipice and save the euro.

Merkel has the priorities right. If eurozone countries want to keep the eurozone with rather than without Germany, this is how. Intrusive monitoring, and no-buts enforcement. Make it quick please.

Earlier this week France wanted its present (a brand new firewall, i.e. the German cheque book) before christmas. This year christmas represents the birth of European rule-based fiscal and monetary institutions. Germany said of course not, you can’t have your present before christmas.

So fortunate the Germans had the good sense not to rush in with financial or political support for funny money, bail outs, guarantees, ring fencing, firebreaks, Eurobonds, and all the rest of the softheaded Keynesian mishmash before extracting constitutional reforms as the precondition.

If Angela Merkel pulls this off she could go down in history as the statesperson who came closer than any other to fulfilling the vision of the German philosopher Immanuel Kant for republican internationalism as the basis for perpetual peace under rule of law.

In the market societies in The Age of Enforcement there will be penalties for breaking monetary rules, fiscal rules on debt etc. Competition Councils will be strengthened to police market freedom free of fraud and rent seeking, and labour market flexibility. All enforceable in court and supervised by a single parliament whose function (engraved into the plinth of the speakers chair) will be systemic risk avoidance.

The cosmopolitan Kant would be delighted with the teleology of the Euro crisis.

Michael G Heller November 25, 2011 at 10:19 am

Oops. Avoidance of Systemic Risk. (*not* a system of risk avoidance). Minor constitutional fine print detail.

Yancey Ward November 25, 2011 at 11:02 am

The constitutional reforms Germany is pushing for are meaningless. Tyler got this part exactly right:

The motto “no monetary union without a fiscal union” isn’t wrong, but more to the point is “no fiscal union without a common electorate.”

Constitutional reforms don’t change this reality one bit. Germany has all the influence it needs (or, to be more accurate, all that it is realistic to have) to enforce fiscal reforms right now- it’s only club is, and always will be, to take away access to German funds.

Davis November 25, 2011 at 11:16 am

in other words, the end of democracy in Europe in favor of technocrstic philosopher-kings. that always turns out well.

Marian Kechlibar November 26, 2011 at 9:50 am

Yeah, ‘kings’ like Herman van Rompuy. How did Nigel Farage say that? ‘Personality of a wet rag’?

dan1111 November 25, 2011 at 9:25 am

The best explanation for this is that there is no good idea. The theoretical “good idea” would be an answer to the question: how do we preserve something roughly like (or as good as) the previous status quo? Perhaps that has already been lost, but it will take awhile for everyone to admit it. There can be no serious solution until reality is acknowledged.

dearieme November 25, 2011 at 8:42 am

Bismerkel.

conchis November 25, 2011 at 8:43 am

Tyler, what’s your view on John Muelbauer’s suggestion for conditional Euro-bonds? (Maybe you covered this previously and I missed it – apologies if so.)

dearieme November 25, 2011 at 8:45 am
Claudia Sahm November 25, 2011 at 8:54 am

So people around here seem to enjoy forecasting (and quasi-crowing when correct), so two questions: 1) Given the conditions today (based on public info), what is the best economically, politically feasible option for the EU to pursue to avoid/mitigate a European-style redux of the 2008 financial crisis? 2) What is the most likely policy for the EU to pursue?

Unanswerable with any confidence, I know. But that’s what forecasts are. I see a lot of current analysis here, which is cool, but forecast can be fun.

mgoodfel November 25, 2011 at 9:06 am

Best choice — Germany and others leave the Euro and switch to marks. There’s no run on banks because the new currency will be expected to appreciate. So they have time to get it right. The Euro drops immediately, improving competitiveness in the south.

Likely choice — screaming and protesting until they fall off a cliff. Followed by the same in the U.S.

Claudia Sahm November 25, 2011 at 9:10 am

+1 … extra points for speed and color :)

Jamie_NYC November 25, 2011 at 9:32 am

“There’s no run on banks because the new currency will be expected to appreciate.” – not so sure about that: wouldn’t the periphery banks’ depositors move their money to ‘new DM’ countires’ banks?

scottyboy November 25, 2011 at 9:52 am

exactly. it is already happening now in advance of that possibility.

NAME REDACTED November 25, 2011 at 7:39 pm

already happened.

Larry November 25, 2011 at 12:54 pm

I suggested months ago that they do this, but call it the Neuro!

Something has to give. The question is what.

If the southerners default, that kills the banks (apparently including US money market funds) Most of the governments don’t have the money to bail them out, which kills the whole financial system.

If the northerners leave the Euro, it can continue and the inflation hawks will be gone from the ECB. The euro can then devalue and maybe that saves things.

I see no signs of the current ECB coming to the rescue, given the absolute opposition of the northern governments and their polities. That of course would be the least bad outcome.

The southerners could reform, but show no significant signs of doing so. This shouldn’t surprise, given the entrenched culture that put them in this position. I see no possibility that they could change quickly enough to matter.

So, the neuro is the least bad, politically possible outcome. Whoa.

Bill November 25, 2011 at 9:35 am

The Federal Reserve forms a currency union with some members of the EU (exchange Euros for dollars) and the US captures Poland, Slovakia, France, Hungary, Czech Republic. As a condition for US assistance, EU opens its market to US goods. Germany withdraws from the EU and becomes like Switzerland–a high DMark, and no exports.

Yancey Ward November 25, 2011 at 11:09 am

Switzerland exports nothing?

Bill November 25, 2011 at 11:26 am

It exports chocolates and cheese, and imports hedge fund managers.

Yancey Ward November 25, 2011 at 11:33 am

Sheesh, that is a lot of chocolate and cheese:

Link

Bill November 25, 2011 at 12:05 pm

Yancey: Swiss economy is a world leader in domiciling world organizations, insurance, homes of drug and chemical companies (their IP assets domiciled there) and banking: is that what you mean? From Wiki: “Chemicals, health and pharmaceutical, measuring instruments, musical instruments, real estate, banking and insurance, tourism, and international organisations are important industries in Switzerland.”

Yancey Ward November 25, 2011 at 12:34 pm

Keep spinning, Bill.

Michael G Heller November 25, 2011 at 12:37 pm

Everyone should set up a direct debit monthly payment to Wikipedia if they haven’t already done so. If Wiki has to start charging for access the quality of the blog commentariat will decline.

Bill November 25, 2011 at 1:06 pm

Yancey, What I like is that you did not see the joke about the Fed substituting for Germany and taking over the EU. At least the Fed is more willing to create some money more so than the ECB. But, in any event, Yancey, you probably didn’t keep with with last month’s news about the Swiss desparately trying to devalue their currency relative to others as it became a haven. No spin there, but I haven’t figured out what you think is spinning yet.

Switzerland is a beautiful, though expensive, country. And, the chocolate and cheese are great.

TallDave November 25, 2011 at 9:07 pm

Exports account for 50% of Swiss GDP. They run a large surplus.

http://www.tradingeconomics.com/switzerland/exports

There are lots of reasons for the Swiss to fear undue appreciation, but their exports have not exactly collapsed.

dearieme November 25, 2011 at 10:24 am

To predict the failure of the Euro was easy peasy: all that was needed was a slight familiarity with economics and the human race. To predict what comes next is much, much harder. It might need insight into the political classes and bureaucracies of a dozen or more countries, their potential responses both to their electorates and to the flow of bribery and corruption that will swill around and, above all, to their mutual interactions. It might well, contra Marx, call for insight into key individuals – for instance, as I hinted above, might there be something of Bismarck about Mrs Merkel?

You may take that as a definite “dunno”.

Claudia Sahm November 25, 2011 at 10:36 am

where I work “I dunno” doesn’t fly as a forecast…of course, humility is important, especially for forecasters.

John Thacker November 25, 2011 at 11:49 am

of course, humility is important, especially for forecasters.

Humility is important as something to avoid, especially for forecasters, because brash overconfidence always sounds more convincing, right?

The Euro was intentionally designed as a Doomsday Machine that could not be easily reversed, and that would cause disaster if countries didn’t play by the rules. This was, however, realized but thought of as a positive, because it would force the countries to play by the fiscal rules.

Claudia Sahm November 25, 2011 at 12:16 pm

John, since I am utterly confused by your statement about humility, I assume that I was not clear. My point is forecasting (as opposed to current or historical analysis) requires someone to take stand on key future events…macroeconomic forecasters actually have to write down numbers. The specifics of the forecast need to be served up with the forecaster’s underlying assumptions about the available data and theory. Humility (or open-mindedness) is needed because these assumptions need to be constantly reevaluated…sometimes the changes are so large that the forecast changes fundamentally. I agree overconfidence is a trouble maker…and yet confidence is necessary.

dearieme November 26, 2011 at 7:10 am

“where I work “I dunno” doesn’t fly as a forecast”: how foolish your employers must be.

derek November 25, 2011 at 12:42 pm

I’ll stick my neck out.

The bi weekly crisis meetings, attempts at manipulating market sentiment and installation of technocrats replacing democratically elected governments will continue.

The real action will be less visible. Productive forward looking individuals will leave; there will be a hollowing out of all sectors of the economy and society. No one will hire or train, on all levels the strategy is maintenance. As people leave and retire, the expertise and ability to run the systems in place diminishes. The effects are a gradual breakdown seen by people in their every day lives. There isn’t money to fix anything.

More and more of the economy is done underground. The increasing taxation, increasing regulation (there will be a constant stream of new rules and regulations out of the bowels of the bureaucracy) along with diminishing returns from the system for individuals make it rational to work outside the system. The bureaucratic impulse to self preservation draws resources towards the center starving any activities on the edges where enforcement and monitoring occur. Statistics become meaningless exercises in creative manipulation. What rational government would publish real numbers just to be punished for them.

Really, what will have changed?

TMLutas November 25, 2011 at 5:14 pm

Actually, the only realistic way out is to legalize more economic activity, more company formation, and more work. The increased creation of goods and services is the foundation of any recovery, whether before, after, or instead of a monetary collapse.

From an IT perspective the pseudo-code runs something like this
For all governments
for all laws, rules and regulations
examine for economic activity downside
examine for actual upside for general welfare
if downside is greater than upside repeal law
repeat for next law, rule, and regulation
repeat for next government.

That’s it, a simple formula for rescuing the US, the euro space, and all of the rest of the overgoverned world (I’m looking at you Japan) that would actually work, be transparent, and politically survivable.

Bartram's Garden November 26, 2011 at 1:40 am

You are describing the situation in the early to middle chapters of Atlas Shrugged.

derek November 26, 2011 at 1:09 pm

Really. I’ve never read it.

Canada experienced situations very close to what I described. The diminished central authority all but in their own minds, all the while double digit percentages of the economy went underground. It is very difficult to be enthusiastic about paying taxes at the best of times, but especially when you are surrounded by neighbors living far better than you who pay none. The police are hamstrung by continually increasing complexity of process all the while getting less funding. The basic functions of government were ignored; there were signs on most businesses saying that they didn’t accept $100 bills due to the careless stewardship of the government. The Democrats in the US better be careful; what they might end up standing for is less government services for higher taxes.

At least Canada recognized they had a problem and worked at sorting it out. I don’t think European elites, especially the eurocrats are even close to understanding what is going on. Understandable of course. Habits die hard; when you work for decades to get into a position where the first budget line item is your salary, you aren’t going to change it.

French boy November 25, 2011 at 9:15 am

Has anyone read this article? http://www.piie.com/realtime/?p=2504
Or this one? http://www.piie.com/realtime/?p=2522
What if the ECB was just playing a tactical game? Is that possible?
I’m quite curious about Tyler’s opinion about it.

ChrisA November 25, 2011 at 9:02 pm

I think that Germany and the ECB are doing exactly that (playing a tactical game). They are not stupid and understand perfectly well the consequences of a break up of the Euro, but they also have to manage the moral hazard. What is happening is exactly what would be predicted by someone following this strategy. It is interesting that the electorate in Portugal were able to understand this, but many more “clever” people don’t.

ChrisA November 25, 2011 at 9:23 pm

Tyler makes a good point though about what happens if the Germans are successful and they get what they want in terms of serious reform minded technocrats in charge of the Med Countries, and so are able to save the Euro. The problem will still remain in that an appropriate monetary policy for Germany is too tight for the Med Countries and an appropriate monetary policy for the Med Countries is too loose for Germany. Since the Germans will be in charge, I guess the first option will be a tight monetary policy, but how long will the Med Countries tolerate that? 1 year of depression? 5 years of depression? Maybe there is a sweet spot between tolerable inflation in Germany and tolerable recession in Med Countries but I wouldn’t bet on it. Fiscal transfers could offset some of the deflation (hence I guess the eagerness of the Germans to get the UK to join the Euro), perhaps this is politically sellable through private financing, i.e. soft ECB guaranteed loans for infrastructure.

Investment tip – buy Italian debt and sell German.

Nonymouse the Third November 25, 2011 at 9:25 am

“Or does it continue forever?”

This makes no sense, Tyler. The German and French citizens must take a loss. Their banking systems have invested in periphery debt. The sovereign government stands behind the banking systems, and the citizens stand behind the government.

That debt has gone bad. It was a bad investment; it was morally hazardous.

The German and French citizens can only choose between taking a painful nominal loss through default and/or Euro breakup, or a real-terms loss over several years by allowing nominal income growth. The real-terms loss is, relatively, a picnic. For the periphery, it will be painful either way but much less painful with nominal income growth. They have learnt their lesson now, surely.

Yancey Ward November 25, 2011 at 11:14 am

The real-terms loss is, relatively, a picnic. For the periphery, it will be painful either way but much less painful with nominal income growth

This sounds like you are describing a relative “picnic” for all. If you are going to spread the losses with an inflation, someone, somewhere, has to suffer much more than they would have otherwise. Who are those people?

Nonymouse the Third November 25, 2011 at 2:57 pm

Hmmm, really? Why is that true?

I could say owners of bunds would suffer more. But, if the Euro breaks up, are bunds the right place to be? I can’t see it. All other roads will be so disastrous for Europe. What else is there?

OK. Jens Weidmann would suffer lifelong humiliation if German CPI inflation goes up above 5%. Let’s all cry for Jens Weidmann. And hedge funds who want to collect CDS on Italian/Greek/… debt, they might suffer more. But then the EU elite seem intent on not triggering CDS, so… who knows.

TallDave November 25, 2011 at 9:15 pm

Bondholders.

This is one reason why I’m thinking now is a good time for me to cash in 100K or so of bonds for a down payment and take on more debt to buy another house. Then it’s “Yay inflation! Go Scott Summers! Target NGDP! W00t!”

Eric November 25, 2011 at 9:39 am

Nonymouse, why was taking in these debts morally hazardous?

vic November 25, 2011 at 9:54 am

Germany signing off their fiscal livelihood to guarantee the debts and obligations of any EU country, good luck with that! You might as well add a provision that an EU country cannot negotiate treaties with foreign nations.

neoclassical_libertarian November 25, 2011 at 10:18 am

Germany is a perfect example of the failure of left-wing social democracy. What Sweden went through from the 70s until the early 90s (when the economy tanked), Germany is going through right now. This is what happens when you try to move your civilization away from Smithian ideas. Europeans deserve the train wreck they are in right now.

Chris November 25, 2011 at 10:44 am

Yep Germany is the problem. Get rid of them and Greece and Spain will be hunky dory.

prior_approval November 25, 2011 at 10:58 am

‘Germany is a perfect example of the failure of left-wing social democracy.’
Yeah, with a disastrous unemployment rate, for example. One that is so bad that employers, at least in this region, are having problems finding anyone to fill jobs – but then, a sub 4% unempoyment rate (by German standards, that is – anyone currently working 15 hours or less a week but who still wants full time employment is counted as unemployed) tends to result in such things.

Germany is a strange case, of course. And if the euro goes away, it will just be the fourth currency someone like Merkel has had to deal with in her life – DDR mark, BRD mark, euro, and whatever comes next – the what comes next having been as inevitable as the fact that the euro will live about as long as any other European currency.

The question of whether the euro’s advantages outweigh its disadvantages remains more open than some are willing to explore. Of course, the fact that the euro is still a good 15% higher against the dollar than at its 1999 (that’s right – the notes and coins came 2 years later) introduction is a real problem for Germany. I’m fairly certain very few people around here would mind the euro returning to its decade past .95 range against the dollar – which would be a real help for those other peripheral economies to boot.

But even with all of the predictions of impending doom, the euro remains stubbornly higher than optimal, at least form an expoert perspective. One wonders what that might mean about the expected direction of the eurozone compared to its major competitors.

Which may look very different in the future, of course. Pretty much a big yawn for most people I know, actually – it just isn’t much of a problem to handle with the proper software – though I won’t be surprised if software companies (like the one I work for) won’t figure out a reason why it will require an update.

Still, I do wonder what will come first – a major American bank disappearing due to euro problems, or an EU bank. Probably worth flipping a coin – I’ll take the one with the number on its shared front.

libertarian_adi November 25, 2011 at 3:24 pm

@Chris

Like anyone cares about Greece and Spain.

@prior_approval

Your red herrings fail to establish that social democratic policies implemented in Germany are any less of a failure than they already are. And it’s funny that you would cite the current unemployment rate (5.8%, not “sub 4% unemployment”).

Here you go:

http://1.bp.blogspot.com/_Et4TQ-a0gGU/TC41loTyzoI/AAAAAAAADJg/jCtsy_MgXlU/s1600/urate_g7.png

And here’s the comparison of unemployment rates between the United States and Germany since the social democrat, Obummer, took office.

libertarian_adi November 25, 2011 at 3:25 pm
prior_approval November 26, 2011 at 2:10 am

‘And it’s funny that you would cite the current unemployment rate…’ in ‘at least in this region’ (maybe I should have used bold instead of relying on reader comprehension?) which happens to be the home of Daimler, which just announced a 1.6 billion euro expansion of its factories, on the same day that Audi announced creating new facilities in Heilbronn. This region – Bundesland isn’t quite right, since the world’s largest truck factory is, technically, in another Bundesland than Diamler’s headquarters – is where I have experience of company owners looking for workers – they are getting increasingly hard to find, in this region. Which is the region with 3.9% unemployment – though it is only second best, as Bavaria’s unemployment is lower still.

‘…fail to establish that social democratic policies implemented in Germany are any less of a failure than they already are.’ That sentence (failing to establish itself as any less of a failure than it already is, or something like that) probably means that I am wasting time in replying – but see the regional announcements from the last couple of days of regional news, originating from this region.

‘since the social democrat, Obummer, took office.’
Yes, wasting my time – you may want to read about what social democracy really looks like, study some of its approximately 150 year history. Or you could just take it on faith that a statement like that is one where pure ignorance of both the terms involved and the realities observed is instantly recognizable to anyone possessing even rudimentary knowledge, like that of any of the ca. 450 million people currently living in what can be considered to be a broadly social democratic economic and political system.

Morgan Warstler November 25, 2011 at 1:18 pm

Nothing gets around that each state knows it will not be able to borrow after default…. as such, they will adopt the austerity necessary. Since you’ll get riots either way, you might as well get what you want out of the deal.

There’s no free lunch – this is not about past debts (debt can be written off), it is about accepting the inevitable future… Southern states HAVE to make like US southern states and compete on less regualtion and lower labor prices.

It is a grand lesson for the world to see.

mark l. November 25, 2011 at 1:46 pm

(following numbers are far from precise-but work with it)
japan:
external debt 2.72 trillion(100% of gdp).
internal debt 5.44 trillion(200% of gdp).

eu:
external debt 16.1 trillion(100% of gdp).
[a year ago, it was 13.72 trillion. it increased by 17% june to june, 10-11]
internal debt 9.82 trillion(2010). (60% of gdp).

us:
external debt 15 trillion(100% of gdp).
internal debt 9.3 trillion(62% of gdp).

japan is the worst case scenario. ironic that our numbers are so close to the eu, but also, telling. yes, the eu can print themselves into a modest decline, once they agree to monetize their debt. we are already doing it in the us, and in a relative sense, are keeping our heads above water.

the eu just has to get over it’s pride and accept that the euro is just anothe fiat currency. germany’s misgivings about inflation have a resonnance in their economic history, but given their net export levels, they will still come out on top, relatively. countries with a trade deficit, will be the sickest men in the room, for quite some time.

i find it funny that soros is opposed to austerity, without accepting that inflation is just another form of austerity, only better hidden.

using the above numbers, the eu can swing 22 trillion in currency devaluation(using japan as a guide). at the above burn rate of 2.4 trillion, it buys them less than 10 years. sadly, the 2.4 trillion burn rate is growing, not shrinking. without austerity, they could buy/print themselves 5 years, at best. once accepting that ALL debt is to be fixed by devaluing the currency, and given the increasing rate, gemany isn’t crazy to recognize a hyper-inflation scenario…’whoomp, there it is’.

at present, i give the germans a ton of credit for recognizing that the ‘best’ solution will deliver them their past, and that it really isn’t a solution.

given the possiblity/inevitability of currency decline, there is a chance that a small country could choose to make the move to become the world’s reserve currency. well, not the country, so much as the currency manipulators, who, using a ‘shell’ country, could create a gold backed standard, which would function as ‘unstoppable force’(or hammer) against rather maleable currencies.

Bill November 25, 2011 at 2:34 pm

mark, Isn’t the assumption you are making is that currency is used only by the nationals? What if the dollar, EU, and yen are used by others to trade, or is used as a reserve currency. In that case, the monetary measures you are using are irrelevant–the country’s debt is a very small fraction of total currency outstanding, and, in fact, the debt is needed to create the currency everyone else is demanding! You could even make the argument that if you did not create additional money you might actually contract the world economy as others grew.

mark l. November 25, 2011 at 4:55 pm

there are a ton of assumptions in the above scenario.

the point a to point b, is that the countries band together and create euro bonds.

there will be no practical market for the eurobonds, and so the eu has to buy them up themselves, thus inflating theri currency,

i don’t think it is a practical solution. i’m just taking care of the very short term, which is how govts have been running for decades.

as for the yen…past history provides that you can inflate your way into stagnation. given the alternative of the rocky cliffs of a depression, it buys them time.

“Isn’t the assumption you are making is that currency is used only by the nationals?”
they can’t sell bonds. they are already dead. the euro is now a national currency ofr the eu, and little else.

Ricardo November 27, 2011 at 5:41 am

“i find it funny that soros is opposed to austerity, without accepting that inflation is just another form of austerity, only better hidden.”

No, it isn’t. Inflation is a type of tax so you could compare it to austerity policies that raise taxes rather than cut spending. Still, the difference is that tax increases are contractionary while inflation is not.

Rahul November 25, 2011 at 2:12 pm

How come the ten year return on bonds is lower than the two year return? Is this typical? Especially for a sinking ship like Italy?

Pat November 25, 2011 at 3:19 pm

I’m not a trained economist. I’m not even a particularly clever man. So it’s rather remarkable that I should be able to spot so many obvious errors in Tyler Cowen’s post, as he is both an economist and clever, although evidently suffering from a turkey coma.

“With Germany’s own credit status now in doubt… are they supposed to endorse … ten or fifteen percent price inflation for a few years’ time, all with no guarantee of reforms in the economically weaker countries?”

I dare say this is the first I’ve read anyone cite 15% inflation. Paul Krugman has suggested 4% inflation for Germany, and I suspect he probably represents the outer limit of mainstream opinion in this debate. So I’m going to posit this is a straw man, and rather shoddy one at that.

As for the absence of reforms in the periphery, you’re playing fast-and-loose here. Italy needs to reform, Greece needs to leave, but it’s stunningly dishonest to imply that all the periphery suffer from those Mediterranean nations’ profligacy. Spain and Ireland had lower debt- and deficit-to-GDP ratios than Germany had, before the financial crisis. The lion’s share of the debt problem is due to the ongoing depression. To put it lightly, this hasn’t been a secret.

” And is that inflation then followed by a subsequent deflation? Or does it continue forever?”

And this is a straw man wearing a particularly stupid-looking hat. Assuming for the sake of the absurd argument that Germany really did go to 15% inflation (which, again, no one is proposing), once the periphery’s prices became competitive again, there would be no need for either of these. Go back to 2% inflation. Deflation would defeat the whole point; continued double-digit inflation would be problematic for the usual reasons. Those are transparently not the only options.

“I don’t see the United States even considering significant aid to Honduras.”

No, but blue states by and large do make significant wealth transfers to red states to alleviate the slower economic growth in the latter. This is done automatically and without any controversy. That is likely the more useful comparison, as the Eurozone has roughly the same population and total GDP as the United States and is bound by a common currency—precisely zero of which three commonalities is true of all of North America, or whatever other unit you choose to get both the U.S. and Honduras into one box.

“I don’t see anybody who has put a successful reform option on the table…. Germany can’t just plop down the money, or turn on the monetary spigot, and get back to where it was.”

Karl Smith and Brad Delong have been pretty vocal about their preferred options. Paul Krugman doesn’t seem to be quite as sanguine, but in terms of diagnosing the underlying problem, I believe his Times magazine piece is now a year old, and his blog has been well-populated with updated comment and analysis.

What you mean is you haven’t seen any options that will work proposed by people you agree with. On this, I agree with you. The center-right has been in charge of policy options for the entirety of this episode, and it’s really quite obvious that austerity hasn’t worked and won’t work in the future. In Europe, the ECB needs to agree to step in and print euros until Italian debt falls to sustainable yields, and in the U.S. we need about a trillion in additional stimulus. If you honestly haven’t seen anyone make these “successful reform option[s],” you can’t have been paying much attention.

TallDave November 25, 2011 at 9:24 pm

No, but blue states by and large do make significant wealth transfers to red states to alleviate the slower economic growth in the latter.

The wealth transfer is more accurately from red voters to blue voters in all states — the popular meme of state-by-state transfers from blue to red is to a large extent just a byproduct of subsidies to agriculture which can only be done in rural areas.

In Europe, the ECB needs to agree to step in and print euros until Italian debt falls to sustainable yields,

This is not a reform proposal, this is a proposal to fill the henhouse full of foxes.

just dreaming November 25, 2011 at 3:59 pm

Pat, you’ve taken up a lot of space calling Tyler Cowen stupid and you’ve linked to your blog where you say about your privileged life as a foreign student in Germany:

“my circadian rhythms have settled lazily into my new schedule of staying up for too much of the day to end and sleeping too far into the one to be begun. I excuse my own lateness for the few remaining lessons by telling myself that the shortened daylight hours must have a psychosomnological effect.”

Never have I been more tempted to say ‘mate, get a job’.

Rahul November 25, 2011 at 4:10 pm

He hasn’t blogged for almost a year now. So maybe he did get a job! ;)

just dreaming November 25, 2011 at 4:17 pm

Pity the boy’s employer.

Nattering Nabob November 25, 2011 at 7:16 pm

Apparently his mother’s fat, too.

Pat November 25, 2011 at 4:23 pm

Christ, is that thing still up? Kindly don’t read that; it contains some really awful writing of which I’m profoundly embarrassed.

I did not call Tyler Cowen stupid. One may infer from my comment that I found his post careless, but I must dispute your (equally careless) characterization. If you need a hint, you might look to the first two lines of my comment, where I called him clever. (A little on the nose, but I gather you missed it on first read.)

I, erm, am grateful for your substantive disagreements with my comments. Such as they are.

joshua November 25, 2011 at 4:42 pm

I thought 7% was the end. Is 8% the new 7%?

TGGP November 25, 2011 at 8:55 pm
joe November 25, 2011 at 9:46 pm

Just give Angela the title Holy Roman Empress and let her rule the continent. At least the southern areas could use some German discipline.
and no, not in a weird way.

NAME REDACTED November 26, 2011 at 6:56 pm

The real question is, “Has the end already happened, and europe is just like a cartoon coyote that has run off the cliff and hasn’t looked down yet?”

Josh S November 26, 2011 at 10:43 pm

From whence comes the assumption that governments can, should, and ought to be able to increase their debt loads forever without limit? No other institution works that way. And without direct control over the issuance of fresh fiat, neither do governments.

Floccina November 28, 2011 at 1:42 pm

If you have a sharply falling population default is not that bad an option. You may not be able to borrow anymore but should a nation with a declining population be borrowing? I think not.

Erik W. November 28, 2011 at 3:06 pm

Massive welfare state? Inflexible professional wages? What country are you talking about? Not Germany, that much is sure. The reformed German welfare payments were ruled unconstitutional for for violating the government’s duty to guarantee a life in “human dignity” to every citizen. It hasn’t been amended. The official unemployment figures are low, but they’re all fake – the algorithm was revised years ago, so if you’re registered as “looking for work” is not “out of work” anymore. Actual unemployment is impossible to gauge, but it may be anything between 120% to 200% of the official figures. The only thing Germany really excels in these days is exports to China, the decline of real wage, and the decline of education level (in all 3 aspects Germany is, IIRC, leading among the OECD, or at least ranking high in all 3). Temp agencies are thriving like weeds, and even if you got an academic degree it’s not guaranteed you’ll make more than 10 bucks an hour and be unemployed 1/3 of the time (As tuition fees are being abolished across Germany – it simply didn’t work as intended – more and more university graduates are taking up second studies, because they can’t find proper jobs anymore and studying cuts down on insurance fees, taxes etc). 10 years ago soup kitchens were something you found in the central rail stations of the largest German towns (I use the term “soup kitchen” loosely; US-style soup kitchens are actually rare in Germany; they were simply not needed in earlier decades, so we now have a unique home-grown approach). Today, there is one soup kitchen for less than 100.000 German citizens; the number has increased 100fold in the last 15 years. Simce about 5 years ago, one can see perfectly normal people, families with children etc, in decent (if worn) clothes collecting recyclable bottles from wastebins (for the deposit). There’s a recent scandal about Amazon Germany hiring “looking for work”s for zero wage; I wonder if that would be possible in any other developed country. In Germany, it’s simply one of the things that makes one shrug; it’s slightly outrageous, but then again, it’s just the logical conclusion of what we’ve seen in the past decade.

The difference between Germany and the UK or France or the US is simply that Germany’s economy is streamlined for export. Domestic consumption is secondary. With 15% of the Germans living in (relative) poverty or too close to it to consume more that that required for survival, this won’t change. China bailed us out back in 2007-2009. It is not clear if that will happen again.

The other economic powerhouses had more of a steady decline starting in ’07/’08. Germany managed to ward this off, but at a cost. If you actually understand the language, check out the comments at news websites. A lot of Germans are horribly afraid of the future, but in a murky way. It’s said that Germans constantly complain, but I’d wager anyone who says this to go to London or Rome to see poeple who have elevated complaining to an art form. The difference is that in Germany, complaining is a surrogate for protesting, for changing things for the better (cf. Lenin’s remark about German revolutionaries wanting to take a rail station and buying tickets first – he was spot on, and timelessly so); Italians get riled up from complaining, Germans get cowed down.

So what we have is an increasingly thin levee that protects the Wirtschaftswunderland, and its already impoverished population which is clenching its fists in its pocket. A populist platform with a hardline anti-Euro(pe(an)) and nationalist stance, if given enough funding, could rise from nothing to third-largest party in one sweep. They might be hardcore economic liberals, people wouldn’t care; the guilty party, as far as the majoritxy of Germans is concerned, is less the national government, or the tame unions, or their own inability to raise a stink and demand higher wages back when the economy was booming – it’s “the foreigners”. Since outright xenophobia is not openly acceptable ATM, it’s clad into opposition to the EU, which is increasingly rejected pro toto. In short, a German nation-state that “goes it alone” is increasingly being considered the way to go, despite all evidence that Germany is less able to stand on its own feed economically than any other major OECD nation.

One wonders what 2012 will bring, but in the end, we’ll find out whether we like it or not.

PS: my major gripe withe original essay is something other: Assuming the fixes proposed or implied do work: how should this correct the central flaw of this all? Namely that Malthusian growth of anything is definitely and categorically rejected for this planet in this universe by matter of simple physics (1st law ot TD mainly). Yet the economic “sciences” (I say this as a grade A MSci in biology, focused on evolution, ecology and biogeography) have not even fully gotten the hang of Verhulstian growth – they use it for workforce calc etc, but that’s not the whole power of it.
And what is ACTUALLY happening to the world economy is one step more complex still.
You will not get out of this with austerity, gold money, zero interest, Gesellian money, debt-reduction policies, nationalism, economic wars, Marxism, Communism, Libertarianism and all that faith-based economics crap.

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