Not a prediction, but I have been thinking through one possible path. Germany supports a phased-in backstop of eurozone bank deposits, but with intermediate goals and targets along the way. They’re not simply going to write a blank check. Some of the goals and targets are fiscal, while others involve turning over bank supervision to the EU. Obviously, none of this can be done quickly, thus there is no immediate done deal, but it might calm the markets. Germany also requires that Spain commit “the Irish mistake,” namely guaranteeing the returns to bondholders and funding that guarantee through “austerity.” Since Germany would also be backstopping Italy, France, and others, it doesn’t want a bondholder run, even if Spain, taken alone, might be better off forcing the bondholders to take losses.
Spain will claim it accepts the agreement, but in fact it won’t. It won’t over time, and it won’t pledge up front to fully protect the bondholders. Spain wants to see the money first. Capital flight continues and eventually intensifies. The deal does not get made in time and arguably there was no deal there in the first place, since Spain never had the willingness, or perhaps not even the ability, to meet the intermediate targets along the way.
One current option for Spain is to announce preemptively that it will accept significant EU supervision for their banks, with or without a broader deal. Arguably this would help ease their way into an agreement with Germany. In fact they are doing the opposite, by playing to the domestic audience and stonewalling on transparency about the nature and extent of their banking problems.
Not only is labor subject to market forces, but the advent of birth control and women’s liberation has started a mining operation on human capital which has lowered wages below Ricardo’s “iron law of wages” since Ricardo’s real law was based on the cost of reproduction, not just the cost of survival. Since we are now mining our women’s fertility for labor — particularly the more intelligent more highly educated women — the inelasticity of demand for labor has resulted in a plummeting labor compensation rate in terms of precious metals and anything else that matters, such as housing or healthcare — and that plummeting labor compensation rate has been going on since the early 70s, not just since the bubbles starting in 2000 on.
There may be a sustained supply of educated labor from sexist cultures such as India and China, as the Europeans disappear.
What an interesting point. Hats off.
Excellent analysis.
Interesting point.
Imagine a situation in which women are going into the workforce but birth control technology was the same as in Ricardo’s time (basically none). The Iron Law of Wages would have a higher level because there would be those additional mouths to feed, clothe, house, educate, etc. What the economists never anticipated was a distinction between “living” and “reproduction” — hence they always assumed continuity in the supply of labor from one generation to the next. That’s now changed. It is as though the US and most of the European-derived peoples (as well as Japan btw) have undergone the greatest genocidal event in human history — even greater than the Maoist purges — and that genocide targeted the youngest so that there could be no replacement population.
PS: No, I’m not a Catholic. I”m just a realist about the economics of vital statistics.
Perhaps ironically, if growth continued and wages rose sufficiently, perhaps we would get back some of this reproduction of the highly-educated. We did the calculations and for my wife it makes sense to keep working even with three kids in daycare. And we prefer daycare anyway, since it socializes. But I would propose a 100% deduction for childcare costs. That’s a win-win for the government and society as it would bring a lot of highly educated women back into the labor force and into motherhood! And it would also raise revenue.
I am not serious but perhaps we get the divergence on income high enough that intelligent men have their pick of the most beautiful women and so stop marring college grads as much. Again I am just playing around with Idea I am not serious.
Since Franklin and Hume discussed the demographic transition decades before Ricardo’s birth, we can deduce the existence of birth control in his time.
What’s the old adage？Uh…oh yeah！ “Good riddance to bad rubbish!” I’ve got one more word– it’s called “comeuppance”. The Europeans, (and to a lesser degree the attempt at emulating this behavior by the copycat Japanese), have wreaked havoc across the globe for 5 centuries, and the world will be better off the sooner you die out and humans can start living more authentic lives again. The post-Euro world will hopefully be absent of the sophistry and hogwash that Europeans always employ when they try to explain their crimes and criminal syndicates with esoteric jargon that makes it appear that the brutality and mayhem are somehow scientifically justified. Ricardo was a moron. Moreover,the entire “profession” (or priesthood) he began of economics is academic masturbatory tripe. It is nothing BUT unfounded assumptions, and fails to notice that the basis of the entire western world’s development was actually THE greatest genocidal event in history, which is still actually occurring. No, it was not the Maoist purges, but the African holocaust that is being ramped up again right now in the spring of 2012. The “developed” nations are in crisis because it is harder and more expensive to extract resources from Africa than it was at the onset of the colonial-brigandage era. Now, Europeans and their copycats are is crisis as they attempt to militarize the world in order to keep priming the pump. But times have changed. It is no longer the 15th century when you could walk in and steal everything that was not nailed down, (including the women for whom you disgustingly claim advocacy in your comments).The culture and knowledge of these idigenous Africans who actually KNEW how to live in harmony with the environment and not turn everything into a commodity for profit has been tossed into the ashcan of history, and replaced with pseudo-intellectual claptrap from institutionalized pirates.
Lol
Hi Tyler
Germany and Spain have been doing this dance for a while now. The problem for Spain is that the burden of its banks is fast becomimg too much for it. However for “safe-haven” Germany it is possible as discussed back in May here.
“There is a way though..
The Federal Republic of Germany is currently paying only 1.6% on its ten-year bonds. So it could borrow the money Spain’s banks needs very cheaply and if you like we are back to the proposed ”Eurobonds” solution of last summer.
However,would you lend the money if you were Germany?”
http://www.mindfulmoney.co.uk/wp/shaun-richards/as-bankia-of-spain-hits-trouble-could-and-should-germany-rather-than-spain-rescue-her/
As the borrowing rate for Germany over ten years has since dropped even further to 1.2% I suspect more and more minds will turn in that direction….The catch as ever is will the Germans do it?
“The catch as ever is will the Germans do it?”
The can’t, the German Constitution is not allowing it, period.
And they don’t want to, since they got imposed harsh restructurings during the past 15 or so years, along with real income stagnations for most of them. While the GIPSIFs had debt financed partys.
And even if they could and would want to, they shouldn’t since Eurobonds de facto existed between 2002 and 2008, see here: http://upload.wikimedia.org/wikipedia/commons/e/e2/Long-term_interest_rates_%28eurozone%29_%281993-2011%29de.png
And what exactly did the GIPSIFs use the for them (undeservedly) good refinancing conditions? Exactly: to give a lot of gifts to a lot of inerest groups, and to refuse necessary structural reforms to make their economies more solid and competitive.
There is no reason at all to assume they would act more responsible the next time they get cheap money, no matter how many contracts and treaties would be signed to ensure such responsibility.
History is the witness here: all eurozone countries broke already rules set by the Mastricht treaties, like the 60% total debt limit, the 3% deficit clause, the no-bailout clause… Next time it’s different? No, of course it isn’t.
“As the borrowing rate for Germany over ten years has since dropped even further to 1.2% I suspect more and more minds will turn in that direction….The catch as ever is will the Germans do it?”
No, the catch isn’t will Germans do it, but can they do it. And frankly I doubt it. Germany gets such a wonderful rate on bonds because a) they are considered very low risk bonds and b) many investors don’t have a lot of other choices since the pool of ‘safe’ bonds has been shrinking. If Germany tried to sell bonds in its name and then give the money to Spain, many investors would likely conclude that the risk of those bonds has gone up and would start requiring a higher rate of return. Since Germans would be unlikely to back any bonds who’s proceeds went to Spaniards at the same level as bond’s dedicated to their own people, the investors would likely be correct in assuming that the new ‘German’ bonds were just a proxy for ‘Spanish’ bonds and would treat them as such.
About Spain, it is a country that has (had?) liquidity problems, but the cost of the debt can make it insolvent instead.
The high cost comes mainly thru the banks, most of wich are bankrupt and that the State has compromised itself (great irish mistake) to bail out. The ‘hole’ in the banks will be about a 25 to 30% of the GIP and the bail out would let the expected 5.8 deficit to at least 20%, that is, not possible to afford.
No matter how hard it is to see, or the UE helps Spain with the banks or it will have to bail out the whole country (or letting it fall and the euro with it). That means,among other things, forgetting about the 3%. But last time I checked, Moses tables said nothing about it, so maybe it is not such a big thing.
Germany is protecting its own banking system as well when it seeks to preserve Spanish banks, since German banks lent, directly and indirectly to the Spanish real estate/’development market–it would just be nice if they could get the Spanish government to get austere and use the Spanish government money to protect German bondholders for them.
At the end of the day, the Euromess (except for Greece) has been about an overleveraged banking system and excessive investments in real estate and CDOs. Governments have opened their treasuries to fix the private market mess, and the only way they can do it is to be austere, when in fact it is simply a choice to not fund government services and instead bail out a banking industry. Ireland, Spain, Iceland, England –nationalizing or investing in banks, in effect, propping up their solvency. Bank reform in Italy should also be on the agenda–bank interlocks, interlocks with depositors, cross directorships–have created malinvestment and also blocked credit to small business competitors of those who do have preferred access to banks through cross ownership.
I’d also look at more deposit insurance and the establishment of guaranty funds (basically, mandated insurance mechanisms) so that the cost is shoved to the banking system (and ultimately depositors and wealthholders) and not to governments and taxpayers.
Or they could settle for their low productivity equilibrium outside the EU, and retain national self-determination.
I think Futurama frames it best.
Hermes Conrad: We can’t compete with Mom! Her company is big and evil! Ours is small and neutral!
That Guy: Switzerland is small and neutral! We are more like Germany, ambitious and misunderstood!
Amy Wong: Look, everyone wants to be more like Germany, but do we really have the pure strength of will?
Ahem.
Hermes Conrad: We can’t compete with Mom! Her company is big and evil! Ours is small and neutral!
That Guy: Switzerland is small and neutral! We are more like Germany, ambitious and misunderstood!
Amy Wong: Look, everyone wants to be more like Germany, but do we really have the pure strength of will?
I have to say, once again, how refreshing this blog is, not just in terms of content but in terms of the polite but stimulating discussion in the comments. I am so very tired of the “fire-ready-aim” nature of so many online economic debates (some never get past “fire”).
Okay, enough praise. My entirely impractical solution to the Greek crisis, and meant entirely as (a weak attempt at) humor: just give Greece to Germany. Germany gains an immediate low-cost vacation spot, with preferential beach access, and the Greek economic crisis is immediately internalized inside the German economic powerhouse. Greece just becomes the most southerly of the German Länder. Given Greek GDP is I guess about 10% that of Germany’s, it might even be easier to pull off than the reunification with the East of 1990 and thereafter. There could be some cultural integration issues, which I will leave to better comedians than I to run with!
I will now patiently sit by the phone awaiting the call from Stockholm, with word of my Nobel….
Why do the Euro zone governments feel the need to save their banks?
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