What Would It Take To Save Europe?

By Simon Johnson

Last weekend official Washington was gripped by euphoria, at least briefly, as people attending the IMF annual meetings began to talk about how much money it would take to stabilize the situation in Europe.  At least one eminence grise suggested that 1.5 trillion euros should do the trick, while others were more inclined to err on the side of caution – 4 trillion euros was the highest estimate I heard.

This is a lot of money: Germany’s annual Gross Domestic Product (GDP) is only about 2.5 trillion euros, and the combined GDP of the entire eurozone is about 9.5 trillion euros.  The idea is that providing a massive package of financial support would “awe” the markets “into submission” – meaning that people would stop selling their holdings of Italian or Spanish debt and thus stop pushing up interest rates.  Ideally, investors would also give Greece and Portugal some time to find their way to back to growth.

But this is the wrong way to think about the problem.  The issue is not money in the form of external financial support – provided by the IMF or other countries to parts of the European Union.  The real questions are: will Italy get complete and unfettered access to the European Central Bank, and when will we know this?

The big package approach to economic stabilization was most famously demonstrated in the 1994-5 Mexican crisis.  With their currency under great pressure, President Ernesto Zedillo and finance minister Guillermo Ortiz arranged a $45 billion loan, a large part of which came from the United States.  This may look like a small amount today, but at the time it was seen as a large amount of support.  President Zedillo famously remarked that when markets overreact, policy should in turn overreact – meaning, in this context, put more money on the table than is needed.  When the financial firepower is overwhelming, as was the Mexican case, it does not have to be used – in fact, the Mexican loan was paid back in about a year.

But this version of Mexican events skips an important detail.  It’s true that the external financial support helped prevent the complete collapse of the currency, but the Mexican peso did still depreciate significantly.  Prior to the crisis, Mexico had a large current account deficit – meaning it was importing more than it was exporting, and the difference was covered by capital inflows (mostly foreigners being willing to lend to the Mexican government.)  With the exchange rate depreciation, exporting from Mexico became much more attractive – an export boom of this kind always helps close the current account deficit and also stimulate the economy in a sensible manner.

Important parts of the eurozone, such as Portugal, Greece and perhaps Italy, badly need a reduction in their real costs of production.  If their currencies were independent, this could be achieved by a depreciation of the market value of their exchange rate.  But this is not an option within the eurozone – and it is within the zone that they need to become more competitive.

These countries could also cut nominal wages – a course of action that is being pursued, for example, in Latvia.  But it is unlikely that any government making such a proposal would last long in Western Europe.  Latvia is a special case for many reasons, including its desire to become much closer with the eurozone – to which it aspires to join.

Unable to move the exchange rate and unwilling to cut wages, the Portuguese government is embarked on an innovative course of “fiscal devaluation,” meaning that they will cut payroll taxes – to reduce the cost of hiring labor – while also increasing VAT (a tax on consumption) as a way to maintain fiscal revenues.  Unfortunately, “innovative” in the context of stabilization policies often means “unlikely to succeed” – and the precise implementation of this scheme, with some very complex details, seems fraught with danger.

Europe needs a new fiscal governance mechanism, to be sure.  Why would Germany – or anyone else – trust Italy under Silvio Berlusconi with a big loan or unlimited access to credit at the European Central Bank?

Greece and some other countries have serious budget difficulties.  But most of the European periphery also faces a current account crisis – something has to be done to increase exports or reduce imports or both.  If the exchange rate can’t depreciate, wages won’t be cut, and “fiscal devaluation” proves unworkable, activity in these economies will need to slow down a great deal in order to reduce imports and bring the current account closer to balance – unless you (or the Germans) are willing to extend them large amounts of unconditional credit for the indefinite future.

And as these economies slow down, their ability to pay their government debts will increasingly be called into question.  Last week the IMF cut the growth forecast for Italy in 2012 down to 0.3 percent.  With interest rates pushing up towards 6 percent, it is easy to imagine Italy’s debt relative to GDP climbing even further than in the still-benign official projections.

If Italy or any other eurozone country is in good shape and can pay its debts, the European Central Bank (ECB) can provide ample short-term support – through buying up bonds to prevent interest rates from reaching unreasonable levels.  The euro is a reserve currency – meaning investors around the world hold it as part of their rainy day funds – and all European debt is denominated in euros.  In Mexico in 1994, for example, much of their debt was in dollars; in such a situation, a foreign loan can help stabilize a crisis – although even there the right policies have to be put in place.

But if Italy cannot pay its debt, then the ECB has no business lending to it.  The Europeans have to decide for themselves: Is Italy’s fiscal policy reasonable and responsible?  If yes, provide full support as need – from within the eurozone.  If not, then find another way forward.

But please get a move on with this decision.

An edited version of this post appeared on the NYT.com’s Economix blog; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

50 responses to “What Would It Take To Save Europe?

  1. Which of the PIIGS (an unfortunate term) are in a position to pay off debt?

    Answer: none.

    Greece can’t pay the interest on its’ debt, let alone the outstanding principal, so pumping 11 Billion euros into it, is like trying to fight the Triangle Shirtwaist Factory fire with a squirt gun.

    The German parliament last week sold out the German people, who overwhelmingly disfavor pumping more good money after bad, and who can blame the Germans?

    The decision that needs to be made FAST, is to let the creditors, bondholders, banks, and other interested parties become subject to real market forces, that is, the realization its’ debts are un-payable, and they are on the hook for the losses, not the industrious workers of Germany, or anywhere else, for that matter.

    If this causes a crash, it causes a crash…but what we have now is death by incremental strangulation.

  2. What is truely needed is a realization that current energy policys are failing, and even if you have an “industrious” people, they can not overcome bad policy. France and Germany have relied heavily on nuclear power and have had for quite some time a spent fuel rod storage problem. They have invested hugh amounts of time and money to solve the crisis but no technology has been forthcoming, and the banks/gvts continue to support these failed projects. Another problem is once they reconize these failures it will only increase the unemployment factor and open a crack of financial instability for these supposed industrial giants. Nothing short of proping up the system will suffice for the banksters, who are actually operating under a blind trust they thought was their own.

  3. Woop
    re: …real market forces….

    The rules of the debt-leverage system and non-rules of the exponentialized derivatives market are (unfortunately – from the 95 percent population perspective) the operating ‘ real market forces’. (Although it is understood what you meant)

    The debt-money-asset global macroeconomic system is completely out of kilter secondary to the valuation distortion and real estate asset over production that was a product of the triumvirate – the central banking system, the financial industry, and the accommodating politicians. The three groups have merged mutual interests now – all part of the bondholders class and keenly interested in maintaining the repayability of Euro debt.

    The rules of the system – made by these people – are what they are. The 95 % have no power and no choice – able to vote only for representatives of opposing parties both aligned with the triumvirate. For instance there are no credible US candidates representing the position of the Wall Street protestors – only candidates supporting the Triumvirates’ created Tea Partiers.

    So Pundits (usually also stakeholder bondholder representatives)will query how can the bond system be sustained (within the finesse scope of the current rules) using the infinite black box source of the shell game central banks and IMF to shore up the system.

    Meanwhile the economy is saturated with real estate, overvalued underwater mortgages, and PIGGS type of US county, city, and state debt that is denominated in the currency of the bond holders.

    How long will the economic winter last for 95 percent in the real economy?

    The patterned science of saturation macroeconmics reckons the time frame to be over twenty years.

    October 2011 will show that there are money-debt-asset system forces stronger than the shore-up job recently approved by the German parliament.

  4. European debt crisis: http://www.guardian.co.uk/business/debt-crisis (FULL PAGE OF THE LATEST REVIEW ARTICLES FROM THE GUARDIAN)
    ————————————————————–
    AND HERE FROM THE ECONOMIST:
    http://www.economist.com/node/21524378
    The euro-zone crisis
    Coverage in full

    MY SELECTION:
    The euro crisis
    Is anyone in charge?
    A look behind the drifting and squabbling to see who is really to blame, and what they’re thinking

    Oct 1st 2011 | BRUSSELS, LONDON, PARIS AND WASHINGTON, DC |
    http://www.economist.com/node/21530960

    ——————————————————————————————–
    meanwhile, back at the ranch:
    perhaps Occupy Wall Street will go GV (GLOBAL VIRAL !) BEFORE International Finance completely destroys the world subsistence and sustenance base.

    Published on Saturday, October 1, 2011 by ABC News
    ‘Occupy Wall Street’ Protests Spread Across the Country
    by Olivia Katrandjian
    http://www.commondreams.org/headline/2011/10/01-4
    —————————————————————————–
    But the bottom line for saving the Financial Earth is to make offshore finance transparent and accountable!

    Why QE2 Failed: The Money Went Offshore | July 11, 2011
    http://seekingalpha.com/article/278836-why-qe2-failed-the-money-went-offshore
    Ellen Brown
    ——————————————————————————————————–
    The global balance can not be sustained upon debt and speculation; so “What Would It Take To Save Europe?”
    NOTHING SHORT OF DECENTRALIZATION AND DIVERSIFICATION TO COMMERCIAL BANKING AND COOPERATIVE BANKING INVESTMENTS THAT ARE SOCIALLY AND COMMUNITY BASED.
    In short: DISMANTLE THE CONSOLIDATION OF FINANCIAL SUPREMACY and the private class superstructure it is sustaining while it sacrifices everyone else as expendable.

  5. @ G Lammert, perhaps you are correct about the superior strength of the old *money-debt-asset system* forces not relinquishing ground, but such forces are not immune to real chaos now enveloping them, and threatening their demise.

    If history has taught us anything, it is this: nothing is invincible over time.

  6. What would it take to save Europe? What would it take to save JP Morgan Chase?

    How about a little cash?

    http://www.jpmorganchase.com/corporate/Home/article/ny-13.htm?TB_iframe=true&height=580&width=850

    To make NYC safer, of course.

  7. @G Lammert who opines, “How long will the economic winter last for 95 percent in the real economy?

    The patterned science of saturation macroeconmics reckons the time frame to be over twenty years.”

    Is that how long you guys are going to argue that gravity does not travel faster than the speed of light?

    Because you cannot possibly be talking about the *economy* – free-maggot capitalism!

  8. Woop..

    forces not relinquishing ground, but such forces are not immune to real chaos now enveloping them …

    The forces that envelop … are epiphenomena of the debt-money-asset system, This is part of the feedback that occurs when the system is out of Kilter and ….this system is grossly out of kilter with the cancer that is the financial industry taking over the real economy and churning 400 percent of the GDP annually in Wall Street London casino and the big banks no longer happy to lend and make two percentage point on the loans but joining in on the speculation as their major business….

    A similar debt-money-asset distortion last happened to a lesser scale in France in the late 18th century … (in the 1790’s it was good for head body connectivity to be part of the 99.)

    Annie:
    re:Is that how long you guys are going to argue that gravity does not travel faster than the speed of light?
    Gravitation fields actually do travel faster than the speed of light …..

    The following, that the money-debt-asset system has patterned laws – exactly on an equivalent level to gravity – is the major observational discovery of the 21st century.

    Saturation Macroeconomics : A Patterned Science Equivalent to Physics: The 11 August 2011 CAC DAX Wilshire’s OCTOBER 2011 Fractal Crash Sequence
    Oct 2, 2011 9:38 AM

    Saturation Macroeconomics : A Patterned Science Equivalent to Physics

    The 11 August 2011 CAC DAX Wilshire’s OCTOBER 2011 Fractal Crash Sequence

    11 August 2011 :: 7/16-17/14/2 of 10-11 days :: x/2-2.5x/2x/1.5-1.6x

    Saturation macroeconomics would seem to qualitatively well describe the world’s current macroeconomic state of affairs.

    Reduce the macroeconomy to its three principle elements:
    debt, money, and other assets. (Debt and money are assets until default or the Sovereign state is kaput).

    Al three have the quality of valuation changes over time relative to each other and subclasses of debt, money(currency), and assets.

    Business cycles are well known where too much debt is created and too great number of assets are produced and thereafter the system self-corrects with unemployment and debt default on the collateral of overproduced and overvalued assets as dependent variables.

    Is there a time denominated patterned mathematical relationship between the elements of macroeconomy – a pattern with sufficient regularity to ascribe to the macroeconomic system the properties of a science?

    in the Final Update of the Economic Fractalist, a challenge was self-made to identify the peak saturation valuation area and the expected nonlinearity of the macroeconomic system.

    The simple mathematical operating laws of asset valuation growth and decay of the Macroeconomic system were described in a single paragraph on the 2005 Main Page of the Economic Fractalist.

    The simple operational self organization law of the Macroeconomic System is a quantum time based ordered fractal progression of growth and decay of its asset valuations :: x/2.5x/2x/1.5-1.6x with the the first 3 fractals representing growth with maximum valuation buying trading saturation areas and the 4th fractal representing decay to a maximum selling devaluation trading saturation area.

    The 11 October 2007 Wilshire was prospectively identified as a reflexic 20/5040 day :: x/2.5x/2x fractal series with the 40th day 7 October 2007.

    The 6 May 2010 Flash Crash was within the 2x-2.5x terminal portion of a second 221 day growth fractal of a 6 March 2009 88/221 day series which ended with a 6/15/12/10 day :: x/2.5x/2x/1.5x series.

    And now to end a 1982 Wilshire 34/85 of 85 quarter series , the DAX and CAC have completed a 11 August 7/17/14 :: x/2.5x/2x growth series with a nonlinear lower low gap between day 16 and 17 of the second fractal.

    Could the 1982 34/85 fractal global collapse be contained in an 11 August DAX/CAC :: 7/17/14/2 of 10-11 day x/2.5x/2x/1.5-1.6x fractal?

    (For the Wilshire after an initiating fractal series of 3 days from 9 to 11 August, an 11 August 2011 fractal of 7/16/14/2 of 10 to 11 day fractal.)

    What is the probability that these repetitive fractal patterns are occurring by chance and chance alone? Near to or simply Zero.

    The Macroeconomic system of money, debt and assets represents a self organizing system with periodicity, patterns, and order equivalent to physics..

  9. @ G Lammert! Are you suggesting by fractal analytics we’re currently “screwed” because we find ourselves at the “4th fractal representing decay to a maximum selling devaluation trading saturation area.”?

    I travelled to Motor City, and was there during the real push-start of this breakdown crisis in September 2008, and it seemed to me, even with the nice splendor of the Atheneum Hotel, we had all sort of reached the 4th fractal point back then :)…..but you say your fractals had this predicted years before?

    All I could see was one form of decay or another, and that’s all I see currently, and I would be a better optimist if something out there, observationally-speaking, provided some glimmer of hope this *BANKER*-INDUCED NIGHTMARE would be ending soon….it’s gotten so rotten, bank presidents are buying protection from the cops.

    http://www.jpmorganchase.com/corporate/Home/article/ny-13.htm?TB_iframe=true&height=580&width=850

  10. http://www.economicfractalist.com/

    From the Main Page …..

    The ideal growth fractal time sequence is X, 2.5X, 2X and 1.5-1.6X. The first two cycles include a saturation transitional point and decay process in the terminal portion of the cycles. A sudden nonlinear drop in the last 0.5x time period of the 2.5X is the hallmark of a second cycle and characterizes this most recognizable cycle. After the nonlinear gap drop, the third cycle begins. This means that the second cycle can last anywhere in length from 2x to 2.5x. The third cycle 2X is primarily a growth cycle with a lower saturation point and decay process followed by a higher saturation point. The last 1.5-1.6X cycle is primarily a decay cycle interrupted with a mid area growth period. Near ideal fractal cycles can be seen in the trading valuations of many commodities and individual stocks. Most of the cycles are caricatures of the ideal and conform to Gompertz mathematical type saturation and decay curves.

    G. Lammert

    This page was last updated on 15-May-2005 01:21:59 PM .

    Examine the currently evolving (time based) fractal patterns of the 11 August 2011 DAX or CAC and match it the fractal proportionality of that described in 2005.

    It is exactly – exactly … the same. The debt-money-asset macroeconomic system is a self organizing self balancing negative feedback system whose operational laws are as precise as those of physics.

    A great nonlinear asset devolution is coming over the next 8-9 trading days :: 7/17/14/2 of 10-11 days as of 2 October 2011. (US long term bonds will fall to 150 year low interest rates.) After this there may be one more 4 phase grow and decay fractal series with a first fractal base day of 5-6 days with the US Wilshire still ending in a1982 34/85 of 85 quarter second fractal window which ends in December. Time will tell.

    If the Triumvirate were as smart as they were greedy, they would have played it like Buffet willing wanting to have given some of non valued added skimming back to the people in the form of taxes and promoting some 5 star Keynesian stimulation.

  11. I didn’t understand the first time, so I was seeking an explanation to help me with your fractal quant theory…I had trouble with Talcott Parsons pattern variables, so this isn’t new with me.

  12. Take the complexity, convoluted nomenclature, and mixed categorization of Talcott, ascribe a number to it, divide that number by a google,squared and that is the relative simplicity of the laws of the macroeconomic system.

    It is grade school child simple…..

  13. Are you making fun of me, of Talcott, of fractals, or of this thread? :)

  14. With all due respect, discussion of cuts to nominal wages in a low inflation environment as a “creative solution” are a non-starter. Cutting nominal wages without cutting nominal debt, when the debt is overwhelmingly large, is doomed to failure. Greece, Portugal, Spain, Ireland – in sequence, we have conducted a great austerity experiment, and failed. So it looks for now that German exports will get a boost, and the US gets to keep its reserve currency status. Oh Joy.

    “Unable to move the exchange rate and unwilling to cut wages, the Portuguese government is embarked on an innovative course of “fiscal devaluation,” meaning that they will cut payroll taxes – to reduce the cost of hiring labor – while also increasing VAT (a tax on consumption) as a way to maintain fiscal revenues. Unfortunately, “innovative” in the context of stabilization policies often means “unlikely to succeed” – and the precise implementation of this scheme, with some very complex details, seems fraught with danger.”

  15. Parsons studied Kant too much.

    The laws time based laws of Quantitative saturation macroeconomics are elegantly simple.

    As a specific example:
    1. the first base fractal of the 11 August 2011 DAX/CAC is 7 days (the fractal counting system counts the last day of the first fractal as the first day of the second fractal, growth begins in decay with integration)

    2. the second fractal is a 2-2.5x times porportionality of the 7 day first fractal base or 2.5 times 7 which equals actually 17.5 days but the length is empirically found to be between 2x and 2.5x of the base fractal x with a nonlinear low between x and 2.5x. For the dax and the CAC non linearity occurs between the 16th and 17th day of the second fractal

    3.the third fractal is 2x of the base (7) or 14 days

    These are quantum fractal laws … because the patterns are evident and repeat themselves at various different time unit dimensions, ie, on the minutely charts, hourly charts, daily charts, weekly charts, monthly charts, quarterly charts, and yearly charts the same proportional x/2.5x/2x patterns

    The nonlinear drop similar to that between the 16 and 17 day second fractal of the 11 August DAX or CAC series will occur in the last quarter of a 1982 34/85 of 85 quarter for the Wilshire with a nonlinear low expected in Oct Nov, Dec of 2011.

    Because the US progenitor equity fractal patterns are identifiable back to 1789 with a 70 year base fractal ending in 1858, the nonlinear lower lows of equity, commodity, and gold, silver will be historical. The US long bond will reach historical low interest rates. A deflationary depression – the greatest the world has ever seen will transpire.

    Qualitatively the money-debt-asset macroeconomic system will lose a large portion of defaulted debt as an asset. Overproduced overvalued real estate caused by the Triumvirate will longer than twenty years to reach a new equilibrium with wage demand.

    Observe what happens to the CAC/DAX/Wilshire thru the next 8-9 days of the 7/17/14/2 of 10-11 day :: x/2.5x/2x/1.5-1.6x 4 phase fractal series.

    Of course Reuters and AP will say the asset collapse is a traditional October under bleak economic conditions with terrible consumer sentiment, and an risk Euro with Greece probably leaving the Union.

    But know that this debt-money-asset is self organizing and has laws as exact as physics …..

    Qualitatively it is saturated with debt, over produced assets, and overvalued assets. A second fractal nonlinear asset contraction will occur and will occur in an identifiable pattern.

  16. Simon, the thing I have worried about for thirty years is coming true. International financial systems cannot work. Every sovereign nation needs their own currency, their separate internal financial system of choice, and international trade needs to be by specific barter – one product for another, based on what both parties will accept. Real supply and demand would determine the ‘reasonable value’ of products and commodities. No subsidies, no discounts – each product stands on its own value.

    Otherwise, the world will have to have one currency, with an international minimum wage, and every job listed in a range of pay – including CEO/CFO. All corporations must determine in which country they will exist and produce. It’s time we started working again – all of us. I’m sure there’s a “law of” somewhere that we’re seriously breaking. It may be the one that says, “There ain’t no free lunch,” or “Perpetual motion is a myth.” I don’t know – but, surely with the intelligence of humanity, we can find a little wisdom somewhere.

    I haven’t worked out all the details, but we all need to start thinking about solving this problem. So far, all we’re doing is trying to organize a garbage can without emptying the contents first and throwing away the rotten – hoping if we stir it enough, it will get sweeter.

    I challenge anyone to prove me totally wrong – and don’t hesitate to do so, I am old and we don’t have much time for the sake of everyone else. Debt is killing every financial system. It could be that debt is the major problem. Think on that one.

  17. @woop

    “…..In the beginning there was $$$$ and then came Life….”

    Mandelbrot would have killed himself had he known…..fractals, Dude, it’s all just a math problem that we made up…

  18. Simon, I am on board all the way. In my way of thinking I like to start from the micro and work toward the macro, understanding that with human action, whether we talk of individuals or countries, we’re still talking about responses to stimulus or lack thereof. As a basis for any starting point in discussing these things, one must understand that what happened over the last five year economic cycle is actually incredibly similar to what happened during the Great Depression. And, now as then, the markets are still enveloped in a heavy fiscal malaise (with some exceptions in Asia). The problem, then as now, is that those sitting on the largest supplies of money (and therefore the ones with the greatest political clout), many of whom were heavily involved in the leadup to the crash and who haven’t changed, are wont to part with the security of their holdings to help the ones they’ve harmed. I look at the size of the bailout fund currently under discussion, some 650 billion euros, and see that as a drop in the bucket. But then as it relates to our $700 billion TARP and the $950 billion stimulus package following that, it is equally anemic in size and scope. But, much of the problem could be overcome now and in the future, by simply requiring banks to get off their accounting gimmicks to hide the massive losers on their balance sheets, make them hold hefty capital in equity and hard cash assets, or make them fail. Needless to say, now as in the TARP, the whole idea is to keep the banks viable, since they are the ones holding questionable bonds along with the wealthiest investors, and, by God, we can’t let them go bad, or, as they say, the world will end. Back to the micro. There is a reason why many very successful people went bankrupt at least once and then came back even more successful. It’s called track record. They were able to reestablish quickly, and get the money they needed to do business. The debtor nations have all been successful in the past for decades and even centuries. They must either be funded sufficiently, or be permitted to go through reorganization. The European Central Bank must come up with a realistic strategy for this to happen. Otherwise, the billions that they can come up with will always be simply stopgap, and won’t actually cure the patient, but keep them near or on life support for the foreseeable future. This means haircuts for a lot of bond holders, and lots more money and time for the PIGS.

  19. Simon, I am on board all the way. In my way of thinking I like to start from the micro and work toward the macro, understanding that with human action, whether we talk of individuals or countries, we’re still talking about responses to stimulus or lack thereof. As a basis for any starting point in discussing these things, one must understand that what happened over the last five year economic cycle is actually incredibly similar to what happened during the Great Depression. And, now as then, the markets are still enveloped in a heavy fiscal malaise (with some exceptions in Asia). The problem, then as now, is that those sitting on the largest supplies of money (and therefore the ones with the greatest political clout), many of whom were heavily involved in the leadup to the crash and who haven’t changed, are wont to part with the security of their holdings to help the ones they’ve harmed. I look at the size of the bailout fund currently under discussion, some 650 billion euros, and see that as a drop in the bucket. But then as it relates to our $700 billion TARP and the $950 billion stimulus package following that, it is equally anemic in size and scope. But, much of the problem could be overcome now and in the future, by simply requiring banks to get off their accounting gimmicks to hide the massive losers on their balance sheets, make them hold hefty capital in equity and hard cash assets, or make them fail. Needless to say, now as in the TARP, the whole idea is to keep the banks viable, since they are the ones holding questionable bonds along with the wealthiest investors, and, by God, we can’t let them go bad, or, as they say, the world will end. Back to the micro. There is a reason why many very successful people went bankrupt at least once and then came back even more successful. It’s called track record. They were able to reestablish quickly, and get the money they needed to do business. The debtor nations have all been successful in the past for decades and even centuries. They must either be funded sufficiently, or be permitted to go through reorganization. The European Central Bank must come up with a realistic strategy for this to happen. Otherwise, the billions that they can come up with will always be simply stopgap, and won’t actually cure the patient, but keep them near or on life support for the foreseeable future. This means haircuts for a lot of bond holders, and lots more money and time for the PIGS.

  20. Above comments are mostly very scientific, unfortunately way beyond me;-) The simple fact is (and I miss this to a large extent in the discussions surrounding the subject), most of the developed world has lived way above it’s means for the last few decades. And there comes a time when the creditors will no longer lend the debtors money; that time is at hand now with Greece, and close with various other PIIGS, and on the horizon for other countries, including USA, Germany, etc.
    So now comes the time to start living within our means again; unfortunately, during this deleveraging phase it becomes double whammy: lower spending PLUS repaying of loans + interest for past sins. It’s a long and painful process, and what we should be discussing IMHO is HOW to do this, country by country. While all methods and routes are painful, some are more so than others.
    Of course, default is an option, with all that that entails; probably anyhow unavoidable in some cases, where the creditors did not stop feeding the drip early enough, and will likely need to suffer the consequences.
    Lastly, I’m unconvinced that we’ve learned: we will still allow politicians to BS us that we can have our cake and eat it. It’s not us, you see, it’s those nasty creditors (which incidentally include widows and orphans money in no small measure).

  21. Richard Proudlove

    The Eurozone is finished. None of the peripheral countries has enough cash to pay back its mountain of debt. It’s a good thing the UK is not part of the Euro.
    Cheers!
    Richard

  22. The fortune cookie says structural change is in order. You cannot keep cooking the books, although this is the favored option among the political puppets that care only about pleasing the banksters. And wouldn’t it be ironic were China to have the last word.

    “The deepening debt crisis in the eurozone and increasingly poor economic data in the US, have overshadowed rapidly deteriorating conditions in the world’s second biggest economy. The China miracle is quickly becoming a nightmare as credit default swaps (CDS) spike parabolically to 3-year highs and stocks plunge “dragging the Hang Seng Index to its biggest quarterly loss in a decade.” (Bloomberg) China’s property bubble has sprung a leak dimming the outlook for future growth and putting the Chinese economy on course for a hard landing. Investors are now shedding stocks at a feverish pace anticipating a credit contraction. China might wind up being the domino that analysts failed to see due to their preoccupation with Europe and the US. That said, China’s troubles are no longer “below the radar”, in fact, the wreckage is drawing more attention by the day.”

    http://www.counterpunch.org/2011/09/30/cracked-china/

  23. @Every sovereign nation needs their own currency, their separate internal financial system of choice, and international trade needs to be by specific barter – one product for another, based on what both parties will accept. Real supply and demand would determine the ‘reasonable value’ of products and commodities. No subsidies, no discounts – each product stands on its own value.

    Challenge accepted, although I never intentionally like to prove anyone totally wrong, but before your perfect system can get started you have to get the law(s) straight, they currently are not. And after that we can educate the children, proper like, and wait for them to behave like real humans did before the industrial age of pollutants and cancers. To achieve this among many nations where the majority is wrong in their basic thinking, would require a person(s) of greater talent than the second coming of christ could/would provide. This obviously is going to take some time and since you and T. Boone Pickens have very little of it left, you may as well enjoy your limited time on the plant, as try to convince anyone here that there is even an answer to your percieved problems.

  24. Owen, I will follow what you have to say about this, because you are the first to acknowledge an understanding of what I said. Thank you. It would be wonderful to discover that my perceived problems are held only to me, but unfortunately, the degrees of separation are too close.

  25. There is an even simpler solution: Kick GERMANY out of the Euro.

    Much of the problem with the Euro zone is that Germany has consciously constructed it, and its own economy as a mercantilist export driven economy.

    It is China writ slightly smaller.

    If Germany leaves the Euro, you won’t see the capital flight from other countries’ banks banks if THEY left the Euro, and the new Deutschmark would rise, and the Euro would fall, placing everything back into balance.

  26. Great article, Simon — now please do a follow up piece: What Would it take to save the US?

  27. When I asked about “sdaving the US”, I was not referring to the government fiscal problems — those are easily dealt with. But rather, the mountain of consumer+mortgage debt owed by the people. As I see it, we are closer as a society to Greece than anywhere else. Should we devalue the global reserve currency? And if we did, what are the ramifications to international trade?

  28. @ Annie, I’m so happy having missed fractals, which sounds like a subset of mental you know what…:)

  29. David Lentz Quote: “When I asked about “saving the US”, I was not referring to the government fiscal problems — those are easily dealt with. But rather, the mountain of consumer+mortgage debt owed by the people.”

    I realize you didn’t ask me the question, but I’m looking at relationships at cross-purposes on this scenario.
    …First, the average real estate mortgagor knows that they are being lent money, assuming it to be a mortgage company, sometimes backed by government insurance. They know the payback terms and are given an address to remit payments.
    …When mortgages are serviced by yet another company, it becomes confusing unless the mortgagee communicates properly.
    …Anything past that relationship is impossible for the mortgagor to track. Any form of financial instruments designed to capture an after-market part of that transaction is fraud – whether currently legal or not, BECAUSE profit is marketed on an asset value that does not exist.
    …Therefore, I believe that anyone who marketed, or purchased, these instruments should take the loss, and the original contract should be honored.
    …The owners of the original contract should be allowed by law, to work together under a variety of agreement options to 1) protect the value of the asset; 2) keep the buyer in the house if possible, or 3) allow the buyer to rent/lease the property to cover the payments, or qualify for a short-sell, and 4) be exempt from credit default on their record, IF they work diligently to correct the default.

  30. ^5 Texasjune

  31. One of the challenges to Simons proposal on clarifying the fiscal situation of Italy is that it is their culture to say something today and change their mind tomorrow. That is not going to change. So how can anyone trust what they say today? Really one needs to live there to understand this mentality.
    So for this reason this approach cannot work I am afraid Simon. Its clear to me that Simon has not lived in Italy before. Simons anaylsis is spot on and is ‘ahead of the curve’, some things one has to experience for themselves though.

  32. Sorry, Woop, what does that mean?
    June

  33. general: http://search.aol.com/aol/search?s_it=webmail-hawaii1-standardaol&q=financial%20transaction%20tax (search page for “financial transaction tax”
    ————————————————————————————————————-
    http://www.makefinancework.org/home-english/financial-transaction-tax/
    “Some call it the Robin Hood Tax, others call it the Financial Transaction Tax, others call it a really good idea. This tiny tax could take $400,000,000,000 out of the pockets of the bankers who got rich by crashing the economy and use that money to stop domestic service cuts and help the people who are suffering the most from climate change, and who did the least to cause it. This amazing 0.05% tax also helps stabilize the economy by preventing high speed trading (done mostly by computers all on their own). Help us make this piece of common sense into a common practice.”
    ——————————————————————————————————————————————————————————-

    http://wallstreetpit.com/84790-eu-financial-transaction-tax-is-feasible-and-if-set-right-desirable
    EU’s Financial Transaction Tax is Feasible, and If Set Right, Desirable

    By Avinash Persaud Oct 3, 2011, 9:53 AM

    The ‘Tobin tax’ has once again appeared in the headlines having been proposed by the European Commission and opposed by the US. This column argues that such taxes are more feasible than most think when they are linked to legal enforceability, and that the burden would be disproportionately borne by high-frequency traders that provide liquidity only when the markets don’t really need it.

    “The announcement on Wednesday that the European Commission will propose an EU-wide, 0.1% tax on bond and equity transactions, and 0.01% on derivative transactions between financial firms, to support European countries in crisis, will generate substantial opposition. Cassandras will shout that it is another crazy idea from Europe that will presage financial Armageddon.

    In truth, this tax is more feasible than many would have us think, and like all taxes can be set well or badly and if set well, could bring several benefits.”

  34. @Texasjune – Woop probably gives you a high 5, which is a good thing.

  35. I’m sure there was a screaming headline of “What Would it Take to Save Europe” back in the late 1930s – after the *Depression* and before WWII….

  36. Hi June, it means: “and I approved this message”…hehe

  37. @ woop, “@ Annie, I’m so happy having missed fractals, which sounds like a subset of mental you know what…:)”

    It’s not really all that funny though, is it, that mental states were not examined? Isn’t the will of man a much bigger force of metaphysics than the flapping of a butterfly’s wing?

    Back when, all the Jamies and Timmys were admitting that they didn’t really *get it* either. So why did it not matter – the fractal details, if you will? Because the CEOs and CFOs are the *bottom line* top dogs – and the bottom line looked real good FOR THEM, personally.

    Remember this post? Can easily be a checklist called “Signs You Live in a hyper-political Lunatic Asylum Run by a Nihilistic Wrecking Crew”:

    Signs you work for a bad company.

    Sign No. 1: Conspicuously posted vision or value statements are filled with vague but important-sounding words like “excellence” and “quality”

    Sign No. 2: Bringing up a problem is considered more as evidence of a personality defect rather than as an actual observation of reality

    Sign No. 3: If by chance there are problems, the usual solution is a motivational seminar Attitude is everything, especially in places where facts are embarrassing or inconvenient.

    Sign No. 4: Double messages are delivered with a straight face. Quality and quantity are both job one.

    Sign No. 5: History is regularly edited to make executive decisions more correct, and correct decisions more executive than they actually were

    Sign No. 6: People are discouraged from putting things in writing

    Sign No. 7: Directions are ambiguous and often vaguely threatening

    Sign No. 8: Internal competition is encouraged and rewarded. The word “teamwork” may be batted around like a softball at a company picnic, but in a dysfunctional company the star players are the only ones who get recognition and big bucks.

    Sign No. 9: Decisions are made at the highest level possible

    Sign No. 10: Delegating means telling somebody to do something, not giving them the power to do it

    Sign No. 11: Management approaches from the latest bestseller are regularly misunderstood to mean what we’re doing already is right on the mark. “Seven Habits of Highly Effective People,” “Good to Great” and “Who Moved My Cheese?” all seem to boil down to, “quit griping and do more with less.” (Anyone remember The Oz Principle)

    Sign No. 12: Resources are tightly controlled

    Sign No. 13: You are expected to feel lucky to have a job and know you could lose it if you don’t toe the line. Dysfunctional companies maintain control using the threat of punishment. Most will maintain that they also use positive rewards … like your paycheck. A few people are actually fired, but most of those who go are driven to quit.

    Sign No. 14: Rules are enforced based on who you are rather than what you do. In a dysfunctional company, there are clearly insiders and outsiders and everyone knows who belongs in each group. Accountability has different meanings depending on which group you’re in.

    Sign No. 15: The company fails the Dilbert Test. Dysfunctional organizations have no sense of humor.

  38. Floating exchange rates are the mechanism for balancing capital flows. The EU and the Euro do not provide that mechanism for the weak , high consumption countries, just the strong exporters. It was a noble idea but it could not succeed without a centralized government setting the budgets, taxes, pensions. All they really have is a centralized banking system.

  39. Bruce E. Woych

    Maybe because it has no axe to grind and translates “objectively” only because it was a work released in 2006 (just before the storm…), but this reference has a good deal of insight into the pretext, context and potentials from the European perspective. In any case, I found that browsing through it helps to frame certain questions in an authentic proportion to the Euro-mind-set.

    For what it’s worth to the serious research enthusiast on this subject:

    Contemporary Studies in Economic and Financial Analysis volume 88
    EUROPEAN RESPONSES TO GLOBALIZATION: RESISTANCE, ADAPTATION AND ALTERNATIVES.
    Edited by Janet Laible and Henri J. Barkey
    1st edition 2006
    ELSEVIER (imprint = JAI Press)
    ——————————————————
    This CSEFA series is edited by Robert J. Thornton and J. Richare Aronson.
    There are many very interesting titles in the series as well.
    compliments!

  40. Bill Gilwood

    If Italy’s fiscal policy doesn’t satisfy lenders do European leaders just let Italy default? How did these leaders ever think they could have currency union without fiscal union?

  41. Scott Peterson

    Professor Johnson,
    Since you are on the FDIC’s Systemic Resolution Advisory Committee, perhaps you would care to explain why the FDIC is essentially doing nothing to accomplish its mandate to take over and wind down insolvent banks. There are almost one thousand banks with outstanding corrective orders from the FDIC and yet each week perhaps one or two very small banks are put into FDIC receivership. This is egregious dereliction of responsibility by the FDIC.

  42. Well now. we have another PIG here, a pig hugely overlooked. That pig is, of course, the US of A. For the US of A has become Wall Street. Being a street in New Amsterdam in the old days, with this former colony of ours ( I am Dutch) we got the short side of the stick, being fooled by the Anglo-Saxons and their perception of free trade. So we got stuck with Surinam (not even worth mentioning on Wiki/English).

    Histoire se repete, history repeats itself: Wall Street got humongous aid by the US Government and the Fed, with two obvious results:

    1: according to FDIC US banks had their second best quarter ever (the first of 2011, the first being second quarter of 2007, before all this made-in-America-shit hit the fan).

    2: . All of a sudden the ratingagencies, Wall Street’s best friend ever, started harrasing Europe, first the PIIGS, lately some EU banks. Standard & Poors de-rating the US was nothing but a decoy, be it a rather good one. Because Europe wasn’t able to support their banks with many hundrerds of billions Bailouts and TARP (US G) and trillions of Primary Dealers Credit Facilities (Fed) the Euro-banks are under attack as well.

    What was that last sentence in Ayn Rand’s monstrosity Atlas Shrugged again:nothing but barren wasteland, John Galt waiving his hand, making the sign of the US $. I give him my middlefinger in return.

  43. Wouter, what did you expect from globalized monitory systems? The nations themselves are the pawns. The economy of the USA is being destroyed under the quest for unearned profit. Direct your displeasure toward the concept that if each nation cannot survive under its own concept of financial and social responsibility to its own people – what chance in hell is there for success in combining all the failures?

  44. Bruce E. Woych

    Dexia Breakup Woes: What Happens During A Bank Bailout: Peter Zeihan
    By: Peter Zeihan Date: 10 October 2011
    http://www.economywatch.com/economy-business-and-finance-news/dexia-breakup-woes-what-happens-during-a-bank-bailout.10-10.html

    “The Franco-Belgian bank Dexia started collapsing Oct. 4, ushering the latest chapter of the nearly 2-year-old European financial crisis. Considering that Dexia is on the list of the top 50 global financial institutions, it is worth examining what happens during a bank bailout and shutdown process and applying that to the Dexia situation.”

    And to the greater scale as well…?

  45. Scotty, very good point there, been wondering that myself.

  46. Bruce E. Woych

    Is Dexia Bank The Bear Stearns Of The Current Credit Crisis?
    4 comments | October 10, 2011

    http://seekingalpha.com/article/298609-is-dexia-bank-the-bear-stearns-of-the-current-credit-crisis?
    ————————————————————————-

    European Debt Crisis: Continuous Bailout Is Not The Answer
    October 11, 2011 |

    http://seekingalpha.com/article/298809-european-debt-crisis-continuous-bailout-is-not-the-answer
    ————————————————————————-

    Euro And Pound Remain Favored Shorts Of Currency Specs
    October 10, 2011 |
    http://seekingalpha.com/article/298684-euro-and-pound-remain-favored-shorts-of-currency-specs

    (Note: this was a determining factor agtainst Japan when the carry trade continuously shorted the YEN)
    ————————————————————————–
    IMF: Income Inequality Worsens In Most Developed Countries
    October 10, 2011
    http://seekingalpha.com/article/298708-imf-income-inequality-worsens-in-most-developed-countries
    —————————————————————————–
    Euro Crisis Management: A High Risk Of Things Ending Badly
    8 comments | October 10, 2011
    http://seekingalpha.com/article/298537-euro-crisis-management-a-high-risk-of-things-ending-badly
    —————————————————————————–

    The only sane solution is a progressive transaction tax that is pegged directly to the size of the debt and that turns regressive as the debt is paid down. This must be coupled with a governing mechanism against crashing the Euro by relentlessly shorting it (and the case is clearly demonstrated in the way this was instrumental in crushing Japanese recovery every time it had an impetus towards correction).
    Only if there is a will …is their a way.

    Otherwise: get your things in order and make up your WILL for the survivors!

  47. Bruce E. Woych

    China maintains gold for the international standards and silver for the domestic stability of its economy. A two tier system does not have to be identical. Weaker or defaulting sub-systems integrated within the European economic coalition could be required to go on a specially designed standard to secure their transactions internally (oversimplified: a gold standard until they get their systemic credit in recovery mode acceptable to the rest of the European community).

    (Just a random idea; I have no claim to economic pretenses. It seems that the experts and authorities need to break out of their class structured casket and get some random ideas going or we are all on a dead end of this free fall).

  48. Bruce E. Woych

    Perhaps the so-called “bailouts” should be made in gold…at least then we could track where the money actually goes!

  49. @Woych “Perhaps the so-called “bailouts” should be made in gold…at least then we could track where the money actually goes!”

    I don’t care for that idea – their perfect opportunity to trade worthless paper for! No! Just a loan, huh? What’s the collateral?