Recent Items

On the Maybe Not So Slow Motion European Train Wreck

Posted on by

I owe readers a longer comment on this, since we may be going into crisis mode (ah, the joys of waking up and toddling out to the computer to see what wheels are falling off the global financial system today).

Your humble blogger may be a bit jaded (two years of watching the crisis and another near year of seeing not enough done to prevent another one may have something to do with it). But this all feels like it was and will be terribly predictable, not in the particulars, but in the general trajectory.

The markets got three pieces of bad news on Friday: Hungary and rumors of large derivative losses at SocGen (which led the euro to tank) followed by a disappointing jobs report. Again, the rattled nerves evident in various news reports and blog posts may abate by Monday, but the sucking sound of deflation and creaking of bank balance sheets is finally calling into question the cheery assumption that patching up the financial system with baling wire and duct tape was a viable long term plan.

With a private sector debt overhang this large, deflationary pressures are hard to forestall. It becomes politically unacceptable to go much further in bailing out private sector entities, although the monetary authorities are creating SIV equivalents right, left an center to accomplish the same end. Defaults increasingly look inevitable on a number of fronts, from homeowners in the US who are increasingly willing to default, to the new focus on the riskiness of not just Hungary, but other Eastern European borrowers as well (some Germany-based readers have long been expecting serious trouble in Austria, whose banks were gateway lenders to Eastern Europe).

The underlying problem is that a huge amount of fiscal and monetary firepower was deployed to validate asset values and avoid debt writedowns at banks. Many advocated instead it would have been better to reduce various debt exposures through resturcturing. While an injection of taxpayer funds might still have proven necessary, banks with cleaned-up balance sheets are more attractive to investors than ones that own toxic sludge.

But as bad as extend and pretend has been in the US, it has been even worse in the eurozone. And the policy errors only seem to be compounding. The latest comes via Bloomberg:

Claude Trichet and Treasury Secretary Timothy F. Geithner diverged on prescriptions to sustain growth, with Europe set to tighten budgets and the U.S. seeking stronger domestic demand.

The impact of narrower budget gaps “on growth could not be considered negative because it would improve confidence,” Trichet told reporters yesterday…

“Stronger domestic demand growth in Japan and in the European surplus countries” is needed, Geithner said at a separate press briefing in Busan. Spending in both areas is “relatively weak,” he said.

While Geithner echoed the view that fiscal consolidation is needed, he said it should be done over the “medium term.” European officials said yesterday that budget tightening needs to come next year, and German Chancellor Angela Merkel said that growth can’t come at the price of high state budget deficits.

Yves here. Consider the example of Ireland, which has embraced austerity. Real GDP is down 12%, and nominal has shrunk nearly 19%. And nominal is what is relevant in terms of paying down debt. How is Ireland going to be able to pay down its debt when its income has collapsed 19% relative to debt levels? Answer: not. This is why Trichet has his priorities backwards. What will instill confidence is not claiming governments can meet austerity targets, particularly when violence in Greece suggests that one can’t assume that the populace in all countries will accept the mission. It would be preferable to ease up on the timetable, try to get Germany to reduce its surplus with other countries within the EU by spending more, and push eurozone leaders to devise a more coherent process for working through the shortcomings in eurozone arrangements (that would likely require a considerably amount of shuttle diplomacy). What has rattled the markets most has been the divergent and mercurial remarks of some leaders within the eurozone.

A credible plan to have a plan (as in a timetable of meetings and agenda items) and a show of greater cohesion would do more for confidence than continued affirmation of commitment to austerity, when some doubt the targets can be met and others question the merits of exercise right now.

Print Friendly
Twitter2DiggReddit0StumbleUpon0Facebook2LinkedIn0Google+0bufferEmail

109 comments

  1. Foppe

    I don’t get it. Unless people expect/think it reasonable that, during a crisis, enough new export products (or decreased imports because of local alternatives) will be developed and produced to pay for the debt itself, how is it going to help to artificially inflate the GDP? GDP is an absolutely horrible identity eqn without having a separate term for external borrowing (which limits future spending/GDP, because the repayments aren’t going to the local population who can then reinvest/spend it) included. Spending is nice, and you have to get it going somehow, but the problem is that, over the past decade, most of the reason why Germany could increase its exports was because they were indirectly borrowing Spain/etc. the money to buy products off them, without Spain etc. investing that money to grow their economies.. Without growth in marketable products created, you cannot really have sustainable increases in consumption. Increased German consumption isn’t going to encourage them to suddenly ‘buy Spanish’, if most Spanish products suck, all it will do is (in 4-5y time) decrease their competitive advantages a bit.
    So unless there is a way for ‘them’ to increase its exports/decrease money flow imbalances in the next few years, the only reasonable thing to do is to just restructure those debt obligations (which will mean pensioners will take losses).

    1. Yves Smith Post author

      If Germans consume more (and this does not have to be imports, it can simply be domestic goods), it will lower the savings rate, which will reduce its trade surplus.

      1. russell1200

        But it looks like the Germans really haven’t been saving the money, they have just been giving it away to the PIGS so that they could spend it.

        If the Germans don’t buy anything from the PIGS, the Pigs economies are going to collapse.

        And Germany is pretty much where the US was at the start of the 1930s. A net exporter who was lending money to countries so that they could keep on buying.

      2. charcad

        The EU Commission has spoken. So more spending more is not in the plan. Merkel’s latest domestic speeches also preach austerity, and a return to the simpler life enjoyed by “our grandparents”.

        http://www.dw-world.de/dw/article/0,,5655024,00.html

        “Chancellor Angela Merkel says social welfare spending should be cut as Germany looks to dramatically reduce its budget deficit. However, political allies have said that tax hikes would be preferable.”

        Merkel said this after meeting with her utility man, President Medvedev from GAZPROM – ooops – I meant from Russia. Other headlines on the Deutsche Welle page include “record (German) debt levels” and “large (German) deficits”.

        How do you envision this working overall?

        EU Budgetary Orders to Germany: “Spend more”.
        EU Budgetary Orders to PIIGS: “Spend less”.

        Is there some way to keep this secret from Diego Garcia and his neighbors while publicly reassuring the world markets that everything is coming into balance?

        1. Glen

          Merkel’s latest domestic speeches also preach austerity, and a return to the simpler life enjoyed by “our grandparents”.

          Maybe my history is hazy, but weren’t her grandparents somewhat busy turning Europe into a smoking ruin?

      3. Sebastian

        Germany is not going to consume more. They are going to consume less, import less, and produce more. Balance their budget and hold europe together. They have the industrial base and technical ability to do it. (With backing of russia. That’s the significance of Medvedev/merkel meeting. But nobody makes note of that here.)

        They have enough of US bullshit. (spend more) Because obviously, after they go in debt, guess who is shorting their bond, downgrade their rating, and attacking their currency? (US banksters)

        So now they say FU america, now it’s our turn to do it our way. Too bad if you go bankrupt and China/Japan will short your bond.

        Next year, Obama has to borrow so much money from the world, there is no way china/Japan will accept that. (not with north Korea/Burma/Iran war talk) They just going to flip their middle finger as well and say, time to pay up that 40% roll over. Margin call.

        By 2015, US will be in argentina/greek/UK during suez crisis/near default position. The notion that US will be in Japan loss decade is delusional, since US has huge trade balance and fiscal deficit.

        watch money market, gold, stock market gyration, all of them are not making any sense. Anybody who ever live in argentina/chile/greek/south east asia during crisis knows those symptoms very well. Even Obama “in denial”/pretend like nothing happens/spend more political moves are familiar.

        1. Doug Terpstra

          Oh my, your glass is not half empty; it’s downright dusty! BARTENDER, bring us another bottle of stimulus!

        2. DownSouth

          Germany is not going to consume more. They are going to consume less, import less, and produce more. Balance their budget and hold europe together. They have the industrial base and technical ability to do it.

          If Germany produces more, and consumes less, who’s going to buy the excess production? Who are its new potential customers?

          Not the United States or the UK, who will be broke according to your predictions.

          Not Southern Europe.

          Not Eastern Europe.

          Russia? Where will Russia get the money? Russia’s got oil and natural gas, but if your prediction comes true the world will be afloat in a sea of oil. It won’t fetch $10 a barrel.

          You sound entirely too much like the guy who cut off his nose to spite his face.

          1. Gigi

            There are plenty of German product that can’t be sold due to US demand (weapons, utilities, high tech machines)

            Why do you think Medvedev was in Germany? Export to China and Russia alone would be more than sufficient to bail out entire europe. (but that involves submarines technology, aerospace, land weapon system)… And you can guarantee, pentagon will go ape.

            Then there is the case of Iran, Syria, Turkey which US/neocon tries very hard to stop germany to do trade with. Iran was third biggest german trading partner. Easy money.

            Of course there is chemical industry, classic german strength, they can kill the entire global rival at the flick of a switch if they want to sacrifice US relationship and obtain cheap oil from middle east and eastern europe. Who will buy their product? The entire world of course, at the expense of over priced US supply.

            Of course they have no problem competing in US too in high tech goods. (Boeing, GM, GE) vs (Airbus, Daimler, Siemens) Who do you think will win? (Hint: the last 3 already won in world market)

          2. DownSouth

            Gigi,

            You certainly bring up some interesting points, but you seem to think that economics exists apart from geopolitics.

            Are you sure you want to slap the bear? Are you sure you’re prepared for the reaction?

            Following 9/11, the US embarked on a pathway of violence as the solution to violence. The new state of affairs is sometimes referred to as “unipolarity,” but the term is an oxymoron within a single word, for by definition “polarity” requires two poles. (The Bush administration’s official statement of its global policy, the “National Security Strategy,” falls into a similar confusion when it speaks of a “balance of power in favor of freedom.” A balance that is “in favor of” one side is again by definition not a balance. And of course Bush, like every imperialist in history, concealed course self-interest behind a veil of noble ideals like “freedom.”

            Even though Obama promised to move away from this pathway of global imperial hegemony, I don’t see any real evidence of it.

            The US’s imperialism without politics is a naive imperialism. It is an imperialism that I believe is eventually doomed to catastrophic failure.

            But in the meantime, however, which path the United States chooses is likely to be decided in a protracted, arduous political struggle in the years ahead. Would not the sort of scorched earth economic policy you advocate play right into the hands of America’s fanatical right-wing?

            Skippy the other day said that “nothing must be done to allow them to pull the trigger, for they will and it will surprise you.”

            Martin Luther King was not naive either as to what America’s right-wing is capable of:

            Anyone leading a violent conflict must be willing to make an…assessment regarding the possible casualties to a minority population confronting a well-armed, wealthy majority with a fanatical right-wing that is capable of exterminating the entire black population and which would not hesitate such an attempt if the survival of white Western materialism were at stake.
            -–Martin Luther King, Jr., “Nonviolence: The only road to freedom,” Ebony, October 1966

          3. Jimbo

            Germany has a tremendous tailwind thanks to the favorable Euro/Dollar Euro/Dollar-indexed currencies. Look for the US to complain, as Obama has said he wants to double US exports in four years.

          4. Doug Terpstra

            DownSouth, you write, “Following 9/11, the US embarked on a pathway of violence as the solution to violence.”

            Like Chomsky or Zinn—it can’t be rendered or distilled any more clearly. And yet our hope-and-change President Obama resolutely “stays the course” on the NeoCon Bush Doctrine—a certifiable strategy.

          5. alex

            Gigi: “Why do you think Medvedev was in Germany? Export to China and Russia alone would be more than sufficient to bail out entire europe. (but that involves submarines technology, aerospace, land weapon system)…”

            Germany is not a major weapons producer these days, and to the extent Russia has any real industry, weapons are its strong point. Traditionally electronics was the Russian weakness, but the 1980′s are over. You can build military electronics using largely COTS (commercial off-the-shelf) parts that you can buy anywhere in the world. And India is Russia’s big partner in enhancing their weapons systems that way.

            Yes there are a few key electronic components that are largely peculiar to military systems, but while they’re technically key their total cost is comparatively small.

            As for China, for all their braying about the US relaxing its export restrictions to help balance trade, they’re also looking for a few items that are technically key but whose total cost is comparatively small. Russia is plenty willing to sell them weapons, and the Chinese prefer to build domestically as much as possible.

          6. Gigi

            “they’re also looking for a few items that are technically key but whose total cost is comparatively small. ”

            China and Russia of course won’t purchase military equipment like a third world country. They are interested in process, key technology, and integration.

            take Russia interest in France Mistral ship. It’s largely international geopolitics + russia interest on command and control computer. They couldn’t care less about the ship itself or whatever is attached to the ship.

            Germany conventional submarine still is the best in the world (the aip integrated propulsion system) The device itself probably cost peanuts, but Russia wants agreement on design. (the part they are interested in trading.) Same with various composite and avionic technology.

          7. alex

            Gigi,

            We seem to agree that “buying technology” (as opposed to many actual weapons) is what Russia and China are interested in, but there is generally a lot less money in “selling technology”. Doing so is a foolish approach. Look at the US – we sell lots of technology and make some money on it, but usually wind up importing products made with that technology. The result is an enormous US trade deficit. Given Germany’s success as an industrial country and exporter, I suspect they’re smarter than to do that.

        3. OGT

          Goodness, this comment is so delusional and ill informed that I can only recommend that you read a bit more about the actual issues. Michael Pettis and Martin Wolf have a couple great pieces that ought to help clear your thinking here.

          http://mpettis.com/2010/05/are-you-ready-for-the-united-states-of-germany/

          http://www.google.com/url?sa=t&source=web&cd=1&ved=0CBUQFjAA&url=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F202ed286-6832-11df-a52f-00144feab49a.html&ei=bdMLTOKfHMSclgeekJWnDg&usg=AFQjCNEZd3lzi-eKuizrzRnygSZik3c7Pg&sig2=VtSv-1NnOeLoTvTxZnEyxw

          1. Stoner

            God forbade you to make any substantive remarks, and in stead told you to say “geez, dude, you’re like, so deluded”?

        4. Piero

          I would be very curious to see China short U.S. bonds. Talk about shooting oneself in the foot!

          If you were the holder of some insane amount of U.S. treasuries like $3 trillion worth, would you be doing anything to make the value of treasuries collapse?

          No? And neither will they.

          1. Gigi

            If I were the holder of $3T bonds, I would use it as weapon to expand national power. The market price of said bond are only a mean to achieve end game.

            “price gain” has little meaning when it comes to long term national interest. Why should I care about 3-5% monthly price fluctuation, when I can use $1T of its notional value to destroy my next rival economy and wins it all?

            $1-2T is cheap price to pay to dethrone US hegemony and to open access to all world resource and capital.

            Don’t say this hasn’t happened before. Eisenhower refused to let IMF release UK gold during suez crisis, that eventually cascade into financial end of British empire. Do you really think china simply forget tibet, regime change gag, north korea, taiwan escalation?

            I doubt it. They are in the game for long run not for measly billion dollar return in worthless currency. That’s a game for PIMCO, Lehman or GS. Not imperial power.

          2. Jimbo

            The US had military superiority to the UK during Eisonhower’s presidency, same as it has today over China. China has far more to lose than the US in a trade/currency war, and wouldn’t dare start one.

          3. Gigi

            Yes and no. US military supremacy was not absolutely clear in the early 50′s, right after the end of WWII. US WWII win was based on numerical, not qualitative advantage. (see various tank battle, immediately after normandy landing or battle of the bulge) Soviet was much stronger in europe until late 60′s. The cold war was real at the beginning, before slowly turning into parody by late 80′s.

            For eg. Pershing tank was handily defeated in sinai campaign by Russian T.

            In suez crisis, it was a case of 3 way conflict between UK-France-Israel vs. US vs. Soviet. and the first group is the weakest technologically. (Nasser has ample soviet technology. And US didn’t see it fit to support UK imperial continuity.)

            etc. etc (it is not as simple as black and white, us vs. them. situation)

            ———–

            “The US had military superiority to the UK during Eisonhower’s presidency, same as it has today over China. China has far more to lose than the US in a trade/currency war, and wouldn’t dare start one.”

            It’s a matter of time frame. And US does not control the pace of the game anymore. We don’t know if China decide it will pull the plug in 5 years or 15 years. But they definitely internationalizing Yuan and reducing their economy from dollar exposure.

      4. Lucio

        Dear Yves, Club Med is to Germany what US are to China. The former buys what the latter produces AND finances. No easy way out, and only the ideologically blind anglosaxon journalist or blogger (not you, who are really open minded) can rant about the coming demise of the euro and the serial failures of the european public debts without acknowledging in such a mess are US and UK by themselves.

      5. MindTheGAAP

        If Germans consume more (and this does not have to be imports, it can simply be domestic goods), it will lower the savings rate, which will reduce its trade surplus.

        I know you’re going to strangle (e-strangle?) me for this, but that won’t help much (by “that” I mean your suggestion–strangling me might work…). In a crisis, people hoard wealth. They will not consume more. The deeper the crisis, the more pronounced the hoarding.

        All the Central Bank and accounting bs isn’t going to change this. Should you force people to consume more (or should the government do it in their place), they will likely continue to subsidize worthless industries, and they will just go broke moe quickly, and the economy will be back to where it is now, only with less savings for the recovery cycle (which, in this case, is going to be long into the future–this is not going to be a two or three year recession!!).

        The real solution (I hate to admit this, but I’m slowly coming around to it) is to default on debt and let interest rates rise (which they will eventually do anyway–probably very, very sharply). The economy then starts from scratch, and the useless industries that have survived due to conspicuous or over consumption will be replaced by companies that serve fundamental purposes. Since credit will contract enormously, prices will drop to the level where people can buy basic necessities without having to go in hoc for them.

        It’s a very messy solution, and it’s traumatic as hell for everybody involved, and it’s one that will likely occur in any case–might as well bite the bullet now.

        Have you ever read up on the panics of 1837 and 1873? We might be in for a bit of a re-visit…I’m guessing that there’s a very significant chance that Obama won’t even bother running for re-election as all this plays out.

      6. Gerold

        Yves said,
        “If Germans consume more (and this does not have to be imports, it can simply be domestic goods), it will lower the savings rate, which will reduce its trade surplus.”

        Dear Yves, the following modification of your statement with the same goals in mind – to overcome the global lack of demand, and balance existing imbalances – are at least equally to the point: “If the rich consume more, it will lower their savings rate, and hopefully their excessive accretion of wealth.”

        If they are not able to help clear the consumer goods market, then obviously we need higher wages (in East and West) and less profits.

    2. ERM

      I saw a EU-sponsored billboard at a tram stop in my eastern European city this afternoon urging us all to buy more Spanish olive oil. Monies have to be filtered that way somehow, I guess.

  2. Richard Kline

    I have not been sanguine that states in the Eurozone will default on their goverment debt, and I remain of that mind. Hungary, however, is an entirely different house afire. They have huge private sector debts in currencies they don’t control (the euro and the Swiss franc to begin with). They have a battered banking sector. Their public sector was already in trouble in the good times. Under present conditions, their options to roll over their claims register between nowhere to be seen and none. This is a classic matrix for a sovereign default. The IMF will be thrust forward by go oligarchy to extend them, but that simply says that they won’t default in the near term but are even more likely in the mid-term. If they pop, one can expect the even smaller non-euro states of E Europe to bowl over like skittles. That will have nasty blowback on eurozone bank balance sheets, and therein lies the contagion question. Outcome: indeterminate, but decidedly other than good.

    It strikes me as politically most unlikely that Germany “will spend more.” It has long seemed certain to me that Europeans as a whole will NOT “consume more” as a way to stimulate their economies. This is simply not, _not_ how the European public goes about hard times, through two generations. Whether or not it would be desirable for them do do so, to consume more—and that is entirely debatable, but I’m not going to raise that kind of ruckus this time and place—this is quite simply the least likely of all possible outcomes from the societal standpoint. Thus the set of outcomes we are likely to have to choose from both as contextually precipitated and policy driven really don’t include this. What, then, is the most likely course having omitted the unachievable? Looking at both mid-term history and more recent results of the last two generations, I suspect a probable outcome is that most would throw their rich under the bus and let their big banks go into run off, i.e. take over, write down, and shutter the mega-banks whose engagement in speculation has burnt Europe so badly.

    —And this is exactly why we hear the wealth-controlled press playing national blame-games and talking of ‘how we might maybe have to leave Europe’ [to go where, exactly?], to steer public ill-will away from the rotter financials and their enablers in government and toward, well, THOSE FILTHY PIIGish _PEOPLE_. And parochialism is still very much alive in well, and this blow-up is only cranking up now in Europe, so the public hasn’t really come to grips with the root of al evil in this crisis. Many Eurobanks are zombies, but relatively few states are so far. Those that realistically are—Greece, Ireland, the UK—got that way on their own merits. If they have deflation, and 20% unemployment, many in France are going to give a cold shoulder if, by taking down their own bad banks, they can scrape by with 10% where they live. Nobody, but nobody in Europe is going to stimulate away to save the zombie banks and the Casinostans in their own ranks. That is my view; it’s just the view that the political class in Europe is doing everything possible to keep from bubbling into plain view.

    Yves: “The underlying problem is that a huge amount of fiscal and monetary firepower was deployed to validate asset values and avoid debt writedowns at banks.” Twenty and thirty years from now, when the history of our present time gets put together from a moderately dispassionate distance with documentation more readily available, it is exactly this point which, in my view, will be the synoptic ‘money quote.’ For the Great Depression, it used to be ‘trade war and contraction of the money supply.’ For the Great Regression, it will likely be ‘futile attempt to support valuations while the house which could have been saved burnt to the ground.’ The Japanese tried to do this, and the net effect was deflationary, but that was in a context of global expansion and high domestic savings. Now, everyone is trying to defend valuations, and the result will be that valuations of _all_ asset classes decline, i.e. incipient deflation. At that point, I expect some chaotic outcomes, frankly. Well . . . let’s get ON with it, sez I.

    1. DownSouth

      Richard Kline,

      And this is exactly why we hear the wealth-controlled press playing national blame-games…to steer public ill-will away from the rotter financials and their enablers in government and toward, well, THOSE FILTHY PIIGish _PEOPLE_. And parochialism is still very much alive in well, and this blow-up is only cranking up now in Europe, so the public hasn’t really come to grips with the root of al evil in this crisis.

      Ah yes, the old project-blame-onto and scapegoat “those people” trick. It’s a ploy that incompetent rulers have used since time immemorial:

      Spain at her height could do anything. She could exhaust her treasury and forget her poor, her bankrupts, her devalued currency, her incompetent economy, her overvalued currency, her recessions and depressions, her debts both internal and foreign, her deficit spending, her negative trade balance, as long as she could keep herself at the head of the mission against the infidel, the Islamic threat and the Protestant threat. But eventually reality caught up and imposed the limits that imperial folly had so easily hurdled over.
      –Carlos Fuentes, The Buried Miror

  3. DownSouth

    Yves said: “A credible plan…would do more for confidence than continued affirmation of commitment to austerity…”

    It seems like some strange Austrian curse has engulfed the world.

    Why not admit the obvious? The Austrian school is a cult of demented sadists.

    All this gives new meaning to what Eric Hoffer, writing many decades ago, said about Germany: “It colors my thinking and shapes my attitude toward events. I can never forget that one of the most gifted, best educated nations in the world, of its own free will, surrendered its fate into the hands of a maniac.”

    Can humanity learn from its past mistakes? It appears not.

    1. Richard Kline

      Humanity learns by getting a hind limb snacked off by its ‘failures of judgment.’ Your kids see you hopping around on one leg, and decide not to make _that_ particular mistake; instead they go out and get their forelimb snacked off making their own mistakes. Progress, what?

    2. RueTheDay

      “Why not admit the obvious? The Austrian school is a cult of demented sadists.”

      Austrian economics is the defense of the rentier masquerading as the defense of the entrepreneur and the capitalist. Once you understand this, the rationale behind their support for deflationary policies (which are obviously harmful to entrepreneurs and capitalists) makes perfect sense.

      1. DownSouth

        RueTheDay,

        So what motivates a disciple of the Austrian School?

        I gave one answer—-sadism.

        And you give another—-a cynical and deceptive way to promote one’s economic self-interest, the underlying motive here being greed and ambition.

        Then there’s vengeance.

        There’s also the idea that suffering and adversity makes one stronger and better, a belief shared by both the ancient stoics as well as the ascetic Christian saints of the late and post-Roman worlds. Maybe the modern-day values of thrift and frugality derive from this tradition?

        And then there’s what I call exclusivity. As Jonathan Haidt points out in The Happiness Hypothesis, we view our status not in absolute terms but in relative terms. So in this game of one-upmanship, our individual worth increases not only by pulling ourselves up, but also by putting others down. In studying ancient Mexican cultures one learns that all but chiefs and rulers were proscribed from possessing and using luxury items that conveyed status—-feathers, seashells, jade, etc. But somewhere along the way the ancient practices began to change:

        Each European town of any size had its miniature Fugger, a merchant whose home in the marketplace typically rose five stories and was built with beams filled in with stucco, mortar, and laths. Storerooms were piled high with expensive Oriental rugs and containers of powdered spices; clerks at high desks pored over accounts; the owner and his wife, though of peasant birth, wore gold lace and even ignored laws forbidding anyone not nobly born to wear furs. In the manner of a grand seigneur the merchant would chat with patrician customers as though he were their equal. Impoverished knights, resenting this, ambushed merchants in the forest and cut off their hands.
        –William Manchester, A World Lit Only by Fire

        The desire to punish to achieve justice may also be a motivation. Here we get into the realm of strong reciprocity, as discussed by Herbert Gintis et al in Moral Sentiments and Material Interests. “Strong reciprocity,” Gintis writes, “is a predisposition to cooperate with others, and to punish (at personal cost, if necessary) those who violate the norms of cooperation, even when it is implausible to expect that these costs will be recovered at a later date.”

        For better understanding, however, all the above motives need to be placed within a more global framework. Haidt cites Roy Baumeister, who he describes as “one of today’s most creative social psychologists”:

        In “Evil: Inside Human Cruelty and Aggression, Baumeister examined evil from the perspective of both victim and perpetrator. When taking the perpetrator’s perspective, he found that people who do things we see as evil, from spousal abuse all the way to genocide, rarely think they are doing anything wrong.

        [….]

        Baumeister found that violence and cruelty have four main causes. The first two are obvious attributes of evil: greed/ambition (violence for direct persona gain, as in robbery) and sadism (pleasure in hurting people). But greed/ambition explains only a small portion of violence, and sadism explains almost none. Outside of children’s cartoons and horror films, people almost never hurt others for the sheer joy of hurting someone. The two biggest causes of evil are two that we think are good, and that we try to encourage in our children: high self-esteem and moral idealism. Having high self-esteem doesn’t directly cause violence, but when someone’s high esteem is unrealistic or narcissi, it is easily threatened by reality; in reaction to those threats, people—-particularly young men—-often lash out violently…..

        Threatened self-esteem accounts for a large portion of violence at the individual level, but to really get a mass atrocity going you need idealism—-the belief that your violence is a means to a moral end. The major atrocities of the twentieth century were carried out largely either by men who thought they were creating a utopia or else by men who believed they were defending their homeland or tribe from attack. Idealism easily becomes dangerous because it brings with it, almost inevitably, the belief that the ends justify the means.
        –Jonathan Haidt, The Happiness Hypothesis

        1. Doug Terpstra

          Thanks, DS. I read Haidt’s Happiness Hypothesis some time ago and did not recall Baumeister’s eye-openers.

          “The two biggest causes of evil are two that we think are good, and that we try to encourage in our children: high self-esteem and moral idealism… Threatened self-esteem accounts for a large portion of violence at the individual level, but to really get a mass atrocity going you need idealism—-the belief that your violence is a means to a moral end. The major atrocities of the twentieth century were carried out largely either by men who thought they were creating a utopia or else by men who believed they were defending their homeland or tribe from attack.”

          This seems to fit Israel, especially as it is leveraged by religious idealism and the deeply ingrained certainty of being God’s exclusive chosen, an obviously deadly, racist doctrine. If only we could believe that all people are chosen.

          And from this “…Outside of children’s cartoons and horror films, people almost never hurt others for the sheer joy of hurting someone.” …we now know what it is that makes Dick Cheney so exceptional.

          1. jdmckay

            (…)but to really get a mass atrocity going you need idealism—-the belief that your violence is a means to a moral end.

            I’d qualify that with: “creating the belief”. Personally, I’ve seen no evidence that financial wizards directing this global recovery believe any of their poop. They sure as hell have a survival interest in trying to get the uninformed to believe it. W/out doing so, they’d be lynched.

    3. Captain Teeb

      “I can never forget that one of the most gifted, best educated nations in the world, of its own free will, surrendered its fate into the hands of a maniac.”

      Don’t forget that the victorious WWI allies were warned by no less a figure than JM Keynes, and they chose to ignore him. So whose fault was the war? Yet everyone thinks that modern Germans should continue to pay everyone’s bills.

      What other country in the history of the world has faced up to its past as well as Germany? Japan, France, the USA?

      1. DownSouth

        Captain Teeb,

        So now Germany is justified in subjecting other countries to the same sort of austerity that proved so disastrous for it?

        It sounds to me like you’re much more interested in vengeance than constructive solutions.

        From oppressed to oppressor, where does the chain reaction stop? Is no one willing to put a stop to the insanity?

        Now the Jewish state of Israel has become the oppressor.

        [F]orgiveness is the exact opposite of vengeance, which acts in the form of re-acting against an original trespassing, whereby far from putting an end to the consequences of the first misdeed, everybody remains bound to the process, permitting the chain reaction contained in every action to takes its unhindered course.
        –Hannah Arendt, The Human Condition

        To meet hate with retaliatory hate would do nothing but intensify the existence of evil in the universe. Hate begets hate; violence begets violence; toughness begets a greater toughness.
        –Martin Luther King, Stride Toward Freedom: The Montgomery Story

        1. Captain Teeb

          Hi Downsouth,

          I’m not sure what Israel has to do with any of this. I thought that the post was on European bail-outs. As far as I know, the US will always bail out Israel.

          As far as Germany goes, I live in the eurozone, where everyone assumes that Germany should pay for everything (it is the only large net contributor to the EU, for example). The rationale for this is simply “the war”. This is unsustainable and will end. It is not oppression. If you refuse to pay my bills, you are not oppressing me, even if you paid my bills in the past and I have become used to it. This is the line of thinking that I object to, and what my post was trying to convey.

          Austrian economics emphasizes low taxes and stable money. It is well described at many sites. My favorite is:
          http://newworldeconomics.com/
          Austrianism is not ‘austerity’, Austrianism is a common-sense method of safeguards for preventing major debt crises. It is unlikely ever to be implemented in any liberal democracy, for reasons that should be obvious.

          Central banking, paper money, welfare states, and ever-growing debt are what we are stuck with. It substitutes periodic small crises (as was the case under the gold standard) with infrequent large crises. I suppose it’s a matter of taste; it’s a great system as long as the crash does not come within you lifetime.

          Yves often asserts that Germans should consume more, that this will make things better. Germans will consume; they are consuming gold coins so fast that dealers cannot keep the more popular ones in stock. Germans know what is coming, unlike Americans, who have no real memory of hardship and no memory of war. One way or another, default is in our future.

          Germany is also in deep financial trouble. Check out today’s Zero Hedge.

          1. DownSouth

            My favorite quote to illustrate just how irrational the Austrian School is, and just how detached the Austrian School is from any this-world reality (there are of course myriad quotes that do this) is this one:

            This upward movement could not, however, continue indefinitely. The material means of production and the labor available have not increased; all that has increased is the quantity of the fiduciary media which can play the same role as money in the circulation of goods. The means of production and labor which have been diverted to the new enterprises have had to be taken away from other enterprises. Society is not sufficiently rich to permit the creation of new enterprises without taking anything away from other enterprises.
            –Ludwig von Mises, “The ‘Austrian’ Theory of the Trade Cycle”

            To understand just how nonsensical this statement is, one must put it in context. Mises wrote this statement in 1936, urging the US government towards a policy of fiscal austerity. At the time, the United States had 25% unemployment [a surfeit of human capital], very low industrial plant utilization [a surfeit of real capital] and was literally floating on a sea of oil (the Governor of Texas had to send in the Texas Rangers to curtail production from the East Texas Field) and other natural resources [a surfeit of natural resources].

          2. greg b

            Austrians focus on stable money IS the problem. Their focus is on money which is a completely man made construct that gets treated by Austrians as something with intrinsic worth that needs protecting. The focus should be on PEOPLE not money.

      2. Yves Smith Post author

        Captain Teeb,

        I recently read Keynes’ Economic Consequences of the Peace, and it is an eye opener. The part that most people cite, that the level of reparations were unsustainable, was only a part of the story, and in some ways the least interesting. There were also a huge raft of measures in the treaty whose sole intent was clearly to dismantle Germany as a economy: seizure of all assets held outside Germany by German nationals; priority claim on Germany’s most vital output, coal (and many many other measures like this). This was the economic equivalent of a plan to put Germany back into the 17th century.

        Keynes saw how this would be destructive to Europe as a whole (which was a highly integrated economy and depended on Germany as a consumer as well as a producer) along with the obvious casualty of the German people.

        It is also important to note that while Germany had surrendered, it was not an unconditional surrender, and had specifically invoked two addresses by Wilson as outlining the basis for surrender. The treaty amounted to a monstrous bait and switch.

        1. Captain Teeb

          Yves,
          Thanks for the information. I read Consequences of the Peace, but it was many years ago and I had not at that time read any history of the era, so I did not grasp the full import of what JMK was saying.

          Since that time I read Tombs’s France 1815-1914, which made it clear that France, and in particular Clemenceau, was intent on getting revenge for France’s defeat in the Franco-Prussian War. Wilson was naive and inexperienced in international politics, and Clemenceau was able to get his way.

          You are right that the peace was monstrous as both economic policy and as a betrayal of trust; JMK said as much himself. To add insult to this injury is that Germans have been the perpetual villains for 60 years now, from Casablanca to whatever that Tarantino film is. If Hollywood had to pay royalties to Germany for the use of Nazi images, the latter would have its debts payed off.

          Even worse, for purposes of the thread at hand, is the notion that Germany owes an unlimited and ongoing subsidy to the rest of Europe for a history that was imposed on it by others. Wise, prominent, and persuasive thinkers like JMK warned against this imposition, but was ignored for the needs of French and English domestic politics. Germans realize this and are increasing unwilling to play an unjust and outdate role.

          I see no special reason to think that it will be otherwise this time. Our best hope is that, among the rich countries, the Nordic peoples will be sensible enough to show the way forward. Sweden, for example, often serves as a model for how not to botch a banking crisis. The only three net contributors to the EU are in this region (Germany, Netherlands, and Finland). The Netherlands is special for having a long history of tolerance, financial probity, and civilized politics. These countries will allocate a relatively higher weight to pragmatism over politics than the other EU countries are likely to do.

          Perhaps, like Sweden, these countries will be the first to grasp the nettle and reach a lasting resolution of the crisis, at least for themselves. The crisis-hit countries should default and devalue, as that is the likely end result in any case.

          But Germany cannot carry Europe any more than it could pay the reparations after WWI. To pretend otherwise and to cloak such demands is unjust and unwise, as it risks alienating those who know the original source material, including educated Germans. Merkel’s political problems following the bailout are the shot across the bow.

          1. DownSouth

            Captain Teeb,

            When Germany surrendered following WWII, we can all be thankful that Eisenhower was not president of the United States.

            I don’t know if you have read Other Losses or not, but Eisenhower was an extremely vengeful man whose treatment of German POWs was hardly better than what Hitler’s treatment of US POWs had been.
            http://www.amazon.com/OTHER-LOSSES-Shocking-Civilians-Eisenhowers/dp/1559580992/ref=sr_1_1?ie=UTF8&s=books&qid=1275861125&sr=8-1

            So much for American exceptionalism, hun?

            But Eisenhower was not president of the United States. Truman was. And Truman did not want to make the same mistakes that were made following WWI. The only countries that received more than Germany under the Marshall Plan were France and the UK.

            I find it a great irony of history that it was none other than Herbert Hoover, the US president that tried to crucify the US on the cross of Austrian School austerity, who advocated generosity and forbearance in dealing with Germany:

            Former U.S. President Herbert Hoover in one of his reports from Germany in March 1947 argued for a change in US occupation policy, amongst other things stating:

            “There is the illusion that the New Germany left after the annexations can be reduced to a ‘pastoral state’. It cannot be done unless we exterminate or move 25,000,000 people out of it.”

            Hoover also noted that “The whole economy of Europe is interlinked with German economy through the exchange of raw materials and manufactured goods. The productivity of Europe cannot be restored without the restoration of Germany as a contributor to that productivity.”

            Hoover’s report led to a realization amongst US leadership that a new policy was needed; “almost any action would be an improvement on current policy.” In Washington, the Joint Chiefs declared that the “complete revival of Germany industry, particularly coal mining” was now of “primary importance” to American security.
            http://en.wikipedia.org/wiki/Marshall_Plan

            Had Hoover seen the error of his ways and recanted the uncompromising austerity that he embraced so zealously during the 1920s and 30s?

            Given the prominent role the US played in rebuilding Germany’s economy following WWII, I find your casting Germany in this victim role to be somewhat puzzling. How can a country that has the third largest economy in the world plead victim status?
            http://www.studentsoftheworld.info/infopays/rank/PNB2.html

            It kind of reminds me of something Robert Hughes wrote in Culture of Complaint:

            Since our newfound sensitivity decrees that only the victim shall be the hero, the white American male starts bawling for victim status too.

          2. Doug Terpstra

            Thanks, DS, for the history (new to me) on Hoover’s redeeming contribution to intelligent post-war reconstruction. Great stuff.

          3. alex

            “Other Losses”

            Don’t take that book too seriously. It’s been pretty thoroughly debunked (and I don’t just mean by Eisenhower apologist Ambrose).

            There was a period at the very end and after the end of WW2 in Europe where German prisoners were badly mistreated by American and French forces. While it didn’t get the attention it deserved, it was no secret to history.

            But “Other Losses” author Bacque makes bizarre claims of nearly a millions deaths – a claim that doesn’t even pass the sanity test. Where did they even dispose of all those bodies? Nobody has ever found traces of them.

          4. Gaucho

            Captain Teeb,
            Germany has two “problems”: a society that is highly productive and miser and history has a lot to do with that). The reality is that Germany has been the biggest beneficiary of the golden years of the Euro influencing demand in other countries through an implied FX control. The other countries benefitted from lower interest rates but, as in the US, lower interest rates don’t mean smart use of such cheaper capital. Without the euro, Germany would have significantly larger unemployment and that will be the case if the euro collapses. Germany should be the #1 interested party in keeping the Euro. But that requires FISCAL transfers to the PIIGS for free (not silly guarantees for the banks), in the same way, DC continues to pay unemployment benefits and social security and Medicare in Michigan and Florida, until those countries get back on their feet. Germany’s recipes, i.e. cuts in soc securitiy, govt salaries and pensions, are exactly IMF’s recipes to Argentina ca. ’99-’00, which kill the “automatic stabilizers” and are unsustainable in developed or semi-developed democratic societies. they should know better.

          5. alex

            Gaucho: “The reality is that Germany has been the biggest beneficiary of the golden years of the Euro influencing demand in other countries through an implied FX control.”

            Interesting take. I think what you’re saying is that without the euro, and absent Chinese style currency manipulation (which AFAIK they weren’t guilty of), the mark would have appreciated and Germany couldn’t sustain it’s 5.2%/GDP current account surplus.

            “The other countries benefitted from lower interest rates but, as in the US, lower interest rates don’t mean smart use of such cheaper capital.”

            Too true. While everyone focuses on Greece, they forget that Spain had a very responsible government budget before the meltdown. They also had a real estate bubble. The Masters of the Universe (European branch) are terribly sanctimonious about the evils of government deficits, but think that supposedly ever increasing real estate prices are just a sign of a good business climate. Not much different than the MOTUAB (Masters of the Universe American branch).

            “Germany should be the #1 interested party in keeping the Euro. But that requires FISCAL transfers …”

            They want to have their cake and eat it too. They love the benefits of the euro, but don’t want to send any money south. Will they screw themselves?

    4. MindTheGAAP

      Why not admit the obvious? The Austrian school is a cult of demented sadists.

      I don’t think this is a fair take, but that’s an aside for now.

      I think people generally forget how models work–models make assumptions that simplify reality in order to draw conclusions that are roughly correct provided that the simplifications were reasonable.

      No model will ever work perfectly or all the time, simply because the underlying assumptions (implicit or explictly stated) can never be universally valid. The trick is to have a number of models, and to figure out which one (if any) to apply to which situation. For some reason, people want to apply the same model to all problems, and that doesn’t work–and it never worked, and it never will work.

      This mistake of mistaking the model for reality is everywhere, though–I see it applied by physicists, economists, engineers, teachers, psychologists–you name it. It’s borderline absurd, really…

  4. Richard Kline

    I will further add this point to consider: when Sweden and Norway had financial system collapses in recent times, they didn’t ‘defend valuations.’ They didn’t ‘consume their way to prosperity.’ In their different ways they wrote down the debt, cinched their belts in retrenchment, and repositioned their economies for the mid- and long-term. Neither were in the Eurozone, no. But the point is that ‘the European way’ to deal with financial system crises in recent memory is the ‘write down’ method; not the ‘prop up’ method, not the ‘rev up’ method. All things considered, this is the armature around which an eventual Eurosolution is structured in my view, because large societies draw upon the tools, skillsets, and examples most directly available to them.

    The situation is now more complicted, yes, because some states—Greece, Ireland, Portugal, all for quite different reasons but the same pit-without-a-rope fix—have high debts. The process of effectively ‘writing them down’ does in part involve, cramming down pensions, just as Foppe says, although it is not limited to that. It has been mentioned elsewhere in commentary on NC in the past that Europeans (to make a gross and inherently distorted generalization) will accept sacrifice as long as it is manifestly shared, and one might add so long as it begins with the wealthy. Those frugal Scandinavians: individuals lost signifiant money when the write-downs came, but the malefactors of great wealth headed up the queue. And again, this is, to me, just what the political [empty-]heads of Europe understand and are striving by all means necessary to avoid.

    The European way was, and thus most likely is, to write down the losses, take the hit, and get on gettin on with things. For Europe to go to the ‘rev up’ strategy would benefit the US, yes, but it’s not so clear that it would benefit Europe nearly as much, and it is not the way Europeans have dealt with loosely comparable problems in the recent past. We shouldn’t be expecting that Europeans would see the ‘rev up approach’ as their solution, is what I’m saying.

    1. DownSouth

      …but the malefactors of great wealth headed up the queue.

      Do you see this happening in Europe now?

      Everything I see in Greece tells me it’s the same story there as it is in the United States: austerity for the common man and let the good times roll for the rich.

      In the US, much, if not most, of the money that is being extorted from the taxpayers is not going to repair bank balance sheets. Instead it is going to pay bankers’ inflated bonuses, which are even bigger now than before the crisis struck. How does Europe measure up on this front?

      1. Captain Teeb

        We’re agreed on this point. The Greek bailout is a rescue (in no particular order) of the Greek elite plus French (mainly) and German banks who lent to them.

        Our democracies have failed, as popular wishes are ignored by elites. This is as true in the EU as it is in the US; the recent Lisbon treaty, plus even the euro itself, were hustled in without referendum.

    2. renting_in_hell

      Slowly, in both of your comments, the idea that the EU/eurozone/Europe aren’t the U.S., don’t really care much about the U.S., and will not be concerned much about the U.S. when it comes to solving EU/eurozone/European is starting to emerge in a way which most Americans should be able to grasp.

      Not that it is likely they will, but ‘growth’ has not been much of a European value, especially in Germany, Scandinavia, and to a lesser extent, the Netherlands.

    3. alex

      Richard Kline: “when Sweden and Norway had financial system collapses in recent times, they didn’t ‘defend valuations.’ They didn’t ‘consume their way to prosperity.’ In their different ways they wrote down the debt, cinched their belts in retrenchment, and repositioned their economies for the mid- and long-term.”

      Sweden and Norway are but a small part of the very heterogeneous entity called Europe. As Yves has frequently pointed out, Europe is currently lagging the US in writing down bad debts (and considering how bad we are, that’s saying something).

      As for “consuming their way to prosperity”, it depends on what you mean. Attempting to maintain consumption by defending inflated valuations (e.g. real estate and various derivatives) and propping up insolvent banks is a bad idea, but that does not mean that Keynesian stimulus is a bad idea.

      Ultimately it’s about who takes more of the hit. Defending inflated valuations and propping up insolvent banks is mostly about bailing out people who made fortunes in irresponsible and often fraudulent “investments”. Unwinding that is going to be painful, but that’s no reason to make it more painful than necessary for everyone else by having government austerity.

      1. Doug Terpstra

        “As for “consuming their way to prosperity”, it depends on what you mean. Attempting to maintain consumption by defending inflated valuations (e.g. real estate and various derivatives) and propping up insolvent banks is a bad idea, but that does not mean that Keynesian stimulus is a bad idea.”

        You said it Alex. God is in the details, the intelligent leveraging of investment—real pump-priming stimulus, not make-work—digging one hole to fill another, or spending blood and treasure on military adventurism.

        That’s what is so exasperating about the current Fed/Treasury approach of re-leveraging debt, buying bad assets to fund decadent bankster bonuses—a profound bankruptcy of vision and imagination. Debt to solve over-leveraged debt to refuel non-productive consumption and bubble-maintenance is self-evident insanity, and yet that is all they offer. This is the manifest insanity that FDR railed against when he gestated the New Deal. There were in His “persistent experimentation” suffered false starts, but focused planning in time produced well targeted investment in commonwealth: public parks, renewable natural resource management, novel urban planning, housing, utility networks, infrastructure, schools, roads, bridges, labs, libraries, and so on. These are what provided a levered springboard for phenomenal shared wealth-creation creation for decades, built a robust middleclass, and became a model for Truman’s Marshall Plan. It also gave us many priceless national treasures that can never be achieved through private enterprise alone.

        This is something we can kick-start again with intelligent, visionary leadership so where is it?

  5. Ishmael

    In a few years, Europe will probably be moving forward while the US is swimming in a Japanese style quagmire.

    1. Vinny

      I doubt it. One day, soon, it may dawn upon the Germans that this “Europe” is just too much trouble. On that day, every German will stop and contemplate the wisdom behind that great American saying: “birds of like feather flock together”.

      From that day on, Southern Europe (and that includes France) will gently and politely begin its descent into the abyss of becoming Third World nations (which they should have been all along, really).

      Food for thought, my friend.

      Vinny

      1. renting_in_hell

        France and Germany splitting apart will signal something very different from a north/south split – and both the French and Germans are very aware of what that would mean. It is extremely unlikely to happen in our lifetimes, as the entire core of the EU is based on France and Germany cooperating, not fighting wars. And hard as it may be to imagine, both countries are fairly well managed (in a French and a German fashion admittedly – tastes do vary as to which is preferable), and have no inherent reason to undo the benefits of not fighting each other.

    2. MindTheGAAP

      In a few years, Europe will probably be moving forward while the US is swimming in a Japanese style quagmire.

      In a few years, you will likely see that Europe has doubled its number of countries.

      For fun, take a look at historical maps and notice how much the borders change over the years…

      The West is dead.

  6. RueTheDay

    If there is a double dip recession concomitant with the failure of another large financial institution, we are screwed. There is zero political will for another fiscal stimulus package, normal monetary policy is up against the zero bound, and the Fed’s concern over the size of its balance sheet will limit how much QE can take place. If this turns into another leg down rather than a bump in the road, it is going to get real ugly real fast.

  7. sean

    The euro is not backed by a taxation system .The ECB is funded through intergovernment transfers.
    The bailout fund of 750 billion to provide liquidity to bust sovereigns is predicated on those busted sovereigns continuing to provide intergovernment transfers.
    States such as Ireland ,Greece and Spain are insolvent so why would any international investor purchase euro bonds when their funding is based on intergovernment transfers(in part from those insolvent countries) and when the ECB claims seniority over all other investors if there is a default.?
    Perhaps they can solve the solvency issue by printing money but given the above restrictions this would make investment in euro bonds even less attractive bearing in mind there is no federal EU tax system.

    So how can you have a credible Euro currency when there is no tax system,insolvent states and a central bank printing money and buying its own bonds (all contrary to the Maastricht Treaty)?

  8. RueTheDay

    Absolutely astounding:

    —–
    Merkel Says Recovery Can’t Trump Cutting of Budget Deficits

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aRrYIf3s6Fg4&pos=7

    The German government “believes we must not achieve growth at the expense of high deficits,” Merkel told a news conference.
    —-

    She seems to think that the entire world can just collapse into depression but Germany will somehow be able to maintain a current account surplus combined with a high savings rate such that their budget deficit will not rise. Madness.

    1. PeakVT

      Germany is fighting the last war (its cause, specifically). One can hardly blame them, given how traumatic it was. But it’s still foolish.

      1. renting_in_hell

        Imagine you can just spend your way out of debt.

        Sadly, Germans are simply not capable of imagining this.

        Which may explain why they are in such incredibly bad shape right now, with unemployment down, orders up, and a proportion of worthless debt (much of it in dollars) which seems pretty much par for the financial engineered course.

        1. alex

          Don’t get too carried away with praising the frugal Germans. I congratulate them for avoiding a German RE bubble and realizing that manufacturing isn’t a quaint economic relic. OTOH their banks are hip deep in other country’s bad debts, prior to the current meltdown their government debt/GDP was about the same as the US and, worst of all, their GDP is based on a large multilateral trade surplus (5.2%/GDP – slightly higher than China’s 5%).

          That last approach works great until it doesn’t. It can only keep going as long as other countries keep borrowing money to buy your stuff – the same debts that the frugal Germans are now complaining about but were happy to supply credit for as long as it propped up their exports. That’s the same approach as the US used in the 1920′s. How did that work out?

          1. Piero

            Exactly. One of the under-recognized aspects of the Euro is that it forced the Club Med countries to work with a currency having a much higher valuation than they would have with their own drachmas, liras etc. This made them even less competitive with Germany in even more fields than they would have been otherwise. The result was to prop up the German export industry including to those club med countries. The Euro was bed for them in a lot of ways. But with french and german banks flooding Spain and Greece with cheap credit, things rolled along fine. Now, the party’s over. But it’s not only the greeks who’ll have that ouzo hangover.

        2. reskeptikal

          Of course you are completely correct renting_in_hell- imagine a world, where every time you get into debt, you just take out another loan… Every time you want something, you just go out and ‘buy’ it. Well, if you’re wondering how lending money works in this world, look no further than our current finance system.

          And for all the apologists who can’t wait to kiss the trash of the elite- it ain’t gonna get better. Don’t kid yourselves. Extend and pretend is not even a concept, let alone any kind of game plan– it’s going to continue until we have a catastrophic crash unless we don’t start to get a handle on our debt.

          Germany is in a terrible position- to put it bluntly it’s a supplier in a system where there’s not enough demand. Think that’s going to end well? But at least the Germans seem to realise that you need to manage your situation and not just throw your hands up in the air like the US and say, “give them what they want!” That’s immature. That’s self-conceit. That’s US politics. That’s US economics.

          1. Piero

            The only group of any sort that has publicly pushed against that attitude to any degree in the U.S. has been the media excoriated “tea party” people who seem to be pretty consistently against the U.S. assuming massive new debt. But they’re all nuts, right? So it must be crazy to not see the brilliance in trying to spend our way out of this.

  9. Bill

    Thanks again to everyone for a very illuminating post and comments.

    Richard Kline in particular has been very helpful, but partly due to the point that the Europeans — but particularly the Germans — have a very different viewpoint toward the “benefits” of aggressively acquisitive
    consumerism than Americans do.

    Having lived among the Germans for several years, I would second the idea that this particular cultural difference will trump other elements of policy.

    Most Americans have no idea what real frugality is: for example, I had a German friend who grew up during and just after WWII, and who actually lived in the States for several years as she married an American soldier.

    She would not pre-heat her oven when baking as it wasted electricity. My other German friends assure me she is an extreme example, but my point is that frugality permeates German culture, in a way it no longer does in ours.

    Though it used to be more prominent in our culture, in my parents’ generation for example (I was born 1944) who grew up in the Depression, it no longer seems to exist in our own current American culture. Its opposite seems to have taken hold.

    1. Vinny

      “Most Americans have no idea what real frugality is: for example”

      Can you please define what “American” means to you? Does that also include the tens of millions of naturalized US citizens who were born in other countries? Or, are you only referring to the Brittany Spears copycats?

      Let us be fair, America is a nation of immigrants, most of whom are well acquainted to saving 25% or more of their wages, buying a home within 5 years of arriving in the US, and holding 2 or 3 (usually labor-intensive) jobs in order to pay for their children’s college education. Are these people “Americans” in your book too?

      As far as the Germans go, most of the young ones today are quite entitled to an easy life, are hooked on various addictive substances, and have largely rebelled against their parents’ values. Let us not idealize them too much, or we risk end up believing again in the stupidity of German superiority that a certain crazy guy called Hitler tried to sell the world 60 years ago, with disastrous results.

      Vinny

      1. Gigi

        East Germany my friend, is now germany too. That part of germany still remember what hard time and being frugal is about. (Merkel grew up in the east)

        The current german leadership are all children of post war reconstruction. (Think about the generation who grew up during depression, the story and attitude they have)

        1. Vinny

          Good point, and I agree. The East Germans are an asset that Germany is just now beginning to value.

          I remember, back in the early 90s, after the reunification, how the West Germans were deriding the ones from the east for being frugal, for cutting coupons out of newspapers, and for driving across town for cheaper bananas. Back then it was so un-cool in West Germany to save money, why would it be any different today.

          This feels like the revenge of the nerds… :)

          Vinny

          1. reskeptikal

            I lived in Germany mid 90s and I’m living here at the moment, and the East Germans didn’t drive across town for cheap bananas, they drove across town for bananas. Period.

            Vinny, East German unemployment has been high and is still high: http://www.bpb.de/wissen/MCBEV2,0,0,Arbeitslosigkeit_nach_L%E4ndern.html

            Germans are not IMHO frugal. They are by no means wasteful, but this is far from frugal. If anything they have a nose for business which tells them that if they can source the same product for the same price don’t not buy the cheaper product. That’s just reasonable.

          2. Bill

            Vinny, your bigotry toward German might be honestly come bym but does, but does not reflect the reality that I experienced while living there from 1989 till 2002.

            You clearly do not know any real Germans outside your distorted view of “them”, otherwise you could not seriously include a remark like
            “Back then it was so un-cool in West Germany to save money”

            I would venture to say that it has never been un-cool to Germans in modern times to save money !!

    2. Andre

      Ding-ding-ding.

      I am laughing at anybody who thinks they can persuade germany to spend their way out of recession. that’s not going to happen. Plus, they’ve done it 3 times getting out of massive recession by saving and increasing export. (post war reconstruction, unification, euro formation) Each of these was accompanied by high unemployment and big economic stress.

      Germany can withstand far more social pain than US, but they turn very hysterical about government and social system breaking down.

      If I have to predict what Germany will do: 1. bring down euro ever lower until export-import is sustainable. 2. work with russia (cheap energy/mineral) 3. hold euro together, impose order and financial discipline on the rest of european losers (eastern, latins,) bail them out if necessary, but in exchange of Berlin having a say on controlling stability.

      In other word: US is screwed. (euro vs. $) And china will back euro recovery, just like Russia. This gets into the traditional disdain of american approach to social order.

      I guess what we are seeing is the formation of next world order. It’s back to 18th century pecking order.

      1. Piero

        The one part of what you say about which I’m extremely skeptical is #3.

        “hold euro together, impose order and financial discipline on the rest of european losers (eastern, latins,) bail them out if necessary, but in exchange of Berlin having a say on controlling stability.”

        Why will greeks exist for Germany? Why will spaniards exist for Germany? Where will the power to impose things on them come from? One can make a perfectly reasonable argument that PIIGS have just as much power over Germany as Germany has over them. They can ruin the German banks at any time. If the Germans would force them into a slow motion, ruinous, IMF style austerity, they might wonder why they shouldn’t be done with it quicker.

        1. Andre

          Neo-feudalism I suppose.

          Germany offers competency to manage continent wide fiscal policy in exchange for little fringe economy security from open market attack. (or a variation of that arrangement)

          Sure Greek can get out of euro and go it alone, but how long will they survive? Who will supply them capital or guarantee their massive military equipments import? Or who will supply them even? They are relatively small country.

          Greek will quickly fall in the same category as Romania or morroco. Even GoldmanSach will kick them around and sell them to pieces.

      2. Pepe

        I guess what we are seeing is the formation of next world order. It’s back to 18th century pecking order.

        Except that the US has lots of guns,planes, bombs, and tanks, many of which are currently in Europe. Do you think the US will go quietly into that good night if backed into a corner?

        China might be willing to back a Euro recovery, but do you honestly think they’ll write off the dollar when they’re owed trillions of dollars?

        1. Glen

          Guns, planes, bombs, and tanks are huge net loses on a country’s balance sheet unless they’re being used to acquire land, natural resources, and people.

          Are you seriously proposing that the US try to “conquer” Europe?

  10. Allen C

    Many good remarks here.

    I find it somewhat amusing that folks look for easy solutions. The only way to beat this depression is to find ways to maximize the collective, productive activity while migrating to sustainable economics. Easier stated than done.

    Perhaps this larger era will be viewed as essentially a failure of trade recycling (i.e. surplus trade partners taking debt from deficit trade partners). Now overlay Japan who on the positive side of this equation found itself in a huge bubble. I conclude that those on the negative side of this equation are in big trouble!

    The other huge factor is the successful introduction of billions of folks willing to work for a whole lot less in economies moving up the product value chain. And we have folks that look for some relatively simple solution.

    After adjusting for those unable to borrow further to fund unsustainable lifestyles in this global arena, most developed country citizens face a very real decline in living standards.

    If the US and other countries spent more time focusing on creating ever higher value products rather than toxic financial products, they might have had a chance.

    The inevitable devaluations and defaults are upon us. There is no financial and economic alchemy! The world seems filled with fools hell bent on avoiding reality.

    1. DownSouth

      Allen C,

      The only way to beat this depression is to find ways to maximize the collective, productive activity while migrating to sustainable economics. Easier stated than done.

      Wow! That’s the understatement of the century.

      The stumbling block is that humans are ruled almost exclusively by a combination of mythology and emotional impulses, and their rational moments are few. That’s why Europe is unlikely to stop this train wreck, and the US can’t achieve substantive healthcare reform.

      As Francois pointed out in 6/5/10 “Links”:

      The majority (of Americans) believe that all care meets minimal quality standards, that more care means higher quality care, that newer care is better care, that treatments costing less are inferior, and that medical guidelines “represent an inflexible, bargain-basement approach to treating unique individuals.”

      In other words, the brain-washing is total, the health care industrial complex has an extraordinary easy time to block any meaningful reform (the one just adopted has very few chances of accomplishing its goals) just by playing on this belief system.

      In this context, is it any surprise to see NYT journalists deciding to avoid a direct confrontation with their readers by telling them that pretty much everything they believe about their care is BS?
      http://www.nakedcapitalism.com/2010/06/links-6510.html

      Culture is what enforces obedience to authority, the authority of parents, of history, of custom, of superstition. Deep attachment to culture is one of the things that prevents different people from understanding one another. It is what pushes groups into compliance with practices that can be good or bad, depending on one’s point of view. Suttee (the practice, eradicated by British colonialism, in which Indian widows were burned alive on the funeral pyres of their husbands) and female circumcision, as well as the spirit of rational inquiry and a belief in the sanctity of each human life, are products of cultural attachments of different kinds. Those who practiced suttee, or who believe that women who commit adultery should be stoned to death, do not believe there is anything bad about those practices, any more than those who practice rational inquiry under conditions of freedom think there is anything wrong with that.
      –Richard Bernstein, Dictatorship of Virtue

      Rational inquiry, where art thou?

      1. carping demon

        DownSouth: “The stumbling block is that humans are ruled almost exclusively by a combination of mythology and emotional impulses”

        You left out crooks.

      2. Captain Teeb

        “The majority (of Americans) believe that all care meets minimal quality standards, that more care means higher quality care, that newer care is better care, that treatments costing less are inferior, and that medical guidelines “represent an inflexible, bargain-basement approach to treating unique individuals.”

        Amen, brother. In 2001 I had a routine hernia repair at a Catholic hospital in a small German city (Trier). The place was spotless, my wife was given a lovely room at the attached monastery for 35/night, and all the doctors, nurses and other staff were Germans. They insisted that I stay in the hospital for an entire week. Total cost: $2,000.

  11. Jardinero1

    I remember a line from the movie “Wall Street” which summarizes the problem with banks and brokers better than any line I have ever heard. It typifies the attitude of everyone I ever knew in the nine years in which I have been a broker. It’s an attitude which is endemic to the financial industry but which the body politic fails to grasp.

    It’s from the scene at the beginning of the movie where Mr. Lynch, Bud Fox’s sales mgr tells Bud to close an account and pay for the losses his client won’t cover. After listening to Bud whine he replies: “All I know is that somebody has got to pay and it’s not going to be me.”

  12. joebhed

    Just a small matter.
    Goes for all of us, but the Euro’s(MU) primarily due to their lack of monetary sovereignty.
    It’s the debt-money system that is broken.
    Creation of ALL monies – the issuance of the national circulating medium of exchange – as a debt, by the debt industry known as private central banking-based fractional reserve lending, IS the problem.
    Regardless of Nationality.
    What we all need is a new money system.
    Not based on debt, and not issued by the private debt-industrialists.
    Take a look around, folks.
    UN-PAYABLE quantities of debts abound, globally.
    Privately-issued.
    Government malfeasance?
    Only so far as allowing it, when every country has the potential for issuing its own circulating medium of exchange, a.k.a. money, a.k.a. currency.
    Time to throw the money-issuers out and restore what Lincoln called the “supreme prerogative of government” back to we the people.
    So, whenever you’re ready.
    The Money System Common.

    1. Toby

      Bingo joebhed!

      Though I would like to add we need a very fresh and radical look at this part of the current debt-based system:

      “Claude Trichet and Treasury Secretary Timothy F. Geithner diverged on prescriptions to sustain growth, with Europe set to tighten budgets and the U.S. seeking stronger domestic demand.”

      Let’s dump our addiction to growth! Hell, let’s demote the role of money too, which the Money System Common would go a long way to affecting. I’m also a fan of Bernard Lietaer’s alternative currencies, and particularly the international currency (The Ecu I think) for trade and investment purposes, which would incur a demurrage fee of about 4%. Fundamentally we need a money system which refocuses our attention on a sustainable and healthy relationship with the planet and each other. Money does not make the world go around.

      Then there’s the small matter of technological unemployment, and the related need to redefine work and how it relates to value. That’s going to be an interesting debate…

  13. michel

    Yves, you consider the example of Ireland, and your prescription basically is to do two things at once, which cannot both be done at once. One is to carry on government spending. This means increasing the amount of debt, and since there seem to be no circumstances in which you approve of cutbacks in government spending, it will eventually come to a Ponzi stop, when all that the borrowing is being used for is to keep up the payments on the previous borrowings.

    The second thing you want them to do is default on their current debt. You describe it as postponement etc, but what you are talking about is default.

    They cannot do both, can they? They cannot carry on with unsustainable debt funded fiscal policies, while defaulting on the debt they have previously raised. Why would anyone in their right minds lend to them?

    The problem is, they and Greece are going to default. That much is clear. The question is when and how and who will suffer. What is also clear is that when this happens, they will retrench. At least as much as Ireland is now, maybe more.

    What cannot happen will not, and so the debt will not be repaid, and they will not continue to consume and spend. Neither one. That is what you need to focus on, the consequences of default.

    1. Yves Smith Post author

      Michel,

      You mischaracterize my argument, and that of other posters here.

      You cannot have PRIVATE SECTOR DEBT DELEVERAGING and public sector at the same time absent a massive increase in exports. That is accounting, not economic theory. It’s an iron law.

      The resulting deflation that results if you go down that path makes the debt burden LARGER relative to GDP, making the eventual defaults and losses to lenders even greater. The larger magnitude of losses leads to further contraction in lending, producing a self-reinforcing down cycle.

      You ignore the fact that I called for restructuring. That is another way to get debt levels down and would make it feasible to embark on fiscal retrenchment sooner.

      The likely consequence, as Wolfgang Muchau has pointed out, is the euro goes to 60 to 80 cents on the dollar. That would lead to protectionism. There is no way a fall of that level and the resulting loss of exports by Japan, China, and the US will not provoke a reaction. That will be another accelerator on global contraction.

      You simply cannot do all the things you are calling on at once without there being massive blowback.

      1. RueTheDay

        “You cannot have PRIVATE SECTOR DEBT DELEVERAGING and public sector at the same time absent a massive increase in exports.”

        Well, technically you can, but it means that national income (GDP) must fall by an amount equal to the deleveraging. That was kinda the entire point of Keynes’ General Theory – if there is an excess ex ante desire to save over ex ante desired investment, then savings will equilibrate to investment, but it will do it by a fall in GDP. There will be less income to save out of, so the increased desire to save leads to less savings. The problem with classical economics was that national income was assumed to be constant. Anyway, we’re talking about double digit changes in negative borrowing, so absent public sector expansion of debt the fall in national income in the face of private deleveraging would be brutal.

      2. Diego Méndez

        “The likely consequence, as Wolfgang Muchau has pointed out, is the euro goes to 60 to 80 cents on the dollar. That would lead to protectionism. There is no way a fall of that level and the resulting loss of exports by Japan, China, and the US will not provoke a reaction.”

        China has been pegging its currency to the US for decades now. It didn’t provoke much of a reaction.

        So the reactions must come from Japan (too insignificant over here) or China, which has a *huge* current account surplus vs. Europe.

        I can’t say I agree with Munchau’s “60 cent to the dollar” line, but it doesn’t seem posed to provoke significant protectionism.

        1. Yves Smith Post author

          Diego,

          1. China has run a peg since 1992. The level of the peg was considered to put the RMB at an OVERVALUED level then, and it was not perceived to be undervalued until 2002 (as developing economies progress and become more successful in international trade, their currencies appreciate).

          2. The Chinese began racking up monstrous surpluses at a time when global growth was decent. No one minded too much their cutting an overly large piece of pie for themselves when everyone was prospering. A completely different fact set now.

          3. China, now having a large surplus which it is not willing to give up any time soon (just read Wen Jinbao’s remarks in response to US pressure to revalue the RMB) and the US commitment to increasing exports, are not going to take well to this. I’ve seen comments to the effect that Boeing will be in dire straits when the euro at 1.15 to the dollar or lower. The job losses that would occur in China and the US with the euro at 80 or lower will not be acceptable from a political standpoint.

          1. Piero

            Luckily (insert bitter laugh here) Ben Bernanke seems more than willing to debase the dollar as much as anyone else debases their currency. Well, perhaps not Zimbabwe.

          2. Gaucho

            Yves,
            I would only add the political factor benefitting China as opposed to Europe. A significant portion of “Chinese exports” are actually US companies exporting from China to the US, so there was internal lobbying supporting a devalued yuan. That’s not the case with Europe. I don’t see how the US can tolerate a highly depreciated euro. And it’s totally unfair as it’s the way for Europe to transfer their largely internal issues to the US and other trade partners.

      3. michel

        I understand that the consequences of lowering public and private debt are going to include lowering of GDP. Since a huge rise in exports is not going to happen for any of these countries.

        The thing I am not understanding is how there is any way to avoid that lowering of GDP. What you describe as ‘restructuring’ is simply a default. But the consequences of default will include the lowering of GDP.

        There is a strange sort of newspeak in all this. We talk of incurring less debt as ‘taking money out of the economy’, which it clearly is not.

        What do you expect to happen to the debt? Is it, in the end, to be repaid or not? Do you expect Greece, Spain etc to continue to borrow and spend? How? How long for?

  14. Lineman

    After two years of crisis I have a very hard time believing a “Plan to have a plan” even a “creditable Plan to have a plan” will have more than a few days beneficial effect on the markets, if that.

    1. Yves Smith Post author

      The eurozone has not had two years of crisis about eurozone arrangements. It has had what, maybe four months? The eurozone will have a rocky time no matter what working through its mess, but the current divergent and halting responses are like pouring gas and magnesium on a fire.

  15. charles

    This is a great post.
    Living in the Netherlands, headlines in the German financial press were related to Geithner and forgetting about a growth of American demand
    Although Germany took one of the biggest hits last year, it seems now well positioned on the return path to growth, the only economy in the eurozone creating jobs, though your analysis and some of the comments rightly point to the ‘elephant in the room’ ( even the IMF in its latest , i.e the current state of its German banking system ( I personnally tend to think that Austrian banks bear the majority of the exposure to Hungary ), as outlined by today NYT Time article: Which banks hold Europe’s troubled loans ?
    http://www.nytimes.com/2010/06/06/business/global/06toxic.html?hpw. And what will happen as Simon Johnson suggests, if a few countries in the eurozone are forced into
    debt restructuring ? ( http://baselinescenario.com/2010/06/04/french-connection-the-eurozone-crisis-worsens-sharply )
    It is useful to remember that Germany is currently dealing
    with domestic problems, the main debate, as in the Netherlands, is related to budget cuts, the other party of the coalition had to shelve their tax-cuts proposals, Schaüble wants to cut as far as into the welfare state, the German governement had to set up a ‘credit fund’ in order not to cripple the export growth of the Mittelstand businesses, faced with the reluctance of the German banks to lend.
    With the majority of the private sector in Europe deleveraging or saving, German and Swedish ( the other country among the EU27 with an export-driven improved growth rate ) businesses are looking for new areas for business. I see the German private spending pattern very unlikely to change in the near future, who knows, given the
    accelerating trend of the European train wreck ( many comments in Germany about the possibe need to recapitalize the ECB ), maybe will they have to deal with tax hikes…

  16. Ronald

    The prescriptions for economic depression heavy or lite flow from the financial engineering crowd. There seems to be no other aspect of modern life that enter the discussion, provide alternative ideas or invited to the discussion period. Financial media defines the terms of the discussion and government actors of all strips seem to come from the same academic institutions very convenient but the net result is largely debates among the same family members all very passionate with little or no changes to the status quo. One week its flood the system with cash the next week its don’t spend and around and around the discussion flows.
    Tody makes a good point in his post that economic’s is not the beginning and end of life as we know it.

    The U.S. and the rest of the industrialized world has structural problems that go beyond what central bankers, Hedge Funds,ETF managers,financial planners,economic schools of thought, are offering up as solutions and the sooner we turn off the financial media channel and look around we may discover a whole new world of thoughtful ideas.

  17. scraping_by

    One of the techniques in the austerity propaganda is conflating consumer debt with commercial debt to create private debt. That is, credit cards are the same as in leveraged buyouts. The business loan for the third cookie shop in the same strip mall is the same as a student loan. A car on time is the same as a bridge loan to a top-heavy, unprofitable company.

    Every time the Irish debt problem is mentioned, the words “plasma TV” are stuck in. However, an Irish company that depended on public spending is probably underwater, and any capital spending they did is probably a bad debt for their lender.

    By creating a verbal entity called private debt, it seems more reasonable to raise taxes on wage earners, to fire public workers, and to default on obligations to pensioners. This is another way of having the public (middle/working class) pay for the incompetence of the politically connected elites.

    http://www.esri.ie/UserFiles/publications/20090519092749/WP298.pdf

  18. spigzone

    “With a private sector debt overhang this large, deflationary pressures are hard to forestall”

    impossible to forestall. that whole peaked oil production thing hasn’t gone away, and will be well started on it’s decline slope within a year (ten MILLION barrels a day short by 2015 acording to a joint forces command study completed a year ago – http://www.guardian.co.uk/business/2010/apr/11/peak-oil-production-supply). that starts the collapse of the world’s financial system in earnest, creating an unstoppable asset deflation married to an irresistable consumables inflation, the offspring of which will be a stagflationary godzilla that will commence ripping the global financial and economic systems into tiny shreds.

    and that’s not taking into account the staggeringly rapid acceleration of global warming’s effects, the melting of arctic ice cap is on pace to demolish 2007′s record.

  19. naked_reader

    Could someone help me with the following riddle?
    It is argued that the Germans raise their domestic demand – this is basically a no brainer however nobody can convincingly present a way. Domestic demand is then just mixed up with consumption so the Germans shall raise that. Consumption goods however do not come from Club Med counties, electronics come from China, clothing comes from Indonesia, furniture from Eastern Europe. I fail to see how this would benefit i.e. Spain or Greece. On the other side what Germany exports is mostly industrial goods and infrastructural equipment so I would argue drawing a trade deficit against the Germans is not that bad as you actually get indebted on investments not consumption. Simple account mechanics to me appear not to be fruitfull. The knack is in reducing the German capital export which has to be used on investments in Germany which have been lagging much. Investmens, meaning construction, business expansion and so forth will then also increase domestic demand, employment, job security, thus also consumption.
    The trouble with Club Med countries is not that Germany don’t buy enough of their stuff, they just have not enough to sell. Is it really the Germans fault if they supply the machines and the credit that the customer brings nothing about?

    Another issue is that the Germans just don’t consume themselves to wealth, it’s not the culture (also note that there is a difference between spend an consume).
    See this figure:
    http://3.bp.blogspot.com/_mJmwQtPmusk/SO8uzD_hEII/AAAAAAAACQ8/XGAdGiq1OBs/s400/debt—household—IMF-08.jpg
    On OECD numbers even the French had household debt increase 33% from the mid 90s on.
    American style credit growth would certainly fix up the account numbers however you need to understand, that this is not the solution, it is the actual problem.

    Don’t know what the foolish German government will come up with but it will not so much hinder investments in Germany. A couple of TVs less, wear the jeans a month longer, won’t harm the EMU much.

  20. atpasture.

    A humble reader (not far north of the antarctic)doesn’t know how to get a question to our humble blogger so I’ll drop it in here and see if anything happens.
    Why doesn’t China just buy Coke a Cola and McDonalds with its reserves?

    1. Polywannacracker

      China through their sovereign investment arm bought a lot of these type of company. Coca-cola inc. and Pepsi co are also a huge companies in china. We are talking about $2-3 billions investments for those nasty canned sugar water.

      (see news below)
      http://www.ibtimes.com/articles/24524/20100521/pepsico.htm

      Not sure about McDonald vs. china.

      The problem with it. You have to sell tons of junk food to balance out a chinese made HDTV. It’s tiny amount. The chinese will dies of cancer and diabetes first before we even balance the current trade.

  21. MichaelC

    Yves comments,
    “If Germans consume more (and this does not have to be imports, it can simply be domestic goods), it will lower the savings rate, which will reduce its trade surplus.”

    The trade surplus could also be reduced if German banks were forced to take writedowns on their Greek (an other ex German European ) exposures.

    To the extent that the German trade surpluses reflect previously inflated sales to overextended borrowers from Germany Inc, then I’d argue its in Germany’s (and the Euro project’s) interest to encourage the banks to take the writeoffs, (reducing the German trade surplus/ reducing the Greece, et al, trade deficits). Providing funding to the banks by Germany to facilitate the bank writedowns would improve the trade stats and reduce some of the stresses feeding the common currency disintegration case. (ie ex German trade deficits are reduced, ability to service external debt is improved)

    If Germany then turns around and taxes the corp beneficiaries for the previously inflated sales figures to recover the vendor financing effectively provided by the state via a bank bailout, then the resulting transfer from German corps to German govt would have the effect of making Germany recognize, that the previous surpluses were a fiction, and that attempts to maintain that fiction are no longer in the interests of Germany or Europe.

    Why bother draining German citizens savings through additional consumption. It hard to imagine that’s going to happen, especially when the Germans themselves must realize the export miracle was, to a degree, a delusion.

    It would be like taxing Goldmans customers for the gains the US govt secured for them through the AIG bailout. Not going to happen here, but the Europeans have a better chance to make some of the real beneficiaries , German corps, of Euro gov’t bailouts pay for it themselves.

  22. Viator

    “It would be preferable to ease up on the timetable, try to get Germany to reduce its surplus with other countries within the EU by spending more, and push eurozone leaders to devise a more coherent process for working through the shortcomings in eurozone arrangements (that would likely require a considerably amount of shuttle diplomacy).”

    It would have been preferable for the majority in the EU not to have cheated on the EU constitution and cooked the books in a rush to spend, spend, spend much of it off balance sheet. It would have been preferable for the majority of the EU countries to make their economies flexible enough to compete in the global economy. It would have been preferable for the majority of the EU countries to minimizes the size, expense and dampening effect of their public sectors.

    The chance of any of the above happening = 0

  23. jdmckay

    I’ve read every comment here, a bunch of similar articles/comments, and maybe my favorite: Telegraph’s survey of British Economists thinks EURO will die w/in 5 years.

    Nowhere in any of this… in Yves’ post, in comments, in Pettis’ article or comments, nowhere is it mentioned what these individual economies produce, nor is there attempt to ascertain relative value of said production, nor accessment of real worker production (eg: rather then that measure being a calculation of diminished worker pay by lower offshore wages).

    Nothing, whatsoever, anywhere, regarding what these economies do… what real value is produced.

    Prior to Wall Street squandering much of the world’s savings these recent years, none of this stuff I read here was on the table. Yet across the US/GB/EU, most of the crooks who perpetrated this have not only walked, they have done so w/their pockets stuffed w/other people’s money, and continue to collect big fixing the mess the made.

    And they are the folks generating these headlines BTW… just look at the Telegraph’s linked lists above. And in regard to that list: in other news, LIKUD members agree Palestinians are irredeemable pond scum, AEP thinks Britain’s bloated and corrupt financial sector is beacon of light to the world, and Timmy G. believes the real problem is… after over a decade of US economy built on backs of Chinese labor while real value produced in this country has slid off the charts… Timmy thinks Germany is really really bad and can fix everything by buying more US junk.

    Just an observation folks.

    Looks to me like panicked self interest is is driving these conversations, and it’s every bit as deceptive as both last and current DOW bubbles… kind’a word bubbles. Blowing bubbles everywhere.

    sheesh….

Comments are closed.