Wolfgang Munchau: Abandon All Hope…..

While Wolfgang Munchau’s latest comment for the Financial Times, “An L of a recession – reform is the way out,” fell short of being apocalyptic, it was the gloomiest piece I can recall coming from him. Munchau argues that the world is going into what is politely referred to as an L shaped recession, but he sees it as a full blown, Japan style recession. Why? Because governments lack the will to take the painful steps necessary to forestall even more painful outcomes.

The big items he points to are: reluctance to reform the financial sector, major economies clinging to national strategies that no longer work, and in particular, exporters unwilling to spend short term and reorient longer term to stimulate enough demand internally.

From the Financial Times:

The US is dragging its feet over the financial sector. The European Union is doing the same, as well as failing to adopt policies that could shield it from an increasingly probable speculative attack. And judging by the state of preparations, the forthcoming Group of 20 summit is going to be a disaster.

So it looks like it is going to be an L – not a V or a U. I mean an L-shaped recession, one that starts with a steep decline, followed by very low growth for many years… This looks like Japan all over. Without financial restructuring, the economy is not going to recover. And Japan was lucky. It was surrounded by a booming global economy.

The best way to fight such a disaster is to restructure the banking system and provide short-term economic stimulus through monetary and fiscal policy. …the current stimulus package is woefully inadequate. In other words: we are looking at an L.

An L-shaped recession will make the adjustment of balance sheets even more painful. Unemployment will continue to rise. House prices will keep on falling. US consumers and banks will spend the next five or more years deleveraging, getting their respective balance sheets back in order. In that period, the US current-account deficit will fall sharply, as will that of the UK, Spain and several central and eastern European countries. This process can take a long time, and in an L-shaped recession it takes longer.

But the effect is also brutal on the rest of the world. The fall in current-account deficits will be partially compensated for by lower surpluses from oil and gas exporters, such as Middle Eastern countries and Russia. But the bulk of the adjustment would be borne by the world’s largest exporters: Germany, China and Japan….

If we had a simple U-shaped recession, we would still have a painful recession in Germany and Japan, for example. But under a U-shaped scenario, both countries would be among the first to benefit from the recovery.

In an L-shaped recession, however, recession gives way to depression, despite the fact that both countries thought they had done their “homework”. If nobody can afford to run a large deficit for a long time – which is what an L recession effectively implies – the economic models of Germany and Japan will no longer work. Germany had a current-account surplus of more than 7 per cent last year. It is the world’s largest exporter. Exports constitute about 41 per cent of national gross domestic product – an extraordinary number, given the size of the country.

So what should these countries do? The right policy response would be to reduce the dependency on exports and undertake structural reforms that facilitate the shift towards non-tradable goods…

Unfortunately, the opposite is happening. Germany is clinging to its export model like a drug addict. An example is the debate about the future of Opel, the European car manufacturing subsidiary of General Motors. Opel is unlikely to survive without help from the government. The proponents of a state bail-out of Opel argue that the company is systemically relevant. This argument is obviously wrong. There can be systemically relevant banks, but there can be no systemically relevant carmakers. But the answer is also revealing. What it means is that Opel is systemically relevant for the country’s export-oriented model. The bail-out adherents are clinging to an industrial structure that has no hope of survival in an L-shaped world…

We are nowhere near a solution to the crisis. After committing errors of omission, global leaders are now producing errors of commission. The Americans dream about a return to a world of credit finance consumption while the Germans dream about assembly lines. In an L-shaped world, these are nightmares.

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  1. Anonymous

    OT, but super cool stuff:
    The World According to Brooksley Born

    Less than six months after she became the seventh Chairperson of the Commodity Futures Trading Commission, Brooksley Born discovered that a number of powerful congressmen wanted to dramatically limit her power to regulate the futures markets. The most controversial aspect of the new legislation sponsored by Senator Richard Lugar and others-and supported by the Chicago exchanges-is a proposal that would allow the exchanges to create “professional markets” that would be free of federal regulation…. great stuff!

  2. Anonymous

    This seems so cool to me in retrospect, although sort of OT, but she suggests that Credit swaps should be regulated by state gaming laws!!! Is that cool or what, and no wonder they had her shut up!!

    BB: If you are going to have unregulated exchanges, it’s difficult to justify limiting the unregulated exchanges to a small group of entities. The futures exchanges seem to be saying that they don’t want federal oversight or regulation but they do want the antitrust exemptions that have allowed them to have a monopoly on exchange trading. I’m not sure you can justify that kind of monopoly if there isn’t significant regulation.

    DS: So if the current regulatory environment ends, it’s conceivable that a legal case would challenge certain protections that these exchanges have right now.

    BB: Under the act, they also are protected from certain state laws. They also have protection from private rights of action that might otherwise exist.

    DS: So is it conceivable that state gaming laws would become applicable to trading on the CBOT or Merc?

    BB: I think that’s an issue that probably would be explored.

  3. Anonymous

    This doesn’t bode well for all the “industrialized” countries that will want to have at least one manufacture of everything. Great waste of resources.

    I played Star Wars Monopoly (talk about extending the brand)with the grandkids over the weekend. A great training tool for American capitalism. The player that gets ahead and has a bit of luck then builds up an insurmountable lead and slowly, or not, destroys the other players.

    I am not sure that it is a good training tool for todays kids and the world they will face but it does show strong competitive personality traits clearly.

  4. Anonymous

    This is so good and so off topic, but has to be shared as much as possible:

    In 1997, Brooksley Born warned in congressional testimony that unregulated trading in derivatives could "threaten our regulated markets or, indeed, our economy without any federal agency knowing about it. " Born called for greater transparency–disclosure of trades and reserves as a buffer against losses.

    Instead of heeding this oracle's warnings, Greenspan, Rubin & Summers rushed to silence her. As the Times story reveals, Born's wise warnings "incited fierce opposition" from Greenspan and Rubin who "concluded that merely discussing new rules threatened the derivatives market. " Greenspan deployed condescension and told Born she didn't know what she doing and she'd cause a financial crisis. (A senior Commission director who worked with Born suggests that Greenspan and the guys didn't like her independence. " Brooksley was this woman who was not playing tennis with these guys and not having lunch with these guys. There was a little bit of the feeling that this woman was not of Wall Street. ")

    In early 1998, according to the Times story, one of the guys, Larry Summers, called Born to "chastise her for taking steps he said would lead to a financial crisis. But Born kept at it, unwilling to let arrogant men undermine her good judgment. But it got tougher out there. In June 1998, Greenspan, Rubin and the then head of the SEC, Arthur Levitt, Jr. , called on Congress "to prevent Ms. Born from acting until more senior regulators developed their own recommendations. " (Levitt now says he regrets that decision. ) Months later, the huge hedge fund Long Term Capital Management nearly collapsed–confirming some of Born's warnings. (Bets on derivatives were a key reason. )

    "Despite that event," the Times reports, " Congress (apparently as a result of Greenspan & Summer's urging, influence-peddling and pressure) "froze" Born's Commissions' regulatory authority. The next year, Born left as head of the Commission. Born did not talk to the Times for their article.

    What emerges is a story of reckless, willful and arrogant action and behaviour designed to undermine a wise woman's good judgment. The three marketeers' disdain for modest regulation of new and risky financial instruments reveals a faith-based fundamentalist approach to the management of markets and risk. If there is any accountability left in our system, Greenspan, Rubin and Summers should not be telling anyone how to run anything. Instead, Barack Obama might do well to bring back Brooksley Born and promote to his team economists who haven't contributed to the ugly mess we're in.


  5. Jojo

    A couple of really good articles on the financial crisis in the current issue of Wired magazine:

    Recipe for Disaster: The Formula That Killed Wall Street




    Road Map for Financial Recovery: Radical Transparency Now!
    By Daniel Roth Email 02.23.09

    The financial world doesn’t need new regulations. It needs radical transparency.



  6. Anonymous

    So what should these countries do? The right policy response would be to reduce the dependency on exports and undertake structural reforms that facilitate the shift towards non-tradable goods.

    Yeah, right…. I can just Germany and Japan getting into the financial engineering business — things like subprimes, student loans, credit cards… LOL


  7. David

    One peculiar feature of this world recession is that governments feel compelled to keep their important (but failing) companies alive. The effect of that is likely to be deflation. Too much supply for the level of demand. How can all these car companies, for example, expect to make profits when every weak lamb is being protected.

    Another feature this time around seems to be excessive saving. That is why interest rates stayed so low for so long, not Fed manipulation. The saving however is not individuals but rather these large institutions, pension funds, non-profit endowments, trusts, central bank reserves. There institutions were not nearly as large (as percent of GDP) 50 years ago. You can goad a person to spend more but you can’t convince a pension fund. They have no choice but to save.

    I think perhaps one of the root causes of this epic crisis was too many institutions seeking fixed income investments which lowered interest rates and eventually lead to over-indebtedness.

  8. alex black

    Judging by sovereign actions, this is quickly turning into a game of musical chairs – with, like 20 chairs and 200 players.

    But the music is better with Obama in the game – Jay-Z, Beyonce…. God, if McCain had won his favorite band was ABBA. It could be worse.

    But once the music stops, blood will be shed for those 20 chairs.

  9. ExBanker

    “And Japan was lucky. It was surrounded by a booming global economy.”

    The most important sentence in that article. The argument for an L-shaped depression really should be dissected into a vertical and horizontal component. Given the positive feedback loop we’re experiencing through demand destruction and increased savings rates, I have difficulty ascertaining what the “right-angle event,” so to speak, that changes this from a positive feedback mechanism to a stable horizontal equilibrium looks like. If export markets are collapsing, while at the same time domestic markets are contracting, or worse, seeing weakness in their currency, at what point do we reach a hypercritical phase where this start to get really destructive?

  10. brushes9

    -Finance and Obama
    “Is Obama War Gaming For A Better Tomorrow?”
    (rated M for mature)

    Finance is where it needs to be, wounded, licking its broken limbs, hiding in the bushes.

    Put another way, finance needs to remain that gang of stiffs walking down the street, nervously eying the patrol car with dark windows, following them, slowly.

    Yes, we need to fix banking and restart the investment frenzies, but not yet. Fix the world of finance, now, and it would be like handing a truncheon to a mean man.

    Behind finance, their are five or six more society-killing issues waiting in line, but complaining less.

    To begin with, I hope that Obama holds finance hostage to the successful passing of healthcare reform through Congress and signed into law. I know that someone is going to say that I’m naive, because this issues of banks, the dollar and derivatives is so important. Well,..not if you are Obama! He has 200 million American faithful. What do you got!?

    I know, it is tough being “masters of the world” these days. The whiz-kid fund managers can’t put money in, can’t pull money out. These ‘dark lords’ are pathetically cooking in their own juices. No wonder the blogosphere is on fire. No wonder Obama is not listening.

    Fueling this blogosphere firestorm is a youthful, neo-libertarian horde in grand mall seizure on the cubicle floor, because Obama is EXTENDING benefits to the ‘undeserving,’ while their own Jim Jones leaders are being led off to jail, or are being mocked in the press, filling their young, powerful bodies, again, with the terrors of the abyss.

    Obama’s message to finance seems to be, “no, you may not have even a single drop of water for your parched tongue!” That is what I see. I don’t see Obama giving anybody anything, except payment to stand still..I know, it drives his enemies crazy,..that is the whole point!

  11. Anonymous


    I hope you’re right but I don’t think you are. Obama just OK’ed a massive payout to AIG that went straight through to pay off CDS owned by a bunch of big banks. Pure theft from taxpayer to banks. Obama OK’ed it.

    I was thinking, hoping the way you write before. But this really is inconsistent with that view.

    It’s possible hedge funds will be blown up. But Goldman will be well protected in all this, Morgan Stanley too.

  12. killben

    While it is very pessimistic, I would agree!!

    Till the debt are set off through bankruptcies and write-offs you can expect things to go downhill … and will the regulators et al allow that to happen .. UNLIKELY!!

  13. Anonymous

    I have been as bearish as almost anyone the last three years, but seriously, we are not in a death spiral. That kind of worry is not constructive. One way or another, the insolvent consumers and the insolvent governments will be bailed out through some kind of redistribution of assets, most likely through massive inflation of most of the important currencies (against commodities and real assets, not against each other) but possibly through wealth taxation. The main point is to worry about who wins and who loses in the ultimate redistribution, not whether it will happen.

  14. francois-guillaume

    Its a I-shaped recession

    we are falling off a cliff, and with no recovery at all.
    its the end of everything.

  15. pigeon

    I usually don’t read Münchaus comments anymore (in german) because they appear so ideoligally biased that the lack credibility. I’m surprised you cite him in your blog. Of course there are a lot of proponents of a bail out for Opel. But Chancellor Merkel refused that idea by stating that Opel is not systemically relevant. Why does Münchau not mention this? Because he wants to paint his own picture of german politics.
    It is fact that Germany is export dependent. But it is also true that Germany applied by far the biggest domestic stimulus to cope with the recession. That is not visible in the official numbers of these so called stimulus packages because most of that stimulus is hidden in the german social security and employment security system. Most economists abroad fail to get that right and therefore complain about Germany being to slow in poassing huge stimulus measures.
    The german system has stimulus measures built in that have not to be passed by government once a recession is there.
    There is a comfortable unemployment insurance and social security fund that Americans can only dream of. There is a thing called Kurzarbeit that enables companies to reduce on duty hours for their workforce in difficult times and receive a subsidy from the employment agency to make up for the reduced wages for their employees. Thus in contrast to most other countries they can keep their work force but at the same time cut cost.
    It is very easy for economists to point out, that Germany will take a big hit. That isn’t news even to the government. So it is all the more important to remain objective about detailed policy reactions.

    It is clear that the trade surplus model will not work in a recession. But take a look at the current numbers and you see that adjustment takes place automatically because domestic consumption has held up rather well even though exports plunge. In effect Germany is contributing much more to the global adjustment of the balance of payments than most economists are willing to admit.

    Münchau simply ignores the facts to make up his own story.

  16. Hubert

    I second Pigeon.

    If you want to understand Germany, Munchau always was, now is and probably will forever be a poor choice.

  17. Yves Smith


    In fairness, Munchau did mention Merkel’s opposition to the Opel bailout. I did not include that bit. But he suggested she might be forced to cave.

  18. Anonymous

    Politicians I suspect perceive advantages in trying to resurrect failing parts of the economy, namely that in an L type recession they can be seen to have had an impact where as a V type recession will most probably cut a lot deeper and politicians will have less claim to have done something. They might actually have to stop running round like headless chickens. Politicians by nature of the fact that they need to convince people to vote for them, need strong views which are inline with consumer policy. Strong views are not conducive to a change of direction or a complete rethinking of policy. In essence the political framework has been found wanting just like banking.

    Full nationalisation of banks with the derivatives (CDS,CDO) problem unaddressed and the possible impact to companies through pension fund deficits scares politicians. With every government action seemingly making things worse, financial restructuring is the last thing on their minds, besides they all need to pat each other on the back as they try to keep their little elite club going. It reminds of the dwindling group of smokers outside my company (which I was once a member of) getting closer together as the numbers get smaller.

  19. Blissex

    «she suggests that Credit swaps should be regulated by state gaming laws!!! Is that cool or what, and no wonder they had her shut up!!»

    Arguably a lot of financial instruments are really insurance, as you collect fees now and book revenue in the present, against potential future losses, allowing one to collect huge bonuses before the inevitable collapse.

    The current problems at major banks resemble very much those that happen in insurance bubbles, when insurance salesmen get rich by selling policies and under-providing reserves against future losses.

    High bank leverage ratios are in effect the same as undercapitalization at insurers: great for flattering book profits and profit-related bonuses. by the deliberate manufacturing of fat-tail, Taleb risk profiles.

    Arguably most “basic” derivatives are insurance contracts (no surprise that AIG went massively into CDSes) without insurance regulation.

    «An initial premise, which will be briefly explained here but not discussed further, is that regulation of the insurance industry is necessary.4 As the United States Supreme Court has long recognized, insurance is business coupled with a public interest. Consumers invest substantial sums in insurance coverage in advance, but the value of the insurance lies in the future performance of the various contingent obligations. Because the interests protected are so important – including an individual’s future ability to provide for dependents in case of death or injury, to retire, to obtain necessary medical treatment, to replace damaged or destroyed property—regulation of the industry furthers public welfare. Related reasons for insurance regulation center on the complexity of insurance and consumers’ inability to obtain and understand information about insurance. Consumers are ill-equipped to assess a company’s future solvency, to compare the coverage of various policies, or to evaluate a company’s claims service. Theoretically, government regulation of insurance eliminates these problems. Regulation can ensure solvency and the insurer’s ability to pay claims in the future, standardize policy coverage, require minimum coverage, and require fair claims processing.
    An equally important justification for insurance regulation is the prevention of excessive and potentially destructive competition. Because an insurance company’s real costs are not known until an insurance policy matures and all claims are paid, the insurance business tends toward extreme competition in pricing. If the insurer’s insolvency results, the consequences for the insured and their beneficiaries may be devastating.

    My view of the USA financial industry in the past 15-25 years is that policy was designed to recreate wildcat banks (e.g. Bear Stearns or Lehman) as well as wildcat insurers.

    Who badly wanted to create huge opportunities for bustouts for their rich friends? Well, it turns out that it was prof. Gramm and his Republican friends:

    «2. The Financial Services Act of 1998, H.R. 10, 105th Cong. (1998), the latest in a series of congressional attempts to modernize the nation’s banking and financial services laws, was passed in the House of Representatives on May 13, 1998, by one vote. The House intended for the Act to promote affiliations among commercial banks, securities firms, insurance companies, and other commercial enterprises, thereby enhancing efficiency in the financial services industry and increasing the competitiveness of American providers in the international market. Specifically, the Act would permit securities firms, insurance companies, and financial firms to own or affiliate with a commercial bank by removing restrictions contained in the Glass-Steagall Act of 1933, ch. 89, 48 Stat. 162 (1933) (codified as amended in scattered sections of 12 U.S.C. (1994)), and the Bank Holding Company Act of 1956, 12 U.S.C 1841-1850 (1994). An April 1998 vote on the Act was postponed when the House Republican leadership realized they could not muster the necessary votes, but the Travelers/Citicorp merger spurred further consideration of the Act.»

    As to the more abstract derivatives, yes, state gaming laws seem far more appropriate than state insurance laws…

  20. dearieme

    1998: signed by Slick Willie when he could have vetoed it. Trying to blame either party alone is pointless – the system is broken.

  21. Blissex

    «OT, but super cool stuff:
    The World According to Brooksley Born

    Not at all offtopic, as she clearly understood that derivatives markets were insurance-like:

    «Born called for greater transparency — disclosure of trades and reserves as a buffer against losses.»

    and could cause a lot of damage:

    «In 1997, Brooksley Born warned in congressional testimony that unregulated trading in derivatives could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it.”»

    Now, on the same site I have found a wider debate, and here are some parts of the case for deregulation:

    «It is clear, however, that the CFTC does not view its role to be an advocate for the business of U.S. futures industry interests in the economy. Instead, the commission views its role as the insurer of some ideally perfect regulatory scheme.»

    and the money quotes:

    «As we have testified before Congress this year, our regulatory structure needs to be changed. Federal regulation is choking our markets. Exchange markets are entitled to, but have thus far been denied, the same treatment as the OTC markets and foreign exchanges as a matter of fair competition.
    Despite the unfounded doomsday predictions of some, self-regulation does not mean no regulation. Nobody has more at stake in the integrity of our markets than we do. Our professional markets would continue to offer customers many well-known safeguards already found in exchange markets, including open and competitive trading, transparent pricing, daily mark-to-market of positions, and unsurpassed financial integrity through clearing systems that eliminate counterparty risk.
    Each of these safeguards was invented by exchanges, not the federal government, because the integrity of our markets is paramount to our success. Yet with all these safeguards in exchange markets, there are some who favor more regulation of exchanges. Nobody has yet explained to our satisfaction why the safer market should have more federal regulation.

    «Alan Greenspan noted in his Coral Gables, Fla., speech, government must “enunciate clearly” the public policy objectives for the regulation of derivatives. These so-called “professionals” use OTC derivatives as an integral part of managing their firms’ financial business. They are subject only to the remedies imposed by contract law, which have apparently been sufficient since the number and size of derivatives-related defaults are statistically insignificant. Accordingly, it is not clear exactly what public policy purpose government regulation is serving.»


    Consider instead these obvious counterarguments:

    «At the same time, the professional market exchange would not be subject to audit trail, books and records, and other regulatory requirements that are essential in uncovering, and thereby deterring, fraud and manipulation and ensuring sound operations. Problems of the magnitude seen in recent trading scandals involving professional traders such as Barings and Sumitomo show too clearly the limitations of relying only on exchange self-oversight. Such events also demonstrate that institutional participants in exchange markets can pose potential systemic problems. Moreover, an unregulated professional exchange could profoundly affect clearinghouse integrity in the event that a firm cannot honor its trades. Problems at the professional market or clearinghouse could easily spill over to the broader financial markets.»

    «We know that there is a strong relationship between trading in derivatives and related case markets. We know that there is, at best, incomplete information on the extent or nature of trading in these markets. We also know that a market in which regulators have no legal ability to require trading reports, to impose “circuit breakers,” position limits, trading halts or margin requirements if they should prove necessary, to obtain the information required to monitor the markets, or to mandate fair competition among participants, is a market that could present great potential dangers for the nation’s regulated securities markets. Actions that would preclude regulators from addressing systemic risk should not be taken unless it can be concluded that such action would be safe and in the public interest, and would have no adverse effect on the proper functioning of and competitive balance in securities.»

    This is particularly funny:

    «Avoid the British experience. As the professional market legislation also proposes, U.K. regulators concentrated on the politically correct goal of protecting small punters, leaving professionals to their own devices. Knowing the relevant history, a U.S. politician worth his or her salt should wonder if the Conservative government’s approach to market oversight has something to do with the number of Tory resumes on the street, and if a vote to duplicate U.K. market regulation communicates this disease, brought on by a rapid succession of Barings, Morgan Grenfell and Sumitomo problems, to name a few. British regulation, now recovering and making adjustments, failed not only to protect the public from the industry, but the industry from itself. Not a good idea in the United States.»

    Reading this debate in 2009 is so incredibly amusing — or not :-/.

  22. Blissex

    «1998: signed by Slick Willie when he could have vetoed it.»

    Well, is a massive difference between fanatically pushing a boondoggle against the interests of your country but to the benefit of your sponsors (the Republicans) and not vetoing one supported by your (also captured) advisors (Greenspan, Rubin and Summers).

    And vetoing legislation pushed by the owners of the large Republican majorities of House and Senate was probably futile or a bad investment of political capital.

    «Trying to blame either party alone is pointless –»

    Surely the Democrats have been somewhat sponsored by the financial industry too, but the parties cannot be put on the same level: the Republicans have been fanatically devoted to destroying the public interest to the benefit of their sponsors and customers, to a degree that approaches treason — except that perhaps it is not treason, it is just loyalty to the Confederacy instead of the Union.

    «the system is broken.»

    The system is not broken — it works very well and very efficiently in the interests of the rich, especially southern and Wall Street interests, overwhelmingly represented by their Republican nominees in Congress.

    Not all Republicans are corrupt — many of those that Norquist derides as Yankee Republicans still have some decency left, and objections to the Great Larceny of the past 15-25 years have come from those as well as from most Democrats.

  23. Blissex

    «since the number and size of derivatives-related defaults are statistically insignificant.»

    This bit is especially lovely — it justifies by itself Taleb’s and Mandelbrot’s repeated warnings about misuses of statistics.

    Also, who could have known that it would all explode?

    After all, that wildcat banking and insurance seem to work for several and then blow up spectacularly is something that was never apparent before :-).

  24. Purple

    Why do export-surplus countries like China, Japan and Germany ‘refuse’ to change their model ?

    Dislocations during the transition to a domestic oriented economy might lead to massive unemployment. And , I’d argue, there are power and wealth structures in these countries who have benefitted from the export model. Changing it potentially starts a new game where there are excluded, or have to start over.

  25. Anonymous

    ‘But he suggested she might be forced to cave.’

    By who? According to yesterday’s front page article in Welt am Sonntag, a majority of German taxpayers oppose bailing out Opel, as does the Deutscher Industrie- und Handelskammer, the organization that represents German business.

    There is simply no public desire in Germany to bail out Opel, especially after such revelations that Opel pays no German taxes, or that the reorganization plans presented by GM and Opel don’t even match one another, or that Opel continues to a source of money for GM, which is siphoning whatever it can to the U.S.

    Merkel has no real pressure to bail out Opel, a fact easily overlooked in the English language press, where bailouts aer considered the latest cure.

  26. Richard Kline

    So frank-willie, you beat me to it: few seem to accept the possibility that this might be an I-shaped event, a real worst-case scenario. I don’t know that there is a right-angle recovery at the bottom; more likely an even distribution of the rubble.

    Munchau makes many points, and I agree with near all of them. Two amongst them haven’t gotten enough discussion to this point, so I’m glad to hear him pumping up the volume. The first is that the national macroeconomic strategies of almost all, if not all, large industrialized countries are now in smack-up mode. This is, in my view, the major reason that the policy response by the G[many] has been so poor, or at best muddled. There are going to have to be MAJOR changes in how the Big Countries make money, and specifically make money amongst each other. That is extremely painful to consider, and very, very costly to undertake. Governments fall like strawmen under that kind of pressure; obviously no one wants to take this issue to the public. A wing and a prayer is far preferable. But those macroplans are all bust. The fiancial system is in its worst shape since 1945.

    Which brings me to Munchau’s other point. The G20 seems to me, too, to be headed for disaster. Planning would appear to be zip, and the non-strategies of most significant players are themselves conflicting. We will all be spinning wheels until the G20 is held, but if it merely flops let alone implodes, we’ve got a prime chance for a financial-system singularity. Everyone’s hanging on for The Plan, and if we don’t get one their fingers are gonna be might tired by then.

  27. mft

    I have to second pigeon, also anon@8:11, contra Muenchau.

    So far as Opel is concerned, it presently seems unlikely that anything more than cushioning the effects of the coming Opel collapse on its workers will be forthcoming. For those with their ears to the ground, it is clear that Opel is being regarded as a necessary and perhaps useful sacrifice – some hope that it will take the pressure off other car makers (they’ll fight like dogs over the scraps).

    Regarding the generous German short-time work subsidy system, this really does act as a massive support, unrecognised by most anglo commentators. But it comes at a cost to the firms, and big layoffs will start in the summer if this goes on. Despite this, attitudes in Germany (from my perch in the south) are remarkably confident – “Zuversicht” is the catch word here. I was at a party yesterday, and the boss of a local construction firm was beaming from one side of his face to the other, boasting of full order books. Manufacturing firms, it seems, are still investing in new buildings. And that’s here in the south where the auto industry and machine tool manufacturing (all export orientated) play a big role.

  28. Bob

    L-shaped or I-shaped?

    L-shaped recession is not the worst case.

    The worst case is an I-shaped recession.

    If it’s an I-shaped recession the economy will be getting worse and worse until a total breakdown of the global economic and financial system, i.e. the breakdown of the civilization as we know it.

    The key question is, is there a force strong enough to stop this decline? If not to reverse, then at least to stop it?

  29. Anonymous

    What’s becoming clear is that Western Banking is in Chapter 13 bankruptcy and trying to avoid liquidation, whatever that means on a global scale, and hunkering down for the long payoff. This can only being when “restructuring” begins, which means the rich (countries, institutions, and individuals) accepting their losses and wiping out vast sums of wealth.

  30. mft

    It’s worth remembering that Wolfgang Muenchau is the same Wolfgang Muenchau who was trumpeting about the approaching “End of Social Market Economy” in Germany in 2006 and singing the praises of private equity firms (seen as “locusts” by social democrats) that plunder strongly-built firms using mountains of debt.

    Now Wolfgang Münchau is calling for policies generally associated with… well, social market economists.

    A plague on these phony commentators whose opinions are as changeable as the English weather!

  31. Anonymous

    Relating to commodities, can someone explain why gas went from $4.35/gal to $1.79/gal in 6 months? Has the change in the dollar and change in demand really affected price that much?

    I don’t really understand futures markets, but I compare it to Google Ads: the way Google advertising works is that people bid for keywords, with higher bids getting higher placement. So a few competitors bidding on “online auctions” for example, can run the price of those keywords up to crazy values, with Google’s profit increasing the whole time. Google isn’t providing any more value for the increasing bids, and they often send emails to customers with “suggested bids” – always higher of course.

    I’m not ragging on Google: they invented a money machine and are making use of it. What scares me is that commodities futures seem to be run the same way: traders keep bidding up the price of oil, and the higher the bids, the more profit they make (higher percentage commission). Meanwhile, Joe Consumer gets stuck with the bill at the pump. Because the oil industry is so consolidated, there’s little competition, so the price keeps going up and up.

    As the food industry has consolidated over the last 10 years too, it seems easy to imagine the same thing happening with food as happened with the run-up on oil. The conspiracy theorist in me suspects that deregulating the commodities markets is a step the thugs want to take to suck even more blood from consumers from the only area they are still spending on: basic necessities of life like food and fuel.

    Does this make any sense?

  32. Anonymous

    The rules were changed in the commodities markets from trading between suppliers and end users (only) to anyone and their mother able to bet on commodities (esp. hedge funds) starting with ECN. (I know, I over simplified it)

    Hedge funds gambling with OPM from 401Ks to retirement funds bet on oil, driving it up until the bluff was called and the gamble was lost. This along with other commodities.

    Hedge funds that lost, are liquidated and now defunct, returning most commodities to cost of production prices (a bottom).

    Rules are still the same and the games could begin again if it attracts enough money.

    On another note, any insurance contracts should be overseen by the insurance industry and not the gambling industry albeit a novel approach.

  33. Anon1

    Ugh…OF COURSE countries should seek to keep a number of basic industries alive AT HOME.

    Sorry, but merely passing financial paper around is NOT an economy, it is mere nonsense with no intrinsic value whatsoever. It is the reason the US is totally fucked – because we simply allowed virtually all manufacturing to move to slave labor/slave wage countries leaving merely paper shuffling behind.

    With a global collapse, you cannot drive that paper, eat that paper, listen to that paper for news or entertainment, cannot run software on that paper, cannot wear that paper, cannot build a house or any other object or structure with that paper. It is total crap and must be relegated to where it belongs: a small, though important, component of a bigger economy that actually MAKES THINGS. Preferably, a goodly portion of those made things being made right here with native workers so that we are (largely) immune to global downturns.

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