Ambrose Evans-Pritchard: Apocalypse 2010

Ambrose Evans-Pritchard is nothing if not decisive in his views, and has a undisguised fondness for the bearish perspective. But he was correct on the 2008 inflation/commodities headfake, saying repeatedly that deflationary forces would prevail when that was decidedly a minority view. He is also a Euro-skeptic, and I’m less comfortable with that position. The EU is due to come under strain, but that does not mean it will shatter (in fact, for any country to exit is probably more difficult and traumatic than for the powers that be to come up with a muddle-through. But the period while fixes are being devised could be fraught indeed (and that seems to be his current position, BTW).

If things work out badly (and I see the odds of that as reasonably high; China is looking more and more like late 1980s Japan), they will work out very badly, markets are highly connected and if the right dominoes fall, many others go down in fast sequence. So the idea that the amplitude on the downside is likely to be extreme is very plausible. But he has also made a timing as well as a depth call, and sees things unravelling pretty soon. That could prove to be correct, but one thing shorts know all too well is that obvious-seeming outcomes can take much longer to come to pass than they ever thought.

Some of his observations seem spot on, in particular, that the Fed will lose its nerve and abandon its efforts to withdraw from quantitative easing, despite noises now to the contrary, that the dollar will rally near-term, and the yen will break.

From the Telegraph:

The contraction of M3 money in the US and Europe over the last six months will slowly puncture economic recovery as 2010 unfolds, with the time-honoured lag of a year or so. Ben Bernanke will be caught off guard, just as he was in mid-2008 when the Fed drove straight through a red warning light with talk of imminent rate rises – the final error that triggered the implosion of Lehman, AIG, and the Western banking system.

As the great bear rally of 2009 runs into the greater Chinese Wall of excess global capacity, it will become clear that we are in the grip of a 21st Century Depression – more akin to Japan’s Lost Decade than the 1840s or 1930s, but nothing like the normal cycles of the post-War era. …The vast East-West imbalances that caused the credit crisis are no better a year later, and perhaps worse. Household debt as a share of GDP sits near record levels in two-fifths of the world economy. Our long purge has barely begun. That is the elephant in the global tent….

Yields on AAA German, French, US, and Canadian bonds will slither back down for a while in a fresh deflation scare. Exit strategies will go back into the deep freeze. Far from ending QE, the Fed will step up bond purchases. Bernanke will get religion again and ram down 10-year Treasury yields, quietly targeting 2.5pc. The funds will try to play the liquidity game yet again, piling into crude, gold, and Russian equities, but this time returns will be meagre. They will learn to respect secular deflation.

Weak sovereigns will buckle. The shocker will be Japan, our Weimar-in-waiting…The Bank of Japan will pull the emergency lever on QE. The country will flip from deflation to incipient hyperinflation. The yen will fall out of bed, outdoing China’s yuan in the beggar-thy-neighbour race to the bottom. By then China too will be in a quandary. Wild credit growth can mask the weakness of its mercantilist export model for a while, but only at the price of an asset bubble. Beijing must hit the brakes this year, or store up serious trouble. It will make as big a hash of this as Western central banks did in 2007-2008.

The European Central Bank will stick to its Wagnerian course, standing aloof as ugly loan books set off wave two of Europe’s banking woes. The Bundesbank will veto proper QE until it is too late, deeming it an implicit German bail-out for Club Med.

More hedge funds will join the EMU divergence play, betting that the North-South split has gone beyond the point of no return for a currency union. This will enrage the Eurogroup. Brussels will dust down its paper exploring the legal basis for capital controls. Italy’s Giulio Tremonti will suggest using EU terror legislation against “speculators”.

Wage cuts will prove a self-defeating policy for Club Med, trapping them in textbook debt-deflation. The victims will start to notice this…

Greece’s Prime Minister Papandréou will balk at EMU immolation. The Hellenic Socialists will call Europe’s bluff, extracting loans that gain time but solve nothing. Berlin will climb down and pay, but only once: thereafter, Zum Teufel.

In the end, the Euro’s fate will be decided by strikes, street protest, and car bombs as the primacy of politics returns…the mood music will be bad enough to knock the euro off its stilts.

The dollar rally will gather pace. America’s economy – though sick – will shine within the even sicker OECD club….Mervyn King’s pre-emptive QE and timely devaluation will bear fruit this year, sparing us the worst.

By mid to late 2010, we will have lanced the biggest boils of the global system. Only then, amid fear and investor revulsion, will we touch bottom. That will be the buying opportunity of our lives.

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  1. a

    “The dollar rally will gather pace. America’s economy – though sick – will shine within the even sicker OECD club….Mervyn King’s pre-emptive QE and timely devaluation will bear fruit this year, sparing us the worst.”

    Ah yes, only the Anglo-Saxons will muddle through. It’s not that A E-P is anti-EU, he’s just pro-Anglo-Saxon, which implies anti-EU, anti-Japan, anti-China, anti-everyone else. Never mind that it’s the Anglo-Saxons who began this thing and are having the biggest problems.

    1. Yves Smith Post author

      The record of the Great Depression is very clear: the overconsuming debtor nations suffer less than the overproducing creditors. The debtors default. The creditors have to work through destroying or decommissioning somehow their overinvestment in manufacturing capacity and the attendant unemployment. That adjustment is more painful and takes longer. Like it or not, his forecast is reasonable.

      1. Diego

        “The record of the Great Depression is very clear: the overconsuming debtor nations suffer less than the overproducing creditors.”

        If that’s true for the US and the UK, why isn’t it that way for Ireland, Greece, Italy, Portugal and Spain?

        1. Yves Smith Post author

          As members of the EU, Greece, Italy, Portugal and Spain can’t pursue independent policies. The remedy for the debtor is to default, at least in part (the UK did on its war debts) and trash its currency (the UK was early to abandon the gold standard). The dollar has depreciated a fair bit, a short term reversal complicates the picture. The so-called PIGS can’t break glass and depreciate currency unless they exit the EU. Now admittedly, the US as owner of the reserve currency has more than a non-trivial problem in depreciating it currency or in figuring out how to default selectively. Everyone in positions of authority in the US seems to assume this is now an absolute impossibility (as in the policies are working, we will never need to do anything so dire). Now it would be much better if I were wrong, but the denial about how bad things could get if things got really bad is exactly what led to bad crisis responses last time (as in expedient actions setting very bad precedents and allowing for inaction on the real underlying problems).

          And we have not seen the nadir of this crisis. The end-game is when the China bubble bursts. That could be a way aways, like a few years. Then we’ll be able to see who did worse on a relative basis. It’s too early to call.

          1. Diego


            if I understood you right, you think you can trash your currency and default on your debts and still keep on receiving foreign investment at a similar pace while there are many other places with just the same regulatory, legal and economic framework + respect for debts?

            Somehow, are you saying the UK can default via inflation with no major problems but Greece cannot reasonably restructure its debt without causing a financial apocalypsis?

            Where’s the appropiate comparison US vs UK vs Germany after the Great Depression? Didn’t fascism and mass qualified emigration from Europe impair investment and economic growth? Did investors have any other country outside the English-speaking zone to make sound investments in?

          2. Yves Smith Post author

            I never said Greece restructuring would be a crisis. It would be disruptive, and would lead the Euro to fall, which will help the entire EU but could worsen a currency race to the bottom (what will China do?). It supports the notion that a debt default (or writedown) is a plus.

            Please read my intro. I did NOT say my views were aligned with AEP’s. I agreed specifically that the downside was much worse than most imagined, and with three of his specific calls, none of which involved Europe.

            International trade and capital flows collapsed in the Depression. Foreign inflows to the US were not a factor in the recovery. It was massive deficit spending in combination with wartime forced consumer saving, and a decade of reduction of old overinvestment and internal debt defaults/restructurings.

          3. Diego

            I may agree that the China bubble will eventually burst, and that everything *may* get worse. However, the idea that Anglo-Saxons will do fine while everyone else will lose a decade is unjustified, as “a” wrote. This would only be the case if the US and the UK were to follow optimal strategies while Europe and others were fools and choose only suboptimal ones.

            If you default on your debt, you are giving a signal to investors; a signal that will resonate for decades to come. Of course, World Wars can help forget these signals; but under ordinary circumstances, long-term foreign investment is conveniently reduced.

            I can’t think of a single investor whose expected investment value on a (directly or indirectly) defaulting country is not correspondingly reduced. So, barring a World War or mass nationalization in all non-defaulting countries (or both combined, as in the Great Depression), defaulting on debts is mathematically equivalent to getting in further debt in order to pay your previous debts.

            On the other hand, Europe has a powerful, underestimated mechanism to profit from the current crisis, namely tariff-like barriers against Chinese and other polluting nations’ products.

          4. Yves Smith Post author


            You are not portraying what AEP said at all accurately. He said the dollar would rally and the US would in the unwind phase look less bad than elsewhere. A dollar rally is NOT a plus from a recovery standpoint. Looking less bad is not at all the same as “doing fine”. Having one arm amputated is less bad than losing both legs, but neither is a good state of affairs.

          5. Diego

            Everything is relative in economics, and shining in the OECD, even if being sick, means doing fine. It’s completely unjustified to portray Europe as an armaggedon-day, car-bombed place, with threats to investors (anti-terror legislation?) a la banana republic, Japan as the “Weimar-in-waiting”, and then say the UK will be “spared the worst” and the US “will shine in the OECD”.

            Whether you want to see it or not, this is a piece of classic Anglo-Saxon political propaganda. The whole article could be summed up in “we’re different, smarter and better”.

          6. Yves Smith Post author

            With all due respect, that’s your projection. It is not in the article.

            In the fable, the grasshopper and the ant, it’s pretty clear the grasshopper was a freeloader and the ant was virtuous. Yet the grasshopper came out better on that trade. The outcome looks similar here.

            You are reading stuff into his piece that is just not there. He loves hyperbole, you need to discount everything he says by a few notches. But there have already been demonstrations in Greece, in 2008 and this year, or did you miss that bit? So far, admittedly, the biggest unions are not participating.


            One of its quotes:

            In its latest bulletin on Greece, the US security think tank Stratfor concludes: “We can, therefore, expect the following year to continue to be a highly volatile one for Greece. Greece already has had a turbulent end in both 2008 and 2009, with an increase in violent anarchist activity and outbursts of social unrest. The rest of Europe will be nervously watching how Athens’ budgetary measures are received by both international investors and the Greek public.”

          7. Diego

            Yves, it’s not my projection. It’s his. There have been strikes all over Europe this year, including Ambrose’s homeland, where xenophobic strikes broke out all over the country’s refineries in early 2009.

            Now, if I write an article in a typical UK-bashing vein and I declare 2010 to be the year “where the future of capitalism and race equality in the UK will be decided by strikes, street protest, and car bombs as the primacy of politics returns…”, that’s political propaganda, UK-bashing. And Ambrose is doing just that, but in the reverse way.

          8. Ishmael


            Maybe the selective defaulting in the US will be that GSEs, debt of large US banks and securitized paper will default but US sovereign paper will remain money good.

            This was the whole problem of TARP and other foolishness the US has been up to since the crises has hit. It continues to contaminate the governments balance sheet with private toxic paper.

            Interesting, we had a practical UN over for dinner on New Years day. People from France do not seem to think things are so bad right now and did not think Greece was that bad of problem. My SO is Greek. The people from France who are not Finance orientated do not grasp the systemic problem of Greece and had never heard the PIIGS reference. Russians were worried like usual.

            Enjoy your writing.

      2. moneta

        I agree. The discretionary stuff tends to be imported. The staples and necessary services tend to be in house.

        1. moneta

          I can’t help but wonder how bad it would be for France to get out vs. staying in. Why would they pay for the dead wood when they don’t have to?

          Just seems to me that some stronger players in the EU will have to be compensated for their staying put. That’s not discounted in the markets that’s for sure.

          1. Diego

            The euro is stronger than any of its constituent currencies combined. If the French woke up earning 2,000 new French francs instead of 2,000 euros because of a mandatory currency regime change, they would immediately earn half what they are earning now.

            Why so? Because the new French franc would suffer a huge devaluation from day 1, making all imports cost twice as much. In one word: Argentina.

          2. moneta

            Of course the French franc would drop like a rock if it happened tomorrow but as it looks, many Euro countries are going to be an increasing drag on the stronger countries and the latter will want to be compensated for that or else why stay? It’s not about today, it’s about what is coming their way in the near future.

            One important reason for the creation of a European Union was to compete against the US. With the US now a basket case and putting doubts about American supremacy in everyone’s minds, some Euro leaders just might wonder how much sense it makes to stay in there and help Greece, Italy and Co. access underpriced capital.

          3. Diego

            The fact that Greece and Italy use the euro does not cost a single eurocent to the French or the Germans who, by the way, broke the Stability Pact just 3 years ago because of their huge economic problems at home.

            You can’t create a lasting European structure with short sight. Spain and Ireland have problems now, as Germany and France had before them, but no one can be sure whether it won’t be the Mediterranean countries who will be wealthier, stronger and willing to bail out Germany and France in just a decade’s time.

            After all, were it not for the crisis, Spain would have already surpassed France in wealth (as measured in GDP-PPP per capita) and production of goods (as measured in nominal industrial production). And just some years ago, Spain’s access to credit was cheaper than Germany’s and much cheaper than France’s.

            Let’s look a things in the long term, and in the knowledge that economic conditions change.

      3. jdmckay

        The record of the Great Depression is very clear: the overconsuming debtor nations suffer less than the overproducing creditors.

        Perhaps. Looks more to me, however, like the more generalized lesson to learn from GD, Bernacke’s take on those lessons, and whole lot of statements I’ve read from elite finance folks on various “lessons learned”: they aren’t very good at learning lessons.

        Especially re: lessons from GD: everything has changed since then… everything. “Emerging” economies have emerged. Ratio of world’s populations vs. minimally required resources has shifted dramatically towards the meager end, w/availability of those resources in abundance to other shores.

        There are now very capable economies beyond our borders, and they are doing what we used to do: research >> invest >> manufacture.

        As far as China’s over-production, we went around around on this a couple weeks ago and I just let it go. But with all due respect, WRT China you really did not accurately depict anything about what’s going on there. Their emerging leadership in any number of very much needed tech sectors, and particularly their role in supplying so much of rest of the globe w/increasingly high quality products… their production is in demand.

        If China has to eat US Treasury investments, they can swallow it and go on. And given how much of $USD’s status as global currency standard is built on conditions that no longer exist here, w/our massively deprecated ability to produce… US default shifts things in ways that don’t bounce back.

        Everything I see tells me US… politically, culturally and resource capability (human, knowledge, infrastructure) has no clue as to the hazard it currently faces.

        I don’t think AEP’s in the ballpark w/his EU prognostications, anymore than wasyour hosted article by Bougearel last week.

        1. David

          My feelings are similar. China is not a bubble. It is an economic powerhouse.

          If we just look at the press in the US and UK, we will pat ourselves on the back. But the US and UK are all alone now. A new name has been coined for us: the G2. Now the Chinese marvel at the situation and actions of the G2. But they put us in our box and continue their business with the rest of the world.

          This is exactly what we did everything to avoid. The world has decoupled from US / UK. They’re not so scared of us any more.

          The US is still blessed with about the best hunk of land in the world, a nice island in the middle of the Pacific, and oil from Alaska. The US will continue to have many advantages. I would appreciate it if Mr. Obama would stop provoking them by selling arms to Taiwan, meeting with the Dalai Lama, etc. China would still cooperate with us, but if we keep kicking them in the face, their attitude will only get worse.

          The UK? They have a cold rainy island, and I wouldn’t want to be them. Don’t forget the Opium War. The Chinese don’t.

          1. Yves Smith Post author


            The US in the 1920s was an economic powerhouse, as was Japan in the 1980s. Being an economic powerhouse and having a bubble that implodes disastrously are not in conflict. I suggest you look into the composition of China’s growth now. It is dependent on investment, with substantial evidence that much of is unproductive, or what the Austrians love to call “malinvestment.”

      1. bob goodwin

        And we lost Willem Buiter to Citi :( – I think JPMorgan has to buy Yves next to get control of the ‘message’.

  2. Diego

    An interesting reading, but nothing new under the surface if you have read other A E-P’s articles.

    There is a couple of failures in his reasoning, though:

    1. “Wage cuts will prove a self-defeating policy for Club Med, trapping them in textbook debt-deflation.” Wage cuts all over a single currency area (e.g. the US) means higher real debt with no net-export improvement, leading to textbook debt-deflation.

    However, wage cuts in a depressed area within a growing single currency area (e.g. Spain in the EU, with balanced Northern European countries leading the recovery) means higher real debt *but* a big boost to net exports, which offsets the debt-deflation effect.

    2. “The Bundesbank will veto proper QE until it is too late, deeming it an implicit German bail-out for Club Med.” Nobody has made the case for a eurozone country being better off outside the eurozone. Why would Germany be better off outside the eurozone? The basis for European integration is regional solidarity; what’s the alternative for “temporarily better-off” Northern European countries if they reject an eventual small bail-out?

    Isolation is not a credible option. The UK is far behind the European debate on integration (since the British still support isolation and a non-world-reserve currency as strong alternatives to solidarity and integration); that’s why their analysis on the euro are always so wrong.

  3. unirealist

    We’re all in this together. If Japan finds it can no longer borrow at 1% and cranks up the printing press, triggering “incipient hyperinflation,” then the same will happen to the US. In real time, it may happen in the US well after it does in Japan, but in historical retrospect hyperinflation in these two powerful economies will appear simultaneous.

    Deflationary forces notwithstanding.

  4. nevket240

    AEP is usually pretty close to reality.
    Unfortunately he isn’t taking into account the present cold snap that is going to snap people back into the reality of low levels of food stcks around the globe. As well as the interference with industrial mobility and tourism numbers.
    The crunch could be sooner than most think.
    Dougs remarks are way outa line.

  5. R.Mutt

    AEP doesn’t make any sense to me. He expects disaster for the Euro and the Yen. I don’t buy it, but okay. That would lead to a very, very strong Dollar, which makes any kind of recovery for US industry totally impossible. Yet, America’s economy “will shine”. How would that happen?

    1. Yves Smith Post author

      China will still maintain the peg. Exports from Japan have already collapsed, China has taken up what would have been exported by Japan. I wouldn’t say “very very” strong dollar. “Stronger” is more like it. His love of over the top writing makes it hard to calibrate. And I don’t expect Japan to react as sharply as he does, therefore I don’t expect the yen fall to be as dramatic as he envisages (but having said that, one of my Japan experts has been calling for a serious fall for the yen for a while based on its horrid fundamentals).

      He still said the US would be sick in the same sentence (he is tripping over himself here, this bit was not the most helpful drafting). This is a relative call. He anticipates that the US will suffer, but less badly than elsewhere.

      1. R.Mutt

        I think the Japanese should uncork the champagne if the market forces the Yen down, because while an open beggar-thy-neighbor policy might get them into trouble, that way they would get away with it.

        How the US would do well, even relatively, with a stronger dollar, is still a mystery to me. Unemployment is 10% as it is.

  6. Donlast

    To quote Yves:
    “And we have not seen the nadir of this crisis. The end-game is when the China bubble bursts. That could be a way aways, like a few years…”

    A few years? With total confusion all round how can it possibly last a few years? A crack could appear any time from anywhere. Talk about Black Swans. There are so many out there they could black out the sun.

    1. Yves Smith Post author

      I saw how long the Japan insanity lasted (I had a front row seat). Remember the dot com nuttiness? Never underestimate how long bubbles can persist. The fact that they “ought” to end soon is no guarantee that they will. Google “confidence intervals” as a form of cognitive bias.

      And China breaking is no Black Swan, it is under discussion, hence no Black Swan.

      1. Jim in MN

        China may already be broken. The way their data is we just don’t know. We’ll find out based on changes in mass migration and civil unrest.

  7. RueTheDay

    There’s quite a bit of hyperbole in AE-P’s article, but I do agree fairly strongly with this:

    “As the great bear rally of 2009 runs into the greater Chinese Wall of excess global capacity, it will become clear that we are in the grip of a 21st Century Depression – more akin to Japan’s Lost Decade than the 1840s or 1930s, but nothing like the normal cycles of the post-War era.”

    This time really is different. Well, not really different, just different from the recessions of the past 70 years in the US. Much more like the old-school DEPRESSIONS of yore in the US, which combined with actual attempts to fight the disaster lead to Japan-style lost decades as opposed to Great Depressions. We’re probably not going to fall off into the abyss at this point, but anyone expecting a return to 3-4% annual GDP growth combined with anything approaching 5-6% unemployment within the next half-decade or so is in for a rude awakening.

  8. sean

    Reading this article in Ireland I have to agree with the general thrust of AEP’ piece and Yves Smiths comments.

    ”..Wage cuts will prove a self-defeating policy for Club Med, trapping them in textbook debt-deflation. The victims will start to notice this…”

    In Ireland wage cuts are being used as a proxy for devaluation .
    Most people are unaware of the connection but I have noticed more newspaper articles commenting on this here and it is only a matter of time before the populace cop on as AEP points out above.

    Another critical factor I believe is the Euro is an unfunded currency.It has no tax base (not yet anyway) and is dependent on inter government transfers.
    At least the dollar is linked through taxation to the American people.In Ireland and in the rest of ‘Club Med’ the imposition of a Federal euro tax would be met with revolt and would trigger a similar crisis that lead to the US civil war.

    The US civil war was essentially a struggle between the primacy of Federal rights over States rights.As lincoln’s army prevailed the union survived.
    In Europe we have had monetary union preceeding political union.As of yet there is no federal EU army or police force and consequently its hard to see how the EU will force its will on ‘straying’ member states.

    Also the ‘QE’ programme used in the EU where banks purchased government (10 year Irish bonds at circa 5%)lodged them in the ECB at 1% and then received cash to bolster their insolvent banks balance sheet has not resulted in increased credit as promised .In fact M3 has declined.
    All that has happened is that main Irish banks (all are insolvent) have gained a guaranteed rate of return of almost 10.5% in real terms .(Irish bonds rate minus ECB rate equals 4% plus deflation currently at 6.5%).
    So Irish sovereignty has been pimped out by the Irish government (with the help of the ECB) to our banks and we pick up the bill .

    What is most striking in Ireland ,though is the breakdown in trust in the political system.There is a real legitimacy crisis brewing here and its not just regarding the extremely corrupt ruling ‘Fianna Fail’ party.
    The failure of the political opposition and of civil society to counter the prevailing orthodoxy that the EU is all good and the fact discusssion is closed down on it rapidly means there is no outlet to mediate this crisis.

    Effectively there is collusion between all political parties,the unions etc in holding the line on EU and Euro membership.Hence there is no real political opposition.

    I think the same scenario applies throughout Europe ,more or less.As I personally cant see how we can muddle through this crisis I reckon this will mean radical political change throughout the EU.
    Whether this will through violent means as suggested by AEP or advocacy is a matter of opinion.

    1. Diego

      Ireland was the poorest country in Western Europe just three decades ago. Its economic take-off was a consequence of the creation of a Single Market, with a single currency and regional development funds (i.e. transfers from the core European countries).

      It’s funny that after 2 decades of EU-led hyper-fast growth to become one of the richest European countries (as measured by GDP per capita), the Irish would think the problem is on the EU.

  9. sean

    Diego says:

    ”…Ireland was the poorest country in Western Europe just three decades ago. Its economic take-off was a consequence of the creation of a Single Market, with a single currency and regional development funds (i.e. transfers from the core European countries).”

    Neither point is reflective of the truth.
    Irelands trade with the ‘Single Market’ has not substantially increased since EU membership.Indeed the composition of foreign trade remains roughly the same.
    Trade with the US and UK are severely impacted due to the exchange rate with the euro.
    Also trade with the EU is even inflated at that because Belgium is the transit country for most goods being shipped by Multinationals in Ireland.
    Ireland had to sign over its fishing rights in order to be accepted into the EU.The value of this resource to other EU states (particularly the French,Dutch and Spanish fleets) has been in the order of value many times the transfers of regional development funds.

    A balance sheet would show more has been given to the EU than received by Ireland.

    Also the gap between GDP and GNP is very high in Ireland.There is a massive amount of transfer pricing going on and so measurements involving wealth etc are only really valid if GNP is used.

    I think I laid out that trust had broken down in the Irish political system and blame has not yet been apportioned by the Irish people where much of it rightly belongs which is in the one size fits all euro zone.

    1. Diego

      Yeah, of course. After centuries being a poor, backwater country, it was only coincidental that Ireland started its hyper-growth phase just when the Single Market, the single currency and the regional development funds were created.

      Of course regional funds were not for free (as it wasn’t for Spain and others), but I think it was a good agreement for all those involved. You say Ireland’s exports haven’t grown; well, you may refer to Irish exports’ % contribution to GDP. But GDP has tripled, and this wouldn’t have been possible were it not for:

      1) EU Single Market and eurozone, which, together with a very low tax base, attracted foreign corporations;

      2) Three times more trade with the EU than before the Single Market;

      3) A huge transformation in the economy, helped by EU competitors, EU harmonized laws and EU funds.

      Regarding the GDP-GNP gap, your GNP is so low because most corporations in Ireland are foreign. There’s nothing wrong with it, and nothing relevant in it. Your GDP per capita is one of the highest in Europe, which makes you one of the wealthiest countries, period.

      1. Anonymous Jones

        Of course those two things might be coincidental. Correlation does not imply causation, obviously. Ireland invested significant resources in post-war education, and the country developed just as the communication revolution made English the dominant language on the planet and far more useful than ever before. I have no idea whether there is just one cause for Ireland’s rapid growth and/or what that cause might be, but you clearly overstep yourself when you imply that you *know* the transformation was the result of “the Single Market, the single currency and the regional development funds.” You might actually be right, but you *know* no such thing.

  10. rickstersherpa

    AEP is essentially right in that we are still in the unwinding phase of one Hymen Minsky’s bubbles, probably the greatest in history. Unfortunately, as some wit I think has remarked about taking a short position, the “markets can stay mad longer than you can stay solvent.” So who knows if any of this will unfold in 2010. However, something like it will probably unfold over the next 3-4 years.

    For every John Paulson win such as 2007-08, other shorts lost during the period of 2002-06, even though Robert Schiller and Dean Baker and others pointed out that U.S. housing prices had gone up beyond every historical precedent, particularly the ratios of housing price to rent and median income, both of which were flat (and with median income, slightly falling). It should have been gobsmacked obvious that payment burden of loans on bubble priced houses made to those at or near the median income for homes was unsupportable, but as long as asset prices kept going up, as described by Minsky as “Ponzi finance” that fact could be overlooked by the Alan Greenspan’s, Bernanke’s, Sandy Weils’ and Chuck (got get up and dance while the music plays) Prince, et al.

    AEP is essentially correct. There is to much debt, not enough income, and to much capacity. To much debt (and growing inequality (see below) means that there will not be much private consumer demand in this decade. Not enough income – and in the U.S. median incomes are falling (inflation in wages continues among the super elite with apparently the upper 400 income earners who averaged $71 million dollars a year in 2006 compared to just $22,600,000 in 1992 in constant 1990 dollars (see – proving that when the currency can’t depreciate to correct a current account deficit, wages eventually will. But this decline makes it difficult to pay off the household balance sheet debt other than through default. And overcapacity and lack of consumer demand will mean that there will be not much in the way of residential, commercial, or industrial business investment to spur economic growth for the foreseeable future.

    That leaves the Government and even if you are not a deficit hawk the prospect of Trillion dollar U.S. deficits as far as the eye can see is dismaying and is of questionable sustainability, especially given the elite’s growing antagonism to paying taxes for the common defense and the general welfare, indoctrinated as they are Randian or its weirdly Christian off-shoot (not to different then the old divine right arguement of Kings and the Nobility that the rich are rich through God’s will, and the poor and the rest, are not so well loved), and that taxing them to pay for Government, particularly programs for equal benefit of all (such a military, environmental, and infrastructure spending), and special programs for the poor, working, and middle class is a form of theft (see Richard Epstein, Law Professor, University of Chicago).

    1. Ishmael

      Personally, I do not see the military as an equal benefit to all. We should have dropped being the policeman of the world a long time ago. This made us more vulnerable not safer. The high cost of the military has hurt the US competitiveness.

      The US rose to global power status with very little military and a large industrial base.

  11. charles

    Funny to read AEP-sometimes it seems he is writing from Gibraltar or whatever take on “splendide isolement” from the country most likely to sink – while on the other side:

    UK deficit warning from City economists

    Britain is in danger of succumbing to a budgetary crisis this year, with the economy likely to stay in the doldrums until at least the end of 2010, a Financial Times survey of economists warns.

    Asked to name the three biggest risks to the economy, 37 of the 79 economists polled said the UK was threatened by a fiscal crisis that could derail any revival.

    Howard Davies, director of the London School of Economics and a former member of the Bank of England’s monetary policy committee, said: “The major risk is the loss of confidence in the government’s ability to get the public finances back under control.”

    Sir John Gieve, former deputy governor of the central bank, said that inadequate plans for addressing the fiscal deficit could result in sharp rate rises and a fall in the pound.

    The warning from City economists, former MPC members and academics comes as politicians stepped up pre-election skirmishing.

  12. Bruce Krasting

    A great deal of this is built on the assumption that history will repeat itself. The argument that debtors do better than creditors is a questionable outcome in my view.

    Yves suggests that debtors restructure as part of the process. She is correct if the country is Iceland or Dubai or maybe even Greece. But if you put on the table a restructuring of US debt you change the outcome. That would be a lights out event that would take a decade to recover from.

    So if Japan and US can’t really restructure will history repeat itself?

    If QE is reestablished and the ten year is targeted to 2.5% you are not going to get a strong dollar as suggested. I don’t care what is happening in the EU or Japan. If Bernanke tries that the dollar is dead.

    And as for ‘mid year’ being the buying point of a life time, well that is the least likely outcome of them all.

    1. Ishmael

      Well, even if correct and extreme action is taken, it will probably take the US and maybe the rest of the world at least a generation to recover. You can not fix 30 years (the last decade was just the parabolic blowoff) of living beyond your means economic policies in a year or two.

      The world is still in the denial stage of grieving.

      All we have to do is look at the chaos tha Russia has gone through. A generation if we are lucky. More if the world goes insane like it did in the 30’s and start moving towards various nationalistic beggar thy neighbor policies.

      As far as I see it this is one of the problems with China, very nationalistic. The world needs to isolate them and tell them to play right.

      1. David

        I think this is a common attitude, but China is onto it and it won’t work.

        The USA has been “very nationalistic” for its entire history. Ditto, famously, for the UK. Now it’s China’s turn, and believe me over the past 20 years we have tried a whole string of blandishments to them to get them to be less nationalistic. I remember when we went over there to tell them they had too gold. As usual with such advice, they smile, say something polite, then laugh about it after we’re gone. After all this time we have to admit, they are not stupid.

        So it’s not a new idea, it has been tried repeatedly. It won’t start working suddenly now.

      2. jdmckay

        The world is still in the denial stage of grieving.

        Apt metaphor IMO.

        As far as I see it this is one of the problems with China, very nationalistic.

        “Nationalistic” far too broad a brush to have any real meaning AFAIC. What’s the difference between Bush’s looking out for “US interests” (invading Iraq w/subsequent off the book costs somewhere between 8-20t+ $USD… and we didn’t even get the oil!) and this Chinese “nationalism”?

        And what’s the manifestation of this “nationalism”? They’ve chosen to insulate their currency against derivative “investments” shorting their currency (eg: see ICELAND), and have set rules guaranteeing their burgeoning industry is domestically owned/controlled w/profits returning their rather than Wall Street.

        AEP (and rest of western crowd singing from this same chorus) still think they are being deprived of a standard of living to which they are entitled based on (???), and those damn “nationalistic” Chinese don’t understand their lot on the blue planet is to perpetuate this system.

        There’s massive ignorance about nearly everything China from the west. I see little anywhere in US/EU press that matches the realities.

        Key aspects of totality of currency/econ/politics in modern China (eg. sum of this comprises AEP and other’s vapid concept of Chinese nationaism): leadership is not the oligarch, self serving policy apparatus which these western views always seem to impute upon them. They used to be all right, even as recently as mid-90s.

        But they have transformed into a very modern, highly educated central planning apparatus that is becoming more & more comprehensive by the day. They’ve forged new models inconsistent with the hubris and debt-ridden “wealth building” sham that is currently lead boots on US economy. They are building needed stuff: we’re playing GS style casino games, betting totality of Fed TARP “investments” on a reviving housing bubble, and not a whole lot else. Other than finance, tell me precisely what emerging world class sectors in which the US is leading the way?

        Of course, if the Chinese leadership shifts back to self-absorbed/serving modalities the west still thinks they are in, the whole thing will indeed turn into a Russian style post-perestroika scenario.

        But that hasn’t happened.

        Looking at US, hard for me to see how our “system” is outperforming them in any regard. In fact, we’re on 2 entirely divergent trajectories.

        What is supposed to be democracy/representative government has turned into a largely bought & paid for congress that seemingly doesn’t understand source of our problems, serves it’s elite donors, and seems incapable of doing the right thing in any crisis.

        I mean really, our financial system is entirely broke as is the country’s balance sheet. Our “stimulus” refinanced the financial sector (eg: crooks who looted US savings and built a fraudulent bubble): China’s stimulus went to infrastructure, investment in emerging industry.

        And just in case US citizens missed it, there was not too much enthusiasm world wide for US crafted bailout/stimulus, nor a crowd of economies following our lead. Kind’a like the W’s “coalition of the willing”, if you recall the constitution of that world changing alliance of bought & bribed (promised spoils from Iraq, which they never got) nations strongarmed into doing what they otherwise wouldn’t do.

        The world needs to isolate them and tell them to play right.

        Way too late for “isolating”: we don’t have the clout or infrastructure to recapture manufacturing (as some here have suggested), much less do so at a wage even close to current Chinese labor (still somewhere around $.70 UDS p/hr for blue collar labor).

        And perhaps more significant, we don’t have respect of world economies needed to follow our lead… that moral grounding literally eviscerated through the Bush years. It may be lost on US public that we became a state sponsored torture operation, but it’s not lost on rest of the world.

        Beyond that, while we’ve been captivated in distracting, silly national conversations about whether as US census is evil (TEA PARTY), a HC reform (which reforms nothing) w/half the debate being absurdities upon absurdities (“nationalization” of HC, “death” panels, etc. etc.) while the so called reform is not much more than transcribing HMO/Pharma etc. wish lists into law…

        China has already forged huge econ relationships virtually all over the world. They’ve got far more going on in So. America than US, a direct result of BushCo policies that entirely eliminated those country’s legitimate national interests from US policy.

        You got it backwards: if anyone’s isolated, it’s US.

    2. Yves Smith Post author


      As I pointed out, the UK in the Depression both selectively defaulted (on its war debts) and devalued (going off gold standard). Although the world was on the gold standard, its main practical use was for inter-commercial bank transaction. The sterling was the invoicing currency of its day, hence the de facto reserve currency. And many economists argue (for instance, Martin Wolf in the FT in the last two weeks) that one of the big challenges we face is the transition away from the dollar as reserve currency, and the transition away from the sterling took nearly 20 years and was highly disruptive. He pretty much says that the lack of cooperativeness of China bodes for an even rougher ride.

  13. Gregor/ Germany


    if the dollar will rally and we will see more debt defaults, where will any growth of the US economy come from? US consumers are deleveraging and a stronger dollar will hurt US exporters.

    In a weak global environment, I don’t see how any nation/ economy could benefit from the weakness of others.

    During the depression, creditor nations were hurt by an unfavorable exchange rate plus defaults by the debtors. I dollar rally would help creditor nations, while the debtor loses an advantage.

  14. D Rumsfeld

    AEP always likes to have a dig at Europe. In this article he seems to be too down on Japan and too up on the USA. As for the UK, I cannot see too much hope for it.

    If you consider Obamies GDP forecasts for the next four years at over 4% and then economic comments saying that GDP growth will be minimal for years, whilst at the same time you have Govt debt and spending growing, it seems to me that the USA is deep in the brown stuff. After reading Sprott Asset Managements article on USA debt which put it at over $118trl that seems to be pretty serious to me for a country with a GDP of $14trl and a savings rate of 5%. Still, who knows.

  15. Damien

    Once aspect no one ever mentions is Northern Ireland’s land border with the Republic, the north is Sterling while the south is Euro, retailers in the south are being crucified as 2 hours drive from Dublin means 30% off everything. Essentially a secret devaluation.

    And lest we forget Northern Ireland was until recently the world centre of excellence for car bomb R&D. And did no one notice the biggest ever dissident bomb (1000lb) was found on NYE :-/

  16. Rick Halsen

    Me thinks AEP has underestimated the global economic impact

    of any developed nation going down in flames.

    There are no winners here. But as Yve’s said just lesser



  17. Joe

    “That will be the buying opportunity of our lives.”

    Uh-huh. And what exactly will be such a good deal to buy? Unregulated securities from unregulated corporations? Debt from mismanaged soveriegns? Real estate at tax-break propped-up prices? Do tell.

  18. Hugh

    I have been saying for something like a year now that the real crash will come in 2011. Like many economics writers, AEP doesn’t seem to factor in the political angle sufficiently. Obama has already announced a vague $200 billion jobs program. Taking off the debt limits on Fannie and Freddie looks like another effort to keep the casino going until after the November elections. Against these we have rising foreclosures, ongoing high unemployment and endebtedness, a couple of bubbles that are mature and ready to go at any time, state budget deficits that skyrocketing out of control, the original stimulus that is almost played out, and a set of elites completely given over to looting the carcass. As a result, 2011 still seems a more likely date for collapse. Unlike AEP, I think the probability of a Japanified scenario is less and a depression more.

    I agree with Joe, except for a few kleptocrats, who is going to have money when everything goes south and what will be left to buy anyway. I think it is at this point that AEP doesn’t understand the full import of his own analysis.

  19. JD


    What do you think about AEP’s prediction of hyperinflation in Japan given there’s no sign of inflation in Japan and printing money will just sink them further into their liquidity trap. Surely, Japan’s sovereign credit risk reflects the possibility that the Japanese government may choose to default, and gives no weight to default via inflation. In this regard, Japaense sovereign risk is of the same type as US and UK.


    1. Yves Smith Post author


      Agreed completely, that bit is dodgy. The yen is overvalued, it “should” be cheaper, that I buy completely, but the hyperinflation bit is a stretch, unless Japan adopts Helicopter Ben methods (and I mean the helicopter bit. Taiwan did distribute retail coupons to all consumers, I think worth $50 or something like that, with a set expiration date. It is possible to implement brute force methods to produce consumption, but that has not been done much to date).

  20. sean

    diego says:

    ”…Regarding the GDP-GNP gap, your GNP is so low because most corporations in Ireland are foreign. There’s nothing wrong with it, and nothing relevant in it. Your GDP per capita is one of the highest in Europe, which makes you one of the wealthiest countries, period..”

    GDP per head was one of the highest in Europe ,however the difference between GDP over GNP is such it is relevant. This excess of GDP is repatriated as profits overseas by multinationals,hence GNP per head is the correct benchmark.
    One must also consider purchasing power parity with other EU countries and Ireland is far more expensive.
    Ireland needs a devaluation of at least 25% if it had its own currency to become competitive again.

    This scenario arose through inappropriate euro interest rates during Irelands ‘boom’ when a boiling economy was turbocharged by an endless supply of cheap euros.

    Unfortunately your other comments are also inaccurate,stating something as fact does nt necessarily make it so no matter how many times you say it.

    1. Diego

      The difference between GNP and GDP is not repatriated profit. GNP is the world production of companies with central headquarters in Ireland; since their stockholders may be Irish or foreign, and the profit is typically a small percentage of production, the difference is irrelevant.

      Moreover, the relevant repatriated profit *does* turn up in GDP as higher consumption and company-tax-financed public-sector activity.

      There’s absolutely no point in considering Microsoft’s Irish workers’ salary as US production, or RyanAir’s Spanish workers’ salary as Irish production.

      So I am sorry: the GDP-GNP gap is absolutely irrelevant and Ireland is one of the wealthiest country in Europe in GDP-PPP per capita, a measure which *already* accounts for the more expensive quality of life in Ireland.

      All this is basic economic data over your own country, so please allow me to smile when I read you on my *not* knowing about your country’s economy.

  21. ian

    Such an optimist! He neglects the distinct possibility of nukes being tossed around by India, Pakistan and Israel with a few little dirty bombs cooked up in Iran.

    Resource nationalism isn’t even on his horizon. Apparently he things that Iran, Iraq, Venezuela, Russia et. al. won’t ever decide to keep *all* their oil for their own internal consumption.

    And then there’s the small, but distinct possibility of a breakdown of the USA itself, either quickly and peacefully, or slowly and violently. In either case, the resulting resource and nuke distribution should prove to make it an entertaining year!


  22. Robert Dudek

    Why can’t this bubble economy go on for 20, 30 even 50 years?

    Maybe this isn’t a probable outcome, but it seems to me that it is at least possible. After all, productive capacity is still in tact, so why should we be plunged into a great depression?

    Surely, there must be technical solutions to these problems – since debt can be wiped out of existence as long as every agrees to do it.

  23. bobh

    The apocalyptic tone of Evans-Pritchard’s predictions and much of the discussion here are relevant to the analysis by UCLA economic historian Robert Brenner that was linked to by Yves last month. Brenner sees the current troubles not as a routine, if painful, function of capitalist business cycles but as a game-changing breakdown in those cycles, where worldwide productive capacity has reached a point that can no longer be matched by credit-fueled demand, since all of that credit has produced debt accumulations that are unmanageable. In this new game, predicting winners and losers may require new definitions of winning and losing.

    1. Yves Smith Post author

      I am reading Brenner’s book now. It is dense (in terms of info, not his writing style) very well argued, and VERY persuasive. Probably why I am receptive to AEP’s general thrust, save his confidence re timing.

      Your point re redefining re what winning and losing means is VERY astute, will have to ponder a bit.

      1. jdmckay

        (sheesh…) sorry ’bout missing close tag on quote. (Preview screen for commenters… please!!!)

    2. jdmckay

      I presume your reference to Yves’ link was In the Eye of The storm. (He’s at UCLA, not SD).

      I think there’s a lot of room for mis-interpreting much of Brenner’s long held views in your statement & Yves’ comments in above link.

      Among other things, Brenner has long used “over production”, “over capacity” & “rate of profit” to describe a process having evolved (by his account) since mid-60’s. This process, over several decades, which he has articulated in detail, is fundamental to understanding his use of those terms and (at least from his POV) what would constitute remedy.

      You say:

      Brenner sees the current troubles not as a routine, if painful, function of capitalist business cycles but as a game-changing breakdown in those cycles, where worldwide productive capacity has reached a point that can no longer be matched by credit-fueled demand, since all of that credit has produced debt accumulations that are unmanageable.

      Two separate issues:
      a) worldwide productive capacity
      b) debt accumulation

      By his account, it was the former (a) which led to policies/strategies ensconced in the later. Here is a blurb in which he describes the process by which we arrived and what he calls “over capacity” (page 10):

      The decreasing vitality of the advanced capitalist economies has been rooted in a major decline, and stubborn failure to revive, of the rate of profit, finding its fundamental (though not its only) source in a persistent tendency towards over-capacity in the global
      manufacturing sector, which originated with the intensification of international competition between the mid-1960s and mid-1970s. Manufacturing over-capacity
      emerged, was reproduced, and has been further deepened by way of an extended process of uneven development, in which a succession of newly-emerging manufacturing powers
      has been able, thanks to systematic state intervention and highly organized forms of capitalism, to realize the potential advantages of coming late, especially by combining
      ever increasing technological sophistication with relatively cheap labor and orienting production to exports for the world market

      Summary: corporations took manufacturing to an offshore location for benefits of cheap labor (and minimal environmental regulation)… established facilities. For various reasons (cheaper labor/less onerous regs), they then took same facility/process/product (eg: w/little or no innovation) to another shore and replicated there. Rinse and repeat.

      They did this to the (largely) exclusion of reinvestment into “the next thing”, thus cloning established & largely consumer driven manufacturing (mostly) throughout Asia.

      Brenner continues:

      Overcapacity has meanwhile been exacerbated and rendered chronic as a consequence of the reluctance of the great corporations at the core of the world economy to cede market share to their rivals even in the face of falling rates of return–their proclivity to fight to hold onto their established positions by cutting costs rather than switch to new unfamiliar lines, especially by falling
      back on their proprietary capital, above all their capacity to innovate.

      So again, Brenner’s “over capacity” and “over production” has, at it’s core component, the understanding that the corroding quality is not size, but replication… and all the strategy encompassed in replication. Not least of which is reinvestment in innovation (eg: “the next thing”… “what’s wanted and needed”).

      When he talks about “rate of profit” and “diminishing profit”, integral in his use of these terms is:

      a) diminished value of product (eg: common… easily copied and produced) and commiserate lack of “next generation” stuff.

      b) making up (a) by volume… huge volume.

      In this new game, predicting winners and losers may require new definitions of winning and losing.

      Maybe. I think it’s “winners” will be, rather, those (China) that meaningfully break this (my term) “replication” cycle and push forward w/the innovation/reinvestment Brenner describes as missing constituent part realizing his “rate of profit” from simply producing the next thing.

      This is where I completely disagree w/AEP (and whole chorus he speaks from). First, China is not 90s Japan, though much of west pundocracy tries to say so.

      For one, China interrupted Brenners “cycle” on their own shores:

      a) they took ownership of facilities, thus larger share of profits
      b) they are reinvesting/innovating themselves. A “breakout” from the cycle.
      c) they are doing this in a broad array of fertile sectors, layed dormant for several decades by consequences of Brenner’s “cycle”.

      China is doing all these things in a very big and meaningful way. All the while, the West is sitting on it’s laurels clamoring for revaluation of the Renminbi and such, which will only produce incremental gains in delaying day of reckoning, while leaving the problems Brenner describes entirely… entirely unaddressed.l

  24. bob goodwin

    I have been short the market for quite a while (since S&P 1000), so I agree with all of your points, especially the part about how the market can remain inefficient longer than you can remain solvent. There are a lot of powerful interests who wish to keep the status quo alive, and it is my gut feeling that they are feeling more empowered rather than less.

  25. JGB

    The idea that predicting winners and losers will require a redefinition of winning and losing is, at the very least, suggestive and it rings true. Yves and/or bobh, I hope you will consider elaborating on this idea, after requisite pondering.

    With thanks for this blog over the last year.

  26. Ishmael

    I have shorted this market off and on since 2006. I recognize this trend can go on much longer than one can expect so when it starts moving against me I take the short down very quickly. With that said I am up about 200% pre tax.

    This is a major struggle of forces and those that do well with the status quo are throwing everything at this market to keep it such.

    Unfortunately, only God can defeat mathamatics and physics so the status quo is doomed to lose.

    Unfortunately, the status quo’s unwillingness to slip off quitely into the darkness is going to make it much worse for everyone else.

  27. purple

    China will continue to be a powerhouse until its surplus labor ends, around 2015. They can control inflation and the yuan peg only with large reserves of surplus labor.

  28. Jamisia

    Assume that I’m the government. I’m in power (picture me holding a gun to your head). I say your tax liable. I also issue this funny colored paper allowing you to pay your taxes in. On that issuance I have a monopoly (I’m that other Lady Sovereign).

    There’s a school of economics called MMT. Let’s say MMT (which is Post-Keynesian) is right and everything else is wrong. It says that a government which is sovereign in it’s currency cannot go broke. Since it’s sovereign in that currency it doesn’t need taxed to fund anything (obviously the government funds itself. duh!).
    The CIA Factbook list of debt vs. GDP puts Japan in the No 1 spot, followed by Zimbabwe. But a comparison between the two is absurd! Zimbabwe is poor and Japan is a modern, almost post-industrial economy. It would be much more helpful if Moody’s etc. followed MMT, to rate accordingly to what has been done with the public debt (not the size). BTW, we’re 41st (I think), the US 65th.

    Dear AEP: what if, whenever Greece fails, this leads to a takeover by Brussels? Right now, the Euro-zone is made up of 25+ governments all sovereign in the same currency. If and when Greece crumbles, this doesn’t have to lead to a destruction of the Euro or the EU. It might as well lead to a single EU government.

  29. Allen C

    I fail to understand how Japan is going into hyperinflation. They owe the money to themselves and they have the largest external net asset position.

    The US has a serious funding problem. The credit line is rapidly being reduced. What occurs when the limit is reached is unpleasant. Global depression is almost certain. Borrowing tomorrow’s production for today’s consumption is ending. All roads lead to devaluation and austerity.

  30. roga

    even if it isn’t because it’s shattering, it looks like the yen collapse has begun today with the full support of their new central banker! looks like it’s happening sooner rather than later.

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