Are Greek Sovereign Debt Tremors a Start of a New Phase of the Crisis?

After the months of buoyant markets, a return to crisis-type headlines seems troublingly familiar, even though the perturbations of the last day or so are a pale shadow of the worst months of the crisis. And some are making the bull case. For instance, a headline at Clusterstock trumpetss, “Yesterday’s Bloodshed Sent The VIX Soaring 20%, Which Means Today Markets Will Rebound.”

But the Greece problem exposes several fracture lines. The most immediate is the strain on the euro. The monetary union left a lot of critical issues and mechanisms in the “to be sorted out later” category, and “later” has arrived. One long-noted problem is the limits on member nations in using fiscal and monetary policy, and the expected large differences in economic performance have resulted. The immediate problem for Greece is its interest rates have spiked up in the last few days based on the belief that its government debt burden is unmanageable; the only ways out look to be a rescue, either from the IMF (presumably on draconian terms) or the EU (which also looks set to keep Greece on a short leash), or the other choice, to abandon the euro, devalue its currency, and default. Gillian Tett points out that the dramatic increase in yields on Greek government bonds isn’t entirely the result of shifting investor perceptions; some ECB collateral rules played a role:

Back in the autumn of 2008,…the ECB loosened the rules which govern how banks can get central bank funds. In particular, it let banks use government bonds rated BBB or above in ECB money market operations, instead of merely accepting bonds rated A-, or more.

This was initially presented as a “temporary” policy, slated to last until late 2009. But last year the ECB extended the policy until the end of 2010. Thus, during 2009, banks which were holding Greek bonds have been merrily exchanging these for other assets via the ECB. This, in turn, has helped to support Greek bond prices (and, by extension, Greek banks that hold a large chunk of outstanding Greek bonds).

Until recently, many observers thought – or hoped – that this policy would be extended again, perhaps until 2011 or beyond. For although Greek debt currently has a credit rating that meets the old ECB rules, there is a good chance the debt will be downgraded this year. This creates the risk that Greek bonds will be excluded from any newly tightened ECB regime.

Earlier this year, senior ECB officials indicated that they intended to “normalise” the policy, as planned, at the end of 2010, as part of their exit strategy. That has removed one key source of support for Greek debt (and spooked investors, such as German insurance companies, which also hold large chunks of bonds.)

The prospect of a Greek sovereign debt crisis has stoked worries about EU members with high-debt profiles, particularly Portugal, now in the throes of a political crisis. As the Financial Times notes:

Portugal moved towards a political crisis on Thursday night as its finance minister appealed to opposition parties not to defeat the minority Socialist government over a regional finance bill that he said would undermine the country’s international credibility.

In a televised address, Fernando Teixeira dos Santos said opposition proposals to allow the Portuguese islands of Madeira and the Azores to increase their debt would have “grave consequences for Portugal’s public accounts” and send “the worst possible message” to financial markets.

His warning came as Portuguese bonds and shares came under fire for the second day running as concerns over sovereign debt spread from Greece to other high-deficit countries in the eurozone.

Tett also made an assessment consistent with what I have seen among blog readers, both in comments and via e-mail. The views here seem polarized. One camp doubts the ability of the EU to cope with this crisis, particularly since it could well redound to European banks, which are even more fragile than their US peers. The other sees this as a different sort of challenge:

To many European bankers and politicians, however, the focus on raw numbers misses the point. To them, this story is not just about economics, but politics, and the determination of a generation of leaders traumatised by the second world war to maintain European unity, almost at any cost. And as the price of Greek debt has tumbled, and yields have risen, doughty figures at the heart of Europe are increasingly likening this to an “attack” on the euro, on a par with, say, the attack on sterling launched by George Soros two decades ago. The potential for some form of political backlash is running high.

But no matter how this drama resolves itself, the odds of collateral damage are high. First, these sovereign debt crises are a frontal assault on the main mechanism used to cope with the global financial crisis: liberal use of government debt, both to recapitalize wounded banks and to compensate for a sharp fall in private sector demand.

Despite brave talk of an end of the downturn, financial markets have been riding on liquidity-driven bubbles that are well ahead of fundamentals. And in particular, Nouriel Roubini has discussed the danger of the unwind of a dollar carry trade. If financial institutions are exposed (directly through bad trading bets or losses on customer margin loans or counterparty failures), we could see another acute crisis episode. The resumption of the crisis should call into question the efficacy of the previous rescue methods, but all the authorities appear to have gone into “Mission Accomplished” mode and have not engaged in post-mortems to devise better crisis responses.

Second, we have the real possibility of an outbreak of protectionism. The US has announced that it intends to double exports in the next five years. But it is impossible for all countries to run trade surpluses; if some nations run surpluses, others have to have deficits. So that goal already increases the potential for friction.

The US has started crossing swords with China, albeit first on what our press has depicted as lesser issues, but they may not look so “lesser” to China, such as Obama’s scheduled visit with the Dalai Lama, the US plan to sell $6 billion of arms to Taiwan, and this doozy:

The United States plans to unveil later this decade a new conventional “Prompt Global Strike” (C-PGS) system. It will enable the US to instantly carry out a massive conventional attack anywhere in the world in an hour or less…..

[Dr. Jeffrey] Lewis [director of the Nuclear Strategy and Nonproliferation Initiative at the New America Foundation] points to a recent meeting, a so-called US-China Track II exchange, involving many US and Chinese participants, which demonstrated how the Chinese may have been caught off guard by the way in which C-PGS has suddenly appeared on their radar screen.

“US participants tried to explain the problem with making a ‘no first use’ promise. What would happen, they asked, if the United States attacked China’s nuclear forces with conventional weapons? Would China still adhere to its ‘no first use’ promise?” said Lewis. “The Chinese side did not understand that the Americans were engaging in a clumsy ‘thought experiment’ that was purely illustrative, but instead believed that they had been subjected to a very serious threat of coercion. Such misunderstandings are inevitable and, in fact, this is why Track II discussions are essential. It simply illustrates the point that Chinese and American strategists have yet to think through what impact [C-PGS] will have on strategic stability.”

Yves here. I don’t buy this “aw, shucks, those Chinese misunderstood us! We were just havin’ a nice theoretical chat!” The folks who do high level defense related work think far more carefully about negotiations and game theory than the vast majority of private sector types do (for instance, Daniel Ellsberg, who worked at RAND before taking assignments at the Department of State and the Pentagon, was a key figure in the development of decision theory). So the fact that this little talk came off sounding like a threat was unlikely to be an accident.

So how does this play into European woes? Well, unless the EU patches up some rescues, pronto, we are likely to see a period of euro weakness. When trade plunged during the acute phase of the crisis, China’s surplus actually grew. Even though its exports fell, its imports shrank more. By contrast, Japan’s surplus went into a deficit and the Eurozone took a hit. This result came about because the yen spiked relative to the dollar and China held its currency peg to the greenback (by all accounts, it should have risen further). As conditions normalized and the dollar weakened, the renminbi depreciated along with it. Some analysts argue that the RMB is even more undervalued than it was in 2008.

So US-China relations are getting fractious, and the US is no longer so keen to be the world’s superconsumer. If euro weakens (and on top of that the EU goes into a slump), that will reduce China’s exports. The US and China (and EU) are starting to engage in tit-for-tat trade retaliation (the Chinese are now taking aim at US chicken). Of course, the lesson of the Great Depression is that protectionism hurts the trade surplus country worst, so China has the most so lose, but they may not be able to restrain their punitive impulses.

But there may be a bigger lesson from the Depression that no one wants to consider. The Carmen Reinhart-Kenneth Rogoff work on financial crises finds that periods of large international capital flows are associated with banking crises. Now, liberalized trade does not have to lead to large international capital flows, but it sure seems to.

Dani Rodrik has posited the existence of a policy trilemma:

I have an “impossibility theorem” for the global economy that is like that. It says that democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full…

To see why this makes sense, note that deep economic integration requires that we eliminate all transaction costs traders and financiers face in their cross-border dealings. Nation-states are a fundamental source of such transaction costs. They generate sovereign risk, create regulatory discontinuities at the border, prevent global regulation and supervision of financial intermediaries, and render a global lender of last resort a hopeless dream. The malfunctioning of the global financial system is intimately linked with these specific transaction costs.

So what do we do?

One option is to go for global federalism, where we align the scope of (democratic) politics with the scope of global markets. Realistically, though, this is something that cannot be done at a global scale. It is pretty difficult to achieve even among a relatively like-minded and similar countries, as the experience of the EU demonstrates.

Another option is maintain the nation state, but to make it responsive only to the needs of the international economy. This would be a state that would pursue global economic integration at the expense of other domestic objectives…. The collapse of the Argentine convertibility experiment of the 1990s provides a contemporary illustration of its inherent incompatibility with democracy.

Finally, we can downgrade our ambitions with respect to how much international economic integration we can (or should) achieve. So we go for a limited version of globalization, which is what the post-war Bretton Woods regime was about (with its capital controls and limited trade liberalization). It has unfortunately become a victim of its own success. We have forgotten the compromise embedded in that system, and which was the source of its success.

So I maintain that any reform of the international economic system must face up to this trilemma. If we want more globalization, we must either give up some democracy or some national sovereignty. Pretending that we can have all three simultaneously leaves us in an unstable no-man’s land.

Yves here. The implication of this may be that a fall in trade, perhaps not as dramatic as what occurred in the 1930s, may be a necessary element of a return to stability. No one seems to be thinking along those lines. And that increases the odds that we will get that result, not via design, but via protectionist responses that escalate into trade wars.

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  1. bena gyerek

    since the google issue got escalated to the state dept, it has been clear to me that the administration’s strategy has moved to the “make china the bogeyman” phase. the intention is to push buttons that provoke a backlash from china (that’s why obama is meeting the dalai lama now, when previously he studiously avoided him). this will provide grounds for explicit protectionist measures against china (and any other “currency manipulator”), to be introduced in concert with the eu. the administration knows full well that it needs to wean the u.s. economy off foreign financing, but this won’t be possible until asian mercantilism has been broken.

    1. Richard Kline

      I’m with you on this one, bena. The Demos take a rout on the hustings; Obama looks weak, not the little man’s friend . . . They need to beat up on some one and look good doing it. China’s been voted for the job. It’s well-understood what result selling arms to Taiwan or meeting with the Dalai Lama would have, so the message is stone obvious. I take a very dim view of this kind of non-negotiating tactic.

      What would be a meaningful response from China, might one posit? Craven concessions? Hardly. None of these pinpricks we have seen in any way seriously threaten China. An apt riposte might be more on the order of, “We’re concerned about ‘North Korean’ copies of Stinger shoulder-fired anti-aircraft missles we’ve found amongst Islamic militants in Xinjiang—fortunately before any were put to use. Have you seen any of these turning up in Afghanistan yet? Please advise.”

      Stupid people who feel themselves immune from retaliation make big mistakes. . . . Guess I’d better order my silk shirts now.

      1. Skippy

        Haven’t you been busy, well at least some one is recycling old play stations and in the mean time India just keeps getting stronger and stronger, plus having a wry smile too.

        Skippy…nice to see you RK.

      2. DownSouth

        Well the war of words surely seems to be heating up. Just go to the NY Times and type in “China trade” and look at the stories that pop up just in the last couple of days:

        • “China Escalates Trade Fight With Europe”

        • “China Rejects U.S. Complaints on Its Currency”

        • “Currency Dispute Likely to Further Fray U.S.-China Ties”

        • “China Repeats Opposition to Tighter Iran Sanctions”

        1. charcad

          Down South,

          Soon you might see:

          “China Demands UN Security Council Act on Strait of Hormuz Blockage.”

          And in smaller point type:

          “US Ignores Chinese Demands As Iranian Campaign Enters Third Week.” “Ten thousand GPS guided bombs a day…”

          If I wanted to cripple China I’d impose an oil blockade. And the best place to do this with the least possibility of Chinese intervention is at the source, not the destination.

          This will count as a three-fer since both the Israelis and the Gulf Oil State Arabs want the Iranians’ wings clipped.

          1. Skippy

            Hell the old Japanese play book just needs to be dusted off with some names whited out and replaced.

  2. attempter

    The “trilemma” is a good heuristic.

    Another option is maintain the nation state, but to make it responsive only to the needs of the international economy. This would be a state that would pursue global economic integration at the expense of other domestic objectives…. The collapse of the Argentine convertibility experiment of the 1990s provides a contemporary illustration of its inherent incompatibility with democracy.

    This sums up feudal imperialism well. It’s the goal of Wall Street and Washington. The national state should be the hired thug of tyrannical globalized monopoly finance capital.

    That was always the one and only goal of globalization and “free” trade.

    Under this dispensation, “democracy”, needless to say, is just a fraudulent buzzword. The simulation of it is useful for what Sheldon Wolin calls “inverted totalitarianism.”

    As for democracy the real thing, for the free traders that’s just an annoying hippie dream at best, a mortal threat at worst.

    Meanwhile real people recognize this trilemma and want restored democracy, and the national state restored as the government of, by, and for the people.

    That means globalization has to thrown into the incinerator of history, and let’s hope it doesn’t emit too many toxic fumes as it burns. It’s already poisoned the world enough.

    1. DownSouth


      Modernism has definitely run aground again, and the viability of the entire modernist project has once more come under scrutiny.

      I began reading Michel Allen Gillespie’s The Theological Origins of Modernity last night, and even though I’ve only read the preface and the introduction, those alone are worth the price of the book.

      Gillespie’s subtext is that modernism is not really what it claims to be. What modernism is in fact is a religion masquerading as something else:

      This opposition to religion in the modern age, however, should not be taken as a proof that at its core modernity is antireligious…. As we shall see, modernity is better understood as an attempt to find a new metaphysical/theological answer to the question of the nature and relation of God, man, and the natural world that arose in the late medieval world as a result of a titanic struggle between contradictory elements within Christianity itself… I will argue further that while this metaphysical/theological core of the modern project was concealed over time by the very sciences it produced, it was never far from the surface, and it continues to guide our thinking and action often in ways we do not perceive or understand.

      Gillespie’s hypothesis has probably nowhere become more evident than in classical economics, modernism’s answer in the field of economics. To any thoughtful observer, it is becoming quite evident that classical economics and all its progeny, including Marxism and neoclassical economics, are little more than ideologies with not much more basis in factual reality than creationism or the geocentric vision of the natural world.

      Along these same lines was the excellent comment Marshall Auerback made yesterday, which points out some of the internal inconsistencies in modern economic theology:

      In Dani Rodrik’s words, “The rules for admission into the world economy not only reflect little awareness of development priorities, they are often completely unrelated to sensible economic principles. For instance, wto agreements on anti-dumping, subsidies and countervailing measures, agriculture, textiles, and trade-related intellectual property rights lack any economic rationale beyond the mercantilist interests of a narrow set of powerful groups in advanced industrial countries.”

      It’s worth reading the entire comment if you happened to miss it, which was easy to do since he posted it so late in the thread.

      Gillespie traces the trajectory of modernism from its roots to its eventual crystallization in the 17th century writings of Bacon, Descartes and Hobbes; to its heyday in the late 19th and early 20th centuries; to its falling out of favor due to WWI, the Great Depression and WWII; to its gaining a second wind with all the material prosperity science and technology afforded in the post-WWII era and the fall of the Berlin Wall; and with its falling out of favor again beginning with 9/11 (and I might add to this the failed wars in Iraq and Afghanistan and the Great Financial Crisis).

      Gillespie says that following the fall of the Berlin Wall modernism manifested itself as globalization:

      …the future seemed stretch out before us like a broad highway leading to a modern world united by commerce, the free exchange of ideas, and the proliferation of liberal government. This was to be the age of globalization, but a globalization that was conceived as the spread of Western values and institutions to the rest of the world. Science and technology would establish a realm of peace and prosperity in which human freedom could be finally and fully realized.

      According to Gillespie, the modernists bifurcated after 9/11. There were the industrial strength modernists who united behind Dick Cheney and encouraged the use of force and the threat of force to spread the Western Way of Life, and whose philosophy is perhaps best captured by Max Boot when he advocated “imposing the rule of law, property rights and other guarantees at gunpoint if necessary.” Then there was modernism light, those who, as Gillespie puts it, “recognized that a great deal remained to be done to establish universal prosperity and perpetual peace, but they believed that this could be achieved by a gradual process of globalization and liberalization that relied on incentives rather than force.” In this latter group I would put Swedish Lex and Kevin de Bruxelles, whose philosophy becomes manifest in these comments which they make below:

      • Swedish Lex:

      A crucial political component, or risk, is whether Greece will respond rationally to the situation or not.

      • Kevin de Bruxelles:

      the EU may have to make an example of one of its weakest Club Med members–if this country decides to not take its medicine quietly–by letting the markets have their evil way with this country to encourage the remaining SIIP nations to get with the austerity program.

      You and I are not nearly so optimistic about the modernist project. On the contrary, we find common ground with modernism’s critics—Kant, Sir William Temple, Swift, Dryden, Spengler, Husserl, Heidegger, Straus, Arendt, Niebuhr, Adorno, Derrida, Deleuze, the Frankfurt School, Whitehead, Wittgenstein, Habermas, etc.

      All of the above approach their critique of modernism from different directions, but Gillespie sums up modernisms failures quite succinctly as follows:

      [T]echnical progress was not identical with moral progress or with increasing human well-being…


      The modern project, first conceived in the seventeenth century, had in fact enormously increased human power in precisely the ways Bacon, Descartes, and Hobbes had imagined, but it had not produced the peace, freedom, and prosperity they had predicted.

      1. DownSouth


        And you and I have talked about this many times before, but I will just bring it up again, because I believe it casts a tremendous pall over the entire modernist project. Almost all the “material prosperity science and technology afforded in the post-WWII era” that I mentioned above is due to one thing: OIL.

        The modernist project now confronts two hurdles:

        1) Now that we are approaching then end of plentiful and cheap oil, what’s going to drive material prosperity?

        2) Now that the degredation of the biosphere is much more advanced, this again threatens material prosperity.

        1. attempter

          Yes, the truth, unappealing as it is even to many who are otherwise on the right side of corporatism issues, is that the level of material so-called prosperity never made people happy, was never rationally or justly distributed (nor meant to be, by any of the dominant ideologies), and was founded completely on cheap, plentiful fossil fuels, and this energy bounty cannot be replaced. The material level of existence will have to descend.

          But since this was never a spiritually redemptive, emotionally fulfilling, or morally valid distribution, and since most people never got to share much in it anyway, this energy descent is no tragedy.

          It can be liberation, if we choose and fight to make it so.

    2. fu manchu

      like it or not, we all wouldn’t be having this conversation right now if it weren’t for globalization amigo (check your computer to see where it’s made, then check the clothes which you have on, etc etc).

      if there must be a choice, i say economic integration + democracy. the patriots can save the “yay team USA uber alles” for the olympics and the soccer pitch. everyone else can go on living without wasting our time and energy focusing our constant attention on the State and its smoke & mirrors show.

      small is beautiful.

  3. a

    “European banks, which are even more fragile than their US peers.”

    An American would say that (…and repeat it and repeat it…). But Americans are always a bit fuzzy what they mean by “Europe”. If “European” banks include UK and Swiss banks (UBS), then ok with your assessment.

    “Well, unless the EU patches up some rescues, pronto, we are likely to see a period of euro weakness. ” Weakness? Well, that would be with the Eur less than 1.1 Usd, and we’re well about that. Anything about 1.25 is considered by Europeans as unwarranted Euro strength, and political leaders would welcome – cheer even – a euro which is less strong.

    1. Dan Duncan

      a, writes: But Americans are always a bit fuzzy what they mean by “Europe”.

      You’re kidding, right?

      Turkey? [How long before Europe settles on whether the later day Ottomans shall truly be “European”?]

      Greece? See above.

      Rest of Balkans? See above.

      GB, Swiss…? Yes, no and maybe so.

      It’s Europe that’s fuzzy about what is meant by Europe.

      As for the EU, it’s simply Austria-Hungary writ large sans the Habsburgs. It didn’t work in 1914 and it’s not going to work now.

      As for the Richard Kline’s comments later in this thread that “sovereignty is _already_ gone”…that’s just plain wrong.

      Sovereignty didn’t disappear…it was simply latent. And as long as things were going well, then it was easy yo sit back and enjoy The Big Happy Union.

      Things aren’t going so well, though. Many feel that what occurred in ’08 was not the real crisis, rather it was just a prelude. Once the shit hits the fan, recriminations will fester and resentments will rise. A hardcore Nationalism will come back with a vengeance.

      The EU just took the Germany/Austria-Hungary model of 1910, substituted France for A-H and replaced the Monarchies with “The EU Constitution of Regulation” that’s so voluminous its pages are numbered with exponents. [Turgid bureaucratic excrement…with a nice little exponent!]

      Short of the Earth being invaded by aliens, prompting us all to ally against this common enemy…the EU will disintegrate…just like it always has and just like it always will. Of this, there is no doubt.

      1. Swedish Lex

        European integration has been widening and deepening for the past 60 years. To its dectractors, its the thing; that would never fly, but did; that got a currency that would not survive its own inception, but did; that would crumble under the weight of taking onbard 15 new member states (from 12) in a decade or so, most of which had just come out of the Soviet deep freezer, but did not; that somehow continues to attract applications for membership despite its flaws.

        1. Dan Duncan

          The 60 year figure is quite misleading. 60 years ago, Europe was broken and beyond fatigued from 2 massive wars. It wasn’t integrating…it was just tired.

          As for the currency surviving it’s inception…c’mon it’s been 10 years. It’s not even licensed to drive yet. It’s way to early to make such a proclamation.

          This is the first real crisis it has faced, and it’s already buckling. [The issues with respect to the Soviet Union were already taken into account before liftoff.]

          Think of all the planning going into this Grand Plan…and in the end, the most basic and simple of questions was not even answered:

          What happens when (not if) one of our Member States gets into financial trouble and takes on too much debt?

          Greece, for starters is imploding, and yet we don’t know the protocol?! “It’s to be sorted out later”?!

          We don’t know if the IMF is going to bail them out or the EU via Germany or if Greece must simply turn in it’s EU Membership Paddle and go home.

          This isn’t integration…it’s a joke.

          1. Richard Kline

            “The 60 year figure is quite misleading. 60 years ago, Europe was broken and beyond fatigued from 2 massive wars. It wasn’t integrating…it was just tired.” Dan, you _seriously_ do NOT understand what you are talking about if you advance that pair of sentences as an argument. Integration was carefully, seriously, slowly planned and implemented by specific individuals and institutions. The execution was effective, progressive, and no part of it has ever been undone (because the results are too beneficial for ‘undoing’ even to be a credible option.) These are historical facts. I say that as someone who has studied them with some interest. You may just be making from-the-hip quips (or thereabouts), but they only demonstrate a prejudice rather than a command of the relevant facts.

            The summary given by Swedish Lex to which you reply is substantively very accurate. Nothing in the program of integration was ever ‘supposed to succeed,’ even for a few years, let alone endure—but these changes did succeed, have endured. And that is exactly what the Euro-haters hate: the cumulative evidence of two generations that integration, once enacted, cannot and will not be undone.

            This is the blindspot of Evans-Pritchard and many others, the unwillingness to accept facts on the ground as real when they would prefer them to be transient, when there is zero (0) evidence of transience, and a definitive trajectory of permanence. This is why Greece will not be allowed to default, and won’t even remotely consider abandoning the euro. For what, pray tell? There are not efficient mechanisms in place to bailout or reform Greece’s tax-dodging, check-kiting fisc, so the process is messy. That’s different from saying that the outcome is in doubt.

      2. dlr

        “As for the EU, it’s simply Austria-Hungary writ large sans the Habsburgs.”


        stifling bureaucracy? check

        impenetrable regulations? check

        lack of democracy? check!

        I think you’re onto something here.

        Too bad it’s not the Swiss Confederation writ large sans the banking cartel.

  4. yoganmahew

    Great post.

    I would add to Europe’s dilemma/opportunity:
    1. The strong euro is pasting the exporting countries. A weak euro, for all the smart talk about strong currency, may be in the interest of parts of the european economy. The problem is inflation (commodity led). There isn’t the same tolerance in Europe for the statistical selectivity that the US government indulges in, so this would feed into headline figures, inflation expectation and interest rates.
    2. The function of the euro is to promote ever closer union. The quickest way to do this is to have regional crises leading to ever tighter fiscal administration (bailouts from the centre will have a political cost). Those countries that were out of step will be brought into step with the economic cycle of the big two.

    Strong economies benefit the individual states, weak one benefit the overall organism!

  5. SA

    There’s plenty of dry tinder right now: Greece, certainly; the failure of Dubai World to negotiate a standstill with creditors; the exposure of Scandinavian banks in the Baltics; Spain; Ireland; the upcoming referendum in Iceland; and of course the U.K….

    None of these problems is new; maybe all will be worked out. If there is a spark, it may be some small but unexpected thing — comparable to the two little Bear MBS-related funds that returned zero to investors in July, 2008, and caused the onset of the crisis, first in the money markets in Aug 2008 (while the stock market slept) before spreading out of control.

  6. Andrew Bissell

    I love how Rodrik just assumes that traders and financiers cannot operate without the hammock of government subsidized liquidity guarantees (i.e. the lender of last resort). One wonders how any of them existed at all in the days before central banks!

  7. Swedish Lex


    Tett’s column has the benefit of recognising the politial dimension of the euro and that the euro states – for legal and political reasons – will step out of the way to do what they can to salvage the euro. Therefore, those who only look at the numbers are likely to be wrong in their assumptions about where it all will end (this does obviously not mean that the numbers, which are dire, are irrelevant either).

    One example of a factor that has to be included when assessing the politics is Merkel’s and Sarkozy’s new initiative (yesterday) to co-ordinate their policy responses in relation to the financial crisis, within Europe and in the broader contexts, G-20 etc. The Franco-German initiative should, according to Merkel and Sarkozy, result in common positions AND proposals on global monetary governance, trade etc. The proof will be in the eating but for the first time – Merkel and Sarkozy have made such a joint initiative of any substance. Greece was not mentioned but the handling of the euro in the run-up to next week’s EU summit on the economy must surely have been on the agenda as must the name of the next ECB head have been, etc.
    A crucial political component, or risk, is whether Greece will respond rationally to the situation or not. The Country’s governance has to be described as dysfunctional to some degree (corruption, fake stats etc.) meaning that the country may not respond as one legitimately would expect. The EU system can, under the current extreme circumstances, handle a Greece that largely plays by the book but can probably not cope with a Greece that goes rogue. I do not mean to belittle Greece or it citizens, but should, for instance, the political parties in Greece engage in short-term domestic politics rather than doing what it takes to avoid disaster, the country might as well sink. I am hoping for the best but am myself not able to predict the outcome of Greek politics, which forces me to raise a big question mark.

    1. john c. halasz

      If you get back into the weeds of the history of “independent” Greece, then you realize what a fractured history/polity is involved. It’s the sort of thing EU ideology is meant to resolve/make disappear, but that assumes memories are short,- and respond to instantaneous “incentives”. Google “Venizelos” if you need a short refresher course on Greek “independence”.

      1. Captain Teeb

        Good point John,

        To underline the general point you make, I would also point to Belgium, where I live, whose division into 2 (maybe 3) parts seems more inevitable with every passing year. Contrary to the expectations of EU-think, the aspirations of Flemish nationalists are emboldened by the existence of the EU, which precludes violence by the Belgian federal state or interference by partial neighbors (as France did in 1830). The Flemings would immediately have their own seat at the EU table instead of having to share one with the despised Wallons.

        A similar calculation is at work among Scottish nationalists, but it is less advanced. A crisis, however, could throw all the puzzle pieces into the air.

    2. Chris

      Didn’t the ancestors have “competitive devaluations” in the 1930’s? And isn’t current orthodoxy the belief that currencies are just commodities like chickens, or turkeys?
      So if we’re going in for protectionist stuff on soft goods, like rubber tires, chickens, and shoes, why shouldn’t the softest commodities of all, currencies, be included?

  8. Kevin de Bruxelles

    Yes, great post. Macro analysis is my favourite.

    On the question of are we starting a new phase of the crisis? I think we are! There is no way that all the economic dysfunctions and imbalances were resolved by the mini crisis of 2008. The premature Mission Accomplished banners are already looking a bit ragged. There is every chance that we are in the top of the second inning at best. All major players (US, EU, China, Emerging markets, etc.) should be war gaming the situation and preparing for years and years of crisis. But these coming crises will open opportunities. For the EU further political union may be on tap if it can resolve the trilemma mentioned by choosing less democracy and national sovereignty in return for protection from the markets. Of course to convince people to make these concessions there will need to be a compelling reason to do so. There is a famous line from Candide, il est bon de tuer de temps en temps un amiral pour encourager les autres, but instead of executing an Admiral the EU may have to make an example of one of its weakest Club Med members–if this country decides to not take its medicine quietly–by letting the markets have their evil way with this country to encourage the remaining SIIP nations to get with the austerity program. It would be a disaster for the EU if they weakly caved into Greece without first correcting the underlying problems.

    On the new Prompt Global Strike system: The deployment of this weapon system is a wonderful illustration of the limits of sovereignty and how the US is striving to overcome these limits in its quest for global sovereignty. According to Carroll Quigley, the primary limit to the extension of sovereignty is the superiority of offensive weapons over defensive weapons. Throughout history there has been a constant shifting of the balance of power between the offense and the defence.

    For example Napoleon achieved a breakthrough for the offensive through mass popular conscription combined with the three steps of: artillery barrage, bayonet charge by infantry, and cavalry pursuit. The defence made its comeback complete in WW1 with the growth of firepower (machine guns), barbed wire, and the use of field fortifications. Hitler brought the offensive back on top with highly mobile, motorized armoured tank units, concentration of power at one point, and the concept of deep penetration after a breakthrough.

    To see how the defensive impacts the limit on sovereignty the classic example is when Charlemagne attempted to create the Carolingian Empire in the tenth century but he failed miserably because the basic unit of offense, a mounted knight was far inferior to the basic unit of defence, a well provisioned castle. No besieging force could muster enough strength to outlast the defender within the castle. So when orders were issued from the center they were widely ignored by any individual knight as long as he could retire to the protection of his castle. This meant Europe was divided into many small political units (feudalism) all across the continent until a way was found to overcome the defensive power of castles.

    The defensive weapons the US faces today that limit its global reach are nuclear arms which create a MAD (mutual assured destruction) scenario and therefore limit the offensive use of American conventional weapons. It seems a bit misguided to try this game on China though. To me this PGS system (taking out pre-emptively ground based nuclear weapons) would only be really effective against second-tier nuclear powers (North Korea, Pakistan, Iran???) who do not yet have a second strike capability (primarily submarine-launched). If this weapon system is real then there is going to be a huge push in certain capitals for the development of submarine-launched ballistic missiles. In any case, China is best controlled through economic means.

    1. Richard Kline

      So Kevin, I meant to make a long reply to your theses in the comments on Yves’ Madrid summit snub, but the site crash ate ’em. Here, I’m with you and yoganmahew above: Greece is an opportunity-crisis not a calamity-crisis.

      There seems to me a great misunderstanding in commentary regarding countries in the euro and in parallel states in the EU. Many keep refering to these as if they were sovereign states: they are not. And they will become progressively less so in appearance as well as in fact; that is the point of ‘union’ after all. Now we don’t have a good adjective for the kind of entity these countries are at present. They have the kind of latitude one typically saw in confederations politically—they can conduct independent negotiations with non-members still, for example—but their degree of economic integration precludes autonomous economic strategies. That is a feature, not a bug, because the small ride the coattails of the large while the large get secure markets from the smalls. The history of modern European nationalism and long term ethnic parochialism means that admiting this publicly is exceedingly awkward, and many rail against it, some times (rarely) for good reasons. All these countries gave up the option of firing off guns at each other too, which is an inestimable boon, as you allude to only to little. This is one of many reasons why no one is going to leave the EU, and why, as you say, it is a near certainty that ethnics forcibly dragooned into nation-states of others over the last few centuries are likely to hive off as EU members on their own ticket like Catalonia, Scotland, Flanders, and a number of others, though that won’t happen over night.

      But the point is sovereignty is _already_ gone. Greece leave the euro? And go where? A ‘currency union’ with Cyprus? (Who wouldn’t touch ’em with a 100 km pole.) That’s like saying that a patient upset with the effects of TB medication decides to leave the hospital by the 14th floor window because they prefer fresh air and open skies. In the end, a ‘stabilization pact’ will be put together. On the terms of the creditor-states in the EU. Greece will be left to rot and sweat until they geek, which they will because trying to go it alone isn’t in ’em. Greece has only papered over its dysfunctional politics of two generations by ‘printing employment,’ excessive and often corrupt public employment leading to severe deficit spending, and that in the ‘good times.’ Smart minds in the EU will use this opportunity to establish functional ‘systemic controls and protocals’ for restraining profligate countries, but it takes a crisis for the opportunity to come. Ol’ Ambrose will rail against it o’course, since for him the EU is a glass all cracked, but that’s my view of it.

      —And consider again how the EU makes use of the crisis compared to how the US makes use of the crisis. They’ll come out of it stronger, I surely think, while we’ll come out of it wronger I’m certain. Wretched City on the Hill . . . .

      1. Kevin de Bruxelles

        That’s funny Richard because I had started a paragraph contrasting about how the US elites would misuse the crisis for their own selfish benefit but I ran out of time and didn’t include it.

        I agree Greece has no where to go but at the same time the EU has to avoid the political trap of being seen as the bad guys in Brussels and the only way to do that is to point out how bad the alternative would be for Greece if they were to leave the Euro.

        1. DownSouth

          Kevin de Bruxelles said: “…the US elites would misuse the crisis for their own selfish benefit”????

          I wonder, Kevin, concerning this wave of benevolence and goodness that you perceive sweeping over “Europeans” but not Americans, is the difference due to genes or to culture?

          1. DownSouth

            Kevin de Bruxelles,

            Oh, I agree completely. For whatever reason (and I’m not sure it’s out of the goodness and benevolence of its elites), Germany, to take a European example, seems to do a much better job of sharing the wealth than the US—that is within its national borders. But what happens when you try to extend the franchise to, let’s say, Greece? Can Greece be made a part of the family (maybe not the immediate family, but the extended family)? Or will inter-group (national, tribal, ethnic, cultural, etc.) differences and rivalries raise their head and destroy unity?

            But this brings me to another inconsistency that I see in your comments. You have stated that you believe the US will impose global hegemony. You have also stated that US elites are in the process of marginalizing rank and file Americans. But it seems to me that, if Germany can unite all Europe together in one big happy family, and if it can take better care of that family, that it would be much better positioned to impose global hegemony than the US.

            Can you give me an historical example of a country that has built a successful empire while at the same time its elites hogged the spoils of empire? It seems to me that such a one-sided arrangement has always led to internal turmoil and paralysis. We were talking about the Roman Empire the other day. Did not Rome experience its greatest moments when it managed to control the greed of its elites and achieve some fair and just balance of the distribution of goods and services? I’m talking about the third and second centuries before Christ, before the insatiable greed, incompetence and corruption of the Roman elite caused the breakdown of Roman democracy in the class wars of Gracchi, Marius, Caesar and Augustus. I’m talking about the Pax Romana organized by Augustus that lasted from 30 B.C. to A.D. 180, before monarchy disgraced itself under Caligula, Nero, and Domitian. And then I’m talking about Nerva, Trajan, Hadrian, Antonius Pius and Marcus Aurelius—“the finest succession of good and great sovereigns,” Renan called them, “that the world has ever had.” “If,” said Gibbon, “a man were called upon to fix the period during which the condition of the human race was most happy and prosperous, he would without hesitation name that which elapsed from the accession or Nerva to the death of Marcus Aurelius. Their untied reigns are possibly the only period of history in which the happiness of a great people was the sold object of government.”

            It seems to me that once internal cohesion is destroyed through geed, incompetence and corruption on part of the elite (whether that be aristrocracy or oligarchy), defense becomes extremely difficult, and projection of external violence (empire) all but impossible. Rome also provides an example of this dynamic:

            There was, of course, a close connection between failure ‘abroad’ and the usurpations and rebellions ‘at home’… As in other periods of history, failure against foreign enemies and civil war were closely linked, indeed fed off each other.


            By contrast with the West, the eastern empire was relatively untroubled by civil wars and internal unrest during the period of the invasions, and this greater domestic stability was undoubtedly a very important factor in its survival. If the eastern empire had faced internal distractions in the years immediately following the Gothic victory at Hadrianopolis in 378, similar to those that the West faced in the period following the 406-7 barbarian crossing of the Rhine, it might well have gone under… [T]he ruler of the West during the years of crisis that followed the Gothic entry into Italy in 401 and the great crossing of the Rhine in 406 was the young Honorius, who came to the throne only through the chance of blood and succession, and who never earned any esteem as a military or a political leader.


            Honorius himself never took the field; and his armies triumphed over very few enemies other than usurpers.
            –Bryan Ward-Perkins, The Fall of Rome and the End of Civilization

            Ward-Perkins gives the following examples of Honorius’ governing methods:

            In April 406 the western government urgently needed more soldiers in order to oppose the incursion into Italy of Germanic tribesmen led by Radagaisus, and it issued a call for recruits. Each was offered a bounty of ten gold solidi on joining up, but the payment of seven of these was delayed until ‘things have been brought to a conclusion’—in other words because the money was not immediately available. At the same time, a highly unusual but even cheaper option was attempted—the levying of slaves, who were to be paid with a mere two solidi and with their freedom, the latter presumably at the cost of their owners… ‘Things’ in the West were never satisfactorily ‘brought to a conclusion’, and the recruits of 406 may never have received their owed solidi.


            Invasions were not the only problem faced by the western empire; it was also badly affected during parts of the fifth century by civil war and social unrest. During the very important years between 407 and 43, the emperor Honorius was challenged, often concurrently, by a bewildering array of usurpers… With the benefit of hindsight, we know that what the empire required during these years was a concerted and united effort against the Goths, and against the Vandals, Sueves, and Alans. What it got instead were civil wars, which were often prioritized over the struggle with the barbarians. As one contemporary source wryly noted: “This emperor [Honorius], while he never had any success against external enemies, had great good fortune in destroying usurpers.

          2. Kevin de Bruxelles


            You are correct to point out the inconsistency. All I can say is it didn’t exist six months ago! I think it’s only a slight exaggeration to say the best way to understand my attitude towards America (even though I am American) is through Boccaccio’s story in the Decameron about the Jew(Abraham) being pressured by his neighbour (Jeannot) to convert to Catholicism. In the story, Jeannot tries and tries to convince him and finally Abraham relents but says that first he must visit Rome before making a final decision on converting. Jeannot tries to talk him out of this idea but falls into despair after he fails, since he knows that all the Jew will find in Rome is wickedness and corruption. Once in Rome, Abraham

            acquaints himself with the ways of the Pope and the cardinals and the other prelates and all the courtiers; and from what he saw for himself that without distinction of rank they were all sunk in the most disgraceful lewdness, sinning not only in the way of nature but after the manner of the men of Sodom, without any restraint of remorse or shame, in such sort that, when any great favour was to be procured, the influence of the courtesans and boys was of no small moment. Moreover he found them one and all gluttonous, wine-bibbers, drunkards, and next after lewdness, most addicted to the shameless service of the belly, like brute beasts. And, as he probed the matter still further, he perceived that they were all so greedy and avaricious that human, nay Christian blood, and things sacred of what kind soever, spiritualities no less than temporalities, they bought and sold for money; which traffic was greater and employed more brokers than the drapery trade and all the other trades of Paris put together; open simony and gluttonous excess being glossed under such specious terms as “arrangement” and “moderate use of creature comforts,” as if God could not penetrate the thoughts of even the most corrupt hearts, to say nothing of the signification of words, and would suffer Himself to be misled after the manner of men by the names of things.

            And of course when the Jew returns home his neighbour is shocked to find out that Abraham has indeed converted to Catholicism! When asked why Abraham replies that although he was shocked by the evil he saw in Rome–it was full of lewdness, avarice, gluttony, and the like–he could nevertheless not help but notice that the church’s power continues to expand and in light of their wickedness, this can only be evidence that they are truly blessed by God.

            I have read for years all the literature about the decline in America but then the facts on the ground that I saw always contradicted this, as all I saw was more and more evidence of America’s overwhelming global power. I argued for years against the invasion of Iraq but seven years on the permanent bases are still occupied (but the war is not over yet!) In order to reconcile this contradiction I have turned to Hobbes’ idea of a sovereign, but on the international scale to explain this paradox of an America in economic decline while simultaneously in global power accession. But to be honest, many things fit, but I am in uncharted territory and I would love to read someone else’s analysis of this idea.

            As for why American elite’s treat their masses like shit, the answer clearly is because they can. In the feudal times the basic calculus of the struggle between serf and knight was, as it is with any elite and popular mass, based on co-dependency. The knights needed the serfs to create an agricultural surplus so that the knights could be free to train for war without needing to work for their food. The serfs needed the knights to provide security and protect them from invasion and pillage. It took roughly a hundred serfs to support one knight. From time to time the knights might push the limits in oppressing the serfs and demand more than usual, but they always knew their limits because if they pushed the serfs too hard, it would be the knights themselves either starving or out there ploughing the fields.

            Back in the days when America was one of many competing productive economies, the masses were well looked after. I am currently reading too many books at once, but one of them is “The Wages of Destruction” which is about the economy of Nazi Germany. In this book they discuss the standard of living of Americans in the 20’s and 30’s and it was head and shoulders above what Britain or Germany were achieving for their people. I would say this is because the wealth of America’s elites was dependant on the well being of their masses as demonstrated by concepts such as Fordism.

            But as America’s elite moves towards a global sovereign role by ridding itself of their manufacturing capability, where is the limit past which they dare not push their masses? In other words, what does the American elite really need from its people? To answer, I would say four things; passivity from all, entry to the elite for a few, military service for a seperate few, and consumption of the world’s excess production like those gluttonous Popes, cardinals, and prelates in Boccaccio’s Rome from the rest of the population. And of course the American elite provide their proles true leadership in this area by giving the example of conspicuous consumption par excellence!

            The problem is that in order to fuel a system where the masses consume wealth instead of producing it you need to receive either credit or parasitical tribute. So the ultimate limit to the US elite is that they must keep either easy credit flowing to their masses or force the rest of the world to pay outright tribute. Of course some may say that credit and tribute are actually the same thing since it is very unlikely that any of the so-called credit will ever be repaid.

            So I would argue that America’s elites are sharing just enough of their imperial spoils with the masses to meet the four requirements mentioned above. The problem is that by transferring these spoils in the form of loans, there is a serious risk of turning the masses into overloaded debt slaves that will soon be unable to perform their role as the garbage disposals of global excess production. Resolving this dilemma will be the challenge facing America’s elite in the coming years of crisis.

          3. Anonymous Jones

            I can’t possibly add much to your discussion, but as to the question, “where is the limit past which they dare not push their masses?” the answer is probably going to depend upon the technology of violence and the technology of security. Eventually, the dispossessed will resort to violence (organized kidnapping, bombings or armed robbery). To the extent that the elites can develop security technology that insulates them from organized or random violence (note that the relatively recently dispossessed have easy access to incredibly sophisticated firearms, making it much different for solo or guerrilla actions when compared to a medieval serf), they could probably push the dispossessed pretty far. I doubt it really comes to that (at least I hope not), but we do have an incredible sickness among elites that has allowed them to truly believe they are worthy and the unwashed masses are not. It will be interesting.

      2. Swedish Lex

        You are right.
        Quite a few view the current crisis as a starting point for the next level of EU integration, adding the fiscal and political dimension that had to be left out of the Maastricht Treaty in the early 90s. Hence why so much political energy had to be spent to get the Lisbon Treaty through last year (giving the EU more legal competence in an increased number of policy areas) and hence the timeliness of the new Merkel-Sarkozy initiative I discussed above to provide leadership (should it materialise beyond the declarations).

        If this is the main direction of things to come, Ambrose will have fodder for writing an innumerable amount of EU nightmare columns and the Brits will have to ask themselves over and over whether they should stay or not (only they know the answer to that question).

        But, as always when it comes to the EU, evolution is muddled, fudgy and often on hold, so one should not anticipate (or fear, as the case may be) a particular transformative moment any time soon.

        1. Richard Kline

          So Sw. Lex, I can give you a transformative period: 2027 +/- 5 years, with the lock-in at +5. The EU will likely look sustantively different at than point then now. The Lisbon Treaty was absolutely critical. Not because of the substance it reflected; the substance is thin, muddled, and weak, exactly as you say. Because of the tipping point change implied in the first supra-country executive offices which are functional. Now, everything has to be done bilaterally, e.g. Sarkozy-Merkel. And serving heads of state would like to keep it that way to maximize their power position, that has been the main drag on integration for two decades, selfish ‘leaders.’ And also, there is thus no reliable, institutionalized form for political negotiations, everything has to be ad hoc and one-off. We have the beginnings of insitutional power in a political way above the level of individual countries, and that will drive change.

          I’ve found the process of European integration to be an extremely interesting historical trajectory against which to test my modeling processes. Rather live there, right now, but what do I do for work? And then I’m an English-only speaker, except (sort of) for a dead language no one knows. : (

          1. Swedish Lex

            The Lisbon Treaty contains strengthened provisions on reinforced cooperation among volunteering avant garde member states, open to other states sthat wish to join. Thus possible that a core group would take the lead WITHIN the EU framework, not only outside and bilarerally.
            Perhaps for 2015.

          2. Swedish Lex

            Do not let “Enlish only” stop you. We have tons of U.S. friends who live here with no or little knowledge of the local language.

  9. Vinny

    Great post, Yves.

    The trilemma discussed is interesting, albeit not new. I think the level of globalization is likely to be reduced before more national sovereignty or democracy Is given up by countries.

    One aspect not mentioned, though, is that reduced globalization implicitly also places limits on the US global militarism. I suspect this may very well prove to be the death blow to America’s empire, and collapse of its otherwise impotent military (any “superpower” that cannot control nations like Iraq or Afghanistan after 8 years of military toil can only be hoprlessly impotent).


    1. Kevin de Bruxelles


      Here is how I see Iraq going down in the next couple years.

      Basically, through bribes, arms deliveries, and promises of future support, the US has convinced the very impressive Sunni insurgency to stand down in return for a promised total withdrawal in 2011 (yeah right!). One of the promises (I believe) we gave is that we will support the Sunnis in their coming attempt to retake the Shia portions of Iraq. After all, a Sunni dominated Iraq makes sense for the US on the regional level. Also Saudi Arabia was not happy about the dividing line between Shia and Sunni shifting west. Right now, with 120,000 or so troops and these promises / bribes, the US has substantial control over Iraq. But 120,000 is not a sustainable number so this year the troop numbers are supposed to decline to 50,000. I would say this is the high end of the sustainable number of garrisoned troops the US can maintain for the long-term in Iraq. The key question is whether this is enough troops to maintain hegemony in Iraq.

      All this talk of withdrawal brings back memories of Vietnam where the US got down to too small a force and the NVA quickly turned into a conventional army and swept south and destroyed the numerically superior ARVN in record time. This time it seems the US is prepared and has already made our deal with the eventual Sunni victors. The endgame will all come down to whether the Sunnis “allow” the US to stay on the permanent bases. If the answer looks like no then the US will quickly try to shift gears and support the Shia.

      One huge variable is going to be the situation in Iran. The other key factor is that this is the first time in centuries that a Sunni Muslim military organization (the Sunni insurgency in Iraq) has actually impressed anyone.

      We also have to remember, post WW2, no Great Power has ever defeated an indigenous insurgency. The French lost in Indochine and Algeria. The US lost in Vietnam. The Soviets lost in Afghanistan. The Israelis eventually got their asses handed to them by Hezbollah after their first invasion of Lebanon (and they did even worse on the second try.) And before the bribes to the Sunnis, Iraq was not looking too good for the US. And Afghanistan II is looking real weak just now as well. On the other hand the British did prevail over a Marxist insurgency in the Malayan Emergency but the insurgents there were Maoist imports and never had much popular support.

      In this light, if the US were able to pull off permanent bases in Iraq it would be quite an achievement. But there is still a long way to go. In the 1960’s, by means of two CIA-backed coups d’état, the US brought Saddam Hussein to power in Iraq. A couple years later he dumped the US and decided to instead play kissy face with the Soviets. History is not on the US’ side in Iraq. On the other hand those bases in Iraq are meant to be permanent. We will just have to see how this plays out.

  10. Andrew P

    Greece does not have to abandon the Euro to default, any more than California needs to abandon the dollar and seceede from the US. As a soverign state of the EU, Greece could simply repudiate its debt, and California, New York, Ireland, Spain, and Portugal could do the same. Other states have repuidated their debts in the past, and Iceland just did so in a referendum.

    “or the other choice, to abandon the euro, devalue its currency, and default. “

    1. Richard Kline

      In principle, those statements are true, Andrew. In practice, they are mostly untenable. California simply is in no position to repudiate it’s debt; practically, that’s not a viable option. Iceland can repudiate it’s debt since it is still a sovereign state—and it should: that debt was run up by a criminal conspiracy with the connivance of many parties, quite a few of them in the EU. Greece ‘could’ repudiate debt, producing alternatives worse than the cure.

      1. jdmckay

        Iceland can repudiate it’s debt since it is still a sovereign state—and it should: that debt was run up by a criminal conspiracy with the connivance of many parties, quite a few of them in the EU.

        Indeed. And the mechanics of that maneuver have gotten short shrift here (US), or more accurately that episode has been defined by it’s final result with the process that led to said result lost in the weeds.

        Kind’a like US WS bailout, not that I think about it.

        I’ve read every comment in this thread, many from most thoughtful/insightful regulars on NC. And with all due respect to most of the wide ranging sentiment, AFAIC most everything… eg (my summaries):

        * “EU is doomed, knew it would fall apart from the beginning, never had a chance”
        * “Greek charactar will propel them to rise above, repudiate the EU elites, and restore their (debt ridden) long enjoyed place amongst world’s upper crust living standards.”
        * “Greece is toast”
        * (a few other prognostications)

        I’ve watched this real closely, as I’ve got (and had since ’03/Enron) my entire retirement in EURO denominated securities. I did this against advice of everyone… brokers, my CPA (and other CPAs I knew), family, wife…

        EU has defied outside prognostications of it’s imminent demise since inception, much of that noise coming from US style “free marketers” who demanded evisceration of any metrics/oversight/regulation (etc.)… the same financial crew who set this whole mess into tailspin w/their fraud.

        I think most of comments here are wildly speculative, most representative of a crowd responding to fire in a theatre. I also think that the mechanisms built into EU lend themselves to constructive recalibration of members much more effectively than here in US where, as far as I can see, no fundamental (and I emphacize fundamental) problems of massive proportion have been addressed.

        None of it.

        I simply don’t know how things are going to turn out. But I think, given structure and intent of EU to date, they are on much firmer ground to meaningfully correct than we (US) are.

        I’m going to stick w/EUROs.


        One thing I do think, however, is that if US keeps on it’s current course… no corrections, no fundamental restructuring of financial system, no meaningful assessment of just what the hell our needs are (what we need to produce, what our production needs to address)… we stay on this course, we’re going to end up on the marginal side of global economic realignment.

        We’ve been riding on our laurels for too long, and those fumes are near exhaustion.

        Just my $0.145 USD (and falling fast!!!)

  11. Kiste

    People should not overestimate the Greek problem. Greek is responsible for roughly 2.5% of the Euro-Zone GPD.

    Compare that to California (13% of US GDP), which is also in deep fiscal trouble.

  12. Doc at the Radar Station

    “The implication of this may be that a fall in trade, perhaps not as dramatic as what occurred in the 1930s, may be a necessary element of a return to stability.”

    Powerful and fascinating statement there and quite true I suspect. Thank you.

    1. MyLessThanPrimeBeef

      We need to go back to the way we traded in the days of the Neanderthals – trade for commodities you didn’t have, like obsidian in Anatolia, etc, and not for things others could make cheaper.

  13. joebek

    One has to wonder if the US will not shortly experience something similar within its borders as the economies of the saltwater drinking oceanic coastal states deteriorate further. These states will junk the state constitutional requirements of balanced budgets and rely on deficit spending to combat unemployment. This will be defended much as it is defended for the “national” government in DC. Will California politicians then seize the SF Fed and begin Open Market operations? It’s all pretty interesting. After the Christmas earthquake and tsunami in Indonesia an Italian geologist remarked: “The whole earth is trembling“.

  14. i on the ball patriot

    “Yves here. The implication of this may be that a fall in trade, perhaps not as dramatic as what occurred in the 1930s, may be a necessary element of a return to stability. No one seems to be thinking along those lines.”

    And very few seem to be thinking along these lines …

    Nation states jumped the shark long ago but their co-opted government systems are still vibrant decoys that allow for good solid resource and energy dissipation in the global masses.

    “Prompt Global Strike” (C-PGS) system is in itself a decoy meant to rattle the cages of the individual decoy nation state boxes so as to continue the well metered out creation of perpetual conflict in the masses that will soon lead to a ruler and ruled world with the ruled in perpetual conflict with each other.

    The wealthy ruling elite are way ahead of the pack and have solidly embraced the ‘full spectrum dominance’ strategy.

    C-PGS — a scary monster in the future — deflects from the present day intentionally created global financial crisis, a right now complex weapons system and an integral part of the ‘full spectrum dominance strategy’. Derivative bombs are exploding daily all over the planet in areas where bubble bombs have already been exploded driving the marks to the teat of the private global central banks just to stay alive — at super usurious terms of course!

    You can scream tinfoil hat bullshit all you want buy it is pretty difficult to deny that there now exists a ‘too big to fail’ global economy where industry and governments can continue to stay alive only on ‘credit’, and that credit is supplied by a global network of private central banks, controlled by an elite few, who have deceptively and corruptly purchased the governments that empower them.

    These wealthy ruling elite don’t want stability! They don’t want profit! What they they want is control and they now have it!

    Greece should say, “Fuck you Mr. Perniciously Greedy Banker!”, and not put the keys in the mail but rather stuff them down the throat of these greedy slime ball bastards! As should the citizens of all the rest of these now hijacked nation states including here in scamerica. It is shit or get off the pot wake up time.

    No balls! No brains! No Freedom!

    Deception is the strongest political force on the planet.

    1. Vinny

      Well said.

      If there is a people in Europe that could upset the apple cart, that is the Greeks. They are informed, idealistic, and courageous. I trust they will soon live up to their image and lynch a few banksters and send a clear message.

      As far as scamericans go, they’re fully brainwashed cattle, ignorant, uninformed, castrated cowards, who will take abuse and mistreatment indefinitely, very much like the frog being slowly boiled alive. Luckily for the frog, it will eventually die. But scamericans will live on to take more and more abuse, as their children and children’s chilren are destined to do.

      That’s why I left Scamerica, and now live in Greece… where all these rumors of national doom and collapse seem greatly exhagerrated to me.


      1. i on the ball patriot

        Vinny, I share your enthusiasm for the strength of the Greek spirit.

        Unfortunately they are being pitted one against the other in a very well orchestrated campaign of energy dissipating divisiveness that demonizes migrants as being responsible for all Greek ills and has given rise to the fascists. This is similar to the divide in the Uk, also over immigrants, that has given rise to the fascist BNP. We have the same dynamic here in scamerica with Mexican labor. A lot of well meaning people get sucked in as it is an almost standardized program of hate mongering so as to divide that is heavily promoted by the sell out corporate western press specifically to build a controlled fascist movement that is clothed in nationalism.

        I disagree about the scamericans. Yes, they have had the wool pulled over their eyes, but when it is removed and they see clearly the real target, — the wealthy ruling elite and all of these Pernicious Greed fat ass bankers that have enslaved them — they will rise to the challenge. They have a basic love of freedom, and, most importantly, they are armed to the teeth, with enough fire power to make the resistance in Iraq look like a day with Mr. Rogers if it comes to that.

        I think before that happens you may surprisingly see a US military uprising.

        Much as the Vanilla Greed Bankers are now coming alive and realizing that the neocon Pernicious Greed Bankers have stolen their lunch and have an end game of control as opposed to profit, so too are many in the ‘Old Vanilla, Freedom and Democracy Loving Military’, beginning to see the elite end game of the new Pernicious Control Military. You see the same awakening and struggle in the scam ‘rule of law’, with a lot of attorneys seeing the pernicious end game promoted with the likes of scum bag sell out piece of shit human being, torture master, John Woo, et al.

        That is why I think it is important to promote the Vanilla Greed vs the Pernicious Greed meme. The Vanilla Greed folks have the resources, at the present time anyway, to at least turn back the clocks and impose some fair and ironclad regulation. They need to really hustle as they are not included in the new two tier social dynamic.

        Here’s some poop on the greek struggle:


        “ # 1 8 3 | S t a t e m e n t b y t h e O p e n A s s e m b l y f r o m t h e U n i v e r s i t y o f A t h e n s a d m i n i s t r a t i o n b u i l d i n g
        F r i d a y , F e b r u a r y 5 , 2 0 1 0

        T o d a y , 5 t h o f F e b r u a r y , a n a r c h i s t s , a n t i – a u t h o r i t a r i a n s a n d a n t i – f a s c i s t s c h o s e t o k e e p t h e u n i v e r s i t y a d m i n i s t r a t i o n b u i l d i n g a t P r o p y l e a o p e n , a s a s p a c e o f m u t u a l c o o r d i n a t i o n a n d s t r u g g l e . O u r a i m i s t h e m o l d i n g o f i d e a s a n d c o u n t e r – i n f o r m a t i o n a h e a d o f t o m o r r o w s a n t i – f a s c i s t g a t h e r i n g , w h i c h h a s b e e n c a l l e d f o r a t 1 1 a m a t P r o p y l e a . A g a t h e r i n g s t a n d i n g a g a i n s t t h e n a t i o n a l i s t i c a n d r a c i s t r a b b l e o f f a s c i s t g r o u p s , w h i c h c a l l f o r a g a t h e r i n g t o m o r r o w a t 3 p m , a t P r o p y l e a . A g a t h e r i n g j u x t a p o s i n g t h e s o l i d a r i t y o f t h e o p p r e s s e d t o t h e s t a t i s t a n d p a r a – s t a t i s t p o g r o m s a g a i n s t m i g r a n t s . W e s t a n d h o s t i l e a g a i n s t i n s t i t u t i o n a l i s e d r a c i s m , a s e x p r e s s e d v i a t h e c i t i z e n s h i p b i l l , a s w e l l a s t h o s e w h o w i t h t h e i r m i s a n t h r o p i c c a l l s a i m f o r t h e p h y s i c a l e x t e r m i n a t i o n o f t h e m i g r a n t s .

        A s t h e s t a t e t a r g e t s s p a c e s o f r e s i s t a n c e o v e r a l l , t h e f a s c i s t s a t t e m p t t o i n v a d e a s p a c e w h i c h h a s c o m e , t h r o u g h t o u g h s t r u g g l e s , t o b e l o n g t o t h e w o r l d o f f r e e d o m a n d r e s i s t a n c e . W e d o n o t i n t e n d t o s u r r e n d e r n o t a s i n g l e s q u a r e m e t e r t o t h e s t a t e a n d i t s p a r a – s t a t i s t s .

        W e c a l l e v e r y p e r s o n i n s t r u g g l e t o t h e o p e n a s s e m b l y a t t h e A d m i n i s t r a t i o n B u i l d i n g t o n i g h t a t 8 p m u n d e r t h e t o p i c o f t o m o r r o w s a n t i – f a s c i s t g a t h e r i n g a t P r o p y l e a .
        N O A U T H O R I T Y I S O U R F R I E N D , N O O P P R E S S E D I S O U R E N E M Y”

        More here …

        Deception is the strongest political force on the planet.

  15. mg

    The significance of Greece is the response of the population to austerity measures. If they quietly adjust to the changes after some tremors of discord then the plan referred to above of global finance overriding all sovereignty will continue to a corporatist state. If cities riot and the rage spreads through the EU then all bets are off.

    Labor and capital, the haves and the haves nots, class struggle is the never ending cycle in history. I’m not sure how the elites plan on overcoming or co-opting the majority but if history is a guide it will be bloody.

  16. dlr

    Correct me if I am wrong, but isn’t the whole theory about free trade between “low wage countries” and “high wage countries” is that the differences in competitiveness in the two countries will be adjusted by changes in the exchange rate. The “high wage countries” currencies will depreciate, and the “low wage countries” currencies will appreciate, and trade won’t result in job losses in either country.

    So, that means that China pegging the RMB to the dollar is inherently a “hostile” act. They are trying to prevent the normal adjustment in the currencies that would result in “fair trade” between our two countries.

    But, I think there is a bigger problem. Even if the Chinese let the RMB float, it seems like as long as there are also free CAPITAL flows between countries (money flows for “investment” instead of money flows for “settling trade accounts) you can also get massive distortions in the exchange rates of two currencies.

    For instance, say lots of people think it is safer to put their money in the US instead of Venezualia or China, etc, because of fears of government expropriation or hyper-inflation (our government is bad, but their government is worse…). As long as there are lots of capital flows into our country, our dollar will be “too strong” to allow full employment.

    There are lots of other reasons why our economy is screwed up, but the massive capital flows inward to the US is surely part of the reason why US jobs are going overseas.

    So, the only way to safely allow “free trade” is to restrict “free capital flows” (“free investment”).

    The only other choice that I can see would be to allow free movement of PEOPLE between countries as well as free movement of money between countries. That hardly seems like a great solution. Even if barriers to immigration were lowered across the board everywhere there are still plenty of other barriers, like different languages. Not to mention that people would vote with their feet on issues other than jobs – like better provision of civil liberties and legal protection, not to mention things like vastly different levels of social welfare spending, environmental protection, law and order…

    But anyway, my point is that the global financial system is inherently flawed the way it is currently set up. “Free trade” CAN’T work the way it is designed, because “Free capital” short-circuits the necessary adjustments in currencies to keep both economies on an even keel. There are inevitably going to be higher unemployment, maybe much higher unemployment in the country with that is more attractive to invest in.

  17. sean

    As far as I am aware Ireland was the first eurozone country to repo its sovereign bonds at ECB via our zombie banks.
    Irelands debt profile and most likely the same goes for other ‘pig’ countries is 80% foreign and 20% domestic.
    Prior to EMU9European monetary union) our debt profile was inverse to the above.

    Now those foreigners,mostly German etc banks and pension funds want their money back.The ECB is essentially running Irish fiscal policy fronted by a notional sovereign government.
    It should be noted the Irish zombie banks purchase sovereign bonds at 4.5% and repo’d them at 1% for cash at ECB.As deflation was recorded in 2009 as 6.5%,the banks are getting an effective 10% guaranteed,risk free return.And people wonder why they wont lend!!.

    Irelands debt levels are far worse than posted as NAMA (National assets management agency) is taking on board 54 billion euros of toxic debt from the banks off balance sheet.(our GNP is about 130 billion).Our corrupt government was first past the post to cut Public sector wages and fooled the international media into thing problem solved.

    The ECB will try and probably ride out the storm if they can and convert all those repo’d sovereign bonds into one perpetuity bond taking them off national balance sheets in return for additional fiscal power.The perpetuity bond will trade as such and pay a coupon but will never be redeemed.

    The ordinary joe soap does nt know whats going on ,most still think their national governments care about them.

    However if the ballon does go up in Greece and one or two other peripheral states this will exert greater political instability throughout Europe.Whole countries full of resentful people looking for someone to blame for their economic collapse may view Europe in the same way Chechens viewed Russia.

    The fact is that on a trade weighted basis and if you acccount for national bond spreads against German bonds there are de facto several currencies denominated in euros .

    Countries such as Ireland are devaluing our ‘Euro’ currency through mass unemployment and severe wage reductions.But even at that its not working in Ireland as our budget defecit continues to widen in absolute terms.

    I would expect bond warriors to short Irish bonds soon.

  18. scraping_by

    Two things…

    First bond ratings, on which so much depends, has been shown to be smoke and mirrors. If we’ve learned one thing from the financial market melt down, it’s the raters are not honest brokers. That is, the rating is a product like any other and is therefore up for bids. This is the free market in action.

    Second, China might be nervous from their reading of American history. The US made a significant profit from WWI. The government confiscated all German assets they could get their hands on and doled them out, after the war, to political insiders. Just the German gold reserves, captured on a ship held from before the war, paid for much of the war effort. With much of their trillions in bonds from that could disappear at the stroke of a pen, they might think twice about their century.

  19. dearieme

    “As for the EU, it’s simply Austria-Hungary writ large”: no, it’s really Vichy France by other means. It’s about accommodating France to German power. And given the history of Louis XIV, Napoleon, Kaiser Bill, and the wee Austrian cove with the ‘tache, Poor Little Greece won’t be allowed to cock it up.

  20. charcad


    The views here seem polarized. One camp doubts the ability of the EU to cope with this crisis, particularly since it could well redound to European banks, which are even more fragile than their US peers. The other sees this as a different sort of challenge:

    A good topic and a good post.

    First, I understand that over two generations everyone got into the easy habit of assuming Germany can be milked for their own projects, and without regard to its inhabitants. It will help to drop this antique and obsolete 20th Century view.

    Second, it’s not true that Berlin only has one move “west”. That is, in the direction of ever greater surrender to the EU bureaucracy in Brussels. Despite EU shills’ diligent efforts to make ever-greater centralization under Brussels’ rule seem as inevitable as permanent real estate price appreciation appeared in mid-2005.

    Berlin has a second possible move “East”: i.e. towards Russia.

    Numbers like one trillion euros are casually thrown around for bailing out the PIIGs (population 61 million minus Italy or 117 million including Italy). As Mish Shedlock would point out, there’s an unlimited demand for “free money”, in this case demand by PIIGS for “free money” from Germany. The question is whether 81 million “Germans” will agree to provide this facility.

    What might one trillion “Euros” (read DMARK II) obtain for Germany in Russia, as compared to the Club Med states?

    Put another way, what are the “real economics” of the two deals? The real economics of Germany-Russia are profound and growing. I’m talking about real fuel, energy and raw material flows, technology and non-deadbeat markets. This is different from “financialization” and the often imaginary economics of modern financial markets.

    The now aborted Sberbank-Opel deal was a very recent example of this alternate axis. Berlin enthusiastically supported this. The deal was aborted by (US) Government Motors. ‘Scuse me, I meant by General Motors Company.

    This existing good economic fit reinforces pretty obvious (to me) strategic imperatives for both sides.

    1. Vinny

      Indeed, a Germany-Russia alliance makes total sense. Americans will be too poor to afford BMWs and Mercedeses anyway, and have no resources to offer Germany.

      But such an alliance makes sense not only economically, but militarily as well. Assuming Russia and China will enter into a tight NATO-like alliance, followed by all former USSR oil rich republics, it makes no sense for Germany or the EU for that matter to remain in NATO, at the whim of a bankrupt nation like the US. And it can all happen peacefully and quietly, without PGS or any other murderous American concoption being able to do a darn thing about it.


      1. charcad

        Assuming Russia and China will enter into a tight NATO-like alliance

        I don’t see this being in the cards or even desired by dominant factions in Russia. The Chinese are not going to make an agreement on the basis of equality. Nor are they even capable of making one in my view.

        Moscow’s present relations with Beijing are partly driven by appeasement and partly by short term trade opportunism.

        Considerations of “China” are also what primarily drives Russia’s nuclear modernization program. Without nukes China could prance across the Siberian border one fine day and there’d be nothing Russia could do about it.

        The Nordstream Baltic undersea pipeline project direct from Russia to Germany will enhance Moscow’s ability to effortlessly muscle adjacent states. These states are in eastern Europe & the Ukraine. The method is using natural gas and oil blackmail. And muscle them without disrupting customers further west.

        The “moment of truth” for the EU and the euro is approaching. And one part of this truth is the EU is the world’s leading energy beggar. As a conglomerate the EU is hopelessly codependent for energy on everyone around it. Oil and gas are the two leading reasons both the UK and Norway have stood clear of the euro so far.

        Germany pays it way on imported fuels with world class exports, just like Japan does. This is not true of other Euro components. What is true is the welfare receipients of Club Med are all in easy agreement that they won’t change their ways and that Germany will continue to pay their energy bills, too. So are the welfare case workers in the EU Brussels bureaucracy.

        The advantages to Germany in doing so are less clear all the time.

        1. Vinny

          Good points.

          One would think that the Club Med nations would roll up their sleeves and start building up a serious industry for producing energy out of the only commodity they have in abundance: sunshine. But I guess in those countries it is too hot to work outside…lol


      2. charcad


        But such an alliance makes sense not only economically, but militarily as well.

        You’re very correct about this alliance as it applies to Germany and Russia. Personally I have great difficulty seeing Russia avoiding territorial loss in this century without it. The two systemic threats are “China” and “Islam”.

        Advocates of an EU bailout of Greece accompanied by some sort of austerity program designed to make Greece function more like Germany are overlooking Greece’s semi-hidden cold war and low heat arms race with Turkey. A state which is daily succumbing more and more to fundamentalist Islam funded by Wahabbi Saudi Arabia.

  21. bold'un

    “Cap and trade” is proposed as a solution for carbon emissions. But, hey, why stop at carbon? The US could cap its whole import bill at some sensible figure and then allow “June 2011 import certificates” to trade on an exchange.
    Globalisation does not have to be incompatible with some central management of trade deficits, and variable tradeable tools are surely a more sensible way than fixed quotas or customs duties.
    This can be sold to net exporters on the basis that free floating exchange rates would tend to push the cost of certicates towards zero. Also the cap somehow be linked to carbon footprints in some way so that international trade increases with a carbon-friendly skew.
    In the immediate, selling certificates could also generate some income to the EU or US authorities: with such huge deficits, every little helps…

  22. MyLessThanPrimeBeef

    Darn, I thought only I knew that word – trilemma.

    In any case, the trilemma is cute but basically life is a dilemma problem – how to maximize one’s profit while caring about other people.

    Question – what ia a unilemma?

    1. i on the ball patriot

      One quarter of a tetralemma.

      Deception is the strongest political force on the planet.

  23. DaveInDenver

    The golden truth is that the Fed is going to be forced to embark on a money printing operation that will blow our minds. It will be interesting to see what kind of smoke screens they put up in order to mask the truth. At some point this nasty short-squeeze rally in the dollar will rip in reverse and the rest of the world will flee from the dollar the way they are fleeing from the euro right now. When that happens, gold will finally become the ultimate safe haven investment and those who poo-poo it now will be left chasing a train that leaves the station suddenly, quickly and with a sharp move higher.

  24. charcad

    Caveat Emptor Notice:

    chasing a train that leaves the station

    I have yet to see any bubble that didn’t include touts using this extremely tired motivational rah-rah line. A particularly amusing example was some old r.e. sandpiper in late 2006 telling everyone that SW Florida re was now a buy.

    One might even be able to time an ultra gold short play by counting and dating the numbers of Google occurrences of “train leaving the station” in connection with long gold speculation.

  25. Attitude_Check

    I think (hope?) that trade protectionism takes a different tack — retaliation against currency manipulation. Having free trade with currency manipulation isn’t free trade. It results in the types of trade imbalances that are destabilizing the world economy.

    First thing to be done is require freely floating currency valuation to be a member of the WTO.

  26. MG77

    This post is all over the place and brings up way too many topics that aren’t directly related to the topic post at hand. Don’t mind at all when Yves has commentary on financial topics or some political ones but bringing up & commenting on nucleur security related issues is way beyond the scope of expertise on this blog.

    Better off left to Jane’s and the scores of other global risk or strategy blogs that are out there and have well-versed experts on nuclear-security related issues.

    1. charcad

      No. It’s very related to one key point. This is the prospect of a northern European funded bailout of the EU’s defict ridden and fiscally incorrigible Club Med states. EU promoters such as “Diego” like to propagate the idea the “EU” is done deal and a super-sovereign federal government in Brussels is inevitable and imminent.

      It ain’t necessarily so. There are profound factors and profoundly powerful groups pulling in the opposite direction.

      1. MG77

        The Chinese-US issues here that are mentioned are discussed only in passing and really don’t have anything to do with this direct topic at hand. If Yves wants to post a seperate topic on it and let someone with a more qualified background speak on Chinese-US military issues, I dont’ mind at all. Bloggers just shouldn’t try to bring something up if they really don’t have much background on the subject and/or unqualified to really talk about it. Might make for a more boring blog but I tend to give it a bit more credibility too.

  27. kevinearick

    You know bosses:

    If you tell them what needs to be done, they will do everything in their power to prove you wrong, and make dumber amd dumber comments along the way down, to complete discharge, and then cuss you out as they drown, after cutting their own lifeline.

    1. kevinearick

      Nuclear security is a sunk cost. The kids are just waiting for the die-off, one way or another.

        1. kevinearick

          This is the point in the film where the masterminds start shooting the hired help in the back as they try to make their escape.

        2. kevinearick

          Their ultimate exit strategy is to shoot the feminists in the back of the head.

          Watch the muni market.

      1. kevinearick

        Technology has traveled several orders of magnitude beyond nuclear. The masses understand nuclear enough to be frightened by it is all.

        1. kevinearick

          Why would any intelligent kid want to work for people who would suck the blood right out of babies, just to extend their own miserable existance?

          For money, other people’s debt?

          Capital put kids in front of tv(s), and got the desired result, but still doesn’t understand the ramifications of the Internet.

          1. kevinearick

            It was bad enough observing the behavior in Cocoa Beach, when Floridian working people are flat on their backs, and then to watch the act of the NASA boys, who now think they own the world … my blood pressure ended up past 160/110.

            (yeah I know, I wish it would have done me in too.)

    2. kevinearick

      Correct me if I’m wrong, but didn’t old man Ford pay his labor $1500 and charge them $250 for a model A?

      1. kevinearick

        Sovereign debt is a symptom, like watching a car wreck in slow motion, standing in the path of the oncoming cars, playing chicken.

        1. kevinearick

          Greece is a gun to the head of Germany, designed to extort an additional tithe, to keep the ponzi economy on life support.

          The titration could reach completion at any time, in which case the reaction will flow to completion quite quickly.

          Until then, money will flow into Treasuries, as designed.

          If you want to watch just one data point, watch household formation.

          Also, you might take a look at age demographics 0-4 yr olds in the industrialized world. Look beyond the data offered, and compare it to their financial circumstances.

    3. kevinearick

      What would the circumstances be if these were not externally-controlled service economies?

      Where would they be if oil were not going at multiples of a reasonable price due to the peak mythology?

      Why is America in the Middle East stirring the pot all the time?

      What if Iraq’s oil came online tomorrow?

      What would happen to the multinational corporate contracts if oil fell and stayed below $65 for an extended period of time, and what would be the resulting effect on corporate America?

      How is loading up Caterpillar to hire an operating engineer to build the wrong infrastructure to produce 3 to 7 service-sector jobs, all requiring government subsidy, along with any new babies, going to get this country out of the ditch?

      And why are we building a high speed train, which is really a low speed train, to ferry people from Tampa to Orlando, to subsidize the theme park, which is the ultimate government subsidy basket-case, that can screen out real labor, but not child molesters, just because most of the cars in the parking lot are from Florida?

      1. kevinearick

        We’re short on talent that can bankrupt the country, so we have to pay them multi-million dollar bonuses, but we can’t afford to pay an engineer a livable wage, with livable conditions, so he or she can raise a family of children that can work on someting more complex than an oil pipeline?

        Toyota has to get an outside expert to figure out that dc circuits, driven by code that has no structural relationship to physics, are predictably unstable?

        Statistics designed to describe mechanized production are applied to human beings, which then become automatons, serving computers, and somebody is surprised that the economy is doing the wrong thing, faster and faster?

        1. kevinearick

          Do we really have to rebuild San Diego globally before someone wakes up?

          What’s the structural and discretionary costs of retirement as a % of city personnel costs there, something like 70%?

          And why is the typical worker on San Diego Port Authority properties being subsidized by the government, when that Authority was one of the richest small governments in America? Not enough hotels or a big enough convention center?

          Secular migration to a service sector economy my …

          1. kevinearick

            More like a secular, global migration in the boot-tracks of the Soviet Empire, right off the cliff.

          2. kevinearick

            Yes, I’ve heard, from all over the country. Anyone that doesn’t go along with this crap gets anger management class, and then can’t get a cert beyond Janitor I, where they work under government subsidized labor, brought in for the purpose.

          3. kevinearick

            If you think that’s bad, I was on a concrete job a few years back, working 80-90 hrs/wk, and the company wanted to install psychological norming exercises to start the day. No kidding. Then they wanted us to stand in a circle and talk about how we felt. No joke.

  28. plschwartz

    There is an anecdote I recently heard.
    A US-savvy Chinese man was asked by a respected distant relative if he could find out what the three top boys boarding schools were. Descriptions were e-mailed to the relative who stated that they would all be satisfactory for his son. He then asked if information could be obtained as to who to bribe to gain his son admission.

    I wasn’t very interested in economics ten years ago when China was let into the WTO. But I cannot imagine the thinking that was involved. If there is enough for four to live in some comfort and three penniless relatives arrive where is the production to care for them. The story of loaves and fishes after all did require a miracle! Since we hardly set any limits of behavior on China, we cannot complain if they have a boardinghouse reach.
    But of course it will take a major lowering of our standard of living to raise the Chinese up til an equilibrium is found.Take the “G” nations and find an average income with and without China.

    WTO presupposes that all play by some set of “fairness” rules. But China doesn’t play by our rules and I doubt they want to play by ours.
    So I will add another answer for you. Cut China out of WTO.
    And let them trade with us according to our rules.

    I am very happy with what Obama is now doing to China. He is baiting them. And so far their response has literally been chicken

  29. Hugh

    Protectionism was a natural consequence of the failure in American leadership. When Obama came on the scene, there was a real opportunity to coordinate the world economies and come up with a common plan for the financial crisis. What we got instead was Team Obama and the likes of Turbo Timmy, footsoldier for the corpocracy. Many countries put together stimulus packages and except for ours most of them were overtly protectionist. With the ongoing failure in American leadership, no viable contenders for it on the horizon, the recovery that never was, and slippage back into economic turmoil, protectionism will increase.

    I am not sure why C-PGS is included here. I would just note that the discussion involved several degrees of absurdity. Land-based ballistic missiles using conventional warheads is a really dumb idea. There is no way to tell if it is conventional or nuclear armed. Any country that saw one of these coming at it would have to assume that it was nuclear and respond accordingly. So the question answers itself. Moreover, missiles fired from the US to likely targets in Asia would overfly Russia and fly near China. These countries would have to go on alert in the case of such a firing. At a minimum, the political and diplomatic blowback would be enormous, and such an event increases the odds of what are euphemistically called “miscalculations”. Finally, it is important to understand that “No first use” policies are all lies. Faced with an imminent attack or the perception of an imminent attack, the real policy has always been “Use them or lose them”. So the question asked was pointless.

    Sea-borne ballistic missiles carrying conventional warheads to countries, say like Iran and Pakistan would, would have different less threatening trajectories, at least from the view point of China and Russia, but the payloads would be smaller so this would go against the depiction of such an attack being “massive”. Trajectories involving North Korea on the other hand would have shorter timeframes for response and could be seen as threatening Russia, China, or both.

    1. Yves Smith Post author

      With China, the geopolitical moves cannot be separated from the trade/currency issues.

      C-PGS is mentioned simply to illustrate that we are suddenly rattling China’s cage on a lot of fronts. By contrast, recall when Geither called China a “currency manipulator” shortly after he was confirmed as Treasury Secretary, which was a hint we might take that line with the WTO, China howled, and the Administration backpedaled fast. Meeting the Dalai Lama is a poke in the eye; the Taiwan and C-PCS moves are a different kettle of fish.

      1. charcad

        the Taiwan…a different kettle of fish

        China prefers to move very deliberately and incrementally in military policy. Taking any unnecessary risk is alien to their approach to this field.

        So far from being “inscrutable” Beijing is exceptionally scrutable here. I know of no major Chinese military action since 1949 (Korea, Tibet, Himalayas, Vietnam border war) that wasn’t preceded and telegraphed by straight forward diplomacy designed to resolve issues without shooting.

        The Taiwan Card is uniquely dangerous and I think largely misunderstood in the West.

        The Chinese already occupy Taiwan demographically. Taiwan has no natural resources that would be additive to the PRC. Taiwan’s economic value is identical to Hong Kong’s. That is, Taiwan is worth a lot as a going concern and very little otherwise. Beijing wants to reduce Taipei to obedience, not rubble.

        Beijing will therefore not go to war over Taiwan, except in one contingency. This is *if* Beijing becomes convinced that not going to war over Taiwan will lead to regime change on the Chinese mainland and maybe even in Beijing.

        Kinetic warfare between Beijing and Taipei would have many of the aspects of another Chinese civil war. The initiating government could conceivably lose civil legitimacy in the eyes of the Chinese peoples.

        I know of nobody capable of guaranteeing such warfare could not spread to the mainland, or that Taipei would not find significant mainland allies. Such an operation could easily be the starter’s gun for the wider Chinese civil war that Beijing fears most. Bejing is acutely aware of this.

        China imports large amounts of foreign oil, mainly by sea. One certain result of a shooting war between Beijing and Taipei would be a self-imposed oil blockade of uncertain duration. A blockade easily enhanced and prolonged by the US, Japanese and British navies.

        A very dangerous game of chicken is possible here, too.

      2. Kevin de Bruxelles


        The US had been selling arms to Taiwan forever. Each time Beijing protests a bit and withdraws their ambassador for a few months or so and then all is forgotten. From China’s point of view, all those arms Taiwan is buying are just more goodies they will inherit once they finally take over Taiwan by peaceful means.

        The C-PGS thing is not meant for serious nuclear powers like China. Not only are they able to site nuclear missiles all over their massive territory, they have second strike submarine-launched capabilities. There is no credible way the US could take out or even substantially weaken Chinese nuclear capabilities by conventional methods.

        And China lashes out at any foreign leader that meets with the Dalai Lama but it’s nothing but sound and fury and not backed up by anything real. Obama showed weakness by not meeting the Dalai Lama last October and this latest round of exaggerated Chinese outrage is his reward.

        But while all this drama is going on it is business as usual between the US and China. I have several American friends working on important infrastructure projects in China. I’m waiting to see some of these projects getting stripped away from American firms and given to others before I believe all this noise is anything more than the usual posturing for the proles to cover up for business as usual.

  30. plschwartz

    “Let China sleep
    for when she awakes,
    she will shake the world”
    Napoleon Bonaparte

    Charcad to rephrase your analysis, since 1949 when talking has not gotten China its way, then they have not been loath to use military force to gain what is its self-proclaimed boarders.I believe that concept in German is “Labensraum”

    I will not be here 50 years hence so I will not be able read a reasoned history of the last administration. But I presume high on the list of its failings will` be its failure to contain China, nay its bending over backwards to enrich and empower China.
    Al Queda can certainly harm us. But if as I believe, that the global economy is close to a zero sum game, then China’s increase came from the Wests decrease, and that this movement has caused great dislocation, then I suggest that in this “Great Recession” more Americans have died then who died in the WTC

    Obama does seem to get it. And one can almost see a list of objectives by year. Confronting China seems to be started in 2010.
    He is gaining the Momentum on the Chinese.

    1. charcad

      “since 1949 when talking has not gotten China its way, then they have not been loath to use military force to gain what is its self-proclaimed boarders.”

      Correct. Borders defined by a chauvinist Middle Kingdom view. And probably using the traditional Middle Kingdom map showing China occupying 90% of the Earth’s surface.

      Obama does seem to get it. And one can almost see a list of objectives by year. Confronting China seems to be started in 2010. He is gaining the Momentum on the Chinese.

      The easiest, most productive and least dangerous way for Obama to start is to confront the S&P 500 first about their practices of off-shoring their domestic US production.

  31. craazyman

    Wow. Europe imploding, China invading Taiwan, civil war in China, nuclear missiles flying around everywhere. Civilization collapsing. Holy Shit. I need to call my psychotherapist on the crisis line just to work through the trauma of even imagining all this. Jesus H. Christ Almighty. No. It’s not gonna happen. Because it’s all happening in the outer mind realm in physical materializations in the noousphere. Watch the UFOs and the apparitions. This is where the psyche is crystallizing its thought forms that, to some degree, project the thanatos into energetic structures. Our demons. And there is some dissipation from this. World War II was the big implosion here, because the apparitions were almost non-existant prior to it and it was the last days of the primacy of tribal consciousness closed in all the unifying energy –and so it had to go boom in the atom bomb. There is no coincidence here. Today the problem is less a suppression of the unifying consciousness than a dissipation of it. Islam is a last stand attempt at unifying what has already been dissipated. Ethical property and money are mechanisms of progagation of unification, hanging a bit tenderly, to be sure.. So The gates of Eden are still open. So when the Chinese go to the Karoke bar tell them “Yes, you sound just like Bruce Springsteen. It’s hard, even, to tell the difference. Really!” Pax Americana.

    1. OneDayWatchmanYouWillSeeTheUniverseAsIHaveSeenIt

      My uncle worked on Manattan Project at Los Alamos.
      High intensity chain-reactions bring them here.
      They took my mother as a young woman and did things to her.
      They came to me as a small child.
      They are not from another planet.
      They are from beyond death.

      1. craazyman

        Hey watchman. I agree with the last sentence. Yes it runs in families for some reason. DNA-related I think. The phenomenon however goes back through history — leprechauns, little people, fairies and changelings, etc. I take my provenance on this one from Valee, John Mack, Patrick Hapur, John Keel, among others. I knew a woman in the 1990s who was taken by them up by Middletown NY. I think she might have been one of them, when she was telling me her story her eyes got huge and black. I was very nervous and tried to hide it. It’s a strange world.

  32. i on the ball patriot

    Never in the history of human kind have so many based their viewpoints and behaviors about their concrete reality on abstract deceptions created for them by others.

    Ethical property and money are deceptions. Evolution snuffs us with our own externalizations.

    Yes. Its gonna happen!

    Wheeeeeeeeee!!!!!! What a ride!

    Deception is the strongest political force on the planet.

  33. Vinny

    As far as the US-China relations are concerned, there is absolutely no danger of further deterioration, ever. Reason being, there’s a pack of plump pandas en route to the US right now, and that is sure to smooth things over diplomatically, economically, as well as militarily…lol


  34. kevinearick

    Capital is saying that it deigns, builds, installs, and maintains economic motors, and the upper middle class now works for capital, so let’s see it. Go ahead, trot it on out.

    So far, we have seen biofuel, solar, wind, and now trains, none of which can create an economic profit.

    Show us the motor Mr. Summers. Show us something we haven’t seen.

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