Auerback: The PIIGS Problem: Maginot Line Economics

By Marshall Auerback, a fund manager and investment strategist who writes for New Deal 2.0.

The Maginot Line, named after French Minister of Defense André Maginot, was a line of defenses which France constructed along its borders with Germany and Italy after suffering appalling damage and casualties during World War I. The French thought they were now protected from a repeat, and believed the defenses impenetrable.

Chatting to a number of German participants at last week’s Institute for New Economic Thinking (INET) conference, we couldn’t help getting a sense of the economic parallel in regard to Germany’s deep resistance to greater fiscal expansion as means of dealing with the problem of the “PIIGS“.

The Problem

Germany’s fiscal deficit fetishism is largely a product of that country’s own hyperinflation experience during the Weimar Republic. As deeply ingrained as that trauma remains in the German psyche, it is now taking on an almost hysterically irrational quality as evidenced by the latest “rescue package” for Greece. Its EMU “partners”, led by Greece and soon to be followed by Portugal, Spain, Ireland and Italy, are increasingly being forced to embrace Germanic-style hair shirt economics, because the obvious fiscal response is constrained via self-imposed rules inherent in the rules governing the European Monetary Union. These rules are regarded, almost to a man, as “sound economics” by Germany’s policy makers and the vast majority of its citizens (if one is to measure this via the national polls, which continue to indicate visceral hostility to “bailouts” for “lazy Greek scroungers and tax dodgers”). We wonder if they’ll still be feeling that way if the contagion extends to Berlin and Paris.

Historians all know how effective the Maginot Line ultimately proved for the French in terms of defending a German occupation of their country during the Second World War: the Germans were able to avoid a direct assault on the Maginot Line by violating the neutrality of Belgium, Luxemburg and the Netherlands, whilst the Luftwaffe simply flew over it.

Likewise, we think Germany’s “Weimar 2.0″ phobia is based on similarly flawed “Maginot Line” thinking, thereby generating a correspondingly ineffectual response to the EMU crisis. It’s becoming a story of intellectual hubris, defending “good economics”, Germanic-style, over common sense.
Judging from the market’s reaction to the 45m euro rescue package of Greece, it appears that the EMU and, by extension, the euro, have dodged a bullet for now. But the PIIGS problems remain. The terms and conditions include IMF ‘austerity’ measures, which will act to slow the economy of Greece and the entire EU — which is already dangerously weak to the point of promoting higher budget deficits through low tax revenues and high transfer payments. All of which serves to further weaken the creditworthiness of all the member nations.

It also increases the euro debts of the other contributing nations because they are being forced to contribute to this funding package for Greece. The implication of the same type of ‘rescue’ for the larger euro nations is not pretty. Expect much higher levels of stress for the remaining euro member nations presumed to be ’strong’ as the same kind of forced austerity appears in store for other “violators” of the Maastricht Convergence Criteria. Think about Spain, which now has 20% unemployment, or Ireland, which has a classic Iceland problem, given that the liabilities of its banking system vastly exceed the country’s overall GDP.

The underlying assumption of the rescue package is not sound. The stronger nations still think by offering a big enough “guarantee” the markets will take up the slack and finance Greece for them. But the markets now want to see the cash and, more importantly, they want a firm demonstration that the funding guarantees provided will help to sustain the ability of nations like Greece to service its debt without turning the nation into an industrial wasteland. The markets no longer believe in a “contingent liability” model, which is something akin to indicating that you have a rich relative who can help you out if needed. The EMU’s “rich relative” has already indicated that this is verboten, but it has denied Greece and the other PIIGS nations the means to grow adequately to service debt going forward.

The Prognosis

The euro should therefore fundamentally remain on the weak side after a temporary bout of short-covering, as the high levels of euro national government deficits are adding the non government sectors’ holding of euro denominated financial assets. And the austerity measures are likely to increase euro government deficits and thereby exacerbates potential national insolvency problems amongst the euro zone nations.

The common Germanic retort to this line of thinking is that a default in, say, California, would no more threaten the viability of the dollar than a Greek default would endanger the euro. Perhaps, although the Lehman experience should have taught us all that the negative externalities of such an event can seldom be determined in advance, given the opacity of today’s funding mechanisms. Additionally, the United States of America is an existing NATIONAL fiscal authority which can respond to the growing problem of state insolvency via dollar creation and corresponding revenue sharing with the states. No such comparable fiscal entity yet exists in the euro zone.

Although we have hitherto characterized Greece as the EMU’s “Lehman” problem, the rescue package announced on Monday makes us that think that the better parallel for Greece might well be Bear Stearns. Bear’s “rescue” in March 2008, initially looked like it enabled the global financial markets to avert a growing crisis in the asset backed securities markets. What it did in reality was kick the can down the road, as the underlying structural problems which created the crisis in the first place remained unresolved. The credit crisis that began in August 2007 involved failure of both the liquidity and the solvency risk systems. The consequent freeze-up arose because the subsequent bankruptcy of Lehman and collapse of AIG destroyed the markets’ expectations (built up by years of bailouts) of their being an ultimate market maker, which would always be able to deal in these securitized instruments.

By the same token, the creation of a common currency via monetary union has created market expectations that one country’s paper is as good as another, which explains why, for so many years, “fiscally profligate” nations such as Italy were able to borrow at Germanic level interest rates. But the decision a few months ago by the European Central Bank to block a basic “repo” function — namely, the purchases of a number of European commercial banks of Greek government debt and exchanging this debt via repos with the ECB for German and French government paper is what appears to have initially triggered the Greek crisis and raised issues of Athens’s potential insolvency.

From what we understand, the cessation of this repo function was largely done at the behest of the Germans, who saw this activity as a kind of “back door monetization” which would lead inevitably to inflation. This, despite the fact that the entire euro zone is characterized by huge unemployment , high output gaps, and collapsing domestic consumption. All of this at the core is being driven by Germany’s pathological fear of inflation which they see as the inevitable consequence of excessive government budget deficits.

But Germany’s irrational fears of inflation are storing up the conditions for a far greater crisis down the line. The euro contagion could now very well spread to Italy Portugal Spain and Ireland, all of which (under the terms of this package) have to lend to Greece, at around 5%. So what happens to their funding costs? They go north of 5% as a next step. In the US, when good banks took over bad banks, they became bad banks themselves (see Bank of America and Countrywide). And what about the seniority structure of these loans? Do they subordinate Greek Government Bond holders? One assumes yes, but this is not made clear by the rescue package. In short, this appears to be a cobbled together solution, and it won’t work for a Spain or an Italy. There’s no clarity even on how it gets ratified. The EU says it’s done, but Germany and Holland say they need Parliamentary approval (which can easily be delayed).

Let’s be clear: in the aftermath of World War I, German production capacity was either significantly damaged, or redirected toward output required by the military. The Allied blockade further restricted imports well into 1919, and in 1923, French and Belgian troops occupied the Ruhr valley which held a good deal of Germany’s manufacturing base. All of these measures significantly restricted Germany’s capacity to produce, fueling the distributional conflict that fed the hyperinflation.

There is nothing like that today in Germany, yet “Weimar 2.0″ thinking predominates in much the same way that “Maginot Line” thinking dominated French thinking in its defense establishment. The obsession with a”defense” against the “external” threat of inflation, is blinding Germany. It doesn’t see the risk that the collapse of aggregate demand within the European Monetary Union will ultimately lead to a collapse in Germany’s export sector (a large chunk of which is the product of intra-European trade), and the corresponding extension of the “PIIGS” disease of slow growth and high unemployment to the heartland of the euro zone. We know how it ended for France, once the Maginot Line proved to be a defense more apparent than real.

We hope that Germany’s similarly “successful” defense of inflation does not lead to a comparably disastrous result for Europe today.

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  1. PJM

    This is the desire or a sure bet?

    “denced by the latest “rescue package” for Greece. Its EMU “partners”, led by Greece and soon to be followed by Portugal, Spain, Ireland and Italy, are increasingly being forced to embrace Germanic-style hair shirt economics, because the obvious fiscal response is constrained via self-imposed rules inherent in the rules governing the European Monetary Union.”

    Lets see if your wishfull thinking works.

    I think that too much interior desire isnt good to be a good analyst. ;)

    1. Thomasina Jefferson

      Good point. A log of arguments I read, not only here but on many other forums, seem to express a desire to see the European experiment fail, mostly because its deemed Socialist.

      Personally, I think the EU is a Corporatist tool, so it is not in any danger of being dissolved.

      1. PJM

        Dear Thomasina Jefferson, you read a lot of arguments thats are only the secret desire of the €uro.

        Sometimes they blame euro because hasnt tools to help countries in troubles, sometimas you read that if you help one cowntry it will spread to others, sometimes you read that the €uro is to strong for some economies and they need more strong internal demand, bla, bla, bla. If you cross the arguments, mostly are contradictory between them.

        But the most discussions are steril. Onlye wish to see the euro fail. This is true.

        What the euro is giving is one to every cowntry: dont expect use monetary policies to do the job that must to be done by the governments. This warning is good for everybody especially for the Clubmed. They must be more discipined and more proactive seeking improve their economies with economic reforms. Ill vive a example: do know people that in Greece exists a lot of regulations concerning jobs and prices. As on economist told to a portuguese newspaper: Greece still looks a sovietic cowntry, with a lot of regulations against free markets. he told to portuguese newspaper: greece is the last sovietic cowntry €urope. Thats why Greece has an inflation about 2,9% even during the economic turmoil.

        Thats why I read these kind of articles, mixing hiperinflation with militar historical facts and I smile. They are a millions away from the reality of Europe and €urozone. Sorry, but these kind of analisys is rubish and in Europe we still believe that americans out side their borders cant have a good picture about the others economies and societies.

        Whats is true is this: Greece has gained more time to fix their imbalances. And the investors are retunring to their debt:

        Greeks’ first debt sale since bail-out draws strong demand
        Greece drew strong demand for its debt on Tuesday, signalling renewed appetite at the its first sale since the European Union and the IMF pledged a €45bn bail-out.

        The country’s debt agency sold €780m of 26-week bills with a yield of 4.55pc. Investors bid for 7.67 times the amount the indebted country was aiming to sell of the bills. In addition, it sold €780m of one-year bills, yielding 4.85pc, with investors putting in bids for 6.54 times the amount of debt on offer.

        The Greek government, led by Prime Minister George Papandreou, has to raise €11.6bn by the end of May to cover debt that matures, and also needs to find another €20bn by the end of the year. Until yesterday’s bail-out, investors had been demanding ever greater returns to own Greek debt, making it more costly for the financially-strapped government to borrow.

        “The auction went well and that’s a reflection of the fact that the rescue package restored investor confidence,” David Keeble, head of fixed-income strategy at Credit Agricole, told Bloomberg. “Greece remains an indebted country, and it needs time to put its house in order. The market wasn’t providing that. Now it has time and breathing space.” ”


        Maybe the Greece authorities have been right concerning the market. They demanded more yields than they deserve. Of course Greece authorities has been atrocious in giving confidence to external investors. But maybe they are right to suspect that exists a complot against their debt for some international banks.

        My opinions is: the €uro is a great tool for everybody. But only if bond markets start working normally and assessing better the risks of every issuer. Because, until the credit crunch, existed to much complacenbcy. I remember portuguese bonds with just a few basis-points of spread to german bunds. 27 points is very low for Portugal, concerning his economy, public finances and trade deficit. Of course is good for portuguese government but isnt good for our economy because doesnt give a real sense about the real cost of money and capital.

        Tomorrow every government must have more fiscal discipline. The market must be more eficient assessing risks and their yields. That better market must put pressure on governements. They cant ilude their citizens, governments must to have a better economic policies. In the long term this is the best way to have a strong economy and better standard of living. Of course that fiscal discipline and more free market oriented economic policies isnt easy and doesnt help to win elections buying votes with others money. Governments must to learn win elections telling the truth to their citizens and not making promises to win elections with money from taxe payers. With the €uro european governments must to be more eficient, more disciplined and more frugal.

        1. PJM

          I some ways Portugals economy is a leading indicator for anothers countries. If someone wnats to know his future maybe should study the portuguese economy during last twenty years.

          During the transition phase to introduction of the €uro in my cowntry the insterest rates fell too fast. That gave a strong internal demand to portuguese economy that was bad. I remember during that phase, the real estate and construction phase, about 1998, 12% of jobs in Portugal were in construction sector.

          later the portuguese economy hasnt legs to sustain too much strong demand. Productivity didnt improve enouph to provide the strong internal demand. The strong internal demand was provided by imports so the trade deficit exploded. The first signal that imbalances inside Portugal will cost a lot to fix. But after the bust of that real estate bubble, 2000/3, the economy couldnt provide jobs to sustain the level of debt. And the revenues from the Estate.

          What is happening today across the Europe and USA is a perfect example of moral hazard by the governments and public authorities. Like it was in Portugal. In portugal, the public revenues were very conected with taxes collected to real estate sector. These high revenues gave a false ilusion about the strength of fiscal situation. When the bust happened in the real estate sector the State revenues fell a lot and the economy couldnt provide revenues that were provided by real estate activities.

          In Portugal real estate was very strong because several causes. The first was a proactive action for speculation in real estate by the politicans that believed that could provide revenues for their spending. Secondly, local revenues were very dependnt of real estate. Thirdly the corruption was high with real estate devloppers pusshing prices above the common sense.

          In 2003 the government changed the tax laws, cuted fiscal stimulus to real estate and improved the fight against corruption in the real estate sector. The tax law was changed puting pressure on real estate sector and stoping the small bubble in the sector. So, in the last 10 years, real estate busted except in Algarve. Algarve is in the south of Portugal and is the summer resort for international jetset and european rich. Algarve had some circunstances that helped to have a bubble during the bust in teh rest of Portugal. These circunstances arent very clear but I believe two main reasons were strong. First, in Algarve the local population treats the rich and international stars (hollywood stars, international sport stars, etc.) like normal human beens. And local population doesnt like paparazzies and some tabloide press. That helps Algarve giving to some rich the discrecy and private that they search.

          With the bust of real estate and the fall in public revenues by this sector, public finances were very hard to control. Spending wanst cuted as should because some opinions believe it will be harder to State colect revenues if the internal demand is crushed. The low interest rates didnt helped too.

          So what happened in Portugal is happening now in some european countries and USA. I can give a good example. In Danmark they had strong fiscal policies. They had public surplus duting their real estate boom. In 2005 and 2006, they had a surplus about 5,2% of GNP. In 2007 they had a surplus of 4,5% of their GNP. But finally when the real estate bubble busted in 2008, they start having fiscald eficits because the State revenues fell when the real estate cant ptovide more jobs and revenues. In 2009, the fiscal deficit was 2,7% of their GNP and in 2010 they could have a deficit of 3,4%. The danish public debt was about 27% of their GNP and last year rose to 42%. So Danmark is having troubles because their real estate bubble. Like Portugal had during 2000 until 2006. Others countries will suffer the same fiscal imbalances because public revenues were very dependent of real estate bubble.

          What these countries need isnt more strong demand. Is cuting their imbalances and change their laws to stop real estate speculation and public revenues from real estate. the public revenues must be changed focusing less in speculation in the real estate.

          Germany dindt have the same real estate bubble as others. In some way they had strong problems with unemplyment when east europeans countries joined to EU. These countries with their low wages were very hard to Germany. The unemployment was high and internal demand was less strong than in others european countries. So Germany had a strong external demand that pushed for their exports and trade balance. sadness Portugal productivity wasnt good enpuph to ride the external demand as german.

          Today european countries must cut their imbalances, their debt and fiscal revenues from real estate sector. They must improve their economy with economic reforms to more open and free market.

          Of course some opinions claims for inflation. Is the case of USA. There are two ways to improve fiscal imbalances. Fiscal policies, like spending less and taxe more. Or reflate the economy. USA has choosed reflate economy puting money in the system to avoid the colapse of public finances. USA choosed theyr way. It will be suceed? I dont think so. Inflation will crush the standard of life of middle class. And will crush the dollar.

          Germany has another aproach. They must fight imbalances crushing public spending and mantain the purchase power of their middle class. That is the German approach that we europeans need to do. All. And is the €uro the tool to improve ours economies with more internal competiion, more free markets, more eficiency and better public policies.

          Of course if the €uro survives the european competitors will have afraid of Europe. In stead to having one germany it will have several germanies, with strong exports and eficiency. in stead to having one strong competitor will have dozens of them.

          Thats why I understand some political agenda in the anglosaxon world. Theyre afraid. And they must. If Europe starts having a strong economy like in some ways Germany… Bye, bye, dollar and free riding others money, with a dollar as world reserve currency.

        2. jdmckay

          Sometimes they blame euro because hasnt tools to help countries in troubles, sometimas you read that if you help one cowntry it will spread to others, sometimes you read that the €uro is to strong for some economies and they need more strong internal demand, bla, bla, bla.

          bla bla bla indeed… I think you got it about right.

          If you cross the arguments, mostly are contradictory between them.


          But the most discussions are steril. Onlye wish to see the euro fail. This is true.

          And agree w/you again.

        3. Arciero

          “Sorry, but these kind of analisys is rubish and in Europe we still believe that americans out side their borders cant have a good picture about the others economies and societies.”

          Yet Europeans feel free to come and post on this blog their opinions of Americans and other nationalities and why they are delusionally misguided.

          1. PJM

            Dear Arciero, youre absolutely right aboyt this:

            “Yet Europeans feel free to come and post on this blog their opinions of Americans and other nationalities and why they are delusionally misguided.”

            And you want to know why?

            is this the same historical american behaviour trying to teach the ignorant foreigner how to roul their own house. Do you see, I remember the same american behaviour about japanese problems, about twenty years ago. The americans made a lot of advice to japanese, and what was the result? Oh Yeah! Your shouldnt help your banking system writedown their bad balance sheets, they told to japanese. They didnt. They use keynesian way. It puted an end in japanese crisis? Not so much.

            Now the americans and british wnats to teach europeans and greeks. They have a lot of opinions about what we should to do. However, inside home, theyre in worst position. Who is more broke? USA and UK or Europe?

            Perhaps these opinion makers should make their homework inside home before pretending to be more smart for others. Maybe they should first show how to do and fix their own problems before pretending to give advice to others and be more smart than others.

            The problem is this. Most opinion makers have opinions about others problems but they dont study serious the others economic problems and they give advice. As we said in Portugal, dont give advice , if theyre good opinions sell it.

            Why I dont see more profound discussons about american and british economic problems? Why I dont see discussions about the dollar overvaluation? Or the british pound overvaluation? Why mr. Soros gave a warning to british and everybody hided and still talk about Greece? Of course, is a way to deny inside home pretending be more smart than others. Is the same thing, when some americans and british say that Greeke live above their means and must to pay for their debt. But, Hey! americans and british are living behind their means too. Oh yeah! The greekes are lazy, right? Are incult and barnarians that need the inteligent advice from americans and british. Right?

            Do you see, thats it. Before we pretend to be more samrt than others we should use that good advice inside home. Later we can pretend to tecah others with our example. But when I saw american and british economy in worst shape than others and they pretend do give economic lessons…

            To finish, for some americans, I will say: is it normal an audience laughin when an american member of Presidency Admnistration says that USA is commited with a strong dollar? As it happened in China, some days ago, when mr. Geithner was humiliated by a chinese audience?

            Maybe its time for some to be more humble in their advice and opinions.

          2. PJM

            Maybe the britsh and americans should listen more in stead talking. Maybe they need some lessons from out side their borders.

            I read this and I think. Could we do the same in Portugal? To learn with others errors?

            But I think too. Could americans and british acept others lessons? No, they cant. They pretend to live in one Empire. And empires dont acept lessons from the “barbarians”. ;)

            [b]Iceland has its Truth Report into the financial crisis – now what about one for the UK? [/b]


            Iceland is making their internal reflexion. The same Iceland who was the model for some british, some years ago. That Iceland who was alone, with his own currency and denied to join the evil €uro. That Iceland was the example apointed by a lot of british opinion makers.

            I sohould notice that Iceland is trying to join the €uro now. Maybe they learned a lesson from their “friends” british, who used laws sagainst the terrorism to blow up iceland financial system. I remember that. Who is forgeting that?

            Some times is better dont listening some advices.

  2. dsawy

    I find several flaws in this analysis.

    The first is a comparison of monetary or fiscal policy to the Maginot Line. Money transcends borders instantly today – the Maginot Line failed for a lack of foresight that the French needed to close their entire eastern border, including the border with Belgium. But let’s not go off on a tangent about military history just now.

    You’re assuming that any talk of inflation is credible. I don’t. I don’t see evidence of inflation, and I don’t see evidence of inflation as a result of ANYONE throwing money down banking rat-holes, anywhere in the world. Japan has been throwing money down rat-holes for 10+ years. Where’s the inflation? We’ve been throwing billions down banking rat-holes for going on two years now (going back to the Fannie/Freddie take-under). No inflation.

    So when someone says “Oh, we can’t fling all this cash into the most recent rat-hole, it might cause inflation!” I’m skeptical that this is truly their motivation.

    Let’s instead just ask ourselves what the Germans stand to lose or gain from two scenarios:

    1. They don’t bail out Greece and all of the spendthrift cohorts in the PIIGS group. The Euro declines in value vs. the $US. If the PIIGS bums soak up liquidity that the Germans could have used to bail out their own over-levered banks, the German economy will suffer at some point from a reduction in lending. Presumably, the other countries (and some banks who lent to the southern-tier spendthrifts) might also be hurt, but the German government could prop up their own banking exposure to Greece far easier without having to prop up Greece itself.

    2. The Germans adopt your strategy. They backstop Greece – and then Italy, Spain, etc. At some point, the German government has to say “Nichts mehr!” and stop – and someone howls about the unjust treatment they receive, whereas the Greeks were bailed out or backstopped, etc.

    The Euro remains firmer in this scenario than in (1) above.

    The German government’s ability to backstop their own banks is reduced, but perhaps the need to do so is also reduced.

    Which scenario benefits the Germans better?

    I believe that (1) does. Getting the Euro to come down relative to the $US would help German exports, and Germany’s economy is very much dependent upon exports. They want the Euro to come down, their exporters want the Euro to come down, and have said as much before the Greek situation started to snowball. I believe that any mention of inflation as a reason to not prop up Greece is a smokescreen.

    1. Jimbo

      Great analysis.

      The author of the piece describes, but does prescribe. Furthermore, even with the “backstop” announced a couple of days ago, how does he believe that Greece, with the Euro, can be competitive. Let’s say you’re in London, and want to charter a sailboat for a couple of weeks. Do you fly to Greece or Turkey?

      1. a

        This figure – or order thereof – is quoted but it is nonsense. French/German bank owns Greek bank with X billion in assets but only Y million in equity. The 110 billion figure comes supposing that the French/German bank is at risk on the X billion and not the Y million. It’s Greek depositors who are most at risk, not the foreign banks.

    1. Thomasina Jefferson

      On refreshing my history skills it seem that there was nothing wrong with the Maginot Line or its concept. It actually did its job very well.
      The issue was that Germany, not being dumb, circumvented the Line because it only reached from the French-Swiss to the French-Belgian border.
      Had it been extended, Hitler’s Wehrmacht might have bleed to death in the Maginot Line.

      The French approach is the equivalent of boltening-up and securing your front door, but leaving the back door wide open.

      1. kevin de bruxelles

        The danger created by the Maginot Line was really that it reflected and cemented an exaggerated defensive strategic paradigm. Humans and the French General Staff in particular have a tendency to swing from one ideological extreme to another when normally in human affairs you need to intelligently either mix both extremes to get to an optimal solution, or apply the one extreme or the other out of strategic necessity, not dogmatically. We see this in the current debates between inflationistas and deflationistas, as well as politically between socialists and capitalists. One side proposes a thesis, the other responds with the antithesis while the answer normally lies somewhere in the synthesis.

        So the Maginot Line has to be seen in its proper context of a battle between the two extremes of a military cult of the offensive vs. the defensive. With this in mind it becomes clear that the defensive Maginot mode of thought was an overreaction to the French Army’s WW1 cult of the offensive, where squad after squad of young recruits were thrown at entrenched German machine gun positions. The favourite slogan of the offensive cultists was “il faut de l’audace encore de l’audace toujours de l’audace.”

        But instead of just letting the French commit national suicide at the alter of the offensive, the Germans instead decided to bleed themselves white (instead of the French) at the Battle of Verdun, after which the French defensivistas, led by General Pétain, slowly gained power so that by the time of the outbreak of WW2 the Maginot way of thinking dominated mainstream French military thought.

        In hindsight, a strong and timely French offensive in 1937 or 1938 would have been a far better strategic choice than sitting in the Maginot Line waiting for an eventual German attack. But the offensive was verboten due to the abuses of it in the past.

        But this doesn’t mean that if the French had completely encircled themselves in an imaginary Maginot Circle that the Germans would then have foolishly attacked it frontally. If George Soros had held a conference back in 1938 for new military thinking then the headline speaker would have been the German general Hans Gurderian, followed by Charles de Gaulle, and the Brits Basil Liddell-Hart and JFC Fuller. Since the French wouldn’t listen to de Gaulle, the Germans would have still found any number of ways to get around an imaginary Maginot Circle and penetrate into and conquer France given that they had a much better understanding of the new mechanized way of warfare and had developed the strategic doctrine of Blitzkrieg to go with it.

        To understand the interplay of the offensive and defensive we just have to look how the Germans, instead of dogmatically picking one over the other, played each theoretical position as appropriate to gain territory. The key was when facing a two front world to be on the strategic offensive on only one front at a time. So to start the land grab they had the Munich Agreements which, from the German point of view, put the western front on the defensive while in the east they went on the offensive to grab Czechoslovakia and then Poland. But this riled up the English and the French so Hitler made his non-aggression act with Stalin, thus placing his eastern front on the defensive and transferred all his troops to the west to take France as well as most of Western Europe out of the war. With his western front now safely on the defensive, Hitler could launch Operation Barbarossa, the invasion of the Soviet Union, which to me is the more appropriate WW2 analogy to describe the current global economic situation.

        First let me just set up a few very simple assumptions. There is obviously too much debt in the world right now. And the reason there is too much debt is that the interest rates being charged for this debt have been way too low for way too long to take into account the risk involved. The key quote from Rob’s piece for me is the following:

        By the same token, the creation of a common currency via monetary union has created market expectations that one country’s paper is as good as another, which explains why, for so many years, “fiscally profligate” nations such as Italy were able to borrow at Germanic level interest rates.

        But we all know that it is beyond Germany and France’s ability to bail the entire Eurozone out. What has really happened is that far too many loans were made at interest rates that are far too low because the risk was not properly calculated. Perhaps a culture of Romper Room Rules of Risk-free investment has taken over in some corners due to repeated government bail-outs over the years.

        So to set the stage for my Operation Barbarossa analogy, we have to see the people and the leaders of the western world as the armies of the Axis powers. The operation was launched in 1985 or so but the goal is not territory but instead to go into debt. “Opposing” this invasion is the Red Army of global wealth, i.e., hedge funds, investment banks, and other wealthy creditors. But just like the Soviets in 1941 they are not really opposing this invasion, far from it, they are in fact encouraging it, by retreating and retreating, allowing the western nations and people to gain more and more “red” territory, in other words: debt.

        But as always with these types of invasions it is all easy going in the beginning, the supply lines are short, and the liberated peasants are all too eager to join sides in conquering even more debt. But as the invasion continues, and towns fall and rivers are crossed, some of those among the advancing army of debtors start to remember their Van Clausewitz and recall his theory of a culminating point. This is the point at which an advancing army must slow down and eventually stop its charge since it can know longer maintain supply lines (repay its debt in this case) and so some commentators start to comment on the folly of continuing forward. It is better to back off now while we still can they plead to deaf ears but because the going had been so easy for so long now the majority can not be convinced to stop the debt offensive.

        The Red Army of global wealth has recently awakened from its slumber, but the world’s debtors continue to march towards their Stalingrad. Just like in 1941, the Lend Lease program initiated by the United States (this time more of a TARP called Grant / Give) has revived the Red Army and they are getting ready to go on the offensive, to launch their own version of the very appropriately named Operation Uranus. Only this time instead of the German Sixth Army in the cross hairs we have Greece leading the charge. Many economists and leading politicians are imploring Greece to never retreat, to keep marching, that through the magic of growth the Greeks will be victorious and conquer Stalingrad. EU leaders are cheered on and encouraged to never retreat, and these leaders themselves respond by make vague promises that more supplies are on the way; maybe even “air bridges” will be created if necessary. Greece is implored not to give up an inch of the red territory of debt it has so far conquered.

        But the answer is so obvious that Greece and many others need to RETREAT immediately from their ill-gained red territory before the Red Army of wealth surrounds and annihilates them. In other words: defaulting. Yes it is true that retreating is distasteful but only the most ideological and reckless of commanders would adopt an approach of never retreating. And yes, an uncontrolled disorderly retreat is known as a rout and is even more dangerous than holding your ground. But the current situation is untenable, the “victories” over Red territory were illusionary, it was just a trap, wealth using its strategic debt to enslave the masses. So this is why Greece and many others need to strategically default in an orderly manner while that option is still on the table. The debt war is well past being winnable; so if they continue to march towards Stalingrad they will only meet their eventual annihilation.

        But it is not as a result of dogmatism that I am calling for retreat. Debt, per se, is not evil, only when it is severely underpriced, like it has been for so long, can it result in the type of disaster that is unfolding before our eyes.

        1. Thomasina Jefferson

          Very nice post, however, the analogies just don’t work.

          Defaulting doesn’t make the debt go away, it will just be renegoatiated but still need to be paid.
          I am afraid, there is no way out of this debt trap, other than to renege on it. The adverse effect on society would just be to great to hold on to a promise that was given to gangster intent on defrauding the state. Social cohesion might suffer, etc.
          Thus the Sovoreign just doesn’t pay. Period.

          1. Kevin de Bruxelles

            Thus the Sovoreign just doesn’t pay. Period

            To me that is within the range of what sovereign default means. A default can range from being as little as just resetting the interest rates or payment schedule to as much as not ever paying back part of or all of the loan (Argentina in 2002).

            We have to recognize that some of those holding Greek debt could be pension funds and/or people’s retirement savings. So there is an interest to minimize the amount defaulted on since there is real pain associated with this move. But I have no idea where the line needs to be drawn on how much they need to stop paying on; maybe it is all, maybe it is just half?

        2. Greg

          Yes there is too much debt in the world. Personal and corporate debt. NOT govt debt (unless denominated in a currency they cant create)

          More to the point there is too little income to the people who need to service that debt and if anyone really thinks the answer to too little income is a decrease in spending I suggest you go and rethink where YOUR income comes from. It comes from someone elses spending.

          This is why these austerity programs will fail. Not that Marshall hopes they will fail like the first commenter suggested but that any knowledge of the circuitist nature of our economies guarantees they will fail. You cannot cut spending without resulting in a loss of incomes and a worsening of a debt situation.

          Greeces debt to GDP ratio will skyrocket(under the proposed plans) not because thier debt is getting higher but because their GDP is going lower.

          It will be a race to the bottom where everyone loses.

          1. Adam

            I totally agree, INCOME is the number one issue here. There is too much debt to income right now on all levels of society nearly everywhere in the world. Austerity on a global scale will only quicken the pace of debt deflation and it will be a race to the bottom. While debt is the problem, income is the solution.

  3. Anonymouse

    Honestly, I think the Germans will get their “leave us alone” moment like the US did in the 1920s, they seem to want it badly. The institutional structure of the eurozone is too weak to support itself.

  4. Vinny

    Great article.

    These are amazing times we live in. On can’t help but wonder what type of leader will the Germans elect after Angela Merkle…


  5. john

    Quite true Vinny, if our FUBAR condition advances much further we may have to take PRACTICAL action! The cranial rectal inversion that calls itself economics is about to excrete itself.

  6. michael

    One things always is given little consideration:
    The German chancellor has a lot less leverage to bend the rules to his/her wishes, than heads of government in most other countries.
    When the Bundesverfassungsgericht (German constitutional court) repeals -if necessary by restraining order- a Greek bailout, then all talk was for nought.

    So far it is not even discussed to deploy the “exceptional occurrences beyond its control” clause in article 103a. Only with it plus a credible explanation for it’s use do I see the Bundesverfassungsgericht giving it a pass.

    1. charles

      Michael outlines an indeed little-known fact. I would like
      to add that a group of leading economists theatened before the
      ‘Brussels agreement II’to start a law procedure in front of the German Constitutional Court on the claims that, since Germany ‘explicitly financially helped’ a fellowmember of the
      EMU and, thus, should be expelled from Europe for ‘breaking’the rules laid out in both the Maastricht and Lisbon treaties.
      Its leader, Mr Joachim Starbatty, was given an Op-Ed in the NYT, “Eurotrashed”, detailing the problem from their point

  7. AK

    I see situation differently. Greece can be partially bailout for political reasons only. Nobody else will be bailout. And euro will stay strong.

    Why do I think so? My prediction is based on the interests of world elite. Where will it keep its money? The dollar is weak and it will become only weaker. It’s because American system is more oriented towards middle class interests. And European matters are more influenced by old rich families.

    So, I believe in strong euro even if EMU has to loose some of its members as Greece, Portugal etc.

  8. i on the ball patriot

    “Shot Through The Wallet”
    Shot through the wallet,
    And your to blame,
    You give science a bad name.
    I play my part, and you play your game
    You give science a bad name

    You give science…
    You give science… bad name
    You give science…
    You give science… bad name
    You give science…
    You give science… bad name

    Deception is the strongest political force on the planet.

  9. dave

    Sorry, you can’t fool those Germans twice. Glad to see not everyone believes in the bailouts are free nonsense.

    Our human and physical capital base is damaged by years of neglect. We wasted capital on two wars. If you can’t see why consumption has to be lower today then the bubble there is no hope for you. Germans had to pay for the war with a lower standard of living afterward. They tried to print their way out of it and got what they deserved. We have to pay for our past mistakes with a lower standard of living until we rebuild capital. If we try to print money for capital that isn’t there we will face the same fate as the Germans did in Weimar.

  10. eric anderson

    I love how the author characterizes those who believe in fiscal restraint as fetishists and obsessives. Is this any way to win an argument? Cast the other side as suffering from a neurosis? or some kind of deviant compulsion?

    If that is madness, count me in. I’d rather be crazy than be impoverished through the devaluation of my savings.

      1. Chicken Little

        And thankfully everyone who decries ad hominem attacks never makes use of them. Labels? With negative connotations? Used to make my ideas seem better? Me? Never!!!

        Ah, if only people could turn their withering criticism on their own ideas…

        Christians decrying faith-based economics!
        People justifying inaction based on the near total ignorance of scientists when we all have near total ignorance about nearly everything!

        The intellectual hypocrisy runs rampant. Hilarious as always. Know this…at least someone is paying attention!

        1. eric anderson

          “People justifying inaction based on the near total ignorance of scientists when we all have near total ignorance about nearly everything!”

          Your implication is, we don’t know what we’re doing, but we have to do *something*! If your starting point is an admission of ignorance, that does not favor interventionism over prudent inaction.

          Hypocrisy? OK, maybe I do use colorful descriptions of people or classes of people I disagree with. I generally try to present just cause. In this case, I felt Auerbach didn’t offer any justification. He simply let loose with the name-calling.

          Why is German fear of inflation irrational? Given their history, it seems highly rational. Not only irrational, but he calls Germans “hysterically irrational.” To expect other countries to live up to agreements they’ve signed, and flouted, is now hysterically irrational in Auerbach’s world? It’s not hysterical. It’s simply the expectation of a business partner acting honorably, in line with his legal agreed-upon obligations.

          1. Samuel Morales Jr.

            Auerbach is a hardcore Keynesian. He hates savings. Savings are evil to them. I live in Texas, and Texas has a surplus, and jobs on top of that. Go figure. I think Greece, and the EuroZone are blown over proportion. Let them default. Long term it’s beneficial.

          2. Greg

            Germanys fear of hyperinflation IS irrational because they ascribe the wrong reasons to it. My fear of sharks isnt irrational but it would be irrational to fear sharks when going to the local park to throw frisbee.

            Germany thinks their way of working and saving is the only way. They are a net exporter and everyone in their country accepts that, but it is not a model that EVERYONE can follow. How can everyone be a net exporter and consume less than they produce? Do we all send our surpluses to Mars?

            Germany has fingered the wrong reasons for hyperinflation. The hyperinflation was not CAUSED by the “printing of money” the printing of money was a response to the real price shocks that resulted from the actions described in Marshalls article, which really amounted to aggression against Germany.

            Calling them deficit fetishists is not really an ad hominem attack because it accurately describes the fact that these people are focusing solely on ONE metric and elevating it to a status which is not justifiable. Calling a catholic priest who has molested little boys a pervert is not ad hominem it is accurate.

            To hear these fetishists talk if we simply get our deficits under control all will be well. That is complete hogwash. Defending the “value” of a currency in todays floating exchange rate environment also qualifies as a fetishist response that is based in faulty metric watching.

        2. Dan Duncan

          “Ah, if only people could turn their withering criticism on their own ideas…”

          It’s a simple choice, really:

          Suffer from an abundance of self doubt, and you make life miserable for yourself.


          Enjoy an immunity from self-doubt…and you make life miserable for everyone else.

          Trying to find some middle ground? Please. That’s just revealing an ignorance about addiction.
          Taste a little freedom from self-doubt and Experience The Confidence! Before you know it, you’re on a Dogmatic Dopamine Bender.

          Soon enough, however, Life hits you with an Intervention.

          You wake up at a Methadone clinic, channeling Nancy Kerrigan. “Why me!?! Why????”

          You find that the dopamine receptors are clogged with a gunk that induces the infinite regress of self-doubt.

          The simplest of decisions becomes an agonizing exercise:

          “Should I wash my car today?
          It could use a good cleaning.
          But who am I trying to impress? What’s wrong with a little dirt? Must I always try to be “perfect”? Why can’t I just relax?
          Fuck that, I’m not cleaning a thing.

          …But I’m so dirty. I’m scum. And I have no discipline. I can’t even muster enough resolve to wash the dirt off my car.”

          Eventually, you come to the conclusion that in order to “recover”, you need to “find yourself”. Like Quixote, you embark on this Never-Ending Quest…you join the Oprah Book Club, you dabble in Buddhism and experiment with the Kabbalah…

          And in the end, you find yourself in a Hawaiian shirt as a semi-practicing, Kabbalah-Buddhist-Parrot-Head on your way to a Jimmy Buffet concert with a 6-pack of non-alcoholic Near-Beer.

          So sad….

  11. Brain

    Don’t blame the Germans. They did not live above their means.
    The best possible solution is for Greece to leave the Euro and default. They will be back on their feet in no time and the euro will be stronger than ever.

    1. Thomasina Jefferson

      That’s true they didn’t live above their means. However, that was also made possible because others within the EU were footing the bill.
      In return Germany paid a significant amount of money to these countries via the EU transfer payments.
      However, it may still have gotten out more of it than it had to pay into it.

      So, yeah. It is good to save, but it’s not good if others have to pay the bills for that.

      1. Brain

        You are saying that others were paying the German’s bills as if they were sending them the money for nothing. How demagogic!
        The truth is that money was flowing to Germany in exchange for valuable products, while the Greeks were enjoying a free ride for which they are now refusing to pay the bill. And I am all for it. Their debts can’t be realistically paid back. Greece should default and leave the euro. That is the best solution for them. Argentina is the proof – shortly after defaulting and a year of though times, their economy started a rapid growth and if they had smarter government, they could be going on like this for a long time.

        1. Thomasina Jefferson

          Argentina is a bad example to follow. They just ordererd their Central Bank to shove over a few billions so that the government would not default on its external debt (again).

          As for Germany, it is really very simple. If others, like Greece for example, had not been going massively into debt, there would have been no German exports to anywhere.
          So the jobs in Germany are financed and dependant – you could almost say subsidised – by other people going into debt.

          I am not saying that German workers don’t work hard – they do. I am also not saying that they don’t produce quality products – they are.
          But this really has nothing to do with the basic mechanism outlined above.

          1. dave

            They could have provided the Germans with useful goods in trade instead of debt. Or the Germans could have consumed many of those export products themselves.

            Face it, Greece’s behavior is that of a deadbeat.

  12. Hugh

    The announced aid to Greece is a patch and it is not even clear that it will happen. Remember how many times we have heard that the Greek problem has been solved.

    I think the Weimar syndrome is too kind. We are looking at a worldwide dearth in leadership. Bubblenomics didn’t happen just here. The European elites let it happen there too, both our stuff and their own. It’s not Weimar. It’s dumbass stupidity.

    Look Europe’s elites are not going to save it for the same reason ours aren’t going to save us. They aren’t problem solvers. They are the problem.

    As for some who resist fiscal stimulus, the alternative is fullbore depression. We would all like to see our elites spend that money wisely. But that isn’t going to happen. Our elites’ fiscal policies have been geared for years to looting: tax cuts for the rich, imperial wars as foolish as they are endless, and more recently propping up the banksters. I mean they have been stealing you blind for years. Why all the angst now about stimulative fiscal policies? Besides, we already saw Obama’s, one shot, too small and weighed down with unproductive tax cuts. Now he and the elites he represents are pulling back from even that. So the spending you are so worried about isn’t going to happen anyway. Obama and company want that money to loot so they are not going to spend it on things of no immediate benefit to them, you know like jobs. Yes, this makes depression all but inevitable. But at least your sensibilities won’t be offended.

    In Europe you could argue that the problems are different but failed elites clinging to a sinking system? Is really that different?

    Lastly, has anyone heard more about the $421.8 billion spike last week in the Fed’s loan sheet? As long as we are talking about money slung around to no purpose. I first saw it reported at Denninger’s:

    1. Toby

      Excellent post Hugh! The first here that deals with the global nature of what is unravelling. This is a systemic crisis which can only be addressed with new thinking. All analyses and prescriptions based on the paradigm that generated this problem, which is both multi-faceted and yet simple at its core, will fail. I fear a generation has to die off and a collapse be endured before humanity, globally, can take a fresh look at: what money is, how it comes into being, which problems it solves and which it creates; that’s where the answers lie. And besides finance we have a looming energy crisis and an unstable ecosystem. In the face of that all we can do in the mainstream and even the eddyings around it, is bicker about inflation and profligacy, as if money and economics were the be all and end all of life on Earth.

      Jared Diamond’s musings on civilisational collapse are helpful here. Typically, those old strengths that lead historically to greatness eventually become hinderances and the chief source of societal sickness. Recognizing this pattern in the midst of crisis seems close to impossible. Evidence of such cultural stubbornness and inflexibility is writ large across this posting and the responses.

      1. Skippy

        Hugh and Toby…

        The one thing, that overwhelmingly drilled white hot, itself though my head, was success racially, culturally, or other wise, that was largely assisted by resource/climate advantage, is the Mother of all HEADJOBS[!] (See Younger Dryas impact event).

        *Thous* that think, that they go forward by the grace of their ideology, in a state of foreordained bliss, will meet the same fate as their ancestral counter parts aka collapse. Humans are just so bad at time frames *individual* with respect to the human timeline, why did they stop digging at 11,500 RCYBP, only to dig deeper many years after, at same sites…eh…whoops more stuff.

        Skippy…My boiled pot of JD’s inference…never fear though for stars can shine bright in an abyss…ye just have to create your own fission.

    2. i on the ball patriot

      It is an excellent post Hugh, and not the first time said here Toby …

      Some others have discussed the global nature of governments that are captured by the central banks of the ruling elite and thereby rendered non responsive to the will of their respective citizens.

      And some others have discussed the mechanics of how they, the elite and their central bankers and their hijacked governments, are going about it through debt trapping the entire planet through the use of captured media and an army of sell out, VOODOO SCIENCE ‘economists’ (read fucktards whose only claim to fame in life is to create ever more complex variations of debt traps — easy credit — that mask the deceptions, the over leveraged dangers, and the selective placement of that easy credit.

      But it needs to be said in many ways and many times to get the point across.

      Debt traps (easy credit) are intentionally and selectively deployed not to assist the debtor and extract a ‘reasonable’ profit, as in the old vanilla greed days, but now, in the newer more pernicious greed world that we live in, to control the debtor by pitting his less prudent consumption against
      his prudent neighbor’s consumption to create intentional rifts. Easy credit is being use to divide and conquer us all by putting us all in a well planned and executed perpetual conflict with each other. The comments in this post, and the post itself, are testimony to how well the scheme is working.

      The really superfluous VOODOO ‘economists’ (like those who create intercontinental ballistic missiles and nuclear weapons in the military industrial complex), work to justify the existence of their sorry ass, sell out, scum bag jobs, and so get involved in the factional wars justifying one weapons system versus another (vanilla greed vs pernicious greed).

      The reality is that it really is a Military Banking Complex, and it is in effect more powerful and more damaging to humanity than the Military Industrial Complex, because its weapons — easy credit and its many derivative variations — are being fired and exploded right now, in real time, all over the planet, and enslaving, exploiting, and eliminating, large portions of the world underclass and middle class.

      So keep up the good pressure;

      • Reveal the machinations of the wealthy ruling elite and how they have hijacked the mechanics of governments to create conditions favorable to them around the globe.

      • Put pressure on the VOODOO ‘economists’ who enable and mask their Military Banking Complex.

      • And incessantly point out and contrast the old ‘profit driven’ vanilla greed with the newer ‘control driven’ pernicious greed.

      Deception is the strongest political force on the planet.

      1. Toby

        Hi iotbp,

        I meant “here” in this thread, not at this site. But I agree, this argument needs to be had and had again, stated and restated until it sticks. Education, both of self and of others, is everything now, and that’s what this process is. Thank you for your part in that…

  13. Thomasina Jefferson

    Perhaps, although the Lehman experience should have taught us all that the negative externalities of such an event can seldom be determined in advance, given the opacity of today’s funding mechanisms.
    Lehman cannot be likened to Greece in any way. Greece is a state and is a sovoreign. Corporations like Lehman only exist and derive all their power from laws made by Sovoreigns.
    It only takes one vote to wipe them out, for example by reneging on the debts owed to them.

  14. Brick

    Europe is the home of politics and they have been scheming amongst themselves for so long that it is ingrained into the system. Take a look at any EU meeting or communication and you will see what I mean. Don’t be surpised when push comes to shove when that sneekiness and scheming gets directed outwards. What much of the EU wants is to reduce chinese imports and expand US exports. They see dollar pegs as cheating and are not above deliberately letting things slide abit to even out what they see as imbalances.
    Next we come to the question of whether Germany wants to see fiscal austerity in some of the free spending european economies. If it was just a question of slashing jobs and spending then you would have a good basis for the argument presented here. Unfortunately it is not just about this, it is also partly about entitlement, corruption and waste.Can you say to a german worker that his retirement age is nearer 70 whilst another european contemporary retirement age is nearer 50, that he should be paying for that difference. Can you say to the german worker that his taxes should go to finance people in another country where half the time they don’t bother to collect the taxes properly.Once there is credibility in resolving these inequalities and Greece along with other countries are moving headlong in that direction then you will see a lot more help flowing.Politics is a game europeans have been playing for a very long time and this brinkmanship in getting the best deal for your own people at the expense of other europeans is normal, and hopefully some lessons are being learnt.

  15. Bruce Krasting

    “And what about the seniority structure of these loans? Do they subordinate Greek Government Bond holders? One assumes yes, but this is not made clear by the rescue package.”

    This can’t be an issue, can it? You can’t just “subordinate” existing creditors to Greece. To do so would devalue all existing claims. The value of existing bonds would fall. This would set the benchmark for new issuance at much higher yields than exist today. It would mean that Greece is award of the Euro state forever.

    This would be the dumbest thing of all. I hope it happens. The failure that would follow would insure that there is no more Euro bailouts. Extend and pretend is dead. At least it should be.

    1. Skippy

      Bruce K said…Extend and pretend is dead. At least it should be…

      Addicts, self rationalize their behavior, ask Vinny…eh.

      Skippy…will we live to see the end game[?] quite possibly.

  16. A. Gouveia

    ” Its EMU “partners”, led by Greece and soon to be followed by Portugal, Spain, Ireland and Italy, are increasingly being forced to embrace Germanic-style hair shirt economics, because the obvious fiscal response is constrained via self-imposed rules inherent in the rules governing the European Monetary Union. These rules are regarded, almost to a man, as “sound economics” by Germany’s policy makers and the vast majority of its citizens (if one is to measure this via the national polls, which continue to indicate visceral hostility to “bailouts” for “lazy Greek scroungers and tax dodgers”). We wonder if they’ll still be feeling that way if the contagion extends to Berlin and Paris.”

    See, that’s a mistake right there. The Germans tried, but never managed to impose anything. It’s the market that’s refusing to lend to Greece, not Germany.
    SO the whole point kind of falls part, does it not?

    I guess a controlled default, inside the Euro Zone, would be the best bet.

    And getting their own currency and devaluate to regain competitiveness has never worked for Greece (or Portugal, for my personal experience, it was dirt poor before), why should it work now, if it allows them to keep avoiding reform in the short-term?

  17. Bill Wilson

    This discussion is starting to drive me nuts.

    On one side we have the bail-out crowd which seems to think a bailout will solve the problem. But, giving Greece more money will not change their situation. Wait another year and they will be back. There will have been no fundamental reform of the economy to address competitiveness issues and issues of tax evasion and corruption. A crisis is required to change behaviour.

    On the other side we have the “hair shirts” that insist that everyone be responsible like them and live within their means even as winter is coming and the food stocks are exhausted. (Nice advice, but a little too late).

    The reality is that Greece has been “reckless” in its fiscal affairs, and should pay a price (the hangover after the party). Those who lent to Greece should also pay a price for their recklessness. A Greek default is eventually inevitable. Better to take the pill early when there is still an economy to try to fix.

    The “hair shirts” are basically correct. The world has been on an unsustainable debt fueled binge for too long – and soon the price will have to be paid. To me the bigger issue is how to ensure that those who have to “pay” are not starved to death in the process. This has to begin with straight talk from the leaders who communicate that the past “party” is over and can not continue and that the future will be rough for some time.

    As someone who has lived within my means I have no desire to see my neighbour walk through bankruptcy with all their possessions (SUV, big screen TV, etc) while I still make do with less. Yes there needs to be a mechanism for bankruptcy, but it must be tough on both the lenders and the borrowers.

    As for inflation … it is real concern. Although big screen TVs keep getting cheaper, the important things that I consume (like food and oil) are getting more and more expensive. A lot of time these increases are “hidden” by new “smaller packaging”. Just about every food product has had its packaging size shrunk, but its price kept constant. ..stealth inflation?

  18. jdmckay

    Well Ed, w/all due respect… dumb article. Utterly useless.

    I find a pattern in your writing:
    * start w/irrelevant premise, non-representative of situation/circumstances you portend to “analyze”
    * extrapolate premise w/other layers of abstraction, more fully removed from reality you suggest you are analyzing
    * Weave all these irrelevant concepts together for a conclusion suggesting ominous this & that, which when traced back to foundation you lay I can find little/no relevance to issue being addressed.

    What was it you wrote about China “devaluing” not too long ago?

    I’ve read most of stuff of yours Yves has posted here. Never once… not a single time, do I recall you actually breaking down and presenting (or even attempting to) the activities/value of underlying economies… whether US, EURO or Chinese, and connecting production to value to currency. In your world, everything is analysis from the top: from the “analyst’s” window of the world, w/out seemingly venturing into the world’s and getting your head around what the people in those worlds are doing.

    It’s like the difference between inches & light years AFAIC.

    Your writing reminds me of clap-trap that came out of Hoover Inst (Stanford Univ’s “conservative” propaganda machine think tank in support of every single lie, mistep & absurdity in Iraq. Victor Hansen in particular: over and over again, describing delayed inaction against Hitler in early WWII, magnifying costs of not confronting his evil aggression (which it was), identifying all the “cowards” and “appeasers” from Chamberlain to “liberals”, then…

    imposing that template over Iraq/Sadam, connecting WWII appeasers to those questioning BushCo’s fearmongering (BusCo/Neocon claims veracity quotient ended up +/- -0-), and then hammering all this home week after week, month after month, feeding a hungry ignorant crowd red meat bs that very much helped sustain the effort.

    IMO, your “models” follow the same dynamics (all though far less ill intentioned), and AFAIC following your proffers would lead to a similar reult: empty, undesired, and very very unproductive.

    My suggestion: put a sign on your door: “Gone fishing, be back when I’m done.” Make a trip to china & stay for a while, talk to the people doing work, go to the productive cities, go talk to students/professors and their many flourishing Universities and find out exactly what they’re doing… because clearly, you don’t know.

    Then go do the same thing in Europe for the same reasons… you don’t know.

    Then throw out all you models, challenge your assumptions with reality based observations, figure in some objective value quotients from bottom up (rather than top down), and start from scratch.

      1. Valissa

        Though you were a bit harsh to the author, I would say that your on-point critique of the academic approach to economics versus observing reality fits with what I’ve finally decided after trying to learn economics from most of economists and analysts.

        I see this as a sort of epistomological problem for the field of economics… the focus on knowledge based on reduction, abstraction and reification (an academic ideal world of types and models) rather than experience, empiricism and experimentation (messiness, multidimensionality and chaos of real life).

  19. jmc

    Just two small points of history.

    1) The original Maginot strategy was a brilliant solution to securing the north eastern border. Problem was they only implemented the first bit, the easy bit, building the fortifications. The second bit, the large mobile force behind the line, was never filled out or made field ready because maintaining such a force is so much more expensive that building lumps of concrete.

    So the real lesson of the Maginot line is not the one usually drawn. The real lesson is that no matter how good the plan is it is worse than useless if not fully executed.

    2)The Wiemar Hyperinflation was a deliberate political policy decision. It was engineered to welsh more on wartime debts and bad decisions made on how the war was financed than on reparations. That’s why the German psyche is so irrational on this subject of debt. The debasement of the currency, just like electing Hitler, was an utterly disastrous decision deliberately taken.

    Both historical episodes have valuable lessons for the moment. But not in the way they are normally interpreted.

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