Hopes for avoiding a second (fatal) credit crisis

For the majority of us, the credit crisis we are living through has come rather unexpectedly. And because it has been both a surprise to many and a traumatic experience to yet many more, we are all trying to contextualize it using past economic and historical periods. Unfortunately, this is a tricky exercise because it risks conflating the root causes and outcomes of the historical period with those of the present. But, we are going to still do it because the need to explain is so great (something I covered in The politics of economics in November).

For me, it is the Great Depression where I see the greatest lessons for us today, particularly given the parallels in complacency today and that witnessed in 1930 and 1931. So let me say a few words about where I think we are in this crisis and what this should mean to policy makers and citizens alike.

When I first wrote about what was then an impending credit crisis in March 2008, I spoke of its roots being in the accumulation of high private sector debt burdens due to easy money. What has become clear since that time is the level of fraud that also occurred due to the lax regulatory environment. So, in many ways, the pre-conditions of this crisis were very similar to those that created the great depression (low interest rates, high private sector debt, globalization, large current account imbalances, speculative mania, a financialized economy, lax regulation, cronyism and fraud).

What we are now being told is that the response in this particular downturn has been very aggressive and all-encompassing across the globe. The result, we are told is that we are out of the woods economically.

But, is that really true? I would agree that we have averted the worst. However, I would argue that the global economy is still so fragile that complacency still risks a catastrophic outcome. 

I’m sure most of you who are familiar with my economic forecasting know that I was fairly bullish in the Spring of 2009.

And I even had to defend myself pretty vigorously because everyone else was so bearish (Through a glass darkly: the economy and confirmation bias in the econoblogosphere). So I am definitely not a perma-bear. I agree that the economy has improved markedly.

However, this Spring I have a more downbeat view and this owes in very large part to the complacency I now see out there. But, the thing that precipitated this post was this:

Government debt in Greece is just the first in a series of European debt bombs that are set to explode. The mortgage debts in post-Soviet economies and Iceland are more explosive.  Although these countries are not in the Eurozone, most of their debts are denominated in euros. Some 87% of Latvia’s debts are in euros or other foreign currencies, and are owed mainly to Swedish banks, while Hungary and Romania owe euro-debts mainly to Austrian banks. So their government borrowing by non-euro members has been to support exchange rates to pay these private sector debts to foreign banks, not to finance a domestic budget deficit as in Greece.

All these debts are unpayably high because most of these countries are running deepening trade deficits and are sinking into depression. Now that real estate prices are plunging, trade deficits are no longer financed by an inflow of foreign-currency mortgage lending and property buyouts. There is no visible means of support to stabilize currencies (e.g., healthy economies). For the past year these countries have supported their exchange rates by borrowing from the EU and IMF. The terms of this borrowing are politically unsustainable: sharp public sector budget cuts, higher tax rates on already over-taxed labor, and austerity plans that shrink economies and drive more labor to emigrate.

Bankers in Sweden and Austria, Germany and Britain are about to discover that extending credit to nations that can’t (or won’t) pay may be their problem, not that of their debtors. No one wants to accept the fact that debts that can’t be paid, won’t be. Someone must bear the cost as debts go into default or are written down, to be paid in sharply depreciated currencies, but many legal experts find debt agreements calling for repayment in euros unenforceable. Every sovereign nation has the right to legislate its own debt terms, and the coming currency re-alignments and debt write-downs will be much more than mere "haircuts."

These are the first paragraphs of Michael Hudson’s latest missive "The Coming European Debt Wars." Quite frankly, I do not think his language is hyperbolic. The Europeans need to confront these issues. We are facing a sovereign debt crisis. There are many ticking debt bombs beyond Greece. And we are way too complacent about it.

I have been optimistic about the near-term prospects for the global economy in large part due to the myriad pro-cyclical effects of recovery. Longer-term, however, there are some serious obstacles to a sustainable recovery.  This is not a garden-variety recession and recovery. It is a recession within a longer-term depression.  And while we are in a technical recovery, I believe much of the fundamental problems which triggered this downturn are still there, lurking.

The bust in Dubai and exogenous shocks

The problems are indeed still there. This is true with euro-denominated debt in Eastern Europe. It is even more true with real estate in Canada. And it is true yet again with commodity prices in China.

Let me give you an example of the kind of complacency I am talking about from "Fixed income investors look to Africa" published today at Risk. While Greek bonds are imploding and spreads to German Bunds are skyrocketing, rates in Ghana reflect a relative calm.

An increasing number of international investors are turning to the developing markets of Africa, as risk premiums on traditional emerging market issuers dwindle. Ghana has been identified as an attractive prospect.

While returns on investments in African countries such as Nigeria and Kenya have declined, yields on Ghanaian bonds remain high.

“International investors are moving down the risk curve, and capital is reaching African shores,” says Antoon de Klerk, an emerging markets analyst at Investec Asset Management in Cape Town. “Ghana looks attractive, especially against Nigeria where rates are extremely low. We’re seeing big positions being taken in Ghanaian sovereign bonds.”

Africa deserves a better look from investors. 100%. But this is nuts. The 10-year in Ghana is trading at 6.3%.  I guarantee you this is a bad deal.

According to Gadio, yields will likely decline further, leaving a rapidly closing “window of opportunity” for investors. “In Ghana inflation was extremely high in 2009, so the yields went up as far as 25%. The three-year bond issued in January 2010 drew substantial international demand. But now that inflation is going down, rates have started to fall rapidly. There’s probably a three- or four-month window for international investors to buy Ghanaian bonds, but after that, the quality might be gone. Yields are decreasing by 50bp or so at the short end of the curve during each auction. Accordingly, it makes sense to buy Ghanaian securities as soon as possible.”

It’s liquidity seeking return, folks. Ich sehe Schwarz.  But, this is the environment we are living in.  Compare what Hudson is saying and what’s going on in Greece to the buy now happy talk for Ghanaian bonds. Clearly, someone is wrong and I’m guessing it’s the complacent ones.

Then, you have David Rosenberg out today, doing his best to imitate "News from 1930" blog. He runs a spate of quotes from the 1930 press:

A good friend of ours at UBS, Robert Procaccianti, periodically emails us his pithy market thoughts, and yesterday he sent us the following. Great digging into some now infamous quotes after the 1929-30 bear market and the widespread view at the time that the worst was over because, of course, Mr. Market said so … erroneously as it turned out.

“[1930 will be] a splendid employment year.” — U.S. Department of Labor, New Year’s Forecast, December 1929

“I am convinced that through these measures, we have reestablished confidence.” — Herbert Hoover, U.S. President, December 1929.

“While the crash only took place six months ago, I am convinced we have now passed through the worst — and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us.” — Herbert Hoover, U.S. President, May 1930.

“This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan … that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years.” — R. W. McNeel, market analyst, as quoted in the New York Herald Tribune, October 30, 1929

“The Wall Street crash doesn’t mean that there will be any general or serious business depression … For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game … Now that irrelevant, alien and hazardous adventure is over. Business has come home again, back to its job, providentially unscathed, sound in wind and limb, financially stronger than ever before.” — BusinessWeek, November 2, 1929

“…despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation…” — Harvard Economic Society (HES), November 2, 1929

“The end of the decline of the Stock Market will probably not be long, only a few more days at most.” — Irving Fisher, Professor of Economics at Yale University, November 14, 1929

“For the immediate future, at least, the outlook (stocks) is bright.” — Irving Fisher, Ph.D. in Economics, in early 1930

“… the outlook continues favorable…” – Harvard Economic Society Mar 29, 1930

If that doesn’t hit home, I hope yesterday’s post from News from 1930 does:

Canada’s banking system offers interesting comparison with the recent epidemic of bank failures here. From 1900 to the present there have been only 4 chartered bank failures in Canada in which depositors were not eventually paid in full. Three of these were before the war, the fourth since; total deposits were $17.5M. In the US there have been 7,000 bank failures since 1914 involving liabilities of about $3B; in the last year alone, 1,345 with total deposits of $865M.

Tuesday, April 7, 1931: Dow 169.72 -2.71 (1.6%)

That doesn’t mean all is well and fine in Canada anymore than it did in 1931, does it? Everyone thinks Canada is protected because 20% down is required for a conventional mortgage. Please read the last paragraphs of my post "Lehman chief warns of more big bank failures" and it should be evident that some mortgages are very leveraged in Canada.

The point is not that doom is coming but rather that complacency is high and this makes a calamitous outcome all the more likely. The Europeans are complacent about their sovereign debt problems. The Americans are complacent about their private sector debt problems. Investors are complacent about the medium-term outlook for stocks and bonds. And policy makers are complacent about how quickly politicized rhetoric escalates. And when [people are complacent they don’t do anything to address underlying problems – issues which often re-appear in a more critical state.

So, returning to the Great Depression comparisons, I am concerned we are on the brink of another credit crisis with the situation in Greece as the trigger. I think of 1931 or 1937 as two specific periods in which complacency ensured a sub-optimal outcome.  Let this not be another.


Breakfast with Dave, 8 Apr 2010 – David Rosenberg, Gluskin Sheff

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward http://www.creditwritedowns.com


  1. PJM

    For those who believe that Greece and europenas countries will default, I would like to say that greek government reported that the fiscal deficit was cuted almost in half, in the first quarter. Actually felt 40%.

    For those who believe that others sill stay home, waiting to blow up, this is bad news.

    I think, in less of one year everybody will see that the only ones that will fail are: USA and UK. These countries arent doing nothing to cut their fiscal deficits. Others are doing. Like Greece. Or even Ireland.

    Thas why I believe that war against the €uro will fail.

    Meanwhile I sugest to read this:


    Maybe europeans arent so fool as someone think. I hope to see news about the investigation that some europeans secret services are doing about this problem. Maybe we will be surprise with the news. Or not.

    The crude reallity is: if the eurozone passes the actual test, the dollar is doomed forever.

      1. PJM

        I read and?

        Are you sure that greeks will default? Im not sure. On contrary, I believe they will not default.

        They tried to escape to their obligations but they understood that washington wants their failure.

        They are learning somethings about international relations.

        Do you see, a lot of rumours are been spreading in Europe. If these rumours are true, USA can say goodbye to their traditional europeans allies. Even OTAN could be in dangerous of spliting. This inst good. For all.

        I hope that rumours are unfounded and USA is having good behaviour, otherwise…

        Is bad when secret services are very mixed with some financial institutions. Is very suspect. But this is an american problem.

        But, for an european who believed in USA and a good ally and are seeing some nasty things coming from USA. The lies bout Iraq almost split Europe. But now thisi is very serious. This looks some currency and stealth war agaisnt the €urozone and his currency.

        I hope to be infounded these rumours.

        1. AK

          >> Are you sure that greeks will default? Im not sure. On contrary, I believe they will not default.

          I don’t know. If citizens don’t want to keep fighting it’s not much that the government can do.

        2. Ishmael

          PJM today’s actions in the Greek bond market certainly do not seem to support what you are saying.

          The situation seems to be confused and the yields on Greek debt are blowing out compared to the German Bund.

          I do not know if Greece is going to default or not, but I also do not believe in the tooth fairy.

          1. PJM

            Dear Ishmael, the markets are afraid and bondmarket is reacting. However some rumours arent good and saying that exists a lot of naked shortselling. The greeks are trying to stop shortselling because theyre afraid of naked shortselling.

            But this is a job for european authorities ans their secret services. What is clear is that some authorities are trying to know who is selling and who is buying and where europeans bonds are accounted. This is fulcral to understand what kind of market were seeing.

            Personally I want to believe this is the normal market reacting and having fear. Thats why I hope to see news soon.

            Dear AK, even with some panick and fear inside the greek financial system, even if citizens dont believe that their government will not default, nothing is clear that they will default.

            Greek authorities were disapointed to see that their blackmail on their inestors (especially frenck and german) didnt worked and no one was behind their lack of responsability. Greeks were disapointed to see that americans also dont want to bail them. So they are taking some cold shower and are understanding that they must to avoid defaulting, because it will be worse for them.

            I believe greeks are learning to play by the roules. even some panick exists in their cowntry.

            What is sad is that the greeks who are rich are the first to leave the ship, even they know that with their running are puting more problems for the cowntry. As I like to tell a lot, money doesnt have nationalism in his face. ;)

          2. PJM

            What is good is this. Aparently, europeans countries are trying to cut their fiscal deficits. Everyone is trying. Ireland (theirs leaders are giving a beautiful lesson to the british government), Greece, France and even Germany.

            We can see this effort is this news:

            “Le déficit public grec a diminué de 40% au premier trimestre”

            In http://www.lesechos.fr/info/inter/reuters_00243451-le-deficit-public-grec-a-diminue-de-40-au-premier-trimestre.htm

            I dont know if some greeks arent runninh with their money because the taxes and government effort to stop with fiscal evasion.

            Even the french are showing good news:

            “France : déficit budgétaire de 21,8 milliards d’euros fin février

            PARIS (Reuters) – Le déficit du budget de l’Etat s’établissait à 21,8 milliards d’euros fin février contre 32,6 milliards un an plus tôt, selon la dernière situation mensuelle budgétaire publiée par le ministère du Budget.”

            In http://www.lesechos.fr/info/france/reuters_00243300-france-deficit-budgetaire-de-21-8-milliards-d-euros-fin-fevrier.htm

            If Europe wins that battle agains fiscal deficit and some changes in the european treaties, concerning the currency, fiscal deficits, and so on, we feel that the €uro will settle as a real internationa currency.

            Of course we know that lack of sound financial fiscal policies in the USA, that the €uro will have a great chance to replace the dollar as world reserve currency. But the problem is USA that doesnt want to cut spending and cut his imbalances. In my personal opinion, we need a good and strong dollar. Bs good for all. But as USA doesnt want to be responsible, I feel that some americans believe that only spliting Europe and destroy the euro is the way to stop the dollar decandence.

            But as I said, there are a lot of rumours and arent good. We must watch this critical situation very careful. When the lies about Iraq, a lot of spin puted in Russia the genesis of some manipulation. Some weeks ago others starting saying that are the germans who want an weak euro and the failure of greeks. One these days, I bet, new rumours will abound atempting to focus Russia as the genesis of some rumours. However, the more credible source of manipulation is USA. This is bad. Too bad. We will not understand the diplomacy of USA if this rumours will be discovered to be true. I think is the end of USA, as an reliable ally.

            I will pray to be untrue that USA is behind a stealth war against Europe and the euro. Because are the only great power that is a Democracy and leader of free world. If USA is behind an war agaisnt the euro, one these days americans will be alone, fighting around the world.

    1. Vinny

      “For those who believe that Greece and europenas countries will default, I would like to say that greek government reported that the fiscal deficit was cuted almost in half, in the first quarter. Actually felt 40%.”

      My friend, you believe in fairytales. You obviously don’t know the mentality of most Greeks. I live in Greece. This is not a European nation — it is a Middle Eastern nation from all points of view except geography. Just like I don’t recommend you believe a word that comes out of the mouths of those turban-wearing bullshitters from Dubai, I don’t recommend you believe word that comes out of the mouth of a Greek.

      As far as this Euro-patriotism you’re showing, please give us a break. The EU is a big joke. It’s all about Germany and France. Little Portugal, Greece, Hungary, and other EU members are there only to buy those shitty Volkswagens and Renaults. This is why I drive a Lexus, by the way… to support German workers…lol

      Wake up, buddy! Don’t believer that bullshitter, Barosso, or whatever is his name, regardless of whether he is from your country or not. It’s all smoke and mirrors in the EU… :)


      1. PJM

        Dear Vinny, what you know about what I am?

        Europatriotism? That doesnt exist. I am not europatriot, even I am not portuguese patriot. If you know more about genetics, maybe I could discuss with you what I believe and what are my dream. But not here, because this is economics blog.

        What I want is simple for Europe, my friend. No more wars for me and my descendents. That is it.

        But, hey! You can allways think that germans and french are genetic superior than you. Is your problem, not mine.

        I am seeing that you need a big box of good wine. ;)


        1. Sid Finster

          No wars? What is it with European naivete? Like little children, really…

          Wars, conflict and fighting are the human condition. Peace is unfortunately the exception. Get used to it.

          Today’s Europe is made of the same nations who not so long ago brought us the modern strains of imperialism and colonialism. Europe only discovered pacifism when Nazi Germany and its satellites ran into bigger and tougher nations in the form of the United States and the Soviet Union. Much the way an aggressive German Shepherd may start fights with other dogs, until it tries to pick on a pitbull terrier or a kavkazka.

          Suddenly fighting is not nearly so much fun.

          Of course, anyone who really believes that there is some kind of American plot to destroy the Euro and that is what is causing the turmoil in Greek debt needs a reality check.

          Before, the conspiracy theory was that this was an attempt to drive the Euro down to make European exports more competitive.

          In either case, talk about scapegoating.

          1. PJM

            Dear Sid Finster, Pacifism started in Europe, more or less, with Christianism. Do you see, I am not christian but it was that religion the first filosophy preaching for love and peace.

            Of course war is old as Humankind but doesnt mean that were warriors by nature.

            However I sugest you to study islam in Europe (I am not isalmic also, actually I believe man is the only tru god ;) ) and you will notice how Europe hada a revolution with that religion and philosofy.

            Do you see, History learned by normal books is onlye propaganda. Even in my cowntry. The winners wright the History.

            However, you put a point very good. Are we europeans trying to use USA as scapegoat for problems in Europe? No. I dont think so. Nobody, oficially has saying that. The problems startes and ends in Europe. However, do you see, the anglosaxon world is trying to put and ugly situation in Europe but close his eyes to the problems of USA and UK. Look the figures. who is in worst situation? USA or Greece? The only thing that Greece doesnt have is a currency that is supported by militar power. (If you like to put enphasis in war, there you got.)

            But europeans arent naive too. We are seeing how the financial system in USA is been rigged and manipulated. That is the reallity. Do you think that we, europeans, arent enouph educated to understand how markets work? And that market is very funny and fancy? ;)

            But hey, look, the problems start and end in Europe. We know that. The €uro has some flaws. We know that. But we also know that €uro will be a great currency if survives to this test. Every currency has tests and must pass trhough. This is the first test.

            I believe in €uro because has a strong pathos. The european central bank isnt controlled by politicians, is very independent and has his first aim: fighting inflation. Thats is the strength of €uro. No governemnet controls ECB and the €uro.

            Of course €uro hasnt the militar power behind. That was important in the past to give credibility to a currency. The two most important things in a currency are militar power, who gives political power and no devaluation in their core system. A currency that isnt debased by politicians is a currency that the economic agents trust. And €uro is showing that strength. No governement has the power to debased the €uro. I hope that in modern times, the militar power isnt a necessity to give credibility to a currency, as I saw with franc suisse, after WWII.

            Do you see, History is an asset to understand future times. And if History teached us is that militar power cant do much without economic power and comercial power. And the actual Europe is a sui generis construction. Is a construction by will not by force and power. This is the new Europe and his acquis comunitaire. An will instead a consent.

            But we will see in the future. I hope USA isnt making a stealth war against the euro. Because, as I said, strange things are happening in USA. A lot os countries are complaining agaisnt american trade wars. Brasil, Korea, Africa, Chinese and so on.

            I hope that the treat of a new international currency, supported by the will of millions of people instead the militar power, and is shaking a lot of americans, will pass the test. but I as many others, werent naive.

    2. Vinny

      Hey PJM,

      You really have bought into that European Dream and swallowed hard, didn’t you. It’s all bullshit, my friend. The European Dream is dead in the water. The Euro will never replace the dollar, and Europe will never amount to anything except a bunch of lazy, arrogant, and nationalistic countries trying to mooch off of Germany. Please don’t take offense to what I said, because I am a European as well. I am also an American, and I tell you, although I agree with a lot of what you write about the US, Europe is in far worse shape than America.

      As far as “European unity” goes… Unity my butt! Most European nations are led by xenophobic and racist pseudointellectual arrogant a**holes who will always give you 100 reasons why the French are superior (even genetically) to the Portuguese or the Italians, or the Romanians, or the Greeks. And the Italians have their 100 reasons why they are superior to the French… well, maybe not the ones down in Napoli…lol But you get my point. There is not such animal as European Unity in this zoo, last I checked…

      The EU was a nice experiment, but I doubt it will survive another 10 years. The EU was actually a desperate attempt of a decrepit continent to survive in the century of massive nations like China, India, and yes, the US, controlling the world. The EU might have succeeded, but nationalism got in the way, and now it is too late to recover from that. China already has achieved escape velocity (in my brilliant assessment, but of course :)), and the US has a Navy that will still kick butt anywhere in the world regardless of how badly the economy performs back home. So, my friend, get used to a world that will be controlled by the US, China, and possibly India. Europe will likely fragment, and fade into irrelevance. But hey, let’s look at the positives: those rich Chinese will always fly to Paris to see the museums, or to Venice, so Europe will go on, as second world. Just that it won’t replace America… or China… or India, if you ask me.

      And that’s my 2 cents for today, my friend…


      1. tim73

        And your ancestors came from where, Vinny? Americans are the fat slobs nowadays, not willing to cut their deficits and behave like ADULTS. Dollar is toast because you Americans just suck big time, a bunch of paper pushers doing nothing of value, selling houses and debt papers to each other.

    3. PJM

      I would like to notice one simple fact. Is the €uro failing?

      Lets check the test of the market. Last year, on 9th April, against the dollar, the quote was 1,325. Today is 1,34.

      Is this a signal of a failed currency? No. In my personal opinion, it isnt.

      So, if €uro is having problems because Greece, why euro is above american dollar vis-á-vis 2009?

      The context is clear. Greek problem should have more impact in the euro currency agaisnt the dollar. Dollar has an inflation above €urozone, has interest rates above the euro and still is the main international currency. Why is euro stronger than the dollar?

      My opinion is: even with problems, the €uro is the only currency that fills some demands from the market. Its a safe bet agaisnt debasement, has strong fundamentals behind his curtain (€urozone has a equilibrated trade balance), has a Central bank that isnt manipulated by politicians and the goal of ECB is price stability (in others words, the fight against inflation).

      But this Greek crisis is having some good lessons to us, as economic agents. Greek politicians are learning that cant cheat others and expect solidariety. They blackmailed others countries, with the treat of default thinking that european politicians will help them, because investments in debt by the european banks. Didnt worked. They used the tricky of Washington´s friend and didnt worked. And theyre learning that greek politician must show a real wish to cut their imbalances and making economic reforms. Otherwise, others europeans will not help them, becuase is giving help to others failures. Without greek politicians making a strong dsire to cut their spending, nobody in Europe will help them. (Some intesretings thoughts about this subject was made by some FMI´s insiders.)

      For an investor, this is the best. ECB is runned with one main goal: price satbility. And the €uro will not let free riders to take avantage from their neighbours. To be inside the eurozone, every cowntry must have commitments with this solidariety: share pain and gain.

      For an investor this is a good signal. Is more important the long term gain than short cuts to stop homefire but with costs in long term. Every cowntry now should be alert for their home policies. This is one gain in credibility for a currency. Politicians cant blackmail monetary authorithies. Or their neighbours.

      For long term investors this is very good. They now that €uro is a strong currency that isnt subject to populists and debasement. Every politician wishes to debase his currency to face elections and political gains in short term.

      For investors inside Europe this is an advantage. It will give lower costs of capital because interest rates are less volatil and price satbility is the real goal of the €uro. This is an important advantage that dollar hasnt.

      For outsiders of europe, especially in middle east, the cost to peg in the dollar is having more price volatility and interest rates high swings. Thats why more countries are looking for the euro as an alternativa to dollar peg.

      So, that crisis is having a good effect in private and public agents. The €uro is a currency that isnt manipulate by who wants uses monetary policy to hide domestic problems and bad policies. The euro is a currency that gives stability.

      Thats why I think the €uro is passing the test. The best indicator is today quote agaisnt dollar. Is above the dollar Y/y. Wich is a strong signal that this crisis isnt having some bad effects that should, if the €uro isnt a good currency. And if we study the volatility of crude oil or gold in euros, we find some others caracterics that are very good for the €uro. And, a plus, inside €urozone, no one wants to leave the €uro.

      For some who believe the euro isnt a good project, maybe its time to readjust his analisys about european currency. theyre looking for the wrong signals.

      Disclaimer: I dont trade or especulate in currency markets. I dont have any position in that market either currency hedges.

      1. PJM

        Another point we could notice is: are €uro currency bad for the countries inside eurozone? I dont think so.

        As I said before, Germany is a problem for others. Not because they cheat us, thats because they are doing a great job to be competitive. So, they export more than others. germany is a problem because theyre very competivive.

        But as I said before too, the Clubmed problems arent Germany. Are the lack of produtivity against their competitores. As germans. I stress this point because Iraland hasnt problems to export, in fact theyre very good to improve their exports and produtvity. They face others problems like excessive state spend.

        But if the Clubmed starts better domestic policies, they can export and they can be more competitive. To give a good example, I can show the last figure on portuguese trade balance. Today, portuguese statistics agency show how portuguese economy is having a strong recovery, exporting more than all the optimistics had in mind.

        In February, portuguese exports incresed 12,9%, vis-à-vis last year. And that growth is strong both inside Europe and outside Europe.

        In fact, last three months ended in February, Portugal exported more 10% for Europe, with last month gaining momentum. Imports in the same periodo stalled, falling 0,5%.

        You can check these figures in http://www.ine.pt/ngt_server/attachfileu.jsp?look_parentBoui=86958017&att_display=n&att_download=y .

        So, a lot of misunderstanding exists in anglosaxon waorld about the €uro and even about the Clubmed (or PIGS).

        I strong believe that Portugal will have a better economic growth than everyone is expecting. The economic reforms are doing a good job in portuguese economy. Portugal could have a better perfomance if economic policies would be more profound, however, conservative policy towards household is the main concern of government.

        The euro isnt bad for Portugal. In fact is very restrive because demands better domestic policies and more work in the real factors that will alow us to have better standard of life. The euro is very good for all us, because we learned to be more focused in our estrutural problems. In stead blaming oothers, we learned to try working better, working for more value added and for better economic perfomance.

        Germany isnt bad for us. Is a good market to learn how to produce better with more value added. Is a difficul market but is a market who give us, economic agents, the benchmark to be more productive and economic eficient.

        Im very confident that Portugal will benefit from german experience. And I am very optimist about portuguese future because tge people is having a great job focusing in evaluate their error and cut them.

        I am seeing the first results of that humble work. Exports are strong again, the €uro is helping us and we will improve more because we dont put the finger on others and close the eyes to own fails. Thats why I love my people. They learn qucquly, they focus where they msut and dont blame others for their problems. It takes time to be sucessful, its hard but is the only way.

  2. AK

    >> For me, it is the Great Depression where I see the greatest lessons for us today, particularly given the parallels in complacency today and that witnessed in 1930 and 1931. So let me say a few words about where I think we are in this crisis and what this should mean to policy makers and citizens alike.

    OK, here is my take on this (and some prudent suggestions, I hope, to appropriate persons).

    1. Big disaster was avoided. Don’t make big moves currently (as trying to destroy China economically) and try to avoid inevitable (as Greenspan tried to do after dotcom burst with an easy money policy) but better drive economy for gradual soft landing and restructuring.

    2. Keep dollar strong as America’s obligation to humanity (if dollar falls the global financial disaster strikes with unimaginable consequences).

    3. America has to swallow her pride and work rather for the benefit of humanity as a whole than for her own self-interest WRT the global financial recovery.

  3. Ishmael

    Ed you said — “I would agree that we have averted the worst. However, I would argue that the global economy is still so fragile that complacency still risks a catastrophic outcome.”

    But then you go along and compare the current situation to 1929 Depression. The second leg down of the 1929 Depression was the destroyer. You kind of talking out of both sides on this one. Do you think we missed the worse or do we have a second leg down which will make the first one look like a picnic!

    Personally, if we look through out history, the avoidance of tackling problems head on usually causes the problem to only get worse. In addition, instead of the banks fixing their problems, they are back to their speculative gains hoping for big bonuses. This is very similar to the situation with the S&L’s where they doubled down on junk bonds hoping to save them selves but just making the situation worse.

    I have not seen one of the previous problems fixed and we appear to be listening to propaganda that things are getting better.

    1. Edward Harrison Post author

      Ishmael, I see 2010 as similar to 1931. The basic problem is debt – some of it private and some of it public, depending on the country and circumstance. Unless the debt is worked of through a combination of repayment, default, and foregiveness, the global economy will be in a constant state of stress in which anything can trigger a cascade of renewed panic.

      By 1931, many believed the worst was over – and they were right with regards to the initial cyclical problems of 1929 and 1930. The same is true today, the cyclical problems have been alleviated and the structural problems have been attenuated in part but exacerbated elsewhere.

      But the bottom line is that most of the debt is still there. When asset prices underpinning the collateral for that debt and economic growth underpinning the servicing of that debt flag, the downside will be extreme.

      Can we avoid this outcome, you ask. I find it hard to believe we can. But I do think we should try. The situation in Greece is a perfect example. There are scenarios in which Greece does not default. But those options are being narrowed and the time is coming when the EU will have to make a choice. If they allow Greece to fail, it’s reasonable to assume the contagion (via bank holdings of Greek sovereign debt and knock-on effects for other sovereigns) will be large. I have yet to hear any plausible plans on how to prevent this.

      Perhaps I am being alarmist. I don’t think I am.

      1. killben


        I agree. Also the more I think about it I feel the real goal of the regulators, govt, politicians is not to do all the right thing to get the correct system. These guys want to ensure that citizens are happy if all LOOKS good. That is the present state of affair. I think it also has to do with the way citizens look at things … So there is a perfect match in keeping things going between powers that be and citizens. The one instance that comes to my mind, in this context, is Winston Churchill who confronted the issue (of Germany at war) but was sidelined till the war was on Britain. Therefore the success of “Extend & Pretend”, Cash for Clunkers, Home buyers Credit, Unemployment benefits perennial extension etc.

        This implies that a real correction in the system can happen only when the CATASTROPHE happens and one has to act to change .. Hopefully it will be soon.

  4. Chad

    I think you underestimate the fact that it wasn’t complacency but rather that previous actions had placed the economy in a very untenable position and that any possible correct responses were institutionalized to not be an allowable response. It also difficult to be sure what the correct response even is.

    That’s not complacency IMO. We’re in a bad spot, it’s hard to know what needs to be done, and it’s even hard to implement it if we did.

  5. shrek

    No its not hard to know what needs to be done. Ed is correct, if we do not tackle the debt issues the system will destroy us. In a lot ways things are even worse than they were last year because the government is taking more private and public debt thinking that its forecasts for the future will be correct and everything will be fine. Most of this advice is probably from Larry Summers who doesnt understand risk and suffers from an overconfidence problem. Federal deficits are going parabolic. At some point it will stop placing everyone in a much worse situation. Either default, or hyperinflation. The best case scenario would be for the government to wind down as much debt as possible in the private sector.

  6. shrek

    Also, Michael Hudsons article today is fantastic. Everyone should check out his website with more of his articles. He gives an excellent historical perspective on debt jubilees, defaults, and the problem of compound interest

    1. sgt_doom

      Well, of course, Prof. Hudson is the greatest macro-economist in the Western Hemisphere.

      (And please never mention the likes of that scatterbrained Krugman in the same paragraph as Prof. Hudson. That goes for everyone on the planet!)

  7. Ishmael

    In 1931 the stock market lost its hype, rolled over and lost 85% of its value.

    Most assets that I look at are still over 50% over valued if you were going to value the asset on its cash flow.

    Financially, countries have to be dragged kicking and screaming to restructure. Most promised benefits in both Europe and the United States can not be paid.

    Elected officials as well as the banking industry know if this happens they there will be a significant change in power and there could finally be an accounting for their actions.

    Accordingly, correct action is not taken and imbalances have to reach the same level as pre Bear Sterns before things blow up again and we take the second leg down.

    Buckle your seat belts, it is going to be a rough landing.


    It’s BULLISH No Matter What! …

    The price of oil is rising – BULLISH! More profits for the energy companies, and more investments in “clean energy.”

    Most of the new jobs created in March were part-time or temporary – BULLISH! Since the economy has turned the corner full-time job offers are practically a sure thing.

    But didn’t wages go down too? – BULLISH! Revenues – Costs = Profits!

    41 states have revenue shortfalls – BULLISH! Various states have always complained about shortfalls. It’s another sign that things are getting back to normal.

    8 million people are still unemployed – BULLISH! That’s 8 million spenders, not savers.

    Interest rates are rising – BULLISH! Yet another sign that the economy is getting stronger.

    Stocks may be going up but on very low volume – BULLISH! That means the “dumb money” hasn’t even bought into this rally yet.

    People have a lot of concerns and uncertainty about the future – BULLISH! Not until the “wall of worry” ends will this party be over.

    So much new liquidity will cause inflation – BULLISH! Stocks are one of the best hedges against inflation.

    The wars in Iraq and Afghanistan are bankrupting us – BULLISH! Don’t get mad, get even. Debit the Treasury and Credit the defense companies.

    Inflation in China is picking up – BULLISH! That should dampen any bubbles that some people worry about.

    Gold is going up in price – BULLISH! This is a broad-based rally.

    Wait, maybe gold is going down – BULLISH! That means economic fears are dissipating.

    Actually the gold price seems to be consolidating and moving sideways – BULLISH! A sell off or rally would mean things are overheating.

    Iran seems determined to develop it’s nuclear program – BULLISH! More nuclear power plants means less demand on oil which means lower energy costs which means more profits.

    Israel may be forced to handle Iran themselves militarily – BULLISH! That will kick-start the construction industry when we rebuild both sides.

    The Health Insurance Reform bill is an abomination – BULLISH! If insurance premiums rise there will be subsidies; if doctors check out they’ll be replaced with cheap foreign ones; if care is rationed then costs will be controlled and profits ensured.

    And now the student loan programs are nationalized – BULLISH! Good riddance for the banks. Now the government can garnish wages and lower the deficit.

    The markets are being purposely manipulated with government money – BULLISH! What’s not to like? That means the market ain’t going down no matter what.

    Big Media is spewing propaganda about the economy – BULLISH! Perception is reality. People only know what they’re taught. Advertising works.

    Greece may default – BULLISH! Greek bond holders will make up their loses in the stock market.

    Japan is a bug in search of a windshield – BULLISH! Just imagine how much more deficit spending we need to do to beat them.

    The Euro is getting weaker – BULLISH! King dollar is back.

    A $400+ trillion financial mine field of derivatives are set to go off – BULLISH! Let’s start the rumor that if the stock market tanks we’ll all be dead.

    1. Ishmael

      Deja vu 2007 all over again. Heard all the same thing then. The more things change the more they stay the same.

      Thank you for the money!

  9. sgt_doom

    I can’t agree with, or fathom, where this post author is coming from.

    The worst is over? In the land of Fantasy Finance (USA), all is not worse, and the worst is yet to come.

    All those structured loans to the private equity firms (an explosion during 2005 to 2007) had a s**tload of securitizations and credit derivatives spun off that buyout debt. And a bunch of PIK toggles have been generated from those loans, which come due in the summer of 2010, and later in 2011 and 2012.

    And that “pump-and-dump” stage of theirs was collapsed with the meltdown (evidently those “financial wizards” don’t really understand too much about fantasy finance?).

    Nope, in a non-economy like the USA (where the top five banks comprise 63% of the GDP – which means the entire godawful financial services sector comprises over 83%), things aren’t looking much better, just that little quiet spot before the onslaught of the tornado.

    You haven’t read Yves Smith’s ECONned yet, have you???

  10. Vinny

    “International investors are moving down the risk curve, and capital is reaching African shores”.

    Good luck! If they thought they saw corruption in Greece and Eastern Europe, just wait until they get to Ghana…


  11. MyLessThanPrimeBeef

    Are we about to face a crisis?

    Well, history is divided into crisis and pre-crisis. If we are not in a crisis, we are in a pre-crisis. One leads to the other. There is no avoiding. Think of it as reincarnation: a crisis is reborn as pre-crisis which is reborn as crisis, so on and so forth.

  12. Hugh

    What you call complacency I call a willful failure of our elites. They are so into looting for themselves that they can no longer be bothered with basic governance. What makes depression inevitable is not that the problems are intractable. It is that our elites flat out refuse to address them in even minimal ways. I agree with the 1930s comparison. I have never seen such rampant Hooverism. It has taken on the attributes of a religion.

    1. Vinny

      My question is, how do I get into that looting gig too?

      I’m not part of the elite — would that pose a problem? Should I change my name to Rockefeller? Or Kennedy? Or Oh’bama? Or, should I just go by my middle initial, say… “W”? :) Would I then be allowed to loot too? :)


  13. Glen

    Good thing the White House is on top of this problem:

    As Rahm Eyes Exit
    Financial Reform Bids Collapse Into Farce:

    Yes, Larry Summers is Leaving:

    Of course, it’s difficult to determine if this is good news or bad news. Many people have been calling for Obama to fire Bernanke, Geithner, Summers and Rahm since he appointed them, but here has been no indication that Obama would do that, and indeed, it looks as if both Rahm and Summers are leaving of their own volition. Rahm to get a plum job on Wall St, and Summers because he didn’t get a plum job in government.

    It is unusual for such key advisers to leave so soon in Obama’s first term. I choose to take the simplistic view of their actions: Both are rats leaving a sinking ship. Both are getting out while the getting is good – before the wheels fall off the world economy.

    The world economy is not pre or post crisis – Ed’s vision that we are moving along the Great Depression time line at about 1931 is correct – we are “in” the crisis, with no clear path out as yet. The world economy is running on a massive version of “extend and pretend” funded by the victims of the economic crash. There has been no reform in ANY world government, and the “masters of the universe”, the real cutting edge financial policy masters (with concurance from Paul Krugman) have made no bones about the fact that future disasters are a given:

    Jamie Dimon Was Right:


  14. killben


    just tell me one thing .. Do you really think that without a catastrophe AND Big Ben finds he cannot do anything more we are going to have any change.

    I think A CATASTROPHE where these interventionists are ineffective IS THE RIGHT TONIC to clear the mess and get going!

    So I for one look forward to this..

    1. Doug Terpstra

      Unfortunately, nothing short of disaster will dislodge the vampires; their taste for easy blood money is now an involuntary addiction.

  15. bluffraise

    If the price of sqid and beer at the beach in Greece is a bit lower it’s ok by me.

  16. Brick

    Today its Greece and the EU, tomorrow it may be California and the US. The question is which do you think will kick the can down the road one more time, and which will position itself for a real recovery. Yesterday land rover in the UK reported record sales partly I guess at the expense of German and US manufacturing due to the decline in sterling, which I believe shows pain being taken on one level to build the success of tomorrow. The point is that complacency may not be universal, but focused in certain places, and yes the UK is probably in danger of being the next Greece so complacency on one level is still high there. I get the feeling that some commenters are like the old saying of throwing stones in a glass house.

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