Kregel/Parenteau: No Sidestepping the Eurozone Implosion?

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By Jan Kregel, former professor of economics at Università degli Studi di Bologna and Johns Hopkins,m and currently a senior scholar at The Levy Economics Institute and Rob Parenteau, CFA, sole proprietor of MacroStrategy Edge, editor of The Richebacher Letter, and a research associate of The Levy Economics Institute

A week ago eurocrats launched their campaign of overwhelming force designed to shock and awe the “wolf pack” of professional speculators and institutional investors (hedge funds and pension fund managers) into a more docile, subservient position. In the currency market, the shock and awe wore off after the first 48 hours, while by the end of the week, it also appeared to be wearing off from the equity markets.

Some of this is undoubtedly just the innate brazenness of the wolf pack being expressed. As a general rule, they do not take kindly to being cowed or constrained in any fashion. It is simply is not in their genetic make up. Consequently, they have no choice but to follow their instincts to call the bluff of the eurocrats, and that is part of the reason we are seeing, for example, the wolf pack dragging the euro exchange rate down to the ground in recent trading sessions.

But this is about more than just testosterone counts. Some wing of the professional investing world is beginning to see the design flaws built into the eurozone from day one. And once the spy these flaws, they begin to realize the nature of the solution is something utterly different than what they are witnessing being rolled out before their very eyes. In the following 11 points, we highlight some of the key aspects of the eurozone predicament using the financial balance approach developed by the late Wynne Godley which we have explored in previous blog submissions, papers, and book chapters. Until more investors and policy makers can understand the true nature of the various predicaments facing the eurozone, and the inherent design flaws exhibited in the European Monetary Union and the (In)Stability and (Lack of) Growth Pact, odds are precious time will simply be wasted trying to make believe the shock and awe fix is already in.

1. Underlying the eurozone predicament is a missing adjustment mechanism. There is neither a price nor a policy mechanism that encourages the current account surplus nations to recycle their surpluses in a win/win, pro-growth fashion. Keynes tried to design such a mechanism into the Bretton Woods agreement, but the American negotiators scotched it. This same pro-growth adjustment mechanism is missing at the global level with regard to China (although they did report a trade deficit in March).

2. An ostensibly moral stance advocating balanced government budgets is revealing a profound ignorance of the simple accounting of sector financial balances. Those preferring to impose a “fiscally correct” policy on the peripheral nations should best recognize these accounting realities, and soon. If we are correct that domestic income deflation will be the end result of fiscal retrenchment colliding with private sector attempts to net save, then surely more desperate citizens will turn to even more desperate acts. Rather perversely, the combined effects of fiscal retrenchment, private income deflation, and rising private debt distress are likely to make moral considerations a second or third order concern for many eurozone citizens.

3. Ultimately, current account surpluses need to be recycled into chronic deficit nations in a sustainable fashion. Such a mechanism could be set up under the auspices of the European Investment Bank very quickly. Effective incentives to recycle current account surpluses via foreign direct investment or equity flows should be crafted at once.

4. Such an approach is likely to prove superior to funneling financial assistance through the IMF or other multinational arrangements. The IMF will undoubtedly insure that fiscal retrenchment gets imposed across the region. Any fiscal assistance is likely to be imposed with conditionality – a conditionality that fails to recognize sector financial balances are interlinked, both within and between nations. IMF conditionality is bound to set off the twin contagion vectors of falling trade surpluses and rising bank loan losses in the core nations. Surely this is not what Dutch and German policymakers intended, nor is it any way to hold the eurozone together.

5. Rapidly cutting fiscal deficits without considering the impact of such moves on private sector financial balances is a shortsighted, if not dangerous policy direction. Sector financial balances – the difference between saving and investment, or income and expenditures – are interconnected, and cannot be treated in isolation.

6. Hiking taxes and slashing government expenditures will suck cash flow out of the private sectors of the peripheral eurozone nations. These private sectors have been rebuilding their net saving positions in the wake of sharp and prolonged recessions. Companies have been conserving cash by slicing investment spending, inventories, and employment. Households have already drastically reduced home purchases and consumer spending.

7. It is an elementary fact of accounting that the private sector as a whole can only spend less than it earns if some other sector spends more than it earns. That sector has tended to be the government, usually as automatic stabilizers kicked in while recessions deepened. Indeed, most of the dramatic widening of government deficits is due to a collapse in tax revenues, not to discretionary stimulus. Pursuing fiscal retrenchment in order to reduce government debt default risk will merely raise the odds of private sector debt defaults. Cash flow will be taken from households and firms attempting to rebuild their net saving positions, and private debt servicing will falter.

8. The only way to avoid this outcome is if the nations undertaking fiscal retrenchment can swing their trade deficits around in a fully offsetting fashion. Otherwise, domestic income deflation is the likely result, Indeed, this is the madness behind the method of “internal devaluation” so evident in Latvia’s economic implosion. There is no guarantee that trade swings will be large enough to overcome fiscal drag. A return to debt deflation dynamics like those engaged after the Lehman debacle is not out of the question.

9. Furthermore, since the current account surplus of the eurozone has remained between +1 and -1 percent of GDP for quite some time, there is every reason to believe that attempts by the periphery to achieve trade surpluses will undermine the export led growth of Germany and the Netherlands.

10. It would therefore appear that fiscal retrenchment is about to set off two related contagion effects. First, the loans on the books of German, Dutch and French banks are likely to sour as private sector cash flows are squeezed in the periphery. Bank holdings of government debt issued by the periphery may not default, but the mortgages and corporate loans these banks have outstanding to the periphery will experience rising loan losses.

11. Second, the export sales of German and Dutch companies will fade with the falling import demand of the periphery. As their domestic incomes fall, they will import less. In other words, the fiscal retrenchment the core nations are insisting upon is highly likely to boomerang right back on them.

As it stands, investors have started to recognize that bank in the region are at risk. CDS for Spanish and Portuguese debt have started to widen more dramatically over the past two weeks, although investors still appear overly focused on government debt CDS. Policy makers have also begun to realize Greece is unlikely to be the last country requiring a bail out, while they at the same time sign on for rapid fiscal “consolidation” (read retrenchment) in order to ostensibly avoid becoming the next Greece.

Yet we continue to find many of the points detailed above are not yet recognized by professional investors or policy decision makers. Absent this coherent framework, it will indeed prove very difficult to sidestep an economic and financial implosion in the eurozone, following on the heels of an already historically deep recession, and burst property bubbles in a number of eurozone nations. May wiser heads prevail.

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  1. Kevin de Bruxelles

    I’m not even an economist but it seems obvious that the mistake you are making is to see the Eurozone as an isolated unit instead of an economic entity that exists within a global system. From the global system point of view it is obvious that most of Europe’s’ recent problems will be resolved as the Euro declines in value. The one main exception is the problem of economic and political integration at the EU level which seems to be moving forward but which paradoxically gets more impetus as the crisis continues. In other words in order to profit from the crisis they have to push the speed of this integration before the falling Euro ends the crisis for Europe.

    As the Euro declines, the current account deficits will become surpluses in the southern countries, with the exception of Greece. The Greek economic model, which by the way is very similar the the American one, is unsustainable within the European context and must be brought into balance. But luckily it is small enough to be dealt with. Even progress is being made there on reducing military spending if we are to believe the rhetoric coming out of the latest Greek – Turkish summit.

    And so as the price of Chinese, Japanese, and American goods and services rise, Europeans will switch to buying European goods. So Germany and The Netherlands will not only be increasing their exports outside the Eurozone but the losses brought on by public fiscal retrenchment will more than be made up for by the increase in demand for European products. In other words the deflationary effects of the decrease in government spending will be matched by the increase in manufacturing brought on by the decline in the euro’s value – both in terms of exporting more out of the Eurozone and switching from imported goods to European manufactured goods within the Eurozone.

    Yes energy costs will rise as the Euro falls but European energy policies are well designed to deal with this problem. The taxes make up a large percentage of most of the cost of many forms of energy in Europe. As prices rise these taxes can be reduced and be recuperated by the increase in manufacturing activity.

    It is no surprise that Europe will be the first major bloc to come out of the current economic mess since their economy has been the least dysfunctional. How are China and America ever going to resolve their Chimerica imbalances? And how will the UK’s SWINEs (Scotland, Wales, northern Ireland, and the North East) deal with the austerity measures to be implemented by the new Tory government?

    1. renting_is_evil

      ‘to see the Eurozone as an isolated unit’

      It goes deeper than that – Americans simply are unable to recognize the concrete economic benefits of the euro WITHIN the eurozone. The arguments about design flaws remain, not that any of them are original to English language economists or analysts, regardless of how often they assume no one actually living in Europe was aware of these flaws. Or more importantly, how those flaws could be used as leverage to create a system which would not have those flaws, ie, greater integration.

      And the idea that a falling euro is harmful to Europe is almost laughable – I don’t think any executive at Nokia (‘anyone need some more cell phone infrastructure?’), or ABB (‘anyone need the hydroelectric facility to power it?’), or Airbus (‘anyone need more efficient planes’?), or Siemens (‘maybe nuclear is better than hydroelectric? – especially with high speed rail’) or … well, at least some people get the idea. OK, most of them are in charge of European industrial exporters, but unlike the U.S., those people still count in how their nations are guided.

      And even the idea that exporters require consumers is peculiarly Anglo-Saxon these days. The idea that a country which improve its road network can pay for the equipment and expertise necessary to build it can thus increase its exports is simply ignored – accounting entities may require zero sum thinking, but really, building a dam which allows for increased food production through providing both better irrigation and the power to process the food which is then sold to the country which provided the equipment is not a zero sum game.

      I am not aware of anyone where I live in Germany that has any problem with a falling euro – of course, the 10% gain in German exports just might have be an explanation for that relative calm. And I’ll grant, especially for an American with some awareness of how world markets work, that a falling euro is a reason to panic. Unfortunately, the reason for panic has little to do with Europe.

      As a side note – Bloomberg had an interesting euro summary, where it was written, apparently as straightforward truth, that the euro was designed to last forever. Hilarious – no one in Europe expects a currency to last a couple of generations, much less for eternity. After all, Europeans didn’t just wake up to the magic ‘fiat’ idea in just the last couple of years. Ask an East German, or a Slovakian, or a Czech, or …

      1. charcad

        It goes deeper than that – Americans simply are unable to recognize the concrete economic benefits of the euro WITHIN the eurozone.

        The source of this failure to see arises with a great many Europeans. They also don’t see “the concrete economic benefits WITHIN the eurozone.”

        Or more importantly, how those flaws could be used as leverage to create a system which would not have those flaws, ie, greater integration.

        This is closer to the mark. For example, the Frankfurter Allgemeine Zeitung has proposed a northern European “hard” currency zone consisting of Germany, Austria, Poland, Finland and the Benelux countries. Such a revived Hanseatic League would exert a strong attraction on Norway, Sweden and even Russia. This system would certainly have far more economic coherence, cultural unity and political stability minus the Latin countries. Cultural, political and economic factors are all far more closely aligned.

        Someone who has the best interests of the inhabitants of these regions at heart will gladly greet such a project. otoh someone with a hidden true agenda that amounts to looting and pillaging northern Europe under a false guise of idealism will be less than happy.

        1. Diego Méndez

          “This system would certainly have far more economic coherence, cultural unity and political stability”

          Don’t shy away. Say the right word: “racial” affinity.

          You know nothing about Europe if you think Poland or Russia are more similar (politically, economically or otherwise) to Germany than France or Spain are.

          1. charcad

            Dear Diego,

            It was perfectly predictable you’d be less than happy. :-) Your agenda of one way North-South transfer payments has been perfectly clear for many months.

            Well, now that my money is committed to EU bailouts via the IMF, let me join my President in calling on you, a Spaniard, for “resolute action” on your economy. I only do this in the same helpful spirit as Obama’s recent telephone call with Zapatero.

            How much will you personally be belt tightening under the new austerity regime? Can we put you down for, say, a 20% reduction? I’m sure you want to set a strong leadership example for your family and neighbors. :-D

            Best Wishes,


          2. Diego Méndez

            Dear charcad,

            remember: in the same way you judge others, you will be judged.

            Remember this when your President gets an urgent call from a foreign power.

            Take care,


          3. Gary Anderson

            I am rooting for the Euro to fail. Then nations can go back to being sovereign and we can do away with bank bailouts all together. I have a dream.

            I don’t see exports overcoming massive consumer deflation, if you are relying on the US to buy the products. The consumer in the US is wounded.

          4. jdmckay

            (…)let me join my President in calling on you, a Spaniard, for “resolute action” on your economy. I only do this in the same helpful spirit as Obama’s recent telephone call with Zapatero.

            How much will you personally be belt tightening under the new austerity regime? Can we put you down for, say, a 20% reduction? I’m sure you want to set a strong leadership example for your family and neighbors. :-D


    2. Diego Méndez

      My dear European fellows,

      I would have agreed with you some weeks ago. Not any longer.

      Europe is blind to the conditions it faces. Solidarity is an empty word, as US commentarists suspected all along.

      The only answer to the North-South euro assymetry in this crisis was an Economic Union. The North should have supported inflationary, Keynesian policies at a eurozone level. They didn’t; domestic politics proved far more important than Continental monetary stability.

      As I was told repeatedly by NC posters and commentarists, Spain just can’t make up for a deficit reduction via higher exports, barring an intra-euro devaluation.

      Kevin, it is just wishful thinking if you think Spain will increase its exports to China and the US 30-fold in a single year, which is what’s needed to prevent an economic collapse.

      In other words: since its eurozone partners don’t want to help (via inflation, higher deficits, etc.) Spain just can’t prevent a decade-long depression unless it gets out of the euro.

      Now, of course, millions and millions of Spanish unemployed simply won’t wait 10 years living in misery so that the French and the Germans keep on misbelieving there is some kind of European solidarity when there is absolutely *none*, as proved once, and again, and again.

      If you just don’t want to give us solidarity, we’ll take it. Forget about some mild inflation in your countries. We’ll just get out of the euro, cause a pan-European banking crisis, and devalue our way to full employment.

      Kind regards,


      1. kevin de bruxelles


        The only sustainable long-term condition both politically and economically in the eurozone is for a nation’s consumption to roughly matches its production. The reason there is unemployment in Spain is that there is more consumption than production. This is an economic model that only the United States can get away with (but for how long?).

        So you do not have to export to China or the US to bring your current account balance to a surplus. You can also do it by either consuming less or producing more for domestic production. In other words stop exporting jobs to China, France, or Germany by buying their consumer goods.

        The EU has shown Spain billions of euros of solidarity over the years. Long-term free cash is obviously not the answer. If German and French companies want to continue having market share in Spain then they will have to transfer production there. More production in Spain is the answer.

        Switching currencies is always tempting but there are no magic bullets that will ever allow you to consume more than you produce over the long term. The US model is tempting but I wouldn’t advise you follow that path unless you are sure that Spain will be able to find some third world country to work for you like fiends in order to ship you high quality consumer products and be happy to just receive Pesetas in return.

        1. Diego Méndez

          “The reason there is unemployment in Spain is that there is more consumption than production.”

          I disagree. The reason there is unemployment in Spain is high inflation over the last decade, which rendered it an expensive country for production vs. Germany.

          That inflation was the consequence of the euro and its one-size-fits-all interest rate. Unemployment in Spain would disappear in a second if our salaries and prices were 15% down in relative terms; if we had our independent currency, we could devalue 15% vs. Germany.

          This wouldn’t mean a 15% fall in GDP, only a 15% fall in nominal salaries, around 10% in additional long-term inflation and a 10% growth in employment. So real GDP (real wealth) would remain stable, unemployment would disappear and the economy could grow again.

          On the other hand, if European solidarity really was there, there would be no need to leave the euro. We could count on high inflation in Germany and other countries. Thus, in 3-4 years of 4% inflation in Germany, we would be competitive again.

          What are Germans telling us? “Dream on, your problems are yours, we want 0 inflation over here.” Moreover, they are telling us to cut our budget deficits (despite our public debt being lower than theirs!) and let our economy implode.

          The rise of economic xenophobia (mainly directed to Greeks, but also to Spain, etc.) in Germany over the last two months have been really shocking, but also revealing: European solidarity is only there for the easy things and the good times.

          Don’t get it wrong, Kevin. Germany has shown 0 solidarity this time. All those loans for Greece only saved their own banks. Greece has been directed towards a controlled default in 2 years’ time, and an economic implosion in the meantime.

          1. renting_is_evil

            ‘That inflation was the consequence of the euro and its one-size-fits-all interest rate.’

            And this explains the immense housing boom, financed in significant part by pounds from British banks?

            Spain is a lot more like America (better said, Florida or Arizona, with the idea that many people from the cold north would want to move to the sunny warm south), at least in terms of the immense bubble it experienced – and in the damage it is causing.

          2. Diego Méndez

            Of course inflation does explain the bubble.

            Due to inflation, Spain had negative real interest rates for over a decade. Any rational investor expecting a decade of negative interest rates would get in debt and invest in housing.

            And that led to the bubble.

        2. Ming

          Local or regional based production is the answer to the income/consumption dilemna of Club Med countries. The problem is that the businesses it still needs to be ‘profitable’, and that is imposssible in the face of competition from Ultra-low labour cost no-environmental regulation countries such China and India. (And it is not just manufacturing jobs that are leaving, but high-tech development jobs that are leaving, since the infrastructure, public goods, and basic goods enjoyed by the high tech workers of China/India are provided for at very low cost by their impoverished peasant citizen/workers. Of course everyone in those countries suffers from bad air pollution).

          We need an intelligent set of regulation and tariffs, that both encourages development in China/India, without decimating the industrial/production/research base of the China and India. What that magic formula is….well God only knows. We know that Heavy Tarrifs encourage laziness, stagnation, and potentially wage push inflation. On the other hand the free trade dogma of the neo-liberals is at best delusional…the industrial base of the United States has been decimated, what remains are Walmarts, housing (albeit foreclosed and empty), guns, and butter. America is still blessed with the financial industry (insert laughter here…)

      2. MacroStrategy Edge

        Diego –

        Yes, it is absurd that the posters to this blogsite for the most part choose to ignore that I and others using this framework a) called this mess in advance, b) called it right, and c) called it for the right reasons.

        Go back and take a look at what I submitted to this website overr the past few months. You listened Diego. You engaged. Hopefully you benefitted from doing so.

        But it would appear many others find that too daunting a task. Changing your mind doesn’t have to be that difficult, but first you have to let go of your one note wonders, and open up to alternative, and sometimes controversial points of view.

        Glad you got there Diego, hope others can as well, but really, the hour is getting late, and the wind begins to howl.

        Lose your delusions folks, before the locust cloud of finanzkapital starts dicktating its terms in your backyard. You can see just how pretty the outcome is when they get the upper hand in places like Hungary, Latvia, Ireland, Greece, and Spain should be next.

        Let’s jackboot the humanity out of each and every freakin European culture in the name of accumulation for finanzkapital uber alles.

        And really now, who do you want for a neighbor, Zorba the Greek, or Mannheim the masochistic mittelstand mechanic? Maybe we in fact need both, but maybe some of the most beautiful stuff humanity can create comes out of the former more often than the latter.


        Rob Parenteau, CFA
        MacroStrategy Edge, sole proprietor
        The Richebacher Letter, editor
        The Levy Economics Institute, research associate

      3. Tortoise


        I am surprised to hear you say such things. I see it as a sign that the dawn is near, as “it is darkest before the dawn.” Spain had a good ride and perhaps has no experience dealing with the down part of the economic cycle while on a relatively stable currency. But economies do adjust and things do get better, and much sooner that pessimists may think. The lower euro will have a healing effect — how much more of a devaluation would you do without inducing inflation? (I am looking forward to visiting your country this summer and the better exchange rate had something to do with this decision. Millions and billions of small decisions like that do have an effect at the end.) Now Spain may have problems of its own but who does not? Ask California or Michigan. One way or the other, with any currency, every country must find a sustainable economic model. Just changing currencies does not solve anything.

        The European South got a bit drunk with cheap credit. Now is the hangover. That will pass too. Do not listen to the naysayers.

        1. Diego Méndez


          you are very welcome in this country. I hope you have a pleasant stay.

          This truly looks like a very, very dark hour. I hope you are right, and it’s the darkest hour just before dawn.

    1. avrymann

      If the people of the PIIGS nations are forced to take a cut in pay, so should the Bankers. The debt should be written down proportional to what the people are being forced to accept. It is not only fair, but it might just work. The clincher would be to loan more money to these nations at the same rate that the Federal Reserve now loans to the international banks who are also creditors to the PIIGS – .25%. It is one thing to say “I feel your pain” and quite another to voluntarily “share your pain”.

      Since the US Supreme Court has now declared that corporations are persons, then they should be treated as such. They should have to make the same sacrifices as everyone else. Moreover, they should be subject to the same laws as the populace and their decision makers should be imprisoned when they commit fraud, or any other crime.

      I know this is wishful thinking, but it is the solution, along with a reasonable rebalancing of expenditures in the debtor nations and criminal prosecution of corruption in business and politics.

  2. john haskell

    1. The fall in the euro is explained by the psychopathic behavior of genetically defective portfolio managers who are irrationally selling;
    2. Here are 11 reasons why a reasonable person would be cutting exposure to the Euro.

    Well okay then!

  3. michel

    Once again, one fails to grasp exactly what the policy recommendation is. It seems to be that Greece should continue to run deficits. To do which it should continue to borrow, as it must. Into the indefinite future? Or is the recommendation that there should be income transfers to Greece by the rest of the Euro zone on the basis that these transfers are subsidies from taxpayers in the North?

    I really do not get the argument. Surely what has happened is really simple, its about debt. Governments have attempted to spend more than the countries produced, on ‘public services’, which in fact were nothing more than people sitting around in Government offices doing nothing. Of course, if people can do this rather than harvest lettuces or work in production, they will. The average wage level rises, investment falls, debt rises to unsustainable levels, the economy becomes uncompetitive, and people invoke the ghost of an economist from a different era to justify this idiocy.

    The solution the authors seem to envisage, it seems to be simply more of the same, same level of spending, same level of state emloyment on unproductive activities, well, its unclear, but whatever, there is surely only one solution to this underlying problem, close down all those offices and have people do something productive? And not retire at 55 after a working life spent doing nothing, on inflation linked pensions?

  4. joebhed

    Jan and Rob:
    “Some wing of the professional investing world is beginning to see the design flaws built into the eurozone from day one”.
    Unfortunately, but obviously, not so for a bunch of NC readers.
    So, another 11 points, please, in reply to Matt above.

  5. alex black

    Most of the articles I’ve been reading on the EU seem to be making the same 4-point presentation:

    1 – There is a big problem.

    2 – Here is a possible solution

    3 – There is no coordinated political will to adopt the solution.

    4 – Oooo, that’s gonna leave a mark……

  6. anon

    “Ultimately, current account surpluses need to be recycled into chronic deficit nations in a sustainable fashion. Such a mechanism could be set up under the auspices of the European Investment Bank very quickly. Effective incentives to recycle current account surpluses via foreign direct investment or equity flows should be crafted at once.”

    Doesn’t seem MMT’ish at all. That’s just changing financial capital structure

  7. dearieme

    @Ramanan: “Godley (who loved publicity and was something of a tease) acquired a reputation for contradicting other forecasters, usually by being more pessimistic…” – that’s why he was known as “Whinge Awfully”.

  8. chsw

    [fill here the blanks] are again the global evildoers:
    “Greece, Spain and Portugal took the first steps last week toward enacting austerity measures that would reduce their budget deficits….were not enough to prevent a flare-up in money market funds, a crucial but little-noticed corner of the financial system in which American investors provide more than $500 billion in short-term loans to help European banks finance their daily operations.
    The cash comes from conservative funds that hold the savings of big American corporations and individual American consumers. So far, the proposed rescue package has failed to ease worries at these funds, which have cut back on loans to European banks and are demanding higher rates and quicker repayment. ….
    Because of the pullback by American lenders, the rate banks charge one another for overnight loans, known as Libor for the London Interbank Offered Rate, has been steadily climbing. ….
    “We didn’t do so out of any special love for Europe” …“We’re American policy makers,…liquidity problems in European markets were showing signs of creating dangerous illiquidity problems in our own country’s financial markets.”
    American banks are also big owners of Spanish bank debt, holding nearly $200 billion.”

  9. sherparick

    Secretary Geithner, channeling Bob Rubin’s and Larry Summers’s infatuation with a “strong dollar” and indifference to the industrial/agriculutural economy west of the Hudson and east of Malibu apparently gave an interview where he stated that Europe’s problems were “not likely to disrupt America’s recovery.” Well, I hope he is right because otherwise we we will get the “Tea Party” in control of the House and first item will be the President’s impeachment for failing to produce a satisfactory (satisfactory as defined by the Tea Partiers) birth certificate, plus a variety of other outrages upon the Constitution that they claim to love so much.

    1. NotTimothyGeithner

      Wow, you really have a high opinion of the Teabaggers. If they took the House of Representatives, they would get rid of the pretense of the birth certificate and impeach the President for his two great sins. One is being a Democrat. The other is on the President’s nose. The Teabaggers don’t care where the President is from. They would fall all over themselves to vote for the Governator.

      1. RagingDebate

        I would think that those that think three levels deep would love the Tea Party. They are advocating exteme austerity measures on themselves.

        The global investor should love them too. Once the country finishes its collapse and the entitlements and beaurocrats are gone, it will be the investment opportunity of a lifetime. Plus, it will be the John Gault’s that feel the public wrath.

        Either way, the U.S.A. economic model has gone off the rails and the empire portion crumbling. There is no solution as a species to mass consolidation and corruption from there except breaking apart into smaller sections and once again beginning the consolidation process. That is called evolution folks. Somdeay, the world will reconsolidate into a supply chain the people themselves will run towards, then a global government that survives will emerge. I see that happening in perhaps another seven decades to two hundred years, in other words long after I am dead.

        1. jdmckay


          Followed link to your website. Great article on fiat currency, and particularly inflation. I’d recommend everyone… e-v-e-r-y-o-n-e, read your excerpt from VON MISE’s: Human Action.

          It says everything about what’s going on w/US economy/currency/markets (etc.), all of which is largely obscured by Mise’s warnings (eg: advanced common sense). And it boils down to all FED/TREASURY/WS symbolic valuation gimmickry has displaced, operationally, real value.

          But nobody wants to talk about it… not as long as there’s dice to roll.

    2. /L

      … otherwise we we will get the “Tea Party” in control of the House …

      We in the rest of the world look anxious forward to a “great” American show when the one term president is replaced by Sahara Palin and (why not) Glen Beck as vice president accompanied by a Tea Party administration. ;-)

  10. S

    The only thing missing from the clever by half accounting argument is debt and interest rates retrospective and prosepctive. How does that fit into the model?

  11. michel

    “Ultimately, current account surpluses need to be recycled into chronic deficit nations in a sustainable fashion”

    Like what? Any ideas? Do we maybe just give them the money? I really, really, do not understand what the proposal is.

  12. Karen

    Maff, this seems to be the policy recommendation:

    “3. Ultimately, current account surpluses need to be recycled into chronic deficit nations in a sustainable fashion. Such a mechanism could be set up under the auspices of the European Investment Bank very quickly. Effective incentives to recycle current account surpluses via foreign direct investment or equity flows should be crafted at once.”

    But I for one have no idea what they mean. They need to spell out – in concrete, implementable terms – just what it is they think should be done.

  13. /L

    This blog post should get a sub title – Euro Crisis for Dummies – and that is an acclamation of making things understandable for us dummies.

  14. Smells Like Chapter 11

    After reading these posts, is there any doubt as to why economics is referred to as the “dismal” science?

  15. charcad

    But I for one have no idea what they mean. They need to spell out – in concrete, implementable terms – just what it is they think should be done.

    They intend for you not to understand. What they mean is they want dictatorial powers to transfer wealth around Europe with a wave of their hand, similar to the way they fantasize that Stalin, Hitler, the Politburo, the Paris Commune, Louis XIV and Caesar Augustus did things back in their days.

    Stating this claim too baldly would catalyze instant opposition. Hence the need to wrap everything in tendentious mendacity.

    1. MacroStrategy Edge


      The solutions have been spelled out elsewhere, in Richebacher Letters, in TV interviews, in blog posts, in newspaper interviews, in conferences at the Ford Foundation – I could go on, but hopefully you catch my drift.

      Go look for them, then let’s talk further.

      Sorry, I’m not hear to spoon feed y’all.

      Let your fingers do the walking.

      1. charcad

        To Rob Parenteau,

        there are undoubtedly people sitting around in gold wondering whether the old yellow dog is going to get up and bark again anytime soon. Although hyperinflation hyperventilation has been catching on in recent months, especially amongst the deficit errorists, gold has been dead money since late November 2009.

        “Rob Parenteau, editor of The Richebacher Letter,
        Posted: March 19, 2010 01:45 PM”

        You did write that, correct? I’ll keep my fingers walking but calling gold “dead” less than two months before it sets a new high is a, well…”prices have reached a permanent plateau of stability” moment.

        And here:

        Most of the commenters have trouble with parts of your deflationist argument, mainly on prices. It seems to me we could easily experience both product price inflation and wage deflation at the same time. I say that because this is what we can see around us.

        I think the bulk of your argument is designed as a justification for inflating away any and all “destabilizing imbalances” you detect.

        And apart from running the presses faster I don’t believe you or your colleagues in the blogosphere commentariat have the faintest idea what to do about wage deflation.

        1. jdmckay

          It seems to me we could easily experience both product price inflation and wage deflation at the same time. I say that because this is what we can see around us.

          Yah, sure… but what do you believe: economic experts or your own eyes? :)

          I think the bulk of your argument is designed as a justification for inflating away any and all “destabilizing imbalances” you detect.


        2. MacroStrategy Edge

          Listen up, charcad.

          If you were to bother to take the time to follow my work, you would know I have consistently maintained a long gold/long silver trade on the view fiat currencies will be contested, the euro predicament being the latest chapter of that. Read the Richebacher Letter, my subscribers know the real deal, not your gross misrepresentations of my positions, and they are getting wealthier for it.

          Enjoy your ignorance, but at a price, charcad.

          Your gummint has been printing money forever – where exactly do you think you get the money to pay your taxes or buy gummint bonds charcad?

          Answer that one and you might start to connect some dots.

          Or you can just pledge allegiance to your favored ideology. Look forward to the cartoon version.



  16. Hugh

    Some of us have been saying this stuff for some time now. What European leaders were doing was a defense, not a fix, for the euro, and as happens with these policy pronouncements, it was unclear how much was real and how much was words. Never a good sign. It is astonishing though that it took 48 hours and longer for markets to begin to pay attention to the obvious.

    Similarly, we have pointed out that the problem is not just with the debt of the PIIGS but with the export surpluses and banks of Northern Europe.

    Northern Europe needs not only to buy from Southern Europe it needs to invest there in a sustainable long term fashion, not the various mortgage and debt bubbles we have seen.

    kevin de bruxelles’ view that countries should live within their means is mistaken. It goes to the schizophrenic nature of the construction of Europe. Europe is neither an assemblage of nations nor is it a real union. And that’s the problem. Where do Greece’s real responsibilites end and those of Europe begin? The North knew about the PIIGS’ economic weakness going into the euro. But those were better economic times, the North profited from them, and they didn’t care about any potential downsides. Now bad times have come and suddenly, Europe doesn’t have a problem, the PIIGS do. As many have said, Europe either needs to go forward or go back. In our country, we have many states, especially in the West that do not pull their full weight. They do not live within their means. They chronically receive more from Washington than they send to it. We do not talk of forcing them to leave. Political union trumps economic disparity. This is the real question that Europe has to answer for itself. If Europeans are European only when it is easy and convenient, then Europe will remain a fiction, a geographic accident.

    1. Karen

      Anyone who thought the Eurozone was even remotely close to a real union was dreaming. It should be obvious that sovereignty still resides almost entirely with the individual nations of Europe. I’ve yet to read that the EU contributed forces to the efforts in Iraq or Afghanistan.

      The “no-bailouts” clause in the EU founding documents should have made it clear that Greek sovereign debt is NOT backed by the full faith and credit of the rest of Europe but only by the Greek taxing authority.

      There is a lot of opinion that countries need to deficit-spend their way back to a healthy economy, but as far as I can tell that opinion is not backed by any historical examples of success, only by the negative example of our NOT having done that in the 1930s.

      So we are in an experiment, and what is happening to Greece seems to me a warning sign that maybe some people should be a little less sure of themselves in their advice-giving.

      1. Kievite


        The USA is also an experiment and with rise of Republican Taliban it might be that this particular experiment also went wrong ;-). Kind of irreparable mental damage cold war inflicted… And it would be nice to isolate crazy states from more sane states in the USA as well. For example what in common has NY with backward places like Kansas where people cannot even understand that they are voting against their own economic interests :-).

        Jokes aside, this is a financial chess game with huge stakes, fog of war and such. In three-or move moves deep combinations the first move might be very deceptively looking. it looks like this wave of negative press about Eurozone while having some elements of truth is just a tactical move which is partially:

        1. A natural reaction of speculators with “burned finders” as well as “wolfs packs” that were deprived of what looked like a legit meal… It’s especially funny to read stories about Eurozone in FT which for all practical purposes should be called “Voice of the City”.
        2. Anglo-American financial attack on the continent (divide and conquer, you know) that have a competing reserve currency. BTW It’s pretty interesting that I do not hear mad cries about the USA industry competiveness problems due to strong dollar for some reason now. This is very suspicious.

        3. The USA has an ecological Chernobyl in this backyard right now and GB has recurrent problem with ash affecting air travel. Translated into economical terms both are huge losses which probably make the financial situation in the USA and GB less sustainable.

        Games that were played against Eurozone by financial hackers (aka wolfpacks of speculators) should became part of broad investigation of financial sector in the USA and GB (with possibly some European partners).

        I think European intelligence agencies should work overtime hand-in-hand with FBI to discover the extent of “CDS -> rumor spreading/short selling -> profit” criminal schemes of those financial hackers. Some call them terrorists, but this is probably incorrect generalization; they are more similar to mafia structures with profit as the main motivation. It would be only natural to discover hedge funds controlled by Sicilian mafia :-).

        Hacking of financial system that they are engaged in should be a crime like hacking of a computer and carry some years of isolation from the society ;-)

    2. anon

      “In our country, we have many states, especially in the West that do not pull their full weight.”

      If you are in the USA, why do you say “especially in the West”? From the stats I’ve seen, the east and midwest have as many states who are net federal tax receivers as the west does. The biggest tax winner, by a huge margin, is DC. (They get over $5 for every dollar paid in. And those tax dollars obviously benefit parts of Maryland and Virginia as well, both of whom are also large net tax winners without including any spillover effects from DC.) Last time I looked at a map, DC was on the east coast (although I think it would be an excellent idea if they moved it to somewhere – almost anywhere – not on the east coast). MS, WV, AL, and VA were in the top 10 tax receivers, as was LA and KY. NM, AK, ND, and SD were also in the top 10 (though, as a Californian, I consider the Dakotas to be in the midwest along with LA and KY). However, all these states have high percentages of indigenous peoples and I suspect that a large part of the reason that the states are “tax winners”. If so, I’d say that the people there still got a very bad deal and so should not be seen as “not pulling their full weight.” IMO they’ve been outright screwed by DC and are still owed much, much more than they’ll ever see from the USA.

      NV, CA, and CO are among the biggest tax losers, as are NJ, CN, NH, MN, IL, DL, and NY. In general, the populous states – regardless of where they are located – are much more likely to be tax losers.

      Unfortunately, the latest link I can find is from 1981 – 2005. In the past, I’ve found more recent data (though it was only through 2007 or 2008 IIRC) that was pretty much the same as this data.

      1. anon

        clarification: However, (unlike the “tax winners” in other parts of the US) all these “western” states that are big tax winners (NM, AK, ND, and SD) have high percentages of indigenous peoples and I suspect that is a large part of the reason that the states are “tax winners”.

        1. anon

          Why would that help? You’ve offered no evidence to support either assertion while I’ve offered evidence to refute both.

  17. kievite


    3. The USA has an ecological Chernobyl…

    should be

    3. Smokescreen. The USA has an ecological Chernobyl…

  18. Eric

    The US has similar regional problems as the euro zone, and so do other large countries, but as far as I can see nobody wants to break up the dollar and go to regional currencies. The dollar is a given fact, any regional imbalances need to be solved in another way. I conclude from this that it’s better that this euro dicussion stops. Look at the euro as a given fact, just as the dollar, and look for other solutions to the internal economic problems in the euro zone.

    1. anon

      It may be wiser to accept the Euro as a given just as we do for the dollar. However, I wouldn’t go so far as to say that nobody wants to break up the dollar. I think many states would at least seriously consider withdrawing from the USA if they could do so without having another civil war. (I assume that most that would want to withdraw would plan to use their own currency.) Although Governor Perry in Texas has gotten the most press, many people in CA see it as a way to at least ameliorate our budget woes. I know that some people in other states feel that way as well. (The NE’s political power, narcissism, and lack of concern for most of the rest of the USA is also aggravating.) However, I doubt that many would be willing to fight to the death in order to withdraw from the USA. That is presumably not a problem for Greece or other eurozone members.

  19. NotTimothyGeithner

    “The NE’s political power”

    Do you mean Nebraska or do the details of the Senate and electoral college escape you?

    1. anon

      I mean the northeast. Why would one say “the Nebraska” in the context of political power, narcissism or lack of concern for most of the USA? I don’t understand what you mean by “do the details of the Senate and electoral college escape you” besides an inexplicable and arrogant snark. The composition of the Senate and electoral college in part underlie what many in the West regard as the NE’s disproportionate political clout so it would seem to support my statement, not undermine it.

  20. Costard

    “Some of this is undoubtedly just the innate brazenness of the wolf pack being expressed. As a general rule, they do not take kindly to being cowed or constrained in any fashion. It is simply is not in their genetic make up.”

    This is a serious argument? Or a joke? Or an appeal to the conspiracy-minded (and who isn’t these days)?

    The authors’ argument is essentially that austerity measures will be unpleasant for the profligate and the foolish, and therefore should be avoided at all cost. And that the livelihood of sycophants demands that governments continue to open their purse strings This would certainly be less “painful” in the short term, and perhaps this meets the authors’ definition of success. In my opinion, economic hedonism is even more distasteful than keynesianism, which is saying something.

    #3: This can’t be serious. Mechanisms to equalize national accounts… you mean, like, exchange rates? Forcing exporters to invest in client nations and avoid currency redemption ensures that the trade imbalance WILL NOT EQUALIZE. This is why China buys treasuries – a policy that these authors would seem to applaud.

    For the eurozone, the mechanisms needed are precisely those the authors discourage – debt destruction and deflation. Wage and asset levels in poorer Euro nations are exaggerated, and must fall if these countries are to become something more than perennial importers. Greece, and the unfortunate Grecian people, must take quite a knock if they are to find firm economic footing, and largely because of decisions made by their forebears. But more likely, bureaucrats will seek to preserve wages and asset prices, and the result will be more of the unemployment and lingering malinvestment that has plagued statist Europe for centuries, with only periodic respites. And Greece will become even more of a backwater.

    1. MacroStrategy Edge

      Since I have worked in the institutional investment world as in investment professional for nearly three decades, Costard, I think I have some basis for describing the culture and nature of the beast. Et tu?

      As for your Austrian inspired proposal to let Rome burn, I would like you and your fellow travelers to go buy a cruise ship, an island, or better yet, a bankrupt nation, and run the show according to your well loved Austrolibertarian precepts.

      I give it 3 months before you are running a replay of Lord of the Flies.

      Get over your adolescent Robinson Crusoe pipe dreams, mate.
      Get real.



  21. kievite

    “Some of this is undoubtedly just the innate brazenness of the wolf pack being expressed. As a general rule, they do not take kindly to being cowed or constrained in any fashion. It is simply is not in their genetic make up.”

    I agree that this is a joke. Tables on “wolf packs” were turned and statements of EU officials reflect that. In reality most of those guys are now really afraid that the history of their previous shady dealings will be revealed and need to estimate the size of the legal fund to defend themselves. They still can bare teeth using sycophantic media, but they understand that their business model is not simply undermined, its existence is threatened. If hedge funds will be forced to register in each EU country separately that’s the endgame. In any case being universally hated is not good for business. It makes bribing officials much more costly.

    Also they have a lot of skeletons in the closet. If a serious transgression is revealed they are gone, due to never ending lawsuits as they pissed off was too many people. I think London based wolf packs now have tails between legs. French especially can be quite aggressive and use Interpol.

    The same is true for GS — it’s just a matter of time before they get on the legal plate more then they can chew. It’s “be afraid, be very afraid” entity. Not a good environment for brazen actions. Paulson also does not sit very comfortably now. The list can continue.

    1. MacroStrategy Edge

      Ah wolf packs, that was a phrase a German policy official used to describe international investors/speculators that they are seeking whose activities they are trying to circumbscribe, hence the currency swap lines set up over a week ago, the promise of ECB to buy public and private debt to place a ceiling on interest rates, etc.

      It is not my phrase. It is their phrase. But if the foo sh*ts, as my proper Bostonian grandmother used to say, wear it!

      1. Thomas

        the term “wolf pack” was coined by the swedish finance minister, not by a german official.

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