We’re All Doomers Now

How bad are things getting in the Eurozone?

Paul Krugman is getting apocalyptic:

The big story: German bonds are now being priced as a risky asset — what the FT calls the “apocalypse trade“. The interest rate on bunds, at 2.21% as I write this, is still very low by historical standards. But it’s above the rate on UK bonds (2.17%) and way above the rate on US bonds (1.88%).

The way to see this is that the market is in effect pricing in a real possibility of eurozone collapse.

In particular, market expectations seem to assume that the ECB will remain utterly indifferent to its responsibilities. The German breakeven rate, an implicit forecast of inflation over the next 5 years, is just 1 percent. That’s a disaster level, implying severe deflation in the debtor nations — or, more likely, a euro breakup.

There is a cruel and almost Shakespearean irony to all of this: the Teutonic monetarists at the ECB, with their sole mandate of price stability, and deep hostility to inflation have had the horrors of the hyperinflation of the 1920s imprinted on their memories. Really, they should have been worried about the credit contraction and austerity of the Brüning years in the early 1930s. Unemplyment shot up, industrial production slouched, hunger was rife, and Germans were willing to vote for a charismatic Austrian anti-semite bent on consolidating Europe into one.

While I do not agree with much from Keynes, he did understand that monetary contractions in a system of fractional banking can totally destroy the productive economy. His response to that was that the answer was government-driven stabilisation. My response to that is interventionism and preservation eventually turns to zombification, and that the true answer to the problem of credit contractions is noticing that fractional banking is a fundamentally unstable and dangerous system, and abolishing or significantly reforming it. But that’s an argument for another day.

From Zero Hedge:

The only quote worth noting from the just delivered speech by ECB executive board member José Manuel González-Páramo is the following: “We cannot completely delegate governance to financial markets. The euro area is the world’s second largest monetary area. It cannot depend solely on the opinions of ratings agencies and markets. It needs economic governance arrangements that are preventive and linear. This underscores my central point that a much more comprehensive approach to economic governance is now the priority for the euro area. And this means more economic and financial integration for the euro area, with a significant transfer of sovereignty to the EMU level over fiscal, structural and financial policies.”

So the ECB has lost faith in markets and now believes that a form of central planning is a better economic model.

It’s a shame they haven’t lost faith in austerity — because it is those disastrous, divisive, technocratic and wrong-headed policies that will drive Europe to the stage of bank runs and systemic collapse far quicker than anything else.

Anyway, despite the technocratic coups d’état in Italy and Greece, a federalised Europe still seems politically and socially impossible. Bureaucrats will be punished for this folly. History always sees to that.

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17 thoughts on “We’re All Doomers Now

  1. “Bureaucrats will be punished for this folly. History always sees to that.”

    And the poor will likely be punished most of all. History always seems to see to that too…

    • There a few other trades that I like at present gold-denominated price levels: solar panels, bottled water, canned food, guns & ammunition. Even certain distressed real estate. Everything else, including blue chip industrials and most real estate will fall much lower (priced in gold). For larger-scale capital preservation only gold and silver will do, but a significant problem during troubled times is storage. I think it’s best to keep it out of bank vaults, and physically accessible. This poses security problems for those without their own compound/vault.

      • alot of gold is a very small parcel……..i like sheetrock mud n paint–what, they’re gonna bulldoze the house?…..even a housefire doesn’t get 2000 degrees….i unplug everything when gone overnight.

        ammunition great esp for trading, i just fired off 50 9mm that were 25 years old without a misfire……i want to be known as the guy w/all the bullets….not gold.

  2. This is why support for the United Nations and ideas pushing for international governance is dangerous. The United States, even with all its shortcomings, needs to do what it takes to preserve its national sovereignty, else we risk losing whatever personal liberty we still have.

    • America gave up her sovereignty when Kissinger and Nixon internationalised the dollar. With other governments controlling huge parts of the American monetary base, as well as controlling American supply chains and American productive apparatus, America can by no means be sovereign. If America (or any nation) wants to be sovereign again it must become food- and energy- independent.

      • I will concede that since the United States has lost the ability to act in the interest of its own citizens in the international economic sphere, its national sovereignty is to a significant extent nullified. Does this mean that our citizens have given up their individual sovereignty such that we are politically international subjects as well? I prefer to think not but I’m probably too old to think in any other way.

        • I don’t believe personal sovereignty comes from any human or governmental authority, and I doubt you do either! This is an ongoing battle, but I think it’s important to remember that if you are independent in your personal affairs and lifestyle then it would be very difficult for anyone to make you “subject” without direct coercion. If the affairs of government, and the money of the nation have been internationalised it is important to be independent of such things.

      • I think of my personal sovereignty as being the unalienable rights set forth in the Declaration of Independence and I do maintain independence in my personal affairs and lifestyle. The US provided me an environment in which I was able to rise from depression era poverty to be financially secure and independent (so far still true), but I’m not optimistic for my seven grandchildren. I do not see what I think is the needed leading vision to move us in a positive direction. We need a real sea change in our political options.

      • Sovereignty is ultimately determined by military might. When the Chinese want to cash in their investment, how are they going to enforce it? By trade sanctions. Military might always trumps economics in the short term. Unless you can make your enemy unable to pay its soldiers or its suppliers, it ain’t a trump card. America’s military-industrial complex is unlikely to look elsewhere for buyers, as they would incur the wrath of whatever is left of America’s military.

        What happens if your creditor comes to door and you greet them with ‘mofo’, your nuke of choice?

        Law is backed by force. Without sufficient force, it’s just pissing in the wind.

        • Twodogs, China could easily shut down a lot of pacific trade routes and supply chains, very quickly badly hurting the American economy. America can’t nuke anyone because of mutually assured destruction.

          American military-industrial complex will be forced to negotiate their way out, unless they are stupid enough to believe they can win a long, slow war conventional war to create regime change in China with the spectre of nuclear holocaust hanging over the entire thing.

  3. ‘Ultimately, I believe that humanity can “grow up”, and learn to live in a sustainable, compassionate, peaceful, free and robust manner on Earth, and ultimately go out and colonise the Universe. We cannot do that encumbered by a stupid economic policy that is not about allowing the market create wealth for humanity at large through hard work, investment, and genius, but is instead about channelling wealth to insiders and bankers.’

    I agree with all of what you say here. I surmise that you don’t envision the United States leading through the current stage of this development. Or is it just that our current pack of top dogs is not capable of this? Or do you see another player(distinct economic entity) emerging with the required attributes to get us there? And how would you describe the personal and marketplace freedom needed to move us forward? Can the US evolve to what is needed to succeed?

  4. This is not just a European problem it will take the US down with it. There is a bigger picture here though. Try and forget about banks, bonds, and debts and just think about currencies. There may be a European Banking and bond problem but this is not a Euro crisis. The US on the other hand has a dollar crisis on their hands and they are losing the battle with the Euro. One just has to look at who is monetizing debt and who isn’t. The Euro is actually well poised to take the place of the dollar when it crashes and is removed as the world reserve currency. Europe may need to nationalize thier banks and some investors might take losses on bonds, but it will pale in comparison to the benefits they will reap when the US loses it’s status as the worlds reserve currency. This would have happened 30 years ago but the Euro wasn’t ready. It would have happeded 10 years ago but China starting buying our debt. This time around, so far, there isn’t anyone willing to kick the can for us again

      • Sam isn’t wrong about the dollar, but I think he is wrong about the Euro. When the petrodollar is replaced, I believe it will be replaced by a gold-backed Yuan. This is because the Teutonic monetarism suffers from a different but equally bad set of problems to the all-you-can-print dollar buffet.

        In reality fiat monetary management has ostensible one goal: economic stability. Central banks might use differing language, e.g. low unemployment, price stability, etc, but in the end it all comes down to creating a stable background for economic activity.

        Neither the ECB, nor the Federal Reserve (nor any fiat currency system in history) has proven itself capable of this in the long run.

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