Indecent Exposure

Paul Krugman believes that American exposures to Europe is not bad enough to make a ballyhoo:

With American exports to Europe forming a small component of GDP, a European collapse would not necessarily mean a collapse in American demand:

The map above — taken from here — tells us that overall, exports to Europe are just 2 percent of GDP. Some states, notably South Carolina, are more exposed (presumably because of those European-owned auto plants). But Obama isn’t going to win South Carolina in any case. And more broadly, even a sharp fall in exports to Europe would be only a small direct hit to demand.

OK, caveats: this only measures goods exports, and we should mark the numbers up maybe 25 percent to take account of services. Also, exports aren’t the only channel: if European events cause a Lehman-type event, disrupting financial markets world-wide, all bets are off.

Um, that’s a pretty ginormous caveat. As far as I am aware, the case regarding America’s exposure to Europe has never been an issue of a collapse of demand in exports and has always been an issue of precipitating financial collapse.

As I wrote in September:

The global financial system is an absurd interconnected house of cards. One falling card (like a Greek default) or ten falling cards (like the European banks who were foolish enough to purchase Greek debt) might just bring down the entire banking system, and its multi-quadrillion-dollar evil twin, the derivatives system.

And that’s not fear mongering. American banks have huge exposure to the European financial system.

From Zero Hedge:

Morgan Stanley’s exposure to French banks is 60% greater than its market cap and more than half its book value

The one thing we will highlight is that $39 billion is about 60% more than the bank’s market cap and a whopping 65% (as in more than half) of its entire book (less non-controlling interests) equity value.

I feel rather sorry for Krugman. He’s analysing a factor that traditionally is very significant in international macro. And in this case it’s almost totally negligible: the real problem isn’t the economy; it’s the monstrous beast of a financial system we find ourselves encumbered with.

20 thoughts on “Indecent Exposure

  1. I read the small excerpt you included and thought that his post was merely his way of psychologically dismissing the potential of a European collapse (that he sees very real) as being able to affect the chances of Obama being reelected (which he wants, and sees important). I followed the link and it confirmed my thoughts. So no serious economic thinking there, just some superficial psychologically motivated ravings, then decorated with some economic data.

    • So no serious economic thinking there, just some superficial psychologically motivated ravings, then decorated with some economic data.

      We as economic thinkers should guard against these tendencies in ourselves. Every day, I hope I do not become one of these ideological creatures. It is better to scavenge.

  2. Gresham’s Law -Bad money drives out good if their exchange rate is set by law.

    Following the logic of Gresham’s Law, I would like to propose a couple new additional economic laws along the line of Gresham’s Law. (Forgive me if these laws already exist!)

    Bliss’s Law (My last name!) – When bad economists drive out good economists with the help of a corrupt governments and/or central bankers.

    Aziz’s Law (Why not?)- When bad bankers drive out good bankers due to excessive greed and stupidity.

    As an aside to above, it has begin to occur to me that change many of us seek will have to come from those of us who understand the problems, can explain said problems clearly to the public and have common sense solutions to the problems. The top-down solutions to the economic crises enacted by governments and central bankers around the globe have clearly been unsuccessfult. Moving forward, much of the economic progress we seek, will have to be the bottom-up

    It is obvious to those of us that have studied economics, that the current group of economists running the world are flat out crazy. It is not enough that most of these economists missed perhaps the largest bubble in the history man. No, even after the data can no longer be doubted, changed and smoothed over they continue to paint a rosy picture in the face of insurmountable evidence to the contrary. Hubris, pride and greed have blinded these men and women into a state of denial that can now only be classified as dangerous frauds.

    Therefore, the responsibility to right the wrongs, fix the damage and get the economy of the world moving again, falls to us! Yes, you and I.

    It took me awhile (And a lot of reading) to understand that today’s economists will not leave voluntarily. They have powerful allies in the government and the private banking sector. Both the government and the banking sector now hide behind these few failed economists. If we can show the people that these economists are dead flat wrong, then the ploticians and bankers will have nothing to hide behind. Perhaps, then, a true change will occur!

    Sooo…how do we do it? Well shoot, why don’t we use the mediums of the digital age? It is one of the last true places for freedom of speech. If we can harness the combined knowledge of the individuals that frequent blogs such as this one, Zero Hedge, Jesse’s Cafe…. and cordinate targeted economic theory attacks on other “establishment websites (NYT, MarketWatch, Yahoo…)

  3. cont…..

    The targeted economic theory attacks will need leaders to organize these attacks. These leaders (I’m betting on the “New Wave” finacial blogs such as this one) will need to direct their imbedded population of readers torwards the individuals, websites and other media outlets that spread the false economic theories to the detriment of the general population.

    In fact, many of these blogs have sprung up from the failure of the MSM to actually report facts and not government press releases.

    If the bloggers (many of you all have links to eachother’s sites) could organize these attacks by first identifying offending articles, then make coherent arguements explain what the issues are (we do this all day on the various blogs) and then cordinate the attacks. I don’t know what these attacks will look like and I am sure (much like any war) that strategies will change is scenarois dictate.

    So, lets say for the sake of arguement, that tomorrow Paul Krugman writes an article extolling the virtues of smoking crack. Now, if we had a bunch blogs and their followers ready to go ASAP, we could send 1000s of comments at Paul, reitering that infact, smoking crack is not good for you. Perhaps we could have some fun while we are at it? We could all wait and then post at the exact same time or just respond to Neo-Keynesian (Debt doesn’t matter) dipsticks or just to women. Really, the fun could be endless.

    In the end, to continue down the our current path, will only lead to senseless and avoidable pain and suffering all over the world. Sometimes the responsibility to right the wrongs and fix things falls not to people who created the mess, but to people who have the ability fix the mess.

    The name: The economic war of 2012

    The goal: Replace corrupt economists in the public, private and educational sectors

    How: Harnessing the power blogs and the populations that follow them.

    The ralling cry/password “That Alien stole my money!”

    • No, no, no that alien GAVE you money, by attacking the Earth and causing us to print a lot of money to pay for giant ion cannons to fight the alien invasion, thus raising aggregate demand and ending the depression.

      Be thankful for your off-world overlords.


      It’s a formidable plan of action. Certainly it is very important that non-mainstream views such as my own get a wider hearing than just fringe blogs. I believe wholeheartedly in a free market for ideas. Central planning of what people should believe is worse than central planning of what they should buy.

  4. Also, what do you’all think? Contructive criticism appreciated and accepted!

    PS France sucks and their numbers make North Korea look more investment worthy.

  5. I am with you.

    I blogg daily on my home town Broadsheet “Online” in response to articles, using my real name, university credentials, and professional affiliations.

    The only way Politicians will listen, if they read these bloggs, is if they slowly get the picture that real people are concerned on the net.

    Then organise a real demonstration with real goals and a leader prepared to be arrested and jailed for inciting dissent.


  6. @FO SHO

    The problem is Enlightenment thinking, economics as a whole is part of it. The reason they did not see the bubble is because they admire the way things are done, if things were done differently we would not need economists and they would be out of a job. The alternative economists that you call ‘new wave’ are also speaking from within the Enlightenment thought…they do not object to the goals of economics, they just think different means and laws will get us there. The truth is in the pre-modern world there were no economists to speak of, and people lived quite well without them, the same can be said for most scientists….really what do the millions of scientists around the world do? How have they improved the condition of human beings in general? Most people are alienated in jobs they hate, or they live sad lives trying to find meaning in consumerism or something…all this just proves that science and Enlightenment thought has led us logically to this.

    • mo,

      Thaks for the reply. I think you make a good point about the “enlightenment” movement and how it makes the term “new wave” kind of silly. But I would disagree with you that by observing the past, we can’t make our future better. In fact, I would guess that most humans are proof of the this phenomenon. We toil in our daily labors in the hopes that tomorrow can always be better then today. Economics is just one way to measure the success, failure and solutions of our lives.

      You said, “Really what do the millions of scientists around the world do?”

      Speaking only from a personal POV, I for one, am thankful for science. My father is diabetic and without modern medicine, the coldness of night would have took him from us along time ago. And for every extra day with him on this planet, I am thankful and science gets the credit.

  7. they do not object to the goals of economics

    I do not actually know what you mean by the “goals of economics”. Perhaps John Maynard Keynes’ view that economics and planning can save the world from itself? I don’t know.

    My own “goal” of economics is insight and understanding so that we can make choices. What I object to is the rationalisation of economics as a form of central planning. But there is nothing whatever wrong with learned study and information.

    Throwing out economics, throwing out learned study, throwing out modernity because of the problems of central planning is throwing the baby out with the bathwater.

    • Yes a friend of mine is claiming that the real winner of all the economic turmoil is actually to be Germany, and not China.

      I am sceptical about that claim. Germany (yes — the English morons were calling Germany the sick man of Europe for not having a larger financial services segment) has certainly “won” in many senses, but it is not the spider at the heart of world trade like China.

      As for 3D printing, well I’m glad I made you think about it. Ultimately, beyond 3D printing exists the world of molecular manufacturing (3D printing is a very crude form of that), and there lies a solution to world poverty and inequality.

      At the same time, I think there will be a huge struggle from the state against this. 3D printing will put unprecedented power into the hands of the people. The state’s response — to maintain its own monopolies — will also be unprecedented.

        • Actually there’s a few steps above molecular manufacturing…

          In order to be able to invent the Apple Pie from scratch, you have to invent the universe first. Molecular manufacturing does not deal with that. Creating a universe is still far above our imagination.

  8. This chart doesn’t show the United States main export! A centralized fiat currency, which is undeniably linked to Europe. Let’s also not forget their second main export bombs and fighter jets, also linked through our new proxy NATO.

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