I’ve been quite explicit about my disagreement with Paul Krugman. His view is that the main problem in America’s economy is a lack of demand that could easily be reversed by a big enough fiscal stimulus. My view is that lowered demand merely reflects underlying structural problems, very often at a global or systemic level. Big stimuli would make the problems go away for a few months or years, only to re-emerge at a later date if the underlying causes aren’t addressed (as I discussed in more depth here).
But he’s definitely onto something (as opposed to on something) today. Here’s a Venn diagram of the road ahead for Europe:
The real question is whether or not Professor Krugman would include a fake alien invasion (to create spending and raise demand) in the “things that might actually work” category.
Do we have six weeks to save the Euro?
From the Guardian:
George Osborne warned on Friday that the leaders of the eurozone had six weeks to end their political wrangling and resolve the continent’s crippling debt crisis.
Speaking in Washington, the chancellor said that the turmoil in the world’s financial markets meant there was now “a far greater sense of urgency” and mounting pressure on Europe from the G20 group of developed and developing nations.
“There is a sense from across the leading lights of the eurozone that time is running out for them. There is a clear deadline at the Cannes summit [G20] in six weeks time”, Osborne said. “The eurozone has six weeks to resolve this political crisis.”
I don’t think so. I think the Euro was effectively dead on arrival. A fundamentally broken system; and that fundamental discord has now been transmitted around the world in the form of European sovereign debt, infecting the balance sheets of nations and institutions, creating huge counterparty risk, and raising the possibility of a tsunami of defaults.
Silver is getting pummelled:
So is gold:
What does this mean?
Hedge funds and speculators who were long gold are trying to get a buffer of cash to soak up hits from the coming default cascade.
What does that mean for gold’s long term fundamentals?
Last week I asked:
Look at the following graph from the St. Louis Fed. It is the amount of deposits at the US Fed from foreign official and international accounts, at rates that are next to nothing. It is higher now than in 2008. What do they know that you don’t?
Here’s another sign that powerful insiders are increasingly running scared.
From Zero Hedge:
Back in the summer of 2007 two important things happened: the market hit an all time high, and the smart money realized what was about to happen (following the subprime and the Bear hedge fund blow up, it was pretty clear to all but Jim Cramer) and bailed out of stocks and into bonds, with Treasury holdings of Primary Dealers soaring at the fastest pace in history.
Finally, disgraced ex-President of the IMF Dominique Strauss-Kahn has weighed in, to confirm what everyone already knew.
From the Wall Street Journal:
The former International Monetary Fund’s Managing Director, Dominique Strauss Kahn, Sunday said Greece is unable to pay its debt and its creditors will have to take losses on the debt they hold.
“Greece got poorer, we can say Greeks will pay on their own, but they can’t,” Strauss Kahn said in an interview on French TV channel TF1. “There is a loss and it must be taken by governments and banks,” he said.
Yes — and so the real question, which nobody in a position of global or national authority has addressed — is just how will the global financial system be made to cope with the another Lehman-style cascade of defaults?
And what might put Europe and the global financial system to the sword? Recrimination. It’s not my fault it’s everyone else’s fault. Now former ECB policy-maker and Euro-hawk Jurgen Stark has weighed in to tell Euro-hopping U.S. Treasury Secretary Geithner (in less direct language) to shut up and go home.
From Zero Hedge:
Finger-pointing in the direction of Europe shouldn’t prevent others from putting their budgets in order and doing their homework before handing out advice to Europeans.
Of course, Stark has a point. Europe is a complete mess, European policy makers are stumbling and slumbering forward to the gates of Hades. But America? The American economy is a jaundiced sham; where Europe has maintained a sliver of its former industrial might (i.e. supply chains, heavy & light industry, consumer manufacturing) in Germany, Scandinavia and the Netherlands, America prefers to ship a significant majority of its consumption (and even a lot of its infrastructure) from China (and subsidise the shipping costs through massive military deployment).
I am sure the Euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.
— Romano Prodi, EU Commission President, December 2001
So the intent for Europe was always that a future crisis would bring about the justification for a resolution to European financial disharmony — namely, that while countries in the Euro control their own budgets, they don’t control their own currency. This mismatch means that with countries pulling in different directions, the European Central Bank is posed with an unmanageable task — create one policy to fit a group of very different economies. At the time of the Euro’s creation, Europe adopted a cross-that-bridge-when-we-come-to-it approach: a crisis would produce the circumstances required to justify unifying fiscal policy, a policy that at the time of the Euro’s introduction seemed unnecessary (and now is deeply unpopular).
But what if disharmony — both in terms of the forces producing the crisis, and disagreement over how to handle the problems — has created such a huge turmoil that instead of crossing the bridge, Europe falls into the water beneath?
Angela Merkel says that Europe won’t issue Eurobonds, presumably heeding the warning that handing over 133% of German GDP to bailing out PIGS may not go down so very well with the German taxpayer. From Bloomberg:
German Chancellor Angela Merkel attempted to shut the door on common euro-area bonds as a means to solve the debt crisis, saying that she won’t let financial markets dictate policy.
Joint euro bonds would require European Union treaty changes that would “take years” and might run afoul of Germany’s constitution, Merkel said. While common borrowing might arrive at some point in the “distant future,” bringing in euro bonds at this time would further undermine economic stability and so they “are not the answer right now.”
“At this time — we’re in a dramatic crisis — euro bonds are precisely the wrong answer,” Merkel said in an interview with ZDF television in Berlin yesterday. “They lead us into a debt union, not a stability union. Each country has to take its own steps to reduce its debt.”