Felix Salmon argues that the scale of a default by itself does not matter. Default matter far more when they are unexpected. The markets were (quite irrationally IMO) treating Greece and other southern European countries as low default risks. Institutions (e.g. banks) that normally only buy high quality credits bought large quantities of sovereign bonds that are now at high risk of default. Salmon sees serious risk to the European political union. I realize this will come across as a statement of the obvious to many well-informed readers. But sometimes the obvious needs stating.
All of which is to say that the great euro experiment seems to be unwinding, the Estonia news notwithstanding, and no one knows where it’s headed over the medium term. If economics and politics become fractious and nationalized across Europe, then within the region only Germany will any longer provide the kind of safety that investors are currently looking for; everybody else is going to start returning to their pre-convergence trade levels, which were a long way away from where we are now.
So anything which threatens the unity of the eurozone or the EU is surely going to have market consequences much worse than a single day drop of a few percentage points on European stock exchanges. And right now it’s far from clear that the political will to keep the union together is going to be sufficient.
Yves Smith makes the point that one big battle over Greece is whether the Greek populace or the lenders pay. You might think the borrowers ought to pay. But if the lenders do not get bailed out by governments (who just shift the costs to a larger set of taxpayers) then lending losses will discipline lenders to not lend money to a country up to the point of well past 100% of GDP. This financial disaster in the making would not have been possible without irresponsible lenders putting up the money in the first place.
I see many things going wrong in Western societies, economies, and politics that are going to cause large, and to the vast majority quite unexpected, discontinuities. While the threat to the euro's existence might seem sudden and unexpected Milton Friedman famously doubted its stability from its founding in 1999 and as recently as 2005 when he was 94 years old.
The euro is going to be a big source of problems, not a source of help. The euro has no precedent. To the best of my knowledge, there has never been a monetary union, putting out a fiat currency, composed of independent states. There have been unions based on gold or silver, but not on fiat money—money tempted to inflate—put out by politically independent entities.
Friedman's comments on a European common currency in 1992 bear reading today. He saw the problems with it and he would not be at all surprised by recent events.
A break-up of the euro in the next few years would probably throw us back into a recession again starting from already high unemployment rates. Could a mechanism for defaults within the euro save the currency? Or is union power and public worker power in southern European states too strong to make their membership in a sound currency workable? Just the labor mobility problem across states with so many different languages alone makes the idea of a common currency seem foolish.
In America the great dumbing down looks on course to go very far. This is totally off the radar screen of what passes for mainstream elite conventional wisdom. But it will depress the US economy in coming decades.
Another really biggie on my radar screen is Peak Oil. See the graph here of world oil discovery and production rates. Production first exceeded discovery around 1981 and the gap between them has grown much bigger. We are now burning thru oil about 3 times faster than new oil is discovered. It is going to get ugly.
Many political divisions that are papered over now with money will rise up into political conflicts. Much larger fraction of populations will be impacted and competition for shrinking pies will intensity. Acrimony over government spending, taxes, and racial preferences systems will become much more intense. I'm expecting street battles by opposing groups of marching protestors.
|Share |||By Randall Parker at 2010 May 15 01:34 PM Economics Sovereign Crises|