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2011 November 26 Saturday
Euro Collapse: A Disaster Telegraphed In Advance

Why worry about asteroid strikes or a massive volcanic eruption when you can worry about the collapse of the euro currency zone? This isn't one of those disasters that come on suddenly. It has a plot that has been building up for years. Though for most of that time the very idea that we were in a disaster plot was denied by the main writers. Now, however, too many plot complications have built up to the point where a disaster cliff hanger is clearly in view. Any outcome looks pretty bad and some of them are "buddy, can you spare me a dime?" doozies. Even collapse of the European Union is being mooted.

Europe is a pretty scenic and culturally rich place in which to have economic collapse, rioting in the streets, and general chaos. If it happens excellent news video feeds will boost ratings more than a terrorist attack. The British government is already preparing to deliver life support to Brits caught inside of failed states. Maybe NATO troops should be pulled out of Afghanistan in order to do nation-building in Europe?

A senior minister has now revealed the extent of the Government’s concern, saying that Britain is now planning on the basis that a euro collapse is now just a matter of time.

“It’s in our interests that they keep playing for time because that gives us more time to prepare,” the minister told the Daily Telegraph.

Time to move US Marines helicopter carriers into position to evacuate Americans from Italy, Spain, and Portugal to England? Stock up US military bases with food? Or maybe dollar ATMs?

Also, there've got to be shady subplots of conspiracies afoot. Have the Bilderbergers have been plotting (benevolently of course) for this outcome in order to undermine Brussels as a competing power center? Is the Trilateral Commission on board? The Illuminati? Name your favorite group to hate or fear. They might have a role.

I don't happen to own a TV. But if I did I'd be clicking thru the channels looking for a news channel that covers the action in Europe more like a sports match. "In the last round heavily favored Germany had a setback and now Finland and Denmark are breaking past Germany. No predicting how this will turn out."

Now that even Germany – Europe’s most creditworthy country – is struggling to raise cash, there’s no haven left within the 17-member common currency. On Friday, two more countries, Hungary and Belgium, saw their credit ratings downgraded as Italy struggled with a bond auction that saw long-term borrowing coasts soar to unsustainable levels.

"The competition intensified after the 2008 near collapse of the whole field." "Some weaker teams are expected to drop out of the race".

A survey by Barclays Capital of almost 1,000 of its clients, published Wednesday, shows almost half now expect at least one country to leave the euro zone. And a mere 3% are expecting a workable solution to the crisis within the next three months.

"The PAC-17 is going to turn into PAC-10 at the rate things are going". "Yep, some of these countries are going to have to enter the Little League".

Banks including Merrill Lynch, Barclays Capital and Nomura issued a cascade of reports this week examining the likelihood of a breakup of the euro zone. “The euro zone financial crisis has entered a far more dangerous phase,” analysts at Nomura wrote on Friday. Unless the European Central Bank steps in to help where politicians have failed, “a euro breakup now appears probable rather than possible,” the bank said.

It is hard for me to see how the United States avoids a recession as Euro countries default, reestablish their currencies in a hurry, and banks fail.

Simon Johnson says Europe's choice is between a Great Depression or a Great Inflation. Is that true? Which will they choose?

There is no way to have just a little debt restructuring for Italy. If Italian debt involves serious credit risk – i.e., a nonzero probability of default – then all sovereign debt in Europe will need to be repriced, downwards. There is a notion that Germany will remain a safe haven, but even that is far from clear. According to the IMF, gross government debt in Germany will be 82.6 percent of GDP at the end of this year (Statistical Table 7 of the IMF’s Fiscal Monitor; the net government debt number for 2011, in Statistical Table 8, is 57.2 percent). Reports of German fiscal prudence have been greatly exaggerated.

There is no way that the German policymakers or the German public will do well in the event of a major sovereign credit disaster. Credit would tighten across the board. German exports would plummet. The famed German social safety net would come under great pressure. If Germany had to call in the International Monetary Fund for advice, even informally and behind the scenes, how would that feel?

Will the Germans opt for inflation to hold the EU together? Or will southern members reestablish their currencies and then pursue inflationary monetary policies? In the latter scenario the euro's exchange rate will probably rise, putting the brakes on German exports and putting Germany into a recession.

Inflation or deflation? What's going to happen?

Share |      By Randall Parker at 2011 November 26 05:58 PM  Europe Monetary Union


Comments
Rama Kandra from Matrix said at November 26, 2011 9:16 PM:

What do you think of this?

http://mises.org/daily/5170

paulkael said at November 26, 2011 9:59 PM:

Life is a Caberet Old Chum and I Am a Camera. Well with inflation probably just a Tweet.

Jason said at November 27, 2011 1:18 AM:

Thanks for the link, Rama, interesting reading - although I will have to ponder it some more since I am not an economist. I have wondered what shape Japan is really in.

Has anyone heard what Jim Rickards has to say? He thinks we are headed for currency wars (or actually in them) that may lead to trouble in a few years.

Rama Kandra from Matrix said at November 27, 2011 2:33 AM:

I'm not sure how accurate his theory is; someone with a Macroeconomics background should probably comment.

For example, he says, "another consideration is that GDP captures mostly consumer spending and subtracts out the majority of business spending."

But the definition of GDP is very standard and equals private consumption + gross investment + government spending + (exports − imports) (see Wiki). I'm, not sure what subtracting business spending out means.

Real growth over the last 11 years was 1.03 %:

http://www.indexmundi.com/g/g.aspx?c=ja&v=66

So the real growth doesn't seem significant, unless of course the data was fudged and real growth was higher.

I'm not sure I understand it all correctly, so I'd like to hear from someone who has studied Macroeconomics formally/understands it well.

Abelard Lindsey said at November 27, 2011 4:58 PM:

The Germans will not inflate. They will bring back the Deutschmark instead. The last time German politicians and bankers opted for inflation (Wiemar Republic), they all ended up in the death camps as punishment. This is a salutary lesson not to manipulate the value of currency (and do many other things) for political expediency. The rest of Europe will probably opt for inflation.

Wolf-Dog said at November 27, 2011 5:07 PM:

But if Germany does not devalue its currency in response to the competitive devaluations that the other countries will be implementing, this would adversely affect their exports and their unemployment will dramatically increase.

Randall Parker said at December 4, 2011 5:10 PM:

Rama Kandra,

Two points:

- I allow and encourage "a href" html tags for URLs in post comments. People are not going to copy and paste URLs. Any URL you include in a post comment without HTML tagging to make it automatically clickable will only rarely get read.

- "What do you think of this" did not even include information about what the link was about.

For everyone else: The mises.org link was to The Myth of Japan's Lost Decades by Kel Kelly.

What I think of the idea that Japan didn't lose any decades: They've got about 200% GDP sovereign debt. That's like a financial nuclear weapon waiting to go off. They've also got a shrinking working age population that is saddled with paying for the retirement of a growing number of more affluent retirees.

Is Kel Kelly's argument correct? Not sure. What I'd like to know about the Japanese economy:

- How much has economic inequality risen? How much has the homeless rate risen? What's the real unemployment rate for males by age?

- What's happened to the median home size?

- What's the ratio of salaries for 30 year olds to 50 year olds as compared to 20 years ago? One can find commentary to the effect that the large corps cut back their hiring (certainly true in one Japanese company I'm familiar with) and there's a much larger number of well paid in the older age brackets than the younger age brackets. More temp workers with poorer benefits among the younger.

Randall Parker said at December 4, 2011 5:23 PM:

Here is Rama Kandra's link to Japanese growth rates by year since 1999.

Want to see something tragic? Here's Greece's GDP growth rate by year since 1999. That chart does not go to the present. But Greece is still contracting.

Here's a quarterly look at the Greek economy since 2007. They've been contracting for a couple of years at least. Here's a source that includes GDP into 2011. Greece has been contracting for 3 years and probably will contract in 2012. The euro is a noose around its neck.

ibaaqa said at July 17, 2012 3:50 AM:

Germany is in allegation because it is the alone above abridgement with a atramentous rather than red antithesis area and accordingly has to pay up for any schemes involving the Euro. Some say the ascendancy has been wrested from Germany by spendthrift debt ridden EZ members. Can it be accurate that debtors are in allegation of the coffer abnormally as it is adjoin German law as able-bodied as German affection to actualize aggregate eurobonds so the PIIGS can abide to gorge on German money rather than cutback?

jogos online


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