Europe as the Apocalypse

Here is a doom-and-gloom view of the world from the Wall Street Journal. They look at the problems in Europe and spin a tale of imminent calamity for the whole world. I, however, see the WSJ as a Cassandra:



The WSJ is like those prophets in mid 1940 wrote off England and proclaimed the end of the world as we know it and the start of a new age of barbarism. On the other hand, I believe in "muddle through". The Brits muddled, Hitler over-reached in Russia, and finally America joined the fray and the world managed to find a way to avoid the obvious bleak tragedy that all the experts foretold.

Krugman Calls the Depression

Here is a bit from an excellent op-ed by Paul Krugman in the NY Times:

It’s time to start calling the current situation what it is: a depression. True, it’s not a full replay of the Great Depression, but that’s cold comfort. Unemployment in both America and Europe remains disastrously high. Leaders and institutions are increasingly discredited. And democratic values are under siege.

On that last point, I am not being alarmist. On the political as on the economic front it’s important not to fall into the “not as bad as” trap. High unemployment isn’t O.K. just because it hasn’t hit 1933 levels; ominous political trends shouldn’t be dismissed just because there’s no Hitler in sight.

Let’s talk, in particular, about what’s happening in Europe — not because all is well with America, but because the gravity of European political developments isn’t widely understood.

Go read the whole article. It will give you a picture of Europe that you are not getting from the mainstream media.

The 1930s should be an object lesson for those who think they can write off 10% or 20% of the population during a financial downturn. Letting the government turn its back and refuse to aid these people and, worse, to refuse to stimulate the economy into a robust recovery condemns that country to a rise of right wing demagogues.

Krugman is sending out a clarion call for a change of course by democracies to save themselves from their own funeral:

Nobody familiar with Europe’s history can look at this resurgence of hostility without feeling a shiver. Yet there may be worse things happening.

Right-wing populists are on the rise from Austria, where the Freedom Party (whose leader used to have neo-Nazi connections) runs neck-and-neck in the polls with established parties, to Finland, where the anti-immigrant True Finns party had a strong electoral showing last April. And these are rich countries whose economies have held up fairly well. Matters look even more ominous in the poorer nations of Central and Eastern Europe.

Last month the European Bank for Reconstruction and Development documented a sharp drop in public support for democracy in the “new E.U.” countries, the nations that joined the European Union after the fall of the Berlin Wall. Not surprisingly, the loss of faith in democracy has been greatest in the countries that suffered the deepest economic slumps.

And in at least one nation, Hungary, democratic institutions are being undermined as we speak.

One of Hungary’s major parties, Jobbik, is a nightmare out of the 1930s: it’s anti-Roma (Gypsy), it’s anti-Semitic, and it even had a paramilitary arm. But the immediate threat comes from Fidesz, the governing center-right party.

...

Kim Lane Scheppele, who is the director of Princeton’s Law and Public Affairs program — and has been following the Hungarian situation closely — tells me that Fidesz is relying on overlapping measures to suppress opposition. A proposed election law creates gerrymandered districts designed to make it almost impossible for other parties to form a government; judicial independence has been compromised, and the courts packed with party loyalists; state-run media have been converted into party organs, and there’s a crackdown on independent media; and a proposed constitutional addendum would effectively criminalize the leading leftist party.

Taken together, all this amounts to the re-establishment of authoritarian rule, under a paper-thin veneer of democracy, in the heart of Europe. And it’s a sample of what may happen much more widely if this depression continues.

...

The European Union missed the chance to head off the power grab at the start — in part because the new Constitution was rammed through while Hungary held the Union’s rotating presidency. It will be much harder to reverse the slide now. Yet Europe’s leaders had better try, or risk losing everything they stand for.

And they also need to rethink their failing economic policies. If they don’t, there will be more backsliding on democracy — and the breakup of the euro may be the least of their worries.

I thought political leaders were "too smart" to let another depression occur. I was wrong. I didn't even consider that the democracies would reprise the horror of the 1930s and allow fascist dictatorships to rise yet again. But it looks like I was far too naive. The idiocy of political leaders plumbs a depth that I stupidly just couldn't believe was possible. Incredible!

For a peek at Krugman's premonitions about the United States, read this.

The European Crisis

Here is a post by Paul Krugman on his NY Times blog. It is the latest in many attempts by him to get the European authorities to be sensible and do what economics requires rather than follow their emotions or "morality play" with counter-productive policies. Sadly, the Europeans are not listening:

Death By Hawkery

What the world needed in this global deleveraging crisis was deficit spending and higher inflation targets. What it got was fiscal austerity and obsessive concern with inflation risks that weren’t real. Hence the catastrophe now unfolding.

Judging from recent comments, many readers missed my earlier analyses on these issues — I’m still getting the “You idiot, debt got us into this mess, how can debt get us out?” type of comment. So let me re-repost my discussion of this whole issue in full, followed by a couple of brief notes on the European situation.

The original post:

Sam, Janet, and Fiscal Policy

One of the common arguments against fiscal policy in the current situation – one that sounds sensible – is that debt is the problem, so how can debt be the solution? Households borrowed too much; now you want the government to borrow even more?

What’s wrong with that argument? It assumes, implicitly, that debt is debt – that it doesn’t matter who owes the money. Yet that can’t be right; if it were, we wouldn’t have a problem in the first place. After all, to a first approximation debt is money we owe to ourselves – yes, the US has debt to China etc., but that’s not at the heart of the problem. Ignoring the foreign component, or looking at the world as a whole, the overall level of debt makes no difference to aggregate net worth – one person’s liability is another person’s asset.

It follows that the level of debt matters only if the distribution of net worth matters, if highly indebted players face different constraints from players with low debt. And this means that all debt isn’t created equal – which is why borrowing by some actors now can help cure problems created by excess borrowing by other actors in the past.

To see my point, imagine first a world in which there are only two kinds of people: Spendthrift Sams and Judicious Janets. (Sam and Janet who? If you’d grown up in my place and time, you’d know the answer: Sam and Janet evening / You will see a stranger … But actually, I’m thinking of the two kinds of agent in the Kiyotaki-Moore model.)

In this world, we’ll assume that no real investment is possible, so that loans are made only to finance consumption in excess of income. Specifically, in the past the Sams have borrowed from the Janets to pay for consumption. But now something has happened – say, the collapse of a land bubble – that has forced the Sams to stop borrowing, and indeed to pay down their debt.

For the Sams to do this, of course, the Janets must be prepared to dissave, to run down their assets. What would give them an incentive to do this? The answer is a fall in interest rates. So the normal way the economy would cope with the balance sheet problems of the Sams is through a period of low rates.

But – you probably guessed where I’m going – what if even a zero rate isn’t low enough; that is, low enough to induce enough dissaving on the part of the Janets to match the savings of the Sams? Then we have a problem. I haven’t specified the underlying macroeconomic model, but it seems safe to say that we’d be looking at a depressed real economy and deflationary pressures. And this will be destructive; not only will output be below potential, but depressed incomes and deflation will make it harder for the Sams to pay down their debt.

What can be done? One answer is inflation, if you can get it, which will do two things: it will make it possible to have a negative real interest rate, and it will in itself erode the debt of the Sams. Yes, that will in a way be rewarding their past excesses – but economics is not a morality play.

Oh, and just to go back for a moment to my point about debt not being all the same: yes, inflation erodes the assets of the Janets at the same time, and by the same amount, as it erodes the debt of the Sams. But the Sams are balance-sheet constrained, while the Janets aren’t, so this is a net positive for aggregate demand.

But what if inflation can’t or won’t be delivered?

Well, suppose a third character can come in: Government Gus. Suppose that he can borrow for a while, using the borrowed money to buy useful things like rail tunnels under the Hudson. The true social cost of these things will be very low, because he’ll be putting resources that would otherwise be unemployed to work. And he’ll also make it easier for the Sams to pay down their debt; if he keeps it up long enough, he can bring them to the point where they’re no longer so severely balance-sheet constrained, and further deficit spending is no longer required to achieve full employment.

Yes, private debt will in part have been replaced by public debt – but the point is that debt will have been shifted away from severely balance-sheet-constrained players, so that the economy’s problems will have been reduced even if the overall level of debt hasn’t fallen.

The bottom line, then, is that the plausible-sounding argument that debt can’t cure debt is just wrong. On the contrary, it can – and the alternative is a prolonged period of economic weakness that actually makes the debt problem harder to resolve.

European twists

The European mess is pretty well described by the story above, with the Sams mainly in the periphery and the Janets in the core; what we’re getting is forced austerity in the periphery with no offsetting expansion in the core, and now everyone is shocked, shocked that the whole continent seems headed for recession.

In Europe’s case, however, higher inflation is even more crucial than for the United States — because Europe also needs a large adjustment of relative prices that will be very hard if not impossible to achieve with low overall inflation.

So as of this morning, the 5-year German breakeven — an implicit forecast of inflation — is only 0.9%.

This is not going to work.

Sadly the American authorities are facing a similar deflationary situation and are just now embarking on the same idiocy as the Europeans: austerity. It will fail in the US just like it is failing in Europe. It is the standard "prescription" of the political right, but it is profoundly ignorant of economic reality and what is required. People will suffer and pay a very dear price for the idiocy of politicians. It is a lost decade just like the Japanese have suffered through. Tragic.

... and here is more despair by Krugman at the idiocy of the politicians (and the "serious people" in positions of authority like the Bank of England, the Federal Reserve, and the European Central Bank):

Death By Accounting Identity

Martin Wolf has a somewhat despairing-sounding column this morning, in effect pleading with the Cameron government to admit that the laws of arithmetic must apply. Good luck with that.

Martin writes,

If the private sector is seeking to run down its debts, it is hard for the government to do so, too, because everybody cannot spend less than their income. That is the “paradox of thrift”. No, it is not a novel idea.

Ah, but for the past two years leaders in the Eurozone, Britain, and the US Republican party have subscribed to the following plan:

1. Slash government spending

2. ??????

3. Prosperity!

For a while ???? was framed in terms of the doctrine of expansionary austerity: slash spending and the confidence fairy would make private-sector spending rise. At this point, however, few still believe in this doctrine. Also, in the euro area it was hard to see how things would work even if the confidence fairy made an appearance; how was that supposed to resolve the large payments imbalances between the core and the periphery?

But even as the intellectual foundations, such as they were, for the austerity plan have been demolished, the plan itself remains unchanged.

I never thought I would live such an era of unrelieved idiocy. But knowing a little history, I was foolish to think I could avoid it. In my young adulthood I watched the US condemn an entire generation of young men to a meaningless and unwinnable war in Vietnam simply because no president had the courage to admit that the war was a mistake and end it. In my early childhood I watch as nutty right wing politicians tore the US to pieces in a mad witch hunt of "communists". I saw sleazy people like Nixon build a career on this evil enterprise. In my working years I watched as people fell in love with the rich and flocked to watch Lifestyles of the Rich and Famous. These sad fools didn't realize they were idolizing the social parasites who were busy from 1980 until today sucking the life blood out of society so they could live a life of mad indulgence while the bottom 99% saw their lives stagnate, saw the economy enter a depression caused by fraud and criminality by the greed of bankers, and saw a hopeful new president be elected and fail to act because he too was madly in love with the rich and unable and unwilling to help the bottom 99%. My life has been lived in an unremitting horror story of cruelty, greed, fear, and ignorance. That is the history of humanity for the last 10,000 years. Tragic.

Where is the Economic Crisis?

The current fear roiling financial markets is the "debt problem" in Europe. But I have a hard time finding the problem. Look at this graph:

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Supposedly Greece, Italy, Spain, and Ireland are "hopeless debtors". But their debt isn't all that different from the debt of Germany or the United States.

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I'm suspicious that all the teeth gnashing and the howls of "we are all doomed!" are simply fear stirred up by financial ghouls who want to stampede markets so they can pick off the weak.

Governments should stand up to them. They should have a united policy of supporting their bonds to stop these financial attacks. Right now the only "winners" are those who feast of the fearful. The fact that governments around the world are letting fear stampede financial markets adds fuel to the flames. It only makes things worse. I simply don't understand why governments can't realize there is strength in numbers. The old Ben Franklin saying is relevant: "Yes, we must, indeed, all hang together, or most assuredly we shall all hang separately."

Sadly, the world does not have leaders worthy of it. Instead, spineless sold-out fools have maneuvered into power on the hopes of money and glory when in fact, the world needs leaders of principle who can make tough choices, tell the people the truth, and in fact lead them out of this mess.

Krugman on the New Romanticism

The Romantic movement of the early 19th century created a lot of poetry, art, and "new sensitive feelings". But by the late 1930s that romanticism had corrupted itself in to the cruel "romantic" vision of the Nazis.

Here is a bit from a NY Times op-ed piece in which Paul Krugman takes the "new romantics" to task for the cruelties they are forcing upon the poor and powerless:

There’s a word I keep hearing lately: “technocrat.” Sometimes it’s used as a term of scorn — the creators of the euro, we’re told, were technocrats who failed to take human and cultural factors into account. Sometimes it’s a term of praise: the newly installed prime ministers of Greece and Italy are described as technocrats who will rise above politics and do what needs to be done.

I call foul. I know from technocrats; sometimes I even play one myself. And these people — the people who bullied Europe into adopting a common currency, the people who are bullying both Europe and the United States into austerity — aren’t technocrats. They are, instead, deeply impractical romantics.

They are, to be sure, a peculiarly boring breed of romantic, speaking in turgid prose rather than poetry. And the things they demand on behalf of their romantic visions are often cruel, involving huge sacrifices from ordinary workers and families. But the fact remains that those visions are driven by dreams about the way things should be rather than by a cool assessment of the way things really are.

And to save the world economy we must topple these dangerous romantics from their pedestals.

For more details, go read the full article.

The powerless and poor are always the ones made to pay for the "visions" of lunatics and mad kings:

So why did those “technocrats” push so hard for the euro, disregarding many warnings from economists? Partly it was the dream of European unification, which the Continent’s elite found so alluring that its members waved away practical objections. And partly it was a leap of economic faith, the hope — driven by the will to believe, despite vast evidence to the contrary — that everything would work out as long as nations practiced the Victorian virtues of price stability and fiscal prudence.

Sad to say, things did not work out as promised. But rather than adjusting to reality, those supposed technocrats just doubled down — insisting, for example, that Greece could avoid default through savage austerity, when anyone who actually did the math knew better.

...

Just to be clear, this is not an anti-European rant, since we have our own pseudo-technocrats warping the policy debate. In particular, allegedly nonpartisan groups of “experts” — the Committee for a Responsible Federal Budget, the Concord Coalition, and so on — have been all too successful at hijacking the economic policy debate, shifting its focus from jobs to deficits.

Real technocrats would have asked why this makes sense at a time when the unemployment rate is 9 percent and the interest rate on U.S. debt is only 2 percent. But like the E.C.B., our fiscal scolds have their story about what’s important, and they’re sticking to it no matter what the data say.

So am I against technocrats? Not at all. I like technocrats — technocrats are friends of mine. And we need technical expertise to deal with our economic woes.

But our discourse is being badly distorted by ideologues and wishful thinkers — boring, cruel romantics — pretending to be technocrats. And it’s time to puncture their pretensions.

History is a long litany of the poor and disenfranchised having to pick up the pieces after the mad elites have utterly ruined a country through war or mad schemes. The ultra-rich don't suffer. They simply move to the "next opportunity". It is the poor and powerless who are rooted to their soil and have the burden of reconstructing a society after a disaster. Think of Germany in 1945. Think of the American Deep South in 1866. And think of the children and grandchildren of the current generation of Americans. Tragic.

Getting History Right

As Europe pushes austerity and the Republicans push an austerity agenda in the US, Paul Krugman points out a bit of history that is overlooked:

The Brüning Thing

Joe Weisenthal tells us about an analyst willing to risk a Godwin’s Law citation; Dylan Grice of SocGen points out that it was the deflationary policies of 1930-32, not the inflation of 1923, that brought you-know-who to power.

Indeed. When we hear assertions that Germans are deeply hostile to loose money because of their historical memories, I always wonder why those memories are so selective. Why is 1923 seared into collective memory, while the Brüning disaster has apparently gone down the memory hole?

This is important — and there’s not much time to get the record straight.

The political right thought it could "control" Hitler. He seized power and destroyed Germany. That wasn't the plan that the 1% thought it was so deftly "handling" in 1932. Today the ultra-rich and the political right are sewing the seeds for another disaster. Maybe not a new Hitler, but something disastrous. Sadly, most people don't know enough history to recognize the path the world is on. And sadly, most people -- especially the elites and the politians they have bought lock, stock, and barrel -- don't know enough economics to realize how disastrous their austerity (deficit reduction) plans truly are.

Everybody should read the Joe Weisenthal article that Krugman is pointing at.

Saving Your Honour by Committing Suicide

The Europeans have painted themselves into a corner. They have created a European bank that has no tools to deal with the current mess. Worse, the elite of Europe refuse to admit the mess they are in. They refuse to think creatively about a solution. It is as if the crew over a sinking ship is fighting for control of the pilot's wheel. But steering isn't the problem. The ship has a big hole and is taking water and now quickly sinking. But the crew is too busy trying to "take charge" of the situation of "piloting" to bother with "sinking".

Here are key bits from a NY Times op-ed by Paul Krugman:

If it weren’t so tragic, the current European crisis would be funny, in a gallows-humor sort of way. For as one rescue plan after another falls flat, Europe’s Very Serious People — who are, if such a thing is possible, even more pompous and self-regarding than their American counterparts — just keep looking more and more ridiculous.

...

Think about countries like Britain, Japan and the United States, which have large debts and deficits yet remain able to borrow at low interest rates. What’s their secret? The answer, in large part, is that they retain their own currencies, and investors know that in a pinch they could finance their deficits by printing more of those currencies. If the European Central Bank were to similarly stand behind European debts, the crisis would ease dramatically.

Wouldn’t that cause inflation? Probably not: whatever the likes of Ron Paul may believe, money creation isn’t inflationary in a depressed economy. Furthermore, Europe actually needs modestly higher overall inflation: too low an overall inflation rate would condemn southern Europe to years of grinding deflation, virtually guaranteeing both continued high unemployment and a string of defaults.

But such action, we keep being told, is off the table. The statutes under which the central bank was established supposedly prohibit this kind of thing, although one suspects that clever lawyers could find a way to make it happen. The broader problem, however, is that the whole euro system was designed to fight the last economic war. It’s a Maginot Line built to prevent a replay of the 1970s, which is worse than useless when the real danger is a replay of the 1930s.

And this turn of events is, as I said, tragic.

The story of postwar Europe is deeply inspiring. Out of the ruins of war, Europeans built a system of peace and democracy, constructing along the way societies that, while imperfect — what society isn’t? — are arguably the most decent in human history.

Yet that achievement is under threat because the European elite, in its arrogance, locked the Continent into a monetary system that recreated the rigidities of the gold standard, and — like the gold standard in the 1930s — has turned into a deadly trap.

Now maybe European leaders will come up with a truly credible rescue plan. I hope so, but I don’t expect it.

The bitter truth is that it’s looking more and more as if the euro system is doomed. And the even more bitter truth is that given the way that system has been performing, Europe might be better off if it collapses sooner rather than later.

This is the kind of blindness you get from ideology. An ideologue doesn't look outside to see if it is sunny. He consults his horoscope because he "knows" that the horoscope captures everything essential about his future. You can't convince the fool that the horoscope was written days or weeks ago, that an astrologer has no knowledge of the future, and that the easiest way to check the weather is to look out the window. Europe is going down and it will take the whole world just like the US took the world down when it refused to rescue the Lehman investment house in September 2008. What an incredibly stupid world.

I foolishly thought that humanity was slowly getting "smarter" as we got wealthier and better educated. I failed to realize that if you can't fix the idiocy of ideology, then the craziness of people who "know" things because their ideology tells them it is so will destroy the world. I've always puzzled how powerful civilization in the past could commit suicide. I now realize it comes about by the elite of those societies getting deeply committed to their ideology and refuse to peek out the window to see whether the sun is shining or not. Incredible!

Sadly nobody will win this prize:

“Lord Wolfson, a prominent eurosceptic . . . is offering £250,000 to the person who comes up with the best plan for winding up the euro in an orderly way. The Wolfson Economics Prize . . . will be the second-largest cash prize for an academic economics after the Nobel Prize.” – Financial Times, October 19

Why? Because the ideologues in Europe refuse to accept that there is a problem with the euro, with deficits, and with the European bank. Sure they will admit to "problems" but not enough to actually address the oncoming catastrophe. This big prize won't be won because you can't "solve" a problem when the problem is stupid people blind to their own stupidy and refusing to even listen to the voice of reason!

The Horror of War

Here is the first of 20 videos from a 2001 BBC production War of the Century. It focuses on the fight between Hitler and Stalin. It is very graphic. The producers wanted to focus on how vicious the fighting was, how both sides stooped to war crimes. It is a very ugly insight into how brutal people can be. Soldiers on both sides who participated in war crimes are asked if they felt they had committed a crime (they mostly say "no" or justify it by saying "it was long ago and a different time) and they are asked if they would do it again (a few say "yes" and many beat around the bushes). The video exposes the hatred that is still there:

Institutions Die from the Head Down

Here is a bit from an article by James Surowiecki in the New Yorker:

In July, 2008, on the eve of the biggest financial crisis in memory, the European Central Bank did something both predictable and stupid: it raised interest rates. The move was predictable because the E.C.B.’s president, Jean-Claude Trichet, was an inflation hawk; he worried about rising oil and food prices and saw a rate hike as a way of tamping them down. But the move was also remarkably ill timed. The crisis was already under way, European economic growth had slowed to a crawl, and within a couple of months the global economy had collapsed, inflation had disappeared, and the E.C.B. was forced to slash interest rates, in an attempt to avert economic disaster. That July rate hike was like kicking the economy when it was down.

One might have thought that the E.C.B. would learn from the experience. No such luck. This year, Europe has been wrestling with high unemployment, slow growth, and a continuing debt crisis, with the economies of Portugal, Ireland, Italy, Greece, and Spain (the so-called PIIGS) struggling to avoid default. Given the situation, Trichet could have decided to keep interest rates where they were, as both the Federal Reserve and the Bank of England have done. Instead, the E.C.B. raised interest rates in April and, once more, in July. Again, as if on cue, European economic growth stalled and the continent’s debt crisis deepened, which has created problems for markets around the world.

...

To be fair, the E.C.B. isn’t alone in its paranoia about inflation. That bias reflects the preferences of many voters, whose hatred of inflation tends to be disproportionate to its real costs. (Cue Rick Perry saying that looser monetary policy would be “almost treasonous.”) Most studies of moderate inflation find that its costs are quite small, but a study of elections in thirteen European countries from the nineteen-sixties to the nineties found that voters were far more likely to toss out politicians when inflation rose than when unemployment did. Inflation hits everyone, after all, even those who have jobs, and it’s easier to get angry about expensive gasoline than about that raise you might have got if the economy were stronger.

I think the Peter Principle is alive and well and explains the heads of all big institutions. How else could the IMF end up with a rapist as their chief?

I think Obama is a good example of the Peter Principle in action. He was diligent, polite, caution so he won the big prize. People simply expected that if he were running for president he realized that required leadership skills and probably had them. We are all shocked to discover that Obama hasn't a clue about what it takes to be a real leader. In his own mind he is doing great things, but if you look around, the US is in a mess and like a car stuck in the mud, the engine is being pumped and wheels are spinning and a great roaring noise arises from time to time, but that car is going nowhere.

Deliberately Running the Ship of State onto the Shoals

Here is a post by Paul Krugman in his NY Times blog where he is pulling his hair out because the lunatics have taken charge of the asylum. Governments are doing exactly the opposite of what they should in the face of a worldwide depression, the first big one since the Great Depression:

Liberty, Equality, Austerity

Sigh. France cuts growth targets, unveils austerity plan. We’re told that it is doing so because it expects slower growth — which the austerity will make even slower.

But France faces soaring interest rates, right? No:

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ECB, Bloomberg
At this point the entire advanced world is doing exactly what basic macroeconomics says it shouldn’t be doing: slashing spending in the face of high unemployment, slow growth, and a liquidity trap. It’s a global 1937. And if the result is another recession, the witch-doctors will just demand more bleeding.

The Recession of 1937 was a completely self-inflicted wound caused by FDR listening to the conservatives calling for "fiscal austerity" and "balanced budgets". It is a wonderful example that demonstrates, in the midst of a depression, that tight money is wrong-headed, that the government has to counteract the increased private saving with public spending to allow the private sector to work of its excessive debts.

Lessons in How to Turn a Little Depression into a Great Depression

Here are some key bits from a post by Robert Reich on his blog:

Not only is the United States slouching toward a double dip, but so is Europe. New data out today show even Europe’s strongest core economies – Germany, France, and the Netherlands – slowing to a crawl.

We’re on the cusp of a global recession.

Policy makers be warned: Austerity is the wrong medicine.

We all know about the weaknesses in Europe’s “periphery” – Greece, Ireland, Spain, Portugal, and Italy. But the drop in Europe’s core is dizzying.

Germany grew at an annualized rate of just half a percent last quarter, down from 5.5 percent in the first quarter of the year. France didn’t grow at all.

What’s going on in Europe’s core? Partly it’s a loss of confidence due to debt crises in the periphery. But that’s hardly all.

...

And as the United States economy sputters, exports to America have been slowing.

But chalk up a big part of Europe’s slowdown to the politics and economics of austerity. Europe – including Britain – have turned John Maynard Keynes on his head. They’ve been cutting public spending just when they should be spending more to counteract slowing private spending.

The United States has been moving in the same bizarre direction. Cutbacks by state and local governments have all but negated the federal government’s original stimulus, and no one in Washington is talking seriously about a second. The pitiful showdown over increasing the debt limit has produced the opposite: a Rube-Goldberg-like process for capping spending rather than increasing it, and a public that’s being sold the Republican lie that less government spending means more jobs.

Yes, governments on both sides of the Atlantic are deeply in debt. But policy makers on both sides seem to have forgotten that economic growth is the most important tonic.

Public debt has meaning only in relation to a nation’s GDP. When more people are working, more companies are profiting, and economies are expanding, revenues pour into national treasuries.

When economies stop growing or contract, the opposite occurs. Economies can fall into vicious cycles of slower growth, lower tax revenues, spending cuts, and even slower growth.

That’s what we’re seeing now.

...

Without an expansionary fiscal policy, low interest rates have little effect. Companies won’t borrow in order to expand and hire more workers unless they have reasonable certainty they’ll have customers for what they produce. And consumers won’t borrow money to spend on goods and services unless they’re reasonably confident they’ll have jobs.

Fiscal austerity is the wrong medicine at the wrong time.

All the mistakes of the slow motion depression of the 1930s are being recreated. All that is missing is for the crazed right wing parties in America and Europe to get out and dust off the old brown shirts and put the goons back on the street to enforce their louch-eyed view of the world.

Adam Smith's Invisible Hand

Dean Baker has found yet another invisible hand in the market of ideas with this post on his Beat the Press blog:

Erskine Bowles Gets $350,000 a Year from Morgan Stanley

For some reason the media never find room to mention the fact that Erskine Bowles is a director of Wall Street investment bank Morgan Stanley (an otherwise bankrupt beneficiary of the bailout). Bowles was a co-chair of President Obama's deficit commission and is now apparently one of the people whose name is being mentioned as a possible successor to Timothy Geithner if he were to resign as Treasury Secretary.

If Bowles was getting $350,000 a year from the United Auto Workers it seems likely that it would be mentioned in news reports. It's not clear why the media do not think his ties to a major Wall Street bank are relevant.

Call me a cynic, but I think people sing for their supper, I suspect Bowles' "advice" on the Debt Commission and as an advisor to Obama probably went like this: "Sir, do this-and-this-and-not-that to help our friends [the ultra-rich]". This was a wonderfully "invisible hand" that helps the rich in magical ways inside Washington and is amazingly effective at ensuring that government actions surprisingly favour the ultra-rich.

I find it funny that Dean Baker can spot the obvious while the rest of the "journalists" covering Washington don't see this kind of stuff.

Here's another example from another post by Baker:

This one is almost too painful to write about. The Post tells us that:

"Even some of the recent bright spots in the global economy are starting to dull. German economic growth, for example, appears to be slowing. Germany exports heavily to the European nations that are experiencing a debt crisis."

Is there anything in the world that was more predictable? Why on earth didn't the people making policy at the ECB see this?

Isn't that surprising! When you choke people to death, they don't hop up and ask you what they can do for you next.

Germany has been "reluctant" to help cover the bonds that are running up in price because of the threat of default by Greece and the other PIIGS. So these economies are being forced (choked) by Germany into austerity which cuts their GDP. Now, isn't it surprising that as they are gasping for air (austerity), they don't jump up and ask what more they can do (suddenly show a GDP growth spurt that demands more of your exports)? The world is a complex and nuanced place where only the subtlest minds -- Dean Baker -- can gaze through the murk and see these obscured truths.

I'm thinking the world wouldn't be so mysterious, dark, and unintelligible if the media presented real facts rather than their usual song and dance show, their magician moves, their propaganda for the rich.

Everybody should read the Beat the Press blog to discover just how beaten up they are by a press that only half covers "the story".

Failure of Leadership

From The Economist magazine:

Leaders in America and Europe are dallying with failure on an epic scale. They are constrained by dysfunctional institutions, it's true. In Europe, the architecture of the currency union is far too underdeveloped to weather a crisis of the current magnitude. In America, the creaking machinery of the legislature is ill suited to settlement of big questions on a short time frame amid divided government. But it's no longer sufficient to blame inadequate policy responses on institutions alone. America and Europe are flailing because their leaders are failing. They seem to be too small for the tasks at hand, too petty, and too myopic.

The challenges facing Europe and America are big, but they're not mysterious. In Europe, the issues are sovereign debt, vulnerable banks, and a poorly designed currency area. It's not tricky to see what must be done. Peripheral debts should be addressed through austerity, sure. But unsustainable debt loads need to be written down. Banks should be recapitalised to prevent trouble in financial markets. Emergency funds should be bolstered to fight sovereign and banking contagion. And substantial fiscal integration must take place, including fiscal transfers to support peripheral economies while they get their budgets in order. The central bank should also stop fighting the phantom of accelerating inflation.

European leaders know what they need to do. They have been slow to do it for two reasons. First, the magnitude of the commitment necessary to save the union is uncertain, and they don't want to pay a penny more than is necessary. And second, the distribution of the costs of the commitment is uncertain, and no individual entity wants to pay a penny more than is necessary.

...

In America, the situation is more ridiculous still. The economy is vulnerable. New data continue to reveal just how weak growth was in the second quarter. The economy may scarcely have expanded at a 1% annual pace. Unsurprisingly, job growth was too slow to keep up with a growing labour force, and the unemployment rate began rising again.

...

Washington seems practically excited to stamp out optimism. Congress has spent the first month of the third quarter dangling the prospect of a full blown fiscal crisis over the heads of American firms and households. Markets are retreating, and businesses are building up cash reserves as insurance against the worst. After two years of pitifully slow recovery, while tens of millions of workers are un- or underemployed and wages flat, the government is doing its absolute best to kill the latest growth rebound in its crib. It is shocking.

Again, it's not like the correct policy path is incredibly complicated. Here, I'll sum it up in three quick steps:

1. Don't cause a major crisis.


2. Do spend more and tax less for the next year or so.


3. Do spend less and tax more after that.

See? That's really easy! If you wanted to move up to more complicated ideas, you could talk about using the opportunity of record low borrowing costs to make needed, long-overdue investments in critical American infrastructure. Instead, Congress seems determined to convince the world that America shouldn't be allowed to borrow at all, except at highly punitive rates. It might also be a good idea to confirm appointees to the Federal Reserve board who know a thing or two about how labour markets work. Instead, Congress is blocking nominees for sport, citing debasement of the currency while 10-year inflation expectations are under 2%. And while the very same legislators muse publicly about how an American debt default might not be so bad after all.

It's inexcusable. And it is a direct result of a leadership in Washington that is too small-minded to see the danger it's courting by recklessly pursuing a foolish ideological agenda.

...

One wants to shout at them: stop screwing around! Lives and livelihoods are on the line! Nothing good will come of a return to recession, to saying nothing of a new financial meltdown. And yet, the trifling continues. Sometimes history gives us individuals equal to troubling circumstances. Sometimes it doesn't, and the world suffers. Maybe everything will turn out all right. Shame on the leaders of Europe and America for working so diligently to ensure that it doesn't.

In an interconnected world simultaneous failures are really disasterous. The world is looking very shaky because Japan is still faltering, and China appears to be ready to explode with a credit bubble. We appear to be heading back into a mini-2008 meltdown.

You can thank the idiots in the Republican party and the paralyzed and inadequate "leadership" of Obama for this crash.

Financial Armageddon

Here is a bit from a post by John Mauldin on The Big Picture blog. It deals with the debt crisis in Europe and the demands of creditors that debtors fall on their swords and/or march of to an eternal debtors prison for the misdeeds of predatory capital.

Here's the simple summary:

... there is a revolution going on all over Europe, slowly building up as people realize that the “solution” being offered benefits banks and not German taxpayers or Greek creditors...

And here's the longer version:

This is what today’s financial War of All against All is about. And it is what the Greeks gathering in Syntagma Square are demonstrating about. At issue is the relationship between the financial sector and the “real” economy. From the perspective of the “real” economy, the proper role of credit – that is, debt – is to fund productive capital investment and economic growth. After all, it is out of the economic surplus that interest is to be paid. This requires a tax system and financial regulatory system to maximize the growth. But that is precisely the fiscal policy that today’s financial sector is fighting against. It demands tax-deductibility for interest, encouraging debt financing rather than equity. It has disabled truth-in-lending laws and regulation keeping prices (the interest rate and fees) in line with costs of production. And it blocks governments from having central banks to freely finance their own operations and provide economies with money.

Banks and their financial lobbyists have not shown much interest in economy-wide wellbeing. It is easier and quicker to make money by being extractive and predatory. Fraud and crime pay, if you can disable the police and regulatory agencies. So that has become the financial agenda, eagerly endorsed by academic spokesmen and media ideologues who applaud bank managers and subprime mortgage brokers, corporate raiders and their bondholders, and the new breed of privatizers, using the one-dimensional measure of how much revenue can be squeezed out and capitalized into debt service. From this neoliberal perspective, an economy’s wealth is measured by the magnitude of debt obligations – mortgages, bonds and packaged bank loans – that capitalize income and even hoped-for capital gains at the going rate of interest.

Iceland belatedly decided that it was wrong to turn over its banking to a few domestic oligarchs without any real oversight or regulation over their self-dealing. From the vantage point of economic theory, was it not madness to imagine that Adam Smith’s quip about not relying on the benevolence of the butcher, brewer or baker for their products, but on their self-interest is applicable to bankers? Their “product” is not a tangible consumption good, but interest-bearing debt. These debts are a claim on output, revenue and wealth; they do not constitute real wealth.

This is what pro-financial neoliberals fail to understand. For them, debt creation is “wealth creation” (Alan Greenspan’s favorite euphemism) when credit – that is, debt – bids up prices for property, stocks and bonds and thus enhances financial balance sheets. The “equilibrium theory” that underlies academic orthodoxy treats asset prices (financialized wealth) as reflecting a capitalization of expected income. But in today’s Bubble Economy, asset prices reflect whatever bankers will lend. Rather than being based on rational calculation, their loans are based on what investment bankers are able to package and sell to frequently gullible financial institutions. This logic leads to attempts to pay pensions out of a “wealth creating” process that runs economies into debt.

It is not hard to statistically illustrate this. There amount of debt that an economy can pay is limited by the size of its surplus, defined as corporate profits and personal income for the private sector, and net fiscal revenue paid to the public sector. But neither today’s financial theory nor global practice recognizes a capacity-to-pay constraint. So debt service has been permitted to eat into capital formation and reduce living standards – and now, to demand privatization sell-offs.

As an alternative is to such financial demands, Iceland has provided a model for what Greece may do. Responding to British and Dutch demands that its government guarantee payment of the Icesave bailout, the Althing recently asserted the principle of sovereign debt... Instead of imposing the kind of austerity programs that devastated Third World countries from the 1970s to the 1990s and led them to avoid the IMF like a plague, the Althing is changing the rules of the financial system. It is subordinating Iceland’s reimbursement of Britain and Holland to the ability of Iceland’s economy to pay.

And here's hoping that something good will come out of this mess:

No doubt the post-Soviet countries are watching, along with Latin American, African and other sovereign debtors whose growth has been stunted by predatory austerity programs imposed by IMF, World Bank and EU neoliberals in recent decades. We should all hope that the post-Bretton Woods era is over. But it won’t be until the Greek population follows that of Iceland in saying no – and Ireland finally wakes up.

EMU Meltdown?

Here is Niall Ferguson pontificating on the EMU's demise:


I was once quite enamoured with Ferguson, but I've since decided that he has spread himself too thin. He may be OK as a historian, but he has no real insight into contemporary events. He needs to return to the books and give up the crystal ball.