The Eurozone crisis and America

Economic activity is NOT a bad thing. Being a nation, such as Germany, that produces things that others buy, and therefore seeing your economy thrive, is NOT a bad thing. It is the fourth largest economy in the world, because it has successfully built companies. It is a natural natural-resource poor country has created a great economy by actually creating stuff. And that is keeping people at work -- even as everything around them stagnates in recession. I mean, give me the Spanish equivalents to these: Volkswagen, Allianz, E.ON, Daimler, Siemens, Metro, Deutsche Telekom, Munich Re, BASF, BMW, Robert Bosch, ThyssenKrupp, MAN, Bayer, Merck, Adidas, Puma, SAP, Infineon, Henkel, Deutsche Post, Hugo Boss. That doesn't even begin to cover it.

The reasons Greece, Spain, Portugal, Italy, etc. are in so much trouble? They don't have economies that create nearly as many things in demand. That is what creates jobs. At the same time, they have long had lax ideas about work, tax collection which is anathema to their cultures, and elected politicians based on policies focused on limiting the number of hours people can work a week, making government-enforced retirement ages of 59 or 60, and fighting for government-supplied benefits that they could only pay for when an economic bubble created false economic expansion.

Now they are in debt crisis.

You are turning this into some kind of misguided moral argument that I wasn't making. Spain is where it is. It is in debt over its head. Germany is where it is. It is not. The entirety of the situation is a debt crisis that I think is going to boil over. And it is serious enough -- and perhaps not understood enough -- to drag the whole world into an economic mess.

That was what I posted.

 

SoCal, Greece is one thing. Italy is the 8th largest economy in the world. Spain is 12th? 13th? The amount of sovereign debt -- and then the private debt their banks are masking due to bad loans -- is at a much different level. That was the point I was trying to make earlier in the thread.

If we see a daisy-chain of sovereign defaults that includes Italy and Spain, it will hit the world's banking system like a ton of bricks. It's worse than what we saw in 2008. If it spirals and we are looking at France and Germany -- which are not immune, just because they have not crossed that line yet -- it is catastrophe.

That isn't a prediction. But SOMETHING bad is going to happen, probably within the next year. Depending on the events, it will effect people in the United States -- how much is the question. Our economy is an eggshell right now. There is a reason why our Federal Reserve is secretly propping up the European banking system. The spillover will be potentially crippling, taking our banks that are not on solid footing, and potentially sending them into crisis too.

 

Desk, Greece is trying to manage a default process on debts it put itself into that it can't afford to pay. Germany holds the checkbook to help them buy time. This is the nature of anyone who goes to another asking to stave off financial ruin. The person holding the checkbook can set terms.

The only leverage Greece has is that it can say no, default on its debt, and go about it alone. It is a viable path, in that they would get to start fresh. It would guarantee years of economic misery -- which may not be unpreferable to the years of economic misery they face otherwise.

Greece is fucked either way.

As I posted earlier, I honestly believe Germany has very little political will to keep writing checks, and they put austerity requirements on Greece that they figured the Greeks -- proud, and unwilling to face reality -- would NOT accept. I think Germany WANTED Greece to leave the Euro, and for the inevitable mess to happen sooner rather than later.

I think they were shocked when Greece accepted the terms.

But "bullying" Greece? Let's be real. Greece has fucked itself and the Germans are being asked to write checks to stave off the collapse--at least temporarily. The fact that they are being dicks about it doesn't make them bullies. It makes them people who don't very much like writing checks to people who created a debt problem that Germany had no sovereign say over, and they are therefore setting conditions. In particular, it's not like Germany has an endless checkbook. Germany is not immune from the debt crisis -- as the continent slips into recession, Germany could very well be following (the same way the U.S. could, because we are sitting on $15.5 trillion of our own debt). Add the resentment and the genuine worry about their own country, and it puts Germany in a precarious situation.

Which is why I think they are sober enough to realize they are not going to be able to avoid the inevitable, and actually wished Greece had told them to fuck themselves. That didn't happen. So the soap opera continues to spin for now. When Spain comes due? No way Germany is there, especially with the elections across the continent that are about to usher in new leaders who are ready to blow the Euro up and potentially defy reality and further spend themselves into defaults.

 

The Eurozone is a mess because of unsustainable spending that was predicated on an unprecedented period of prosperity that was created by overly accomodative monetary policy done at the behest of the politicians that benefited from the good times. They printed money, spent it liberally and mistook it for growth. It created housing booms. It created industry loans. But it wasn't predicated on demand. It was predicated on central banking shenanigans.

That kind of behavior also creates bubbles, that sit side by side with the false growth. There was no thought about those bubbles ever popping or of economic growth ever slowing down -- as they do due to natural cycles. They kept running up debt that required their economies to grow at very robust levels year over year. It was la la land thinking.

When 2008 came, and the false prosperity came to an end due to the U.S. paying the price of similar behavior, their economies got hit. The growth they needed to keep up on their hampster wheels abruptly came to an end. Already in massive debt, they could no longer keep up with their interest payments, let alone deal with paying down any of their debt. And on top of that, they didn't do much to reign in further spending, making their situations worse.

The U.S. is acting similarly right now. Not facing the reality of growing debt, and STILL trying to rely on Central Banking tricks that have become more and more impotent in staving off having to deal with the situation. It is disheartening. As I said, the only thing that separates us from the countries in trouble is that our economy is large enough to give us a bigger credit limit. Why we are testing it -- when we could very well see a lost decade of economic stagnation similar to what Japan faced in the 90s under similar circumstances -- shows just how short-sighted we are. We choose "leaders" who put off making decisions that tell people they can't have it all from their government. There are costs, and we are already so far in debt that those costs are pushing us toward an edge. Europe should be a warning. Instead, we are behaving just like Greece and Spain and Portugal and Italy, which kept spending beyond their means, even after it was apparent they were worsening their situations.

 

Mike, That is a pretty backward assessment. Germany would benefit by leaving the Euro. Germany was rich before the Euro. It would have been richer without the Euro, because it has a strong economy.

The Euro hasn't improved Germany's economy. It has now become an albatross, as Germany has been called on to write checks to keep the whole scheme hanging together. At the same time, as fiscal policy in the peripheral nations has dragged the Eurozone down, it has by proxy hurt germany.

No idea why you would say such a thing. The peripheral countries would certainly benefit by a devalued currency -- it is how you inflate away your debt. But the fact that you can't just do that to gloss over the actual debt isn't Germany's fault and it isn't Germany's doing. Why should Germany (or France), which has NOT created those problems, sacrifice its economy so the countries in trouble can create massive inflation to try to make their debt problems look less severe than they are?

Finger pointing at Germany for the problems of countries whose sovereign policies Germany had zero to do with is a backward way of assessing the situation. Just because Germany isn't Spain, doesn't mean Germany caused Spain to put itself into a fiscal mess.

The fact they they all cojoined their currencies drags Germany into it, but Germany has hardly benefited from it. It is being hurt by what is going on.