The political and financial elite have jumped the shark and are about to be eaten by it.
1. Complexity and Collapse – Empires on the Edge of Chaos
– Niall Ferguson (Foreign Affairs)
“Over the last three years, the complex system of the global economy flipped from boom to bust — all because a bunch of Americans started to default on their subprime mortgages, thereby blowing huge holes in the business models of thousands of highly leveraged financial institutions. The next phase of the current crisis may begin when the public begins to reassess the credibility of the monetary and fiscal measures that the Obama administration has taken in response. Neither interest rates at zero nor fiscal stimulus can achieve a sustainable recovery if people in the United States and abroad collectively decide, overnight, that such measures will lead to much higher inflation rates or outright default. As Thomas Sargent, an economist who pioneered the idea of rational expectations, demonstrated more than 20 years ago, such decisions are self-fulfilling: it is not the base supply of money that determines inflation but the velocity of its circulation, which in turn is a function of expectations. In the same way, it is not the debt-to-GDP ratio that determines government solvency but the interest rate that investors demand. Bond yields can shoot up if expectations change about future government solvency, intensifying an already bad fiscal crisis by driving up the cost of interest payments on new debt. Just ask Greece — it happened there at the end of last year, plunging the country into fiscal and political crisis.”
2. Eurozone: The Kitchen Sink Goes In – Now It’s All About Solvency – Simon Johsnon (Baseline Scenario)
“The European Central Bank intervention and this package raise enormous moral hazard issues. The ECB’s management was forced into this kicking and screaming. It was only when they realized that the whole euro zone financial system was at risk of collapse that they threw the kitchen sink at the problem. This can now go two ways: either they tighten fiscal policy across the eurozone, and introduce much more rigorous and enforced rules on deficits and profligate credit through banks, or, they let a system persist which is another “doomsday machine” that will live again to grow, and could one day topple them.”
3. It’s One of Three Doors – Bruce Kasting (Zero Hedge)
“-The first is that the Euro bailout package has some legs and the results will last more than a few days. Should that be the case, the US 10 year will go toward 4% and the 30-year will move to 5%. This will not be without domestic consequences.
-The second is that that the market will see through the charade of debt that is again unfolding and by week’s end we will have retraced most of this morning’s moves. That is a scary outcome. There is no round two on this bailout. This is it. The global economy has made an “all in” bet.
-The markets all go “Goldilocks”. Stocks are steady to higher. Strong sovereign bonds are stable, weak sovereign bonds rally, CDS spreads for all forms of credit collapse, commodities stabilize and resume a modest advance and gold goes back to $1,050.
I think the third is the least likely outcome. Keep your eyes on the bond market; stocks are now just a sideshow.”
4. Is Eurozone Shock and Awe Enough? – Yves Smith (Naked Capitalism)
“This may persuade the markets for bit, but how long will it take for market participants to start testing the ECB’s resolve? If it is concerned about tanking the euro, it will not want to go very far down the path of quantitative easing (cynics will argue that the euro is destined to go lower, but there is a big difference between a price decline and a disorderly collapse).
But the real problem is that there appears to be no impetus towards a longer term solution. How do solve imbalances within the eurozone? Without a plan to develop a plan on that front, this simply rearranging the deck chairs on the Titanic.”
5. Europe prepares nuclear response to save monetary union
– Ambrose Evans-Pritchard (Telegraph)
“Nor is this rescue fund any more than chemotherapy for the cancer eating away at the foundations of monetary union. It is not a cure. The rot set it when the South joined EMU before it was ready to cope with ultra-low interest rates or match German wage-bargaining. The ECB made matters worse by gunning M3 at an 11pc rate during the bubble. Club Med lurched from credit boom to bust. It is now trapped in debt deflation at an over-valued exchange rate, like Argentina with its dollar peg in 2001 until air force helicopters rescued President De La Rua from the roof of the Rosada.
The answer to this — if the objective is to save EMU — is for Germany to boost its growth and tolerate higher `relative’ inflation. This would allow the South to close the gap without tipping into a 1930s Fisherite death spiral. Yet Europe will have none of it. The weekend deal demands yet more belt-tightening from the South. Portugal is to shelve its public works projects. Spain has pledged further cuts. As for Germany, it is preparing fiscal tightening to comply with the new balanced budget amendment in its Grundgesetz.
While each component makes sense in its own narrow terms, the EU policy as a whole is madness for a currency union. Stephen Lewis from Monument Securities says Europe’s leaders have forgotten the lesson of the “Gold Bloc” in the second phase of the Great Depression, when a reactionary and over-proud Continent ground itself into slump by clinging to deflationary totemism long after the circumstances had rendered this policy suicidal. We all know how it ended.”