On Sun, Nov 28, 2010 at 7:24 PM, wrote:

I’ve tried to think of a happy ending here and there simply isn’t one.

That’s like thinking for the endgame of the US if you believe the federal budget needs to be balanced. There isn’t one in that case either.

The end game is always for the fiscal authority to run a deficit. Which means the ECB in the euro zone.

They won’t let the Euro collapse which means Germany leaving is out of the question. But Germany won’t just become the funding source for all of these periphery nations.

Right, it has to be the ECB. Just like Texas can’t fund the other states.

I think they should just vote to remove Ireland and Greece with a partial debt restructuring. They’d actually be doing them a huge favor while also avoiding massive collateral damage in the banking system.

Likewise, the ECB has to fund the deposit insurance to make it credible and workable.

Then they could target their efforts on saving Spain and the Euro.

Problem is, they all need to be saved.

As credit sensitive entities like the US states their debt to gdp ratios need to be below 20% to be ‘stand alone.’

The reason Luxembourg is that low is because they never did have their own currency, and so never could get higher than where they were.

The other national govts had their own currencies before joining the euro, and therefore had deficits appropriate for being the currency issuer, which is equal to non govt savings desires. Problem was they joined the euro, turned over the currency management to the ECB, and kept their old debt ratios. The informed way to have merged would have been to have the ECB take over their national debts, and let them start clean. But it happened the way it happened and now they have to move forward from here.

Ireland and Greece go it alone, the world panics for a few months and then everyone realizes that we’re all better off. Then the Euro continues to exist until it causes another crisis in 15 years (assuming no central funding system is created)….

They already have a central funding system in place- the ECB buying nat govt bonds in the secondary markets. While far from my first choice on how to do things for a variety of economic and political reasons, it does function to keep member nations solvent, for as long as the ECB keeps doing it.

My proposal remains the most sensible but not even a consideration- per capita ECB annual distributions to the govts to pay down debt of the member nations beginning with an immediate 10% of GDP distribution. To do this they first have to understand why it’s not inflationary, which means they have to understand inflation on the demand side is a function of spending, and the distribution does not increase govt spending.

That’s a big leap from their inflation expectations theory of inflation. They believe that anything that increases people’s expectation of inflation is what actually causes inflation. And they believe that because they have still failed to recognize that the currency itself is a (simple) public monopoly.

That means the price level is a function of prices paid by the govt of issue when it spends, whether it knows it or not, and not a function of expectations.

So while in fact it is the economy that needs the govt’s funds to pay its taxes, and therefore the economy is ‘price taker’, they instead believe that it is the govt that needs the economy’s funds to be able to spend.

6 Responses

  1. Europe is rapidly heading for another showdown, this time off the military battlefield. Either the EMU countries accept effective fiscal hegemony from Germany, or they go back to independent currencies. Are they ready for a EEU-wide fiscal authority? No way, not even Germany (especially) – yet they’re forcing yes/no on this decision anyway. Crisis is great for focusing minds & driving innovation. Gotta hope they’re more up for this than they were in 1914, 1918, 1939 etc, etc!

    Long term? Hundred years from now they may look back & thank god they did this. Ditto what our 13 colonies did in 1776. Even we eventually had a civil war, but not hundreds of them (yet).

    I look for the Europeans to come to their senses, but maybe not fully in our lifetimes. That’s why we may all profit from shorting the Euro short term. Helps to focus their minds! 🙂 In fact, I wouldn’t mind losing a few bucks, if it kept France, Germany & England et al from going at it again.

  2. Right, it has to be the ECB. Just like Texas can’t fund the other states.

    It’s funny you say that Warren, I know lots of southerners, some from texas, who say they are tired of thier surplus helping california deficit and they don’t want to be in the union anymore under a federal government that takes from them and gives to other states. California is already doing some experiments of its own debt and currency stuff no? Perhaps it is time for some US states to bust up and become their own little nations. If Alaska or Texas decide to quit the union and take thier oil assets with them, will a modern day lincoln use a militay war to keep them under the fed government? How barbaric to keep people your slaves at the point of a gun, that sounds like the days of pirate ships and treasure chests. Warren lets face facts, McCain came on TV yesterday and said Sara Palin was like Reagan! I am sorry Warren, but any nation that is going to put Sara Palin in charge needs to break up, cause that nation is going down an unsustainable path. As you have just experienced first hand with our political system, smart guys like you get the boot in the face, and idiots that obviously the kleptocrats feel they can control get promoted, and as you often say the politics are killing off the good ideas and needed adjustments and the banking sector has expanded into areas that do nothing for public purpose. It’s time for this experiment to die and a new one to emerge from the ashes that is more beneficial to the public.

    Here is what Mish just said about the moral hazard of this new deal(tongue in cheek for the less astute coming here):

    Bondholders Do God’s Work

    In a followup interview Trichet commented, “The debt crisis is over. We are willing to grant Greece and Ireland as much time as they need. If an extra-four-and-a-half years to repay emergency loans proves insufficient, we are willing to wait an extra-hundred-and-a-half years”.

    When asked if he meant 150 years or 100.5 years, Trichet replied, “I mean as long as it takes to make the ECB whole, forever if necessary. The important thing is for bondholders to never suffer losses. Heaven forbid we should ever unsettle bondholders by insinuating they may have to take some losses. Bondholders in general, not just Goldman Sachs bondholders, do God’s work.”

  3. Strawberry,

    Texans are perfectly happy to export their surpluses today, just like Japanese, Germans or Australians. As an idependent country they wouldn’t behave any differently.

    If I was the federal Government, I’d wave Texas goodbye with few qualms. They will still want to exchange sides of beef for my federal reserve dollars.

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