Thursday, February 4, 2010

Must Read Articles 05.10

If you're wondering what all the hubbub is about Greece, Portugal and Spain, I've grouped together a set of articles that explain the situation lucidly. Like most of the world's economic problems, it can be summed up by the simple phrase "there's too much debt." But in Europe, individual governments are restrained from printing money to temporarily relieve the stress. The only other cited cure is for public and union workers to take massive pay cuts in order to regain competitiveness. Socialist-leaning governments in these countries are not treating that like a legitimate option and appear to be losing control. They've now resorted to blaming their problems on "speculators." Euro-skeptics have always said this would eventually prove to be the undoing of the Euro. Right now they're being proven correct in spades.

While most of the focus lies on government debt, please remember that private banks in this region are even more susceptible. Credit default swaps (CDS) on Portuguese banks, for example, are up 30% today. That's no small potatoes. And Europe's banking system is just as systemically intertwined as is America's. If Club Med banks start going down, the big northern banks will likely follow.

The only actual solution to this problem is the only one everybody seems to agree is "not a solution." Debt repudiation.

Spanish Canary in the European Coal Mine (Rolfe Winkler)

If PIIGS Could Fly (Neils Jensen, Absolute Return Partners via Credit Writedowns and John Mauldin)

Should Germany Bail Out Club Med or Leave the euro Altogether? (Ambrose Evans-Pritchard)

Funds Flee Greece As Germany Warns of "Fatal" Eurozone Crisis (Ambrose Evans-Pritchard)

And now for some other issues:

Demand For Loans Weakens Again in Fed Senior Loan Survey (Mish)

It is easy to blame banks for not lending money to people who "need" it. President Obama does it all the time. But the problem is not that banks won't lend, it's that there's nobody willing to borrow that is remotely credit-worthy.

Saving, Asset Price Inflation and Debt Induced Deflation (Michael Hudson, via mannfm11)

Hudson follows a similar train of thought as Steve Keen. Neither are Austrians. They both maintain that Keynes was misinterpreted and combined with destructive "equilibrium based" theories. This is the most compelling of non-Classical Liberal theories I have come across.

On Depreciation, Malinvestment and GDP as a Gross Number (Ed Harrison)

All things I like to talk about. GDP is calculated based on aggregate spending data. Not all of that spending is worthwhile and beneficial. In fact, some of it is downright harmful. Eventually, that must be realized. The process of realization is otherwise known as "recession."

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Anonymous said...

Damn spammers. Time to eliminate anonymous comments, Matt.

Matt Stiles said...

I know. This is getting ridiculous. I'll look into it.

ViewFromTheSouth said...


What do you believe is the resistance to debt repudiation? I have been trying to figure this out the last year and a half or so. Hudson has stated "in videos I have seen" that in pre-nation state days, that some societies did this as a matter of tradition/practice. They understood that debt could not grow forever and a periodic reset was needed. He stated that because the debt was generally owed to the crown they could reset, but now the ownership of debt is not monolithic-ally owned it may not be as palatable.

Matt Stiles said...


Yes, the periodic reset was referred to as a "Debt Jubilee." I think it was Byzantium that had them scheduled every 60 years or so, and conducted this practice for many centuries.

As far as the aversion to debt repudiation, the only cause for such an attitude is that most have something to gain by ensuring creditors are made whole. Most of the people you hear giving their opinions on "possible solutions" work for major investment houses, banks, brokers, etc. Many others would be hurt as well. Pensioners would probably be the hardest hit. That would likely result in serious civil and political discord.

But the simple fact remains. Debts that can't be repaid, won't be repaid. Most people under 35 seem to understand this. And I don't think any of them have any intention whatsoever of honoring the obligations created by others. That demographic is growing. Eventually they will get their way.

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