Well, this lady isn't fat, but you get the idea.
Read it at The New York Times | The Conscience of a Liberal
Eurodämmerung
by Paul Krugman | Professor of Economics, Princeton University
(h/t Trixie in the comments)
(h/t Trixie in the comments)
PK is signaling that this is a consensus view. Who were the "some of us," I wonder?
What this says is that the punting is effectively over. Either the EZ has the will to go forward and do what it takes to deliver, or not. If not, that's the end of the euro, and the end is likely to unwind rather quickly as money moves. The Krugman consensus group apparently think that the necessary will is not going to be forthcoming.
I am not as sure about this outcome, since the problem can be resolved by going forward and there is a lot of popular impetus for EZ holding together as a currency zone. So far, I don't think that most people in the EZ have been considering this as a real possibility. They believe that some accommodation will be worked out and are trying to make whatever it turns out to be as comfortable for themselves as possible, recognizing that there is going to be pain all around.
But I would agree that it is unlikely, given present conditions, and I suspect the situation will become clearer from the response in the next week, or two at most. If there is no significant change in direction by then, the handwriting is on the wall. Right now, the impetus of the German powers-that-be seems to favor cutting Greece loose, and that would set the above scenario in motion, as Krugman predicts.
Another key question is whether the parties involved know how to deal with the situation intelligently if there is a breakup. Probably not, especially at a time when emotions are running high. Entrepreneurs like to say that every breakdown is an opportunity for a breakthrough, but most people, including politicians and their economic advisers don't think that way, unfortunately. Their motto is instead, cover your butt and save yourself. While I agree with Barry Eichengreen that this is not the Thirties and it won't result in overt conflict, it is not going to be smooth sailing either — only a disaster and not a catastrophe, if that is any consolation.
If this projected scenario unfolds, I am concerned that the effect on the US may be to give austerity a push "in order to avoid Europe's fate." Of course, austerity would have the opposite effect. Increasing austerity would result in a severe economic setback in the US, which could even provoke a debt-deflationary spiral that takes down the global economy, perhaps ending Western (neoliberal) dominance. Extreme possibility maybe, but not off the table.
Whatever, there would financial and economic turmoil resulting in greater uncertainty, and it would throw a wildcard into the US general election, which is going to be focused on the economy anyway. Failure of the euro, and Europe, would broaden and deepen the economic concern in the US at a time of political fragility.
Do Americans know enough to make an informed choice about such matters. No way.
16 comments:
I was really surprised to see Krugman make such bold statements with very specific time frames. And he didn't mince words either. Given that he has a lot of credibility to lose if wrong, I am inclined to think he may have some insider information which could explain the "some of us have been talking it over". We all know it's a club anyway.
We'll see, but when Krugman goes out on a limb like this, he's got my attention.
Chilling. I agree with you, Tom. Very serious turmoil ahead for the U.S.
The 1% are going to start to play nastier! They will not concede anything and they are willing to take it all down if necessary.
Rotten to the core bastards.
I think, Krugman's intention is to warn EU left political leaders about the risk.
I'm Spanish, and I can tell you that nobody here imagine a future outside the euro. For any political party here, even daring to propose an euro exit would be a disaster.
I think the same goes for any other country and the real reason is that nobody knows anything about MMT and how modern money works.
So much pain and suffering ahead :(
I think Aitor Calero Garcia has the accurate view from the ground in Spain.
I talked to an associate last week who has a parent still in Greece and the parent wants an entire new government but does not support Greece leaving the Euro.
If Krugman is wrong there is no one to hold him accountable.
Resp,
"which could even provoke a debt-deflationary spiral that takes down the global economy, perhaps ending Western (neoliberal) dominance"
This is an interesting outcome, given the current working alternatives in developing nations which play along more nationalistic and statist systems. Where they understand the game of financial paper (money, private debt, public "debt) shuffling and that it has to be 'shaped' to accommodate for the people otherwise revolution is a possibility.
China, south american nations (with their own limitations given the FX problems pointed by Ramanan) and other Asian nations which suffered their own crisis.
Here (Europe, USA), creditors still have a lot of power and credibility and the game is skewed towards them, even if I don't have any doubt people in power knows the workings. Hence Bernanke radical change from 2002 to now in policy making and advocating, from talking about helicopter drops to talk about deficit problems.
Maybe the outcome of all this will be a collapse of the current international banking & credit arrangement and fundamental changes to forex markets and capital flows. We know these are the cause of much trouble so it's only logical that knot gets untangled.
There is no talk at all in Spain about leaving the euro right now (except maybe in closed circles at the top). It's unthinkable, and no one wants to contemplate we are just a Greece in the workings.
All I keep hearing is the old tune of 'growth', 'growth', 'growth' and the confidence fairy, and we need more credit. Confidence for more credit.
Growth in credit = nominal growth, more private debt per capita, public debt has not to be paid, can be rolled over and inflated away. And private debts can increase exponentially forever in this world, this is the whole problem, it ignores the leverage capacity of the private sector relative to incomes and real growth.
Public debt is never going to be paid off (we know it would be a complete absolute catastrophe), public debts have NEVER been paid in history since the first civilization, it'a game of rolling it over eternally. But people can't link why public debts never get paid to the fact of private savings, this disconnect is conceptually problematic...
Factor in real growth is never coming back into countries like Spain which are losing population and you can see the solution is never going to be an exponential growth in private credit.
But what you can make of humanity when people just ignores obvious real estate bubbles for ages until they explode. We are just in an other bubble, the bubble of failed ideas... I think Soros talked about that bubble in last INET partially, in this case the bubble of eurocrats living in fantasy world, the bubble of export nations waiting for martians so the earth can export itself out of depression (man that would be hilarious, aliens would just laugh at us rightfully, a whole specie willing to give free resources in exchange of some paper), etc.
So many bubbles yet to explode!
"So many bubbles yet to explode!"
Exactly, as Steve Keen keeps pointing out tirelessly. The situation in the EZ is really "the eurobubble," as private debt in peripheral countries became unsustainable, which puts banks in the core on the hook as counterparties. They haven't decided to bite the bullet yet and convert the debt that can't be repaid to public debt.
As Warren has pointed out, this started at the inception of the euro, when the public debt of those signing on to the EMU was converted to euro putting the member behind the eight ball wrt to the treaty if any shock developed, which was predictable with the tight provisions of the treaty and reliance on private debt. Given the lower borrowing rates on the periphery, the outcome was baked in.
Yeah, countries have to increase competitiveness to reduce the external imbalances…
All the while increasing production for more and more consumption by fewer and fewer people that will be able to consume said production.
In the meantime external balances are seen by some as "debt" that must be "satisfied".
Here in the U.S. people would love the opportunity to be able to work to "pay off" that debt and spend it on our own production as well as supplying goods to our "debtors".
Unlike money paid to banks this "debt" doesn't disappear into thin air.
Seems like a win-win to me.
Strange thing this "debt"…
Interesting to hear that no one in Spain can "imagine a future outside the euro". That matches the recent poll showing 78.1 per cent of Greeks wanting the new government to do whatever it took to retain the euro.
I think (hope?) this will change soon, and perhaps suddenly...
Hell, 60+ % of Americans think we need to cut the deficit or balance the budget.
Paul,
Encouraging you to keep it up. Not many out there espousing the mathematical point of view in this...
btw Warren posted this up today:
"Send 100 dogs into a room that has only 95 bones in it.
• 5 will come back without bones.
• Education, training and individual effort, while
beneficial, effort don’t change that outcome."
What those of the semantic orientation will exclusively get out of this
is that Warren has one extra word "effort" in his powerpoint slide here...
Resp,
Even though there is overwhelming support for the euro in the EZ on virtually all levels, money talks and it it talks in many ways. One of them is by walking. Who is going to buy the bonds of EMU countries other than Germany if the ECB does not? Rational investors are not going to be signing up for possible haircuts, at least not without demanding exorbitant interest to balance the risk. This is already becoming evident.
Matt,
Appreciate the encouragement.
Half the time I feel like I'm beating a dead horse or just pissing people off.
I might be more convincing if I knew a little more about economics but I can't figure out what's worth learning since it's mostly based on false premises.
btw, I read that piece from Mosler you quoted and immediately sent it to some friends - doubt that they will read it though.
Requires too much (i.e. any at all) thinking.
" if I knew a little more about economics"
That may be wasting some brain cycles.... I think a better use of your time and efforts would be to stay on the math.... there are plenty of folks in the academe of economics arguing about semantic issues that have that side of it covered imo.
Resp,
Speaking of Krugman, there's a post at Naked Capitalism by Michael Hudson criticizing Krugman and his new book Michael Hudson: Paul Krugman’s Economic Blinders - 05/14/2012
I'm with Hudson, although I (along with Yves Smith) wish that he would more clearly distinguish sovereign government debt from private debt...
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