Greek Comedy and Irish Tragedy
Ok it's been a while since I've ranted about moral hazard and bailouts, but the ongoing farce in the PIGS and the rest of Europe's responses are just too hilarious and frightening. This is an investment blog but the macro econ, politics, and history intertwined in the Irish saga is just too ripe to pass up.
Basically the Irish bank investors are being made whole while the rest of the Irish population is getting screwed.
Evans-Pritchard has two good articles. Ireland's Debt Servitude
The line in the second article that really woke me up was:
Even so, it is remarkable that Berlin is not even allowing the European Central Bank to pursue the first and obvious line of defence, which is to calm eurozone bond markets by using its financial stability powers to buy Irish, Portuguese, and Spanish debt on a nuclear scale.
This is what the Fed did in 2008 when the banks were teetering with TARP, and when there was a threat of a double dip with QE2. The Fed has chosen the nuclear option with debt monetization and the EU/ECB is sure to follow. Every time there is a hint of deflation, the central banks paper over the bad debt with more debt. This time they're using Irish pensioners money. It started with Bear Stearns as documented on our blog and it hasn't ended! It was followed by Merrill, AIG, Fannie & Freddie. I'm afraid the Greek episode was just a prelude and not just noise. The losses keep getting socialized but the bankers still keep their bonuses. I know this sounds hyperbole but this is the stuff of revolutions. Will the Irish people have the guts to stand up to the bankers and their paid off politicians unlike the Americans? If not the Irish, then who? The Spaniards? Maybe the Italians have the balls!
So what caught my attention was what Evans-Pritchard's wrote about the ECB buying PIGS debt on a nuclear scale like the Fed. I believe this is coming. Either there is a breakup in the Eurozone, or the ECB will have to play this card. This will have the effect of causing gold to rally.
Labels: bailouts, debt monetization, getting fucked, moral hazard
posted by Des @ 11/30/2010 09:57:00 PM
3 Comments:
The Krugman blog says pretty much the same thing.
http://www.nytimes.com/2010/11/29/opinion/29krugman.html?_r=1&ref=paulkrugman
It's taken me a few years to believe the rumours, but the game is fixed and the rich are getting richer on the backs of the poor.
Krugman is only partially right. He never wastes an opportunity to lash out at the Republicans but I disagree with his disdain for a stronger currency. The problem with the Fed is its dual mandate which makes it conflicted. During times like these you can't have full employment as well as a stable currency.
He also seems to think devaluation is the salvation. Japan became an export powerhouse in the 70,80, and 90's because of a lower Yen but also because it made better electronics, and better cars than American companies. Krugman never acknowledges that. Also Krugman's denial of the lack of inflation is disingenious. What is $85 oil? and increasing food prices. Just because it's not in the calculation of the CPI doesn't mean that people don't use energy and eat! The bottom quintile of society spends 50% of their income on food and energy, so its no wonder that the elites don't mind inflation because it affects people unequally and those that have the means can hedge against it to some degree.
Your last point gives me the chills because I don't want to believe it either. A world wide banking cabal that will stop at nothing to keep the game going with a huge advantage.
Krugman is undoubtedly partisan, but the Republicans trying to handcuff the Fed with a single mandate at this time reeks of opportunism. I would say you have been drinking too much conservative kool-aid, but I recall you have a long standing aversion to currency devaluation. I think we've had this conversation before but currency stability is only relative. What's the point of tying the Fed's hands if the ECB and the Chinese do not agree to play by the same rules; good luck with that!
So back to reality, without protecting employment, the wild swings in the boom and bust cycles would itself be an impediment to growth. Both individuals and corps would be saving for a rainy day and be very risk averse to invest in the future. There are nobel prizes for modeling the cost of risk and volatility. Your dogmatic stance of currency stability really flies in the face this basic modern economic reality that *volatility* inhibits growth.
Inflation calc is a moot point, I think the fed actually looks at a basket of indicators, but choose only to cite the CPI to avoid controversy. Besides, oil was $150 in 2008, so there's your deflation.
Also, the japanese example is about the price-quality trade-off. the Chinese make tonnes of crappy stuff and are exporting their way to prosperity based on their weak currency. People will buy crap if its cheap enough (Eddie's 1st laws of economics.)
I'm sure we're limited by time and space for our opinions so it seems our AGM should be a worthwhile discussion.
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