The latest reprieve, for all its ballyhoo, is nothing but a stay of execution for the euro and (next) the dollar, but for the moment the central bankers -- and especially Ben Bernanke -- can share the spotlight and have the Usual Suspects praising them for their Great Wisdom and Foresight:
In Europe and the United States, where the announcement broke well ahead of stock market openings, the prospect of more cheap money to ease banks’ operations sent stock indexes soaring. A broad index of German stocks, the DAX, jumped almost 5 percent Wednesday, while the broad measure of American stocks, the Standard & Poor’s 500-stock index, climbed more than 4 percent. Short-term borrowing costs also declined modestly for some European governments and banks.In other words, the head has been temporarily moved from the chopping block, and that is cause for a party. Keep in mind, however, that the very people who celebrated in the stock and bond exchanges sooner or later will return with very different looks on their faces, as they realize that this lurching from crisis to crisis -- with the "solution" being more "liquidity" (read that, inflation) -- is unsustainable. The debt is unmanageable, period, and these economies are incapable at the present time of generating enough income to pay back these loans, especially given that the current set of "bailout" loans coming from the Fed and elsewhere are nothing more than loans to enable these countries to pay their current debt service.
But policy makers and analysts were quick to caution that the Fed’s action did not address the fundamental financial problems threatening the survival of the European currency union. At best, they said, efforts by central banks to ease financial conditions could allow the 17 European Union countries that use the euro sufficient time to agree on a plan for its preservation.
Now, according to Paul Krugman, there really is a way out for the euro and the dollar. Yes, in response to the Greek crisis and others that follow in its wake, the European and U.S. government must follow policies that resemble...Greece. No, I'm not kidding.
Read for yourself:
I hope, for our sake as well as theirs, that the Europeans will change course before it’s too late. But, to be honest, I don’t believe they will. In fact, what’s much more likely is that we will follow them down the path to ruin.Yes, what is needed is inflation and more borrowing, the very things that put us in this untenable position in the first place. The U.S. economy is not producing enough to give the tax revenues needed for this burst of spending in the last four years, so borrowing and, essentially, monetizing U.S. debt are the only ways even to continue this spree.
For in America, as in Europe, the economy is being dragged down by troubled debtors — in our case, mainly homeowners. And here, too, we desperately need expansionary fiscal and monetary policies to support the economy as these debtors struggle back to financial health. Yet, as in Europe, public discourse is dominated by deficit scolds and inflation obsessives.
There is another way out, one that is painful but at least will not have the long-term destructive effects of the kind of massive inflation that seems to be on the horizon: default. Yes, default.
First, a real default versus what Krugman is demanding -- default via inflation -- will not have the same distorting economic effects that inflation (and especially if it reaches double-digits...and beyond) would have, and second, a default would provide a much more realistic picture of what the situation really is, as opposed to what happens when inflation undercuts the price system. Yes, there will be a sharp downturn when this happens, but afterward, there will be the real prospect of an economic recovery, something that simply is not going to happen if this borrowing and printing madness continues.
When Krugman calls for "expansionary fiscal and monetary policies," he is not talking about policies that actually will expand the real economy. No, he is talking about more financial trickery, more central bank "pulling rabbits out of hats," more "stimulus" money given to politically-connected groups that are tied to the Obama administration, and so on.
Trickery and inflation won't save the euro. The irony as I see it is that the euro has a lot better chance of surviving if some honesty is permitted to enter the discussion. At the present time, unfortunately, the loudest voices are those that call for further debasement of the euro (and the dollar) and even more borrowing to cover the payments for the last set of loans. Neither option is sustainable, but for now, that is all the Keynesians seem to be offering.
Krugman is having serious cognitive dissonance problems these days, as in, being hoisted by his own petard. He believes that government debt is a good and noble thing, a "liberal" thing that sustains the socialist democracies of Europe and the entitlement programs here at home. Now that sovereign debt is the very thing that is going to collapse the West (and Japan), he's outta intellectual ammo. He can't very well admit that it's the impossible debts that are the problem in the first place. Witness, for example, his desperate attempt to prove that all these problems began during the 2007 downturn, that Italy and Spain were doing just fine. Who could possibly have foreseen that an (unsustainable) debt bubble built up over the last 30 years in the West could be unsustainable? Certainly not our arch-Keynesian, who egged on the housing bubble here at home, the very one that he now says so vexes the American "consumer."
With the European banks leveraged 20, 30, 40, 50+ to 1 on sovereign debt, you can imagine how many Euros/Dollars will need to be printed to paper over this mess.
Whoa!! That is some serious leverage! Yeah, the party really is over.
Post a Comment