Links: 2010-05-14 Beijing’s stop and go and Greece’s solvency
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The European Bazooka which led to a massive short covering rally on Monday has been proven a complete waste in just 5 days. Reports of political and social fissures within the European Union and more importantly the prospect of slow growth in the whole region due to fiscal cuts has led to the Euro falling even below the level of last week.This despite the raison de etre of the bailout being the “defence of the Euro”
The defence of the euro is fundamentally antithetical to a growth strategy,
which requires a weaker euro. That’s the built-in contradiction that the
markets are now exposing. I very much agree that if beggar-thy-neighbour
policies spread as in the 1930s, this could turn out be pretty nasty for US
(and other) exporters as well. However, in the current context, the
European authorities are simply trying to localize the income deflation in the
GIIPS through strong orchestrated IMF-style fiscal austerity, while seeking
to prevent a strong downward spiral of the euro. But the contradiction in
this policy is that a deflation in the GIIPS will simply spread to the other
members of the eurozone with an effect essentially analogous to that of a
competitive devaluation internationally. As you say, the weight of the
eurozone is not at all like Argentina in the world economy. This is why it is so
critical that Europeans get out of the EMU straightjacket and get
government deficit spending to do its job. Anything else will entail a deflationary
trap, no matter how they initially try to localize the deflation.
In a message dated 5/14/2010 08:31:09 Mountain Daylight Time,
writes:
It makes sense for the Eurozone to breakup with different countries at different levels of productivity having currencies of differing strength.However I think it will be a long complicated process to reverse the Euro.Another sideeffect of this Euro going down is that China may even devalue its currency against the dollar.The paper thin margins for the Europe export dependent companies would be wiped out leading to a domino effect. For example look at Suntech,world’s 2nd largest solar company .
Agreed. I always thought Wilhem Buiter was completely out to lunch when he
suggested that the longer the euro zone nations operated under the yoke of
a common monetary union the greater would be the economic convergence.
Absent the fiscal policy variable, this is impossible.
And talk coming out of China about ‘monetary easing’ tells me they see
reason to be very concerned about their growth as well.
So it looks like the two external threats to the US economy, the euro zone
and China, are indeed happening as feared.
Last, on a reread and after discussion with Warren Mosler, it looks like
the new Fed swap lines look to be both unsecured and containing rollover
language that reads as the foreign central banks being able to roll over their
loans in perpetuity meaning they are not loans but one way fiscal
transfers from the US to foreign central banks, as repayment is strictly voluntary.
In a message dated 5/14/2010 09:16:22 Mountain Daylight Time,
writes:
Abhishek wrote, in response to Marshall Auerback:
It makes sense for the Eurozone to breakup with different countries at
different levels of productivity having currencies of differing
strength.However I think it will be a long complicated process to reverse the
Euro.Another sideeffect of this Euro going down is that China may even devalue its
currency against the dollar.The paper thin margins for the Europe export
dependent companies would be wiped out leading to a domino effect. For example
look at Suntech,world’s 2nd largest solar company .
Link to comment:
https://pro.creditwritedowns.com/2010/05/links-2010-05-14-beijings-stop-and-go-and-greeces-solvency.html#comment-50350698
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