The scenario I laid out for Europe for 2014 in three posts on the global economy last week is one of muddling through. However, whereas in the US, there are upside risks, in Europe the risks are mostly to the downside, politically and economically. A few thoughts on the situation follow.
Tag: currency sovereignty
In the case of Greece, with fuel, food, and medicine making up a large share of the import bill, further economic disruption and destabilization would likely result from a choice to exit the eurozone. Exiting the euro does not appear to be an option – at least not one without a large risk of introducing further turmoil. The task then becomes to thread the policy needle – namely, to exit austerity, without exiting the euro. The following simple proposal introduces an alternative financing mechanism, along with safeguards to minimize the risk of abuse of this mechanism, which may accomplish this threading of the needle.
Newman: “in my own book the explanation starts the cycle with government spending, thus adding to the money supply, and then issuing treasuries for roughly equivalent amount. The bond vigilantes really have it backwards.
Despite Europe’s continual moving of the goalposts to give countries more breathing room, the economic paradigm in Europe is still the same: austerity. This will dampen growth in Europe for the foreseeable future and increase government debt to GDP ratios, making debt deflation and crisis a background threat which will result in sovereign restructurings regardless of recovery.
Deficits present governments with the sole challenge of making good on future promises without inflation. For nations sovereign in currency, the constraint is inflation, not solvency.
The Eurozone’s tangle of conflicting goals – a series of ‘trilemmas’ – is not without precedent. This column argues that it is reminiscent of the interwar situation. The interwar slump was so intractable not just due to financial issues, but also a crisis of democracy, of social stability, and of the international political system. The big difference in the EZ is that nations cannot go off the euro as they went off the gold standard. That is why the initial EZ crisis may not have been so acute as some of the gold standard sudden stops, but the recovery or bounce back is painfully slow and protracted.
Summary: Below are some brief thoughts on the consequences of the US government shutdown and its aftermath. In general, I believe the consequences are more likely to be political and long-term without any significant short-term implications outside of a 0.5% drop in in annualized quarterly US GDP growth.
Summary: Recently, Niall Ferguson reminded us of the eurozone pessimism of 2011 and 2012 in a recent polemic against Paul Krugman. Without getting into the Krugman-Ferguson war, I want to hone in on this subject because I think it tells us something about the way crisis politics work.
As the US government shutdown continues, the risk of default grows. Below are some thoughts on why this has played out as it has and what the outcome may be.
Abenomics has been very successful in goosing the Japanese economy thus far. However, the question remains whether this success will be short-lived or durable. I believe it is likely to be short-lived because of the policy constraints that all countries face irrespective of whether they have fiat currency.
In the links today, the biggest threads outside of the NSA scandal were on Greece and Europe. I believe the economy there is bottoming and I want to discuss some of the news flow. There was also a rate decision by the Japanese central bank that was met with disappointment. Let’s put this into context regarding the viability of Abenomics.
I see that Paul Krugman has shifted his rhetoric in a recent post on British government economic policy. Let me explain how in this post so that I can make a point as to how bond market vigilantes actually work.