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So long, euro?
- jackfoxy 17y agoIf anything has been learned from the past decade's ramping up and unwinding of the Collateralized Debt Obligations (and related matters), it's that today's politicians and technocrats have taken leave of the notion of moral hazard, as if they could repeal it. Until moral hazard comes back into vogue, I fear the sky is the limit for the bad things that can happen because the game will always be to act in your short term interest before the next guy does.
- wtn 17y agoVery true. Reminds me of this email I got recently from my brokerage: While the Fed is lending money at almost zero interest rates, why not take advantage of it through <brokerage name>? <Your broker> will lend up to $566,000 at 1.25% for every $100,000 in a Portfolio Margin4 Securities Trading account. As of 4/5/2010, more than 500 stocks had a dividend yield of 5% or more.
- jrockway 17y agoYour broker just buys a CDS on you, and then when you default, they get their money and whatever stock you bought. And since most people don't default, the bank that issued the CDS makes money too. Playing numbers games helps everyone grow their capital. You just have to do it intelligently.
- roboneal 17y agoUltimately, the "euro" experiment is doomed to failure. You can't have a unified currency and monetary policy, while individual countries have massively different domestic spending policies.
- hugh3 17y agoRight, so the EU powers that be have two options: 1. Admit they were wrong and dismantle the Euro, or 2. Use it as an excuse to centralise more power in Brussels, "harmonising" the spending policies of the various member nations Which do you think they'll pick?
- gaius 17y agoThe problem isn't the spending policy, tho'. Go to Athens and you will see the problem very clearly. The habour is full of yachts, the streets are jammed with luxury cars and the people covered in designer labels and bling. This is a wealthy place, you might think, then look at little closer. The place looks like a building site and here's why: in Greece you pay no taxes on a building 'til it's completed, but since the weather is fine all year anyway, why not just leave the top floor unfinished? And they do, private individuals and corporations alike. You see, the Greeks want a level of government spending like Germany or Sweden. They're even willing to vote in the taxes to fund it. But they're not willing to actually pay those taxes, and so they just don't. Greece is a poor country full of rich people. In that sense the austerity measures will be easy to implement: corruption is everywhere. As is a strong sense of entitlement... Compare that to Germany or Sweden where paying your tax is seen as a civic duty. I did quite like the German idea that the Greeks ought to sell off their islands to other countries to raise cash.
- dpapathanasiou 17y ago"But they're not willing to actually pay those taxes, and so they just don't." It runs deeper than that: Greece is the last Stalinist economy in Europe (despite never being behind the Iron Curtain). The government is so massively bureaucratic and corrupt that most people there consider it foolish to pay taxes to such an entity. This article goes into the background, and, on a hopeful note, suggests how that could change in the future: http://www.aei.org/article/101804 http://www.aei.org/article/101804
- jbooth 17y agoUnless there are a whole bunch of Greek collective farms and forced labor camps that I'm unaware of, "stalinist" might be overstating it.
- sailormoon 17y agoYou can use the exact same argument to say the US federalism "experiment is doomed to failure". Actually, I wrote that with the intention of disagreement, but now I think about it ...
- eru 17y agoThe US has probably greater fiscal transfers between states and the federal budget is bigger than the EU budget compared to the member states' budgets.
- conover 17y agoBut the big difference is that US states (redundant?) must run a balanced budget.
- sailormoon 17y agoOh yes, and haven't they been doing a sterling job of that.
- tokenadult 17y agoMost states run balanced budgets most years, and some have been in surplus quite recently. Of course, they do that partly by shifting funding of state government functions to the federal budget, which is not constitutionally required to be balanced as most state budgets are.
- wtn 17y agoThey may technically have "balanced budgets" but many large states have huge off-balance-sheet liabilities (as does the US Treasury).
- m_eiman 17y agoEuro countries are supposed to do that too, it's part of the deal. Not everyone cares too much about that, though. It's easier to be yelled at by the ECB than your voters when the latter will vote you out of office.
- eru 17y agoWhy do you think so? What odds would you offer on common monetary policy in the EU falling apart first vs common monetary policy in the US and China falling apart first? (China and other countries are copying US policy, by pegging the exchange rate. They should fail soon, too, by the same logic.)
- roboneal 17y ago>> Why you think so? While China may have pegged it's exchange rate to the U.S. , it has the power to decouple at any time to adjust to changing market conditions. Greece (and soon Portugal, Spain, & Italy) don't have that ability. What can they do? - beg for a bailout or exit the EURO and devalue their currency. I guess there is a third option - dramatically cut SPENDING and entitlements.
- eru 17y agoI guess the Germans are hoping the rest of Europe follows them with the third option.
- henryprecheur 17y agoBeing unable to devalue the currency (print money to pay debt), is --I think-- a good thing. It is harder for politicians to postpone the pain, they have to cut spending and do what's needed for the country/state/province to recover fiscally. If somebody weights 200kg: The right solution is to lose weight and eat your vegetables; not to "devalue" the Kilogram.
- cynicalkane 17y agoAnother way to lose weight would be to starve to death, which is what happened to many people the last time the Fed refused to devalue the currency (1929-1933).
- yummyfajitas 17y agoTo be fair, a massive ecological crisis (the dustbowl) and price controls on food (making it uneconomical to ship food to cities) also contributed to food shortages.
- anamax 17y ago> price controls on food (making it uneconomical to ship food to cities) also contributed to food shortages. You got the boundary on the price controls wrong. They mandated minimum prices, not maximum. The minimum was more than enough to pay for shipping, but it was higher than the amount people could afford. FDR believed that the depression was caused by excess production. The federal govt destroyed food and other things to reduce supply in an effort to drive up prices. That didn't stop until WWII was imminent, when it became obvious that the US couldn't be an "arsenal of democracy" if it wasn't producing as much as it could. This war on production is what made the great depression "great", that is, long an deep. To be fair, these FDR policies were extensions of what Hoover had done. Interestingly enough, FDR campaigned against them.
- eru 17y agoOne wonders why FDR is held in such a high regard. But popular historical judgement seems strange anyway. Just look at English kings.
- nickpinkston 17y agoThe real economics at work here are the economies of scale that comes with being the reserve currency of the world. Whoever owns the reserve currency holds the keys to the global economy - they're not backing anytime soon. Some say it could be 2022 when the Euro > Dollar. PDF: http://www.ssc.wisc.edu/econ/archive/wp2006-01.pdf http://www.ssc.wisc.edu/econ/archive/wp2006-01.pdf
- cabalamat 17y ago> You can't have a unified currency and monetary policy, while individual countries have massively different domestic spending policies. This is factually incorrect, because for over 1000 years European currencies were backed by silver or gold and were thus the same, despite the fact that European polities had vastly different spending priorities and indeed levels of development.
- cynicalkane 17y agoThe GP meant not that it's physically impossible, but rather that it is a bad idea. (I'd rather not get into an argument about the gold standard; except to say that almost every economist that matters thinks it is a bad idea.)
- roboneal 17y agoYou may need to brush up on the history of currency. So called "gold and silver" standards did not eliminate fluctuating exchange rates and valuation/devaluation cycles. For example: "In 1663, a new gold coinage was introduced based on the 22 carat fine guinea. Fixed in weight at 44½ to the troy pound from 1670, this coin's value varied considerably until 1717, when it was fixed at 21 shillings (21/-, 1.05 pounds). However, despite the efforts of Sir Isaac Newton, Master of the Mint, to reduce the guinea's value, this valuation overvalued gold relative to silver when compared to the valuations in other European countries" http://en.wikipedia.org/wiki/Pound_sterling#Gold_standard http://en.wikipedia.org/wiki/Pound_sterling#Gold_standard So even in physical coin form, this only worsened with introduction of paper notes, individual currencies fluctuated in valuation from country to country. Thus, European currencies historically were not "the same".
- presidentender 17y agoYou've just criticized bimetalism, not the concept of a backed currency. Gold will be the same value relative to gold; it's just impossible to peg gold to silver.
- cabalamat 17y agoThere were fluctuations of gold relative to silver. There were not fluctuations of gold relative to gold, or of silver relative to silver.
- Keyframe 17y agoMore of a temporary setback and more centralized decisions and restrictions in the future. I really can't see anything not normal happening for a new currency/"government in the making" on the block.
- wtn 17y agoYou may see this as a "normal" transition period but that doesn't mean EMU will survive intact. Sovereign debt crises (plural) and bank solvency are huge problems for several EMU states. If one EMU state defaults on sovereign debt, there will be a chain reaction in the banking system and the debt markets. Several states are at risk of defaulting. The politics remain highly unpredictable.
- rue 17y agoSo long, Euro? No. Seriously? Meanwhile, in reality, it was about time for the euro to come down against the dollar. Macroeconomically too, of course, but on a personal level a ~10% effective gross wage increase (or reversal of decrease to be precise) is quite alright with me.
- patrickgzill 17y agoAnecdotal evidence (i.e. a friend who knows someone in Greece) is that Greeks are lining up at banks to withdraw all their funds, i.e. a classic bank run is now in progress.
- steveplace 17y agoWhen I see headlines like this I think "So, long euro."
- eru 17y agoBeing contrarian can be profitable. Are you willing to put your money where your mouth is?
- steveplace 17y agoI traded the euro (6E futures) long yesterday, so yes.