12 ms·

Italy and the euro: On the edge

141 points by llambda 15y ago

Derbasti 15y ago
At some point, we will have to realize that debts are a bad thing. No one can spend money he does not own without paying the consequences. The Euro seems to be exacerbating this race towards a tipping point. It seems that some kind of serious crash is inevitable. But it is yet to be seen whether Europe (and the world) will come out of this united or in flames.
- lkrubner 15y ago
  People who make arguments against debt are ignoring a great deal of historical information. A person, or a nation, can clearly spend money on stupid things, but that doesn't mean that debt is bad. Many businesses take on debt to grow, or at least they seek a credit line to cushion themselves against variations in income. The argument for debt goes like this: in the future "we" will be wealthier, so why don't we borrow against our future income to make the investments that will ensure that, in fact, in the future we will be wealthier. "We" can refer to a person, business, or nation. The careful and strategic use of debt has been used to build great empires. A quote: http://www.ukpublicspending.co.uk/debt_brief.php http://www.ukpublicspending.co.uk/debt_brief.php "Chart 2 tells, in stark detail, the story of the British Empire. It was built on the National Debt. Throughout the 18th century the National Debt grew and grew, from nothing at the end of the 17th century to about 60 percent of GDP by the end of the War of Spanish Succession in 1715." To win World War II, the USA drove up debt to 100% of GDP, a level much higher than what it faces today. To finance business, an interesting difference has developed between the English speaking nations (I mean those who inherit their legal codes from English Common Law) and those nations of continental Europe. In the English speaking nations, it became common, by the 1800s, to finance growth by offering equity for sale at public auction. The continental nations developed along different lines -- banks played a larger role. In Germany, most firms operate with higher levels of debt that what would seem normal in English speaking nations. To get an understanding of the importance of debt, and its history, I'd suggest you read Fernand Braudel: http://www.amazon.com/Wheels-Commerce-Civilization-Capitalism-15Th-18th/dp/0520081153/ref=sr_1_5?ie=UTF8&qid=1310738832&sr=8-5 http://www.amazon.com/Wheels-Commerce-Civilization-Capitalis... As he points out, debt and civilization tend to go hand in hand. Debt was illegal in many European nations during the Dark Ages. Nations in the Mideast and India all had flourishing markets in debt, and flourishing trade, while Europe was sunk in poverty. When Europe revived and began to expand again, it helped itself along with the revival of credit, and credit markets. By the time the 1600s came around, Amsterdam was able to offer the world the full range of modern financial instruments: put and short and forward contracts, options of every kind (save for the exotic derivatives of recent vintage). There is no civilization without debt, no advanced commerce without debt, no growth without debt. The wheels of commerce are greased with credit.
  - spydum 15y ago
    Yes, debt makes sense when talking of investment. However, borrowing is a bad choice when you are just trying to pay operating expenses. This is the dilema: nations have shifted from borrowing for investment purposes, to borrowing to keep the lights on.
    - seanalltogether 15y ago
      Precisely! Taking out a loan to pay for college should be seen as a good thing. Taking out payday loans to cover living expenses should be seen as a bad thing.
  - scythe 15y ago
    >"Throughout the 18th century the National Debt grew and grew, from nothing at the end of the 17th century to about 60 percent of GDP by the end of the War of Spanish Succession in 1715." That's a fifteen-year period, not throughout the 18th century, and for that entire period, England was at war. It's absolutely true: debts help win wars. This isn't surprising: war is one of those times when there's a good argument for borrowing against the future, because the alternative is annihilation. On the other hand, during most periods of peace, historically, debt as a percent of GDP has fallen. http://en.wikipedia.org/wiki/File:US_Federal_Debt_as_Percent_of_GDP_by_President.jpg http://en.wikipedia.org/wiki/File:US_Federal_Debt_as_Percent... The thing is we don't have any more wars worth fighting. Maybe in twenty years the precarious situation of "the largest economy in the world is totalitarian [i.e. China]" will boil over, but that definitely isn't happening any time soon. These days, we just accrue debt for no reason, or to fight a war on nothing (drugs, terror, cancer, tobacco). Debt by country: http://en.wikipedia.org/wiki/File:Public_debt_percent_gdp_world_map.svg http://en.wikipedia.org/wiki/File:Public_debt_percent_gdp_wo... Growth by country: http://en.wikipedia.org/wiki/File:GDP_real_growth_rate_CIA_Factbook.PNG http://en.wikipedia.org/wiki/File:GDP_real_growth_rate_CIA_F... (I wanted to say something about this but I'm having trouble distinguishing between five identical shades of green)
  - craftsman 15y ago
    The Braudel book looks really fascinating. Is it understandable on its own, without having read volumes one and two?
- thingie 15y ago
  Is there some concept of money that doesn't (almost) directly link money to debt? (so money wouldn't be completely worthless without debt)
  - onemoreact 15y ago
    While the demand for most moderen currency is based around Taxes and Debt you can also link them to a wide range of real or vertual goods. AKA gold in an MMO or Mooncakes in china. (http://marketplace.publicradio.org/display/web/2010/09/21/a-black-market-for-mooncakes-in-china/ http://marketplace.publicradio.org/display/web/2010/09/21/a-...) Edit: Bit coin is an interesting experement with the idea that simply because something is finite it has value based around the idea that at some point people might want it. Even the most simplistic analysis suggests the market will quickly become prone to bubbles but what's intresting is how it will recover after a major crash. PS: I don't know why people ignore the link between Taxes and Money but try paying your taxes in gold bullion and see how far you get.
  - carsongross 15y ago
    Yes. It was called the gold standard. It worked quite well for a very long time. No respectable academic economist takes it seriously. Which is why you should.
    - rayiner 15y ago
      You don't need fancy academics to see why the gold standard was a bad idea. You need money to function as a proxy for the economy. Every time grows up and enters the workforce, you need to add money to the economy to be able to serve as a proxy for his or her labor. As population and economic activity grows exponentially, you need to add exponentially increasing amounts of money to the economy just to avoid deflation. Now, explain to me how we could've sustainably kept mining exponentially increasing amounts of gold out of the ground?
      - carsongross 15y ago
        Why do you need to add money? Can you name an industry in which the much-feared deflation has occurred in the last fifty years? How has that industry done in terms of wealth creation? Why do you think that the economy isn't capable of adding money if necessary? Are there any historical examples of the opposite occurring? Why do you think that exponential growth makes sense in a finite world? Keep an open mind: the banks would prefer that you didn't.
- adw 15y ago
  Debt is a mechanism for moving risk around - risk-averse parties (the people taking the loan) selling risk to risk-seeking parties (the lender). You're buying money now and paying interest, providing return, against which there's a chance it doesn't get paid back. As such, there's actually not much of a difference between debt, insurance, and synthetic derivatives such as credit default swaps. (Modern debt and insurance practice both originate from the shipping industry.) Of course, if you believe the world's a better place without corporate finance, you're entitled to think so, but we'll have to disagree.
  - carsongross 15y ago
    Am I allowed to think that the world would be a better place without implicitly and explicitly publicly backed private corporate finance? Just want to make sure that'd be OK.
    - sethg 15y ago
      I don’t think you can have a stable financial system without a government that is willing and able to step in when things go pear-shaped. (You might say “if the government weren’t doing that, then lenders would be more careful with their money and things wouldn’t go pear-shaped”, but the string of crashes in the late 19th and early 20th centuries, before the Federal Reserve was created, suggests otherwise.)
      - mseebach 15y ago
        The argument isn't that if only the government keeps out there will be no pears, but that if the government keeps out the following recoveries will be faster and those responsible for the crash will take a hit financially, so hopefully someone learns a lesson or two.
        sethg 15y ago
        But this did not happen. http://en.wikipedia.org/wiki/File:US-GNP-per-capita-1869-1918.png http://en.wikipedia.org/wiki/File:US-GNP-per-capita-1869-191...
- iwwr 15y ago
  Only exacerbated because the ECB is not a central bank in the traditional sense. Traditionally, the central bank (or a related institution) would just print up money to make up for the shortfall. The logic of modern politics leads inevitably to the printing press. Now, the only way the Germans would have agreed to an ECB would have been a bank at least as strong (and printing-averse) as the Bundesbank. So the so-called 'stability pact' was signed in order to placate them (max 3% of GDP deficits and max 60% debt to GDP ratio, working toward zero deficits at some point). What happened was the Euro states continued or increased their spending, producing deficits even during the great boom years right before the collapse. Today, the Stability Pact is a dead letter and members (the PIIGS in particular) are trapped without an ability to print themselves out of trouble. Of course, the ECB has been issuing a lot of new money, but just to rescue the major banks, the governments are on their own. This isn't to say that it's a good idea to print oneself out of debt, but governments find it the easiest thing to do. The crisis would not exist if expenses could have been scaled down as easily as they have been increased. It's better in the end to have a strong currency and balanced budgets, but balanced without low expenditures, not high taxes.
- nhaehnle 15y ago
  From a purely accounting perspective, debt and money are just two sides of the same coin. Every financial asset you own, whether it is paper money or a number in a bank account, is somebody else's liability. With this in mind, it is clear that blanket statements like "debts are a bad thing" are useless. Bad with respect to what? For example, when citizens save some amount of their income in government bonds to have some buffer to protect them against future individual troubles, then can you honestly say that this debt is a bad thing? The problem of the Eurozone is that there is no fiscally sovereign government which can safely (and in a politically legitimised fashion) carry an unlimited amount of debt.
  - rrc 15y ago
    > Every financial asset you own, whether it is paper money or a number in a bank account, is somebody else's liability. Gold is a form of money with no counterparty risk; if I own gold it's nobody's liability. One complication is that some central bankers and governments try to suppress gold being used as money through enforcement of fiat money monopolies at gunpoint... Edit: I am incorrect in saying gold is a financial asset.
    - nhaehnle 15y ago
      Gold is a natural resource, so it's not really a financial asset. Coins containing gold are liabilities of the issuing government just like any other type of coin. I hope you do not seriously believe that the reason gold is not used for trade is that governments suppress it. The fact is that using gold is actually extremely impractical compared to modern forms of payment. The use of gold in trade in the past developed naturally because sufficiently stable fiat money systems did not exist. However, once such fiat money systems do exist, they are simply better and there is no reason left to use gold as a medium of exchange (outside of goldbugdom).
      - rrc 15y ago
        I do believe governments and central banks would like to suppress its use, though I wouldn't claim that's the only reason it isn't used in transactions today. It's in their interests to suppress its use because it's one way to spend more than they take in as revenue by issuing new currency. I think we're seeing the results of that globally today. As to gold being impractical for use in everyday transactions, I don't think that's true anymore. You can look at companies like Goldmoney for a real world example of what is possible. Any trusted third party can hold the physical gold, while allowing electronic transactions of said gold in whatever increments, without any physical exchange taking place. In fact, this is generally how the dollar worked before it went off the gold standard. I'm not sure why you think fiat money is better. The history of fiat money has been one of short lifespans and dramatic failures, while gold's history of use as money spans over 6,000 years.
- jerf 15y ago
  As people are pointing out in replies, debts are bad is probably not the right answer. However, debts are much more dangerous than our current analyses are telling us does seem like an inevitable correction. Debt calculations based on smooth probability distributions underestimate Black Swans, and the evidence of this has been pretty clear for a while, it's just that if you give our highly intelligent financial analysts five to ten years of clear sailing, they'll talk themselves into forgetting it again. For various reasons, this is probably not a solvable problem. (Mostly because, during the periods of clear sailing, underestimating risk means you make more money, and over time simple greed will cause more people to do that, until... kaboom. In a way the problem is that we don't have enough crises.)
  - jbert 15y ago
    This has always been my perception. I think that the market forces an underestimation of risk as the only viable long-term strategy (ironically). If I can run my finance house on a "I will blow up on a once-every-5-year event" I will outgrow a business running on "I will blow up on a once-every-50-year event". So I outcompete my competitors and acquire them or steal their best employees with high salary etc. Basically, short-termism seems to be the optimal solution in the game theory of risk management. (Of course, the real problem is the frequency of such events is poorly understood. What happens is that a finance house pursues a 'more profitable' course without perhaps fully understanding their increased exposure. See Taleb, sub-prime crash etc)
- tybris 15y ago
  All of that is true if you don't consider inflation and the money supply. Then stuff gets complicated.
- kahawe 15y ago
  More dangerous than debt is a political system which accepts broke countries into a monetary union when these countries just downright faked their economic statistics and noone did any due-diligence or found out only until years later when it was too late.
retube 15y ago
>They cannot agree on who should bear the cost of today’s crisis: should it be creditors (through a write-down), debtors (through austerity) or the Germans (through transfers to the south)? In theory it should, of course, be the creditors. You buy an asset (govt bonds), you're implicitly and knowingly shouldering a risk of default. The institutions that bought these assets should have known what they were buying. Caveat Emptor. Of course in practice you need to ask what the wider implications of default are. Greece _should_ be allowed to default. Absurd austerity budgets are penalising the average Greek whilst minimising the bottom line impact to (arguably wealthy and powerful) European banks. It's no wonder they're pissed. The short-sharp shock of a Greek default will be over in no time. Rolling debt and refinancing terms etc etc is likely to make things worse in the long term. But of course Italy is different, given the size of the economy. The impact of a default is likely to be far, far wider than a write-down to the creditors. But to be honest I think this worry over contagion is being over-blown. Markets often over-react. It only takes a single hedge-fund these days to move a market - even a big one like Italy debt. It's probably just Bluecrest or Moore selling the market :)
- reirob 15y ago
  Who knows, maybe Greece is about to get as much money as they can from the EU in order to default after? What would happen in this case?
  - yequalsx 15y ago
    I believe that the money lent to Greece is just being funneled back to banks to pay their existing debt obligations. The so called bailout for Greece is really a bailout for banks. Everyone knows Greece will never pay back these loans. The hope of the ECB is that a Greek default can be pushed long enough into the future so that when it does default the banks will be in better financial shape. The fear is that right now the banking system can't handle a Greek default.
    - reirob 15y ago
      Yes, this could be an explanation. But why would the Greek government provide the money to the banks? I mean they could invest the money (that they've got from EU and IWF) in infrastructure and economy and then declare default. If I understand it well Argentina was as well helped by IWF, but in the end they defaulted - and it seems like it was the right step. So I do not really understand what is the EU's interest to absolutely safe Greece from default? They are pumping more and more money at a time where many voices say that Greece will not be able to pay back. Even George Soros thinks: "A Greek default may be inevitable but it need not be disorderly" (http://www.cnbc.com/id/43720940 http://www.cnbc.com/id/43720940). So if you could explain, why is it important for the banking system to be able to handle a Greek default? I mean throughout the financial crisis everybody is saying that it is absolutely important to save the banking system - every politician repeats this like a parrot. But why? Most of the middle/lower class population in Europe does not have spare money in a bank account but in contrary has debts for housing or other stuff. And I would guess that this is by far more than 80% of population. These people would not necessarily suffer from banks collapsing, but they are suffering from the economic cuts that the governments are doing everywhere in order to save banks - who are actually responsible because they did not mitigate the risk and triggered the subprime crisis. So if you have a good explanation, please share with me.
btcoal 15y ago
The problem as I see it, and the article briefly hinted at this is illiquidity. Western Europe is extremely rich (in terms of capital stock) but has a relatively low income (in terms of capital flow) and extremely low income growth. Without structural reforms (improving infrastructure, decreasing frictions in the labor market, reducing entitlements to incentive work, etc) you cannot increase income or income growth levels. But, by increasing public claims on private wealth and opening the country up to foreign direct investment (read: selling the Sistine Chapel to China to rent) you can tap the capital stock. This should be increasingly seen as a way out for wealthy yet cash-poor Euro countries. Without structural improvements in the US it will also be the only way forward 30 or 40 years for now. Be prepared for a "Sponsored by India" sticker on the Washington Monument.
- r00fus 15y ago
  Your explanation is a silly mix of right-wing tropes. You think it's going to be China that buys the Sistine Chapel, or India that purchases the Washington Monument? No, it will be crony capitalist groups (formulated by the banksters and politically connected) that do so. The fact that these groups may be involved with some sovereign wealth fund of a BRIC or other country is incidental. Then they'll rent it out at obscene prices and gouge the public further.
  - btcoal 15y ago
    Hmm, well I didn't think this needed clarifying but the internet is notoriously bad at transmitting humor (or maybe I am). But I was being facetious with respect to the examples I gave. By capturing private wealth, what will most likely happen are taxes on existing wealth (national property taxes, increases in the estate tax, etc.). National debt is uncollateralized and will always be this way, so sovereign debt holders will never have claim to the physical assets of a nation. It is country themselves that can change laws to appropriate private wealth. Constitutions and laws vary in the extent to which this is allowed. There is the notion of an unconstitutional level of taxation in the US. As for the rest of your ideological rant. Anyway.
- nate_meurer 15y ago
Gravityloss 15y ago
It is also very possible that the average Greek or whatever country person is not responsible for the country's problems. What we have here is a communications breakdown. So anyone from those countries themselves want to explain what went wrong, when and where?
ez77 15y ago
On related news, US and the dollar: On the edge
shin_lao 15y ago
The economist likes to predict the end of the euro every six months or so. Newsflash: countries have armies, banks do not. Guess who will ultimately prevail?
- run4yourlives 15y ago
  Newsflash: Banks have been prevailing since they were created. Tanks and Guns are nothing against the power of credit.
- uvdiv 15y ago
  "Newsflash: countries have armies..." All the Red horses and all the Red men could not put Soviet economy together again.
  - gvb 15y ago
    It did provide a really intense story plot, though. http://en.wikipedia.org/wiki/Red_Storm_Rising http://en.wikipedia.org/wiki/Red_Storm_Rising
- nate_meurer 15y ago
  Except the conflict is not "countries vs. banks". Big banks and governments are essentially the same entities, and this has been the case throughout history. Historically, financial crises and disputes haven't often lead to armed conflict.
- mcphilip 15y ago
  If you'd actually read the economist over the past year and a half (i.e. acute phase of euro crisis) you'd know the paper has been a staunch critic of the reactive measures taken by the various parties trying to save the EU and that the paper has not predicted a time frame in which the euro will end; it's only cautioned that current policies are not solving anything and that the crisis will continue to worsen until either it's comprehensively solved or leads to a dramatic breakup of at least part of the currency union.
- icarus_drowning 15y ago
Uchikoma 15y ago
Italy is nowhere like Greece.
ChuckMcM 15y ago
I enjoy the Economist because they cover topics well and will tell you their sources as well. (which both validates that they have sources and you can evaluate the base information they are using for their article). That being said, this particular event, or series of events, will change the European Union profoundly. As with most political enterprises, the EU is a compromise. Much like the original Articles of Confederation [1] it took a very touchy situation (pretty much independent political nation-state entities) and attempted to craft a framework around how they might co-operate politically, financially, and militarily. Early criticism of what was produced was once called 'a bus where every passenger has their own steering wheel' by a Swiss delegate. We can see the literal effects of that as participating countries, have their wheels apparently turned 45 degrees to the direction of travel. If enough countries do that the bus can, and will drive off the road. (ok that's enough torturing of that analogy!) Europe remembers what it was like to be dominated by Germany involuntarily. One of the sub-themes of the original EU discussions had very real tension about effectively handing over the soverignty to the 'big' economic powers (France, Britain, and Germany). So there were a number of checks and balances in the final treaties that provide very real limits on what the EU can do (mostly they left in the ways to 'help' and took out most of the ways to 'discipline'). That compromise may ulitmately be untenable and the events of the next few years will test those compromises to the breaking point. I predict several things will be true after this crisis that are not true now. One, I think there will either be a way for the EU to expell a member or to put it under 'federal' control. Second there will be a trans-EU judiciary system which allows for injecting change (either through impeachment, imprisonment, or both) into member states leadership. If such a system existed it would have allowed the joint-EU leadership to demand (and get) corrective action on destructive behavior. Those changes will effectively mean handing national soverignty over to a central authority. And either the Europeans will be able to swallow that change, or the EU will disintegrate back into independent nations. It may be that they reach a compromise somehow, but my expectations that the EU will survive unchanged are low. [1] https://secure.wikimedia.org/wikipedia/en/wiki/Articles_of_Confederation https://secure.wikimedia.org/wikipedia/en/wiki/Articles_of_C...
- enjo 15y ago
  Can you really see those smaller countries go for that type of language tho? The Irish, Greeks, and Italians (among others) aren't ones to cede anything resembling autonomy. It would seem the most likely course would simply be the unraveling of many of the treaties that created the EU in the first place.
Jayasimhan 15y ago
The image on the article is very creative!

141 points by llambda 15y ago

At some point, we will have to realize that debts are a bad thing. No one can spend money he does not own without paying the consequences. The Euro seems to be exacerbating this race towards a tipping point. It seems that some kind of serious crash is inevitable. But it is yet to be seen whether Europe (and the world) will come out of this united or in flames.

lkrubner 15y ago
People who make arguments against debt are ignoring a great deal of historical information. A person, or a nation, can clearly spend money on stupid things, but that doesn't mean that debt is bad. Many businesses take on debt to grow, or at least they seek a credit line to cushion themselves against variations in income. The argument for debt goes like this: in the future "we" will be wealthier, so why don't we borrow against our future income to make the investments that will ensure that, in fact, in the future we will be wealthier. "We" can refer to a person, business, or nation. The careful and strategic use of debt has been used to build great empires. A quote: http://www.ukpublicspending.co.uk/debt_brief.php http://www.ukpublicspending.co.uk/debt_brief.php "Chart 2 tells, in stark detail, the story of the British Empire. It was built on the National Debt. Throughout the 18th century the National Debt grew and grew, from nothing at the end of the 17th century to about 60 percent of GDP by the end of the War of Spanish Succession in 1715." To win World War II, the USA drove up debt to 100% of GDP, a level much higher than what it faces today. To finance business, an interesting difference has developed between the English speaking nations (I mean those who inherit their legal codes from English Common Law) and those nations of continental Europe. In the English speaking nations, it became common, by the 1800s, to finance growth by offering equity for sale at public auction. The continental nations developed along different lines -- banks played a larger role. In Germany, most firms operate with higher levels of debt that what would seem normal in English speaking nations. To get an understanding of the importance of debt, and its history, I'd suggest you read Fernand Braudel: http://www.amazon.com/Wheels-Commerce-Civilization-Capitalism-15Th-18th/dp/0520081153/ref=sr_1_5?ie=UTF8&qid=1310738832&sr=8-5 http://www.amazon.com/Wheels-Commerce-Civilization-Capitalis... As he points out, debt and civilization tend to go hand in hand. Debt was illegal in many European nations during the Dark Ages. Nations in the Mideast and India all had flourishing markets in debt, and flourishing trade, while Europe was sunk in poverty. When Europe revived and began to expand again, it helped itself along with the revival of credit, and credit markets. By the time the 1600s came around, Amsterdam was able to offer the world the full range of modern financial instruments: put and short and forward contracts, options of every kind (save for the exotic derivatives of recent vintage). There is no civilization without debt, no advanced commerce without debt, no growth without debt. The wheels of commerce are greased with credit.
- spydum 15y ago
  Yes, debt makes sense when talking of investment. However, borrowing is a bad choice when you are just trying to pay operating expenses. This is the dilema: nations have shifted from borrowing for investment purposes, to borrowing to keep the lights on.
  - seanalltogether 15y ago
    Precisely! Taking out a loan to pay for college should be seen as a good thing. Taking out payday loans to cover living expenses should be seen as a bad thing.
- scythe 15y ago
  >"Throughout the 18th century the National Debt grew and grew, from nothing at the end of the 17th century to about 60 percent of GDP by the end of the War of Spanish Succession in 1715." That's a fifteen-year period, not throughout the 18th century, and for that entire period, England was at war. It's absolutely true: debts help win wars. This isn't surprising: war is one of those times when there's a good argument for borrowing against the future, because the alternative is annihilation. On the other hand, during most periods of peace, historically, debt as a percent of GDP has fallen. http://en.wikipedia.org/wiki/File:US_Federal_Debt_as_Percent_of_GDP_by_President.jpg http://en.wikipedia.org/wiki/File:US_Federal_Debt_as_Percent... The thing is we don't have any more wars worth fighting. Maybe in twenty years the precarious situation of "the largest economy in the world is totalitarian [i.e. China]" will boil over, but that definitely isn't happening any time soon. These days, we just accrue debt for no reason, or to fight a war on nothing (drugs, terror, cancer, tobacco). Debt by country: http://en.wikipedia.org/wiki/File:Public_debt_percent_gdp_world_map.svg http://en.wikipedia.org/wiki/File:Public_debt_percent_gdp_wo... Growth by country: http://en.wikipedia.org/wiki/File:GDP_real_growth_rate_CIA_Factbook.PNG http://en.wikipedia.org/wiki/File:GDP_real_growth_rate_CIA_F... (I wanted to say something about this but I'm having trouble distinguishing between five identical shades of green)
- craftsman 15y ago
  The Braudel book looks really fascinating. Is it understandable on its own, without having read volumes one and two?
thingie 15y ago
Is there some concept of money that doesn't (almost) directly link money to debt? (so money wouldn't be completely worthless without debt)
- onemoreact 15y ago
  While the demand for most moderen currency is based around Taxes and Debt you can also link them to a wide range of real or vertual goods. AKA gold in an MMO or Mooncakes in china. (http://marketplace.publicradio.org/display/web/2010/09/21/a-black-market-for-mooncakes-in-china/ http://marketplace.publicradio.org/display/web/2010/09/21/a-...) Edit: Bit coin is an interesting experement with the idea that simply because something is finite it has value based around the idea that at some point people might want it. Even the most simplistic analysis suggests the market will quickly become prone to bubbles but what's intresting is how it will recover after a major crash. PS: I don't know why people ignore the link between Taxes and Money but try paying your taxes in gold bullion and see how far you get.
- carsongross 15y ago
  Yes. It was called the gold standard. It worked quite well for a very long time. No respectable academic economist takes it seriously. Which is why you should.
  - rayiner 15y ago
    You don't need fancy academics to see why the gold standard was a bad idea. You need money to function as a proxy for the economy. Every time grows up and enters the workforce, you need to add money to the economy to be able to serve as a proxy for his or her labor. As population and economic activity grows exponentially, you need to add exponentially increasing amounts of money to the economy just to avoid deflation. Now, explain to me how we could've sustainably kept mining exponentially increasing amounts of gold out of the ground?
    - carsongross 15y ago
      Why do you need to add money? Can you name an industry in which the much-feared deflation has occurred in the last fifty years? How has that industry done in terms of wealth creation? Why do you think that the economy isn't capable of adding money if necessary? Are there any historical examples of the opposite occurring? Why do you think that exponential growth makes sense in a finite world? Keep an open mind: the banks would prefer that you didn't.
adw 15y ago
Debt is a mechanism for moving risk around - risk-averse parties (the people taking the loan) selling risk to risk-seeking parties (the lender). You're buying money now and paying interest, providing return, against which there's a chance it doesn't get paid back. As such, there's actually not much of a difference between debt, insurance, and synthetic derivatives such as credit default swaps. (Modern debt and insurance practice both originate from the shipping industry.) Of course, if you believe the world's a better place without corporate finance, you're entitled to think so, but we'll have to disagree.
- carsongross 15y ago
  Am I allowed to think that the world would be a better place without implicitly and explicitly publicly backed private corporate finance? Just want to make sure that'd be OK.
  - sethg 15y ago
    I don’t think you can have a stable financial system without a government that is willing and able to step in when things go pear-shaped. (You might say “if the government weren’t doing that, then lenders would be more careful with their money and things wouldn’t go pear-shaped”, but the string of crashes in the late 19th and early 20th centuries, before the Federal Reserve was created, suggests otherwise.)
    - mseebach 15y ago
      The argument isn't that if only the government keeps out there will be no pears, but that if the government keeps out the following recoveries will be faster and those responsible for the crash will take a hit financially, so hopefully someone learns a lesson or two.
      - sethg 15y ago
        But this did not happen. http://en.wikipedia.org/wiki/File:US-GNP-per-capita-1869-1918.png http://en.wikipedia.org/wiki/File:US-GNP-per-capita-1869-191...
iwwr 15y ago
Only exacerbated because the ECB is not a central bank in the traditional sense. Traditionally, the central bank (or a related institution) would just print up money to make up for the shortfall. The logic of modern politics leads inevitably to the printing press. Now, the only way the Germans would have agreed to an ECB would have been a bank at least as strong (and printing-averse) as the Bundesbank. So the so-called 'stability pact' was signed in order to placate them (max 3% of GDP deficits and max 60% debt to GDP ratio, working toward zero deficits at some point). What happened was the Euro states continued or increased their spending, producing deficits even during the great boom years right before the collapse. Today, the Stability Pact is a dead letter and members (the PIIGS in particular) are trapped without an ability to print themselves out of trouble. Of course, the ECB has been issuing a lot of new money, but just to rescue the major banks, the governments are on their own. This isn't to say that it's a good idea to print oneself out of debt, but governments find it the easiest thing to do. The crisis would not exist if expenses could have been scaled down as easily as they have been increased. It's better in the end to have a strong currency and balanced budgets, but balanced without low expenditures, not high taxes.
nhaehnle 15y ago
From a purely accounting perspective, debt and money are just two sides of the same coin. Every financial asset you own, whether it is paper money or a number in a bank account, is somebody else's liability. With this in mind, it is clear that blanket statements like "debts are a bad thing" are useless. Bad with respect to what? For example, when citizens save some amount of their income in government bonds to have some buffer to protect them against future individual troubles, then can you honestly say that this debt is a bad thing? The problem of the Eurozone is that there is no fiscally sovereign government which can safely (and in a politically legitimised fashion) carry an unlimited amount of debt.
- rrc 15y ago
  > Every financial asset you own, whether it is paper money or a number in a bank account, is somebody else's liability. Gold is a form of money with no counterparty risk; if I own gold it's nobody's liability. One complication is that some central bankers and governments try to suppress gold being used as money through enforcement of fiat money monopolies at gunpoint... Edit: I am incorrect in saying gold is a financial asset.
  - nhaehnle 15y ago
    Gold is a natural resource, so it's not really a financial asset. Coins containing gold are liabilities of the issuing government just like any other type of coin. I hope you do not seriously believe that the reason gold is not used for trade is that governments suppress it. The fact is that using gold is actually extremely impractical compared to modern forms of payment. The use of gold in trade in the past developed naturally because sufficiently stable fiat money systems did not exist. However, once such fiat money systems do exist, they are simply better and there is no reason left to use gold as a medium of exchange (outside of goldbugdom).
    - rrc 15y ago
      I do believe governments and central banks would like to suppress its use, though I wouldn't claim that's the only reason it isn't used in transactions today. It's in their interests to suppress its use because it's one way to spend more than they take in as revenue by issuing new currency. I think we're seeing the results of that globally today. As to gold being impractical for use in everyday transactions, I don't think that's true anymore. You can look at companies like Goldmoney for a real world example of what is possible. Any trusted third party can hold the physical gold, while allowing electronic transactions of said gold in whatever increments, without any physical exchange taking place. In fact, this is generally how the dollar worked before it went off the gold standard. I'm not sure why you think fiat money is better. The history of fiat money has been one of short lifespans and dramatic failures, while gold's history of use as money spans over 6,000 years.
jerf 15y ago
As people are pointing out in replies, debts are bad is probably not the right answer. However, debts are much more dangerous than our current analyses are telling us does seem like an inevitable correction. Debt calculations based on smooth probability distributions underestimate Black Swans, and the evidence of this has been pretty clear for a while, it's just that if you give our highly intelligent financial analysts five to ten years of clear sailing, they'll talk themselves into forgetting it again. For various reasons, this is probably not a solvable problem. (Mostly because, during the periods of clear sailing, underestimating risk means you make more money, and over time simple greed will cause more people to do that, until... kaboom. In a way the problem is that we don't have enough crises.)
- jbert 15y ago
  This has always been my perception. I think that the market forces an underestimation of risk as the only viable long-term strategy (ironically). If I can run my finance house on a "I will blow up on a once-every-5-year event" I will outgrow a business running on "I will blow up on a once-every-50-year event". So I outcompete my competitors and acquire them or steal their best employees with high salary etc. Basically, short-termism seems to be the optimal solution in the game theory of risk management. (Of course, the real problem is the frequency of such events is poorly understood. What happens is that a finance house pursues a 'more profitable' course without perhaps fully understanding their increased exposure. See Taleb, sub-prime crash etc)
tybris 15y ago
All of that is true if you don't consider inflation and the money supply. Then stuff gets complicated.
kahawe 15y ago
More dangerous than debt is a political system which accepts broke countries into a monetary union when these countries just downright faked their economic statistics and noone did any due-diligence or found out only until years later when it was too late.

retube 15y ago

>They cannot agree on who should bear the cost of today’s crisis: should it be creditors (through a write-down), debtors (through austerity) or the Germans (through transfers to the south)? In theory it should, of course, be the creditors. You buy an asset (govt bonds), you're implicitly and knowingly shouldering a risk of default. The institutions that bought these assets should have known what they were buying. Caveat Emptor. Of course in practice you need to ask what the wider implications of default are. Greece _should_ be allowed to default. Absurd austerity budgets are penalising the average Greek whilst minimising the bottom line impact to (arguably wealthy and powerful) European banks. It's no wonder they're pissed. The short-sharp shock of a Greek default will be over in no time. Rolling debt and refinancing terms etc etc is likely to make things worse in the long term. But of course Italy is different, given the size of the economy. The impact of a default is likely to be far, far wider than a write-down to the creditors. But to be honest I think this worry over contagion is being over-blown. Markets often over-react. It only takes a single hedge-fund these days to move a market - even a big one like Italy debt. It's probably just Bluecrest or Moore selling the market :)

reirob 15y ago
Who knows, maybe Greece is about to get as much money as they can from the EU in order to default after? What would happen in this case?
- yequalsx 15y ago
  I believe that the money lent to Greece is just being funneled back to banks to pay their existing debt obligations. The so called bailout for Greece is really a bailout for banks. Everyone knows Greece will never pay back these loans. The hope of the ECB is that a Greek default can be pushed long enough into the future so that when it does default the banks will be in better financial shape. The fear is that right now the banking system can't handle a Greek default.
  - reirob 15y ago
    Yes, this could be an explanation. But why would the Greek government provide the money to the banks? I mean they could invest the money (that they've got from EU and IWF) in infrastructure and economy and then declare default. If I understand it well Argentina was as well helped by IWF, but in the end they defaulted - and it seems like it was the right step. So I do not really understand what is the EU's interest to absolutely safe Greece from default? They are pumping more and more money at a time where many voices say that Greece will not be able to pay back. Even George Soros thinks: "A Greek default may be inevitable but it need not be disorderly" (http://www.cnbc.com/id/43720940 http://www.cnbc.com/id/43720940). So if you could explain, why is it important for the banking system to be able to handle a Greek default? I mean throughout the financial crisis everybody is saying that it is absolutely important to save the banking system - every politician repeats this like a parrot. But why? Most of the middle/lower class population in Europe does not have spare money in a bank account but in contrary has debts for housing or other stuff. And I would guess that this is by far more than 80% of population. These people would not necessarily suffer from banks collapsing, but they are suffering from the economic cuts that the governments are doing everywhere in order to save banks - who are actually responsible because they did not mitigate the risk and triggered the subprime crisis. So if you have a good explanation, please share with me.

btcoal 15y ago

The problem as I see it, and the article briefly hinted at this is illiquidity. Western Europe is extremely rich (in terms of capital stock) but has a relatively low income (in terms of capital flow) and extremely low income growth. Without structural reforms (improving infrastructure, decreasing frictions in the labor market, reducing entitlements to incentive work, etc) you cannot increase income or income growth levels. But, by increasing public claims on private wealth and opening the country up to foreign direct investment (read: selling the Sistine Chapel to China to rent) you can tap the capital stock. This should be increasingly seen as a way out for wealthy yet cash-poor Euro countries. Without structural improvements in the US it will also be the only way forward 30 or 40 years for now. Be prepared for a "Sponsored by India" sticker on the Washington Monument.

r00fus 15y ago
Your explanation is a silly mix of right-wing tropes. You think it's going to be China that buys the Sistine Chapel, or India that purchases the Washington Monument? No, it will be crony capitalist groups (formulated by the banksters and politically connected) that do so. The fact that these groups may be involved with some sovereign wealth fund of a BRIC or other country is incidental. Then they'll rent it out at obscene prices and gouge the public further.
- btcoal 15y ago
  Hmm, well I didn't think this needed clarifying but the internet is notoriously bad at transmitting humor (or maybe I am). But I was being facetious with respect to the examples I gave. By capturing private wealth, what will most likely happen are taxes on existing wealth (national property taxes, increases in the estate tax, etc.). National debt is uncollateralized and will always be this way, so sovereign debt holders will never have claim to the physical assets of a nation. It is country themselves that can change laws to appropriate private wealth. Constitutions and laws vary in the extent to which this is allowed. There is the notion of an unconstitutional level of taxation in the US. As for the rest of your ideological rant. Anyway.
nate_meurer 15y ago

Gravityloss 15y ago

It is also very possible that the average Greek or whatever country person is not responsible for the country's problems. What we have here is a communications breakdown. So anyone from those countries themselves want to explain what went wrong, when and where?

ez77 15y ago

On related news, US and the dollar: On the edge

shin_lao 15y ago

The economist likes to predict the end of the euro every six months or so. Newsflash: countries have armies, banks do not. Guess who will ultimately prevail?

run4yourlives 15y ago
Newsflash: Banks have been prevailing since they were created. Tanks and Guns are nothing against the power of credit.
uvdiv 15y ago
"Newsflash: countries have armies..." All the Red horses and all the Red men could not put Soviet economy together again.
- gvb 15y ago
  It did provide a really intense story plot, though. http://en.wikipedia.org/wiki/Red_Storm_Rising http://en.wikipedia.org/wiki/Red_Storm_Rising
nate_meurer 15y ago
Except the conflict is not "countries vs. banks". Big banks and governments are essentially the same entities, and this has been the case throughout history. Historically, financial crises and disputes haven't often lead to armed conflict.
mcphilip 15y ago
If you'd actually read the economist over the past year and a half (i.e. acute phase of euro crisis) you'd know the paper has been a staunch critic of the reactive measures taken by the various parties trying to save the EU and that the paper has not predicted a time frame in which the euro will end; it's only cautioned that current policies are not solving anything and that the crisis will continue to worsen until either it's comprehensively solved or leads to a dramatic breakup of at least part of the currency union.
icarus_drowning 15y ago

Uchikoma 15y ago

Italy is nowhere like Greece.

ChuckMcM 15y ago

I enjoy the Economist because they cover topics well and will tell you their sources as well. (which both validates that they have sources and you can evaluate the base information they are using for their article). That being said, this particular event, or series of events, will change the European Union profoundly. As with most political enterprises, the EU is a compromise. Much like the original Articles of Confederation [1] it took a very touchy situation (pretty much independent political nation-state entities) and attempted to craft a framework around how they might co-operate politically, financially, and militarily. Early criticism of what was produced was once called 'a bus where every passenger has their own steering wheel' by a Swiss delegate. We can see the literal effects of that as participating countries, have their wheels apparently turned 45 degrees to the direction of travel. If enough countries do that the bus can, and will drive off the road. (ok that's enough torturing of that analogy!) Europe remembers what it was like to be dominated by Germany involuntarily. One of the sub-themes of the original EU discussions had very real tension about effectively handing over the soverignty to the 'big' economic powers (France, Britain, and Germany). So there were a number of checks and balances in the final treaties that provide very real limits on what the EU can do (mostly they left in the ways to 'help' and took out most of the ways to 'discipline'). That compromise may ulitmately be untenable and the events of the next few years will test those compromises to the breaking point. I predict several things will be true after this crisis that are not true now. One, I think there will either be a way for the EU to expell a member or to put it under 'federal' control. Second there will be a trans-EU judiciary system which allows for injecting change (either through impeachment, imprisonment, or both) into member states leadership. If such a system existed it would have allowed the joint-EU leadership to demand (and get) corrective action on destructive behavior. Those changes will effectively mean handing national soverignty over to a central authority. And either the Europeans will be able to swallow that change, or the EU will disintegrate back into independent nations. It may be that they reach a compromise somehow, but my expectations that the EU will survive unchanged are low. [1] https://secure.wikimedia.org/wikipedia/en/wiki/Articles_of_Confederation https://secure.wikimedia.org/wikipedia/en/wiki/Articles_of_C...

enjo 15y ago
Can you really see those smaller countries go for that type of language tho? The Irish, Greeks, and Italians (among others) aren't ones to cede anything resembling autonomy. It would seem the most likely course would simply be the unraveling of many of the treaties that created the EU in the first place.

Jayasimhan 15y ago

The image on the article is very creative!