Euroskeptic Ambrose Evans-Pritchard’s most recent column in the Telegraph is causing heads to explode all over the more Austrian-oriented sections of the econblogosphere. Here’s the meat of the column:
The eurozone economy is in imminent danger of crashing into deflation, bringing down the whole interlocking edifice of sovereign debt and distressed lenders. And bear in mind that Europe’s bank nexus — including the UK, Swiss, Scandies — is €31 trillion. Big stuff.
This crisis can be stopped very easily by monetary policy, working through the old-fashion Fisher-Hawtrey-Friedman method of open-market operations to expand the quantity of money, ideally to keep nominal GDP growth on an even keel.
That’s quite right. It will end the crisis. Unfortunately, it won’t do much about the problem which is the euro itself.
Mike Shedlock responds:
Pritchard clearly has it in for Germany. Why I do not know.
What’s disappointing about his article is that he predicted well in advance that the Euro experiment would end in failure. Rather than bask in the glory of being correct early and often, he has now lost his mind attempting to save the unsaveable.
If that’s not losing one’s mind, what is?
and then quotes at length from a post by Steen Jakobsen, chief economist at Saxo Bank.
Let me make my own views clear:
- I don’t think the euro should exist.
- The euro is functioning as designed (boosting German exports at the expense of Greek, Spanish, Portuguese, etc. development).
- Most of the kerfuffle of the last several years over the euro has been a desperate stab at saving French and German banks from their excessive exposure to Greek, Spanish, etc. debt.
- The only way to make the euro “work” is for Germany to, in effect, export a substantial chunk of its GDP to Greece, Spain, etc.
- That’s politically impossible in Germany and will remain so as long as the Germans maintain their “thrifty, hard-working Germans vs. lazy, spendthrift southerners” prejudice.
- The primary objective of U. S. policy in this matter should be reducing the exposure of U. S. banks to European debt.
That’s why I was intrigued by Brad DeLong’s radical proposal for Fed action to reduce U. S. exposure to the euro. Rather than doing that the Fed seems to have maximized its own exposure to the euro.
So, here’s my question. What are the implications for the U. S., Japanese, and Canadian economies if the euro simply ceases to exist? By that I mean no value, unredeemable. I’m thinking, in particular, of the impact of the Fed’s swaps. There’s a range of possibilities all the way from “not much” to The Road Warrior.
Well, if there is an issue of deflation the solution is to print more money. We tried not doing that when we had a period of deflation and it didn’t work so well. It was from about 1931-to-1939 and most people today call it the Great Depression.
Heh…I seem to remember much sturm und drang when similar statements were made back in 2008. So, couldn’t one fairly ask why does Mike Shedlock hate Europeans so much? Has he lost his mind? [smirk]
Oh…no tax increases but we’ll still make tax payers responsible for bank loses. How the fuck Shedlock thinks that isn’t essentially a tax increase I don’t know, but meh he is clearly smarter than me.
Sorry, can’t keep reading, its just drivel.
“This crisis can be stopped very easily by monetary policy, working through the old-fashion Fisher-Hawtrey-Friedman method of open-market operations to expand the quantity of money, ideally to keep nominal GDP growth on an even keel.”
This is the big problem with Evans-Pritchard’s argument: a central bank cannot print money via monetary policy. He makes the same mistake regarding QE, thinking of it as printing when it was just an asset swap. I see no evidence a central bank CAN create inflation: The Federal Reserve has been attempting to do so for three years and the Bank of Japan for twenty without success. Banking transactions are endogenous, meaning they occur within the financial system and have only a very limited impact on the real economy. What
Evan’s-Pritchard wants can only be accomplished via fiscal policy.
“So, here’s my question. What are the implications for the U. S., Japanese, and Canadian economies if the euro simply ceases to exist?”
U.S. financial institutions will need to be recapitalized. Again. Better to take them into receivership but it ain’t gonna happen, so bailouts galore. I don’t know how much exposure the Canadians and Japanese have to euro losses, but if it’s significant then capital becomes a problem for their banking systems as well.
The dollar will continue to strengthen if the euro really does evaporate, harming our trade balance which is negative anyway, so we’ll have an even greater drain on domestic demand suppressing our economic performance. Combined with a Europe which for a short time won’t be able to buy much because it doesn’t know what currency it’s using, we’ll at the very least see GDP growth here in the U.S. slow to near zero.
Capital flight to the U.S. will push asset prices up, putting the Fed in the difficult position of accepting greater inflation or forcing credit to contract even further by raising the FF rate.
I’ll think about it some more.
Given that the Fed has decided to go all-in, I know that THEY must think the end of the Euro would be a lot closer to the “Road Warrior” scenario than the “not much” scenario.
That rather brings us to the reason I brought up the question. It could be that they see the situation as very serious, indeed. Or it could be that their notions of risk and reward are so different from mine that I find it hard to fathom what in the heck they’re thinking.
I find that increasingly the case. Clinton and Bush were so eager to take risks I found their apparent thinking torturous. I haven’t decided about Obama. Sometimes I think he’s much the same, others I think he’s extraordinarily risk-averse.
Take Libya, for example. There the risks weren’t to our own soldiers but to North African stability.
Dave – I’ve noticed within several posts you’ve made these comments before:
The only way to make the euro “work†is for Germany to, in effect, export a substantial chunk of its GDP to Greece, Spain, etc.
That’s politically impossible in Germany and will remain so as long as the Germans maintain their “thrifty, hard-working Germans vs. lazy, spendthrift southerners†prejudice.
Have previously posted, in greater detail, your thoughts on those ideas?
@Dave
Keep in mind the Fed always has a strong bias toward Doing Something, whether it helps or not. I think it comes from its understanding that thanks to a dysfunctional Congress no fiscal policy will be deployed to deal with the situation, so the Fed takes what are effectively cosmetic steps to shore up confidence.
Let me give it a quick shot here. In normal international trade Greeks buy German goods with deutschmarks and Germans buy Greek goods with drachmas. Germany may produce everything more efficiently than Greece but doesn’t produce everything with equally greater efficiency. Consequently it continues to make sense for the two countries to trade with one another. Check the details of how that works under “comparative advantage”.
Greeks want German products. That raises the demand for deutschmarks and the cost of deutschmarks, measured in drachmas, rises. Germans aren’t so interested in Greek products. That pushes the price of drachmas measured in deutschmarks down. The relative values of the two currencies limits the volume of German products that Greeks buy.
Greece and Germany being on the same currency, the euro, effectively means that the German currency is substantially under-valued and the Greek currency substantially over-valued. That puts more wind in the sales of German products. The governor for Greeks buying German products is removed.
California and Mississippi use the same currency, have for the last 150 years, Mississippians generally buy more California products than vice versa but we’re not vexed about the trade deficit between the two states. Why? Because California, effectively, subsidizes Mississippi. That’s what I mean by “shipping a portion of GDP”.
One or some combination of several things needs to happen between Germany and Greece. Germans need to buy more Greek goods and/or Greeks need to buy fewer German goods. That’s contrary to the present German operating philosophy. Or the Greeks could continue borrowing and the Germans could subsidize their debt. That, too, is against the present German operating philosophy. That’s the impasse.
The key point to remember is that there is no level of Greek austerity that will correct the trade imbalance and the trade imbalance is at the heart of the problem.
German currency is substantially under-valued and the Greek currency substantially under-valued.
Typo?
Thanks. Corrected. I was flying’ low on that comment so I wouldn’t be surprised at a couple of typos and even some conceptual goofs.
@ Dave
Excellent description of the trade imbalances killing the euro. Next time someone asks me about it I can just direct them here.
The recent announcement on swap lines is another potential pitfall should the EMU sink. Let’s say the ECB swaps $200 billion and then the euro disintegrates. That leaves the Fed holding a worthless asset, while that $200 billion is still out there; the Fed has effectively printed $200 billion because it engaged in making unsecured loans. Some are arguing the swaps are actually a violation of the Fed’s charter.
Thanks Dave.