Been a pleasure, Europe

[K. A. Pital]

If I were arguing from a Minsky perspective, I would also ask Surlethe whether there is a labour market equilibrium at all that is reached. Is a post-recessionary state an equilibrium, and if so, why?

[Zed]

For the record, today's German bond auction went pretty bad. The contagion has hit Germany.

[Starglider]

For the record, today's German bond auction went pretty bad. The contagion has hit Germany.

Nothing to worry about, it's absolutely fine. Sure, it was the worst German bond auction result in the history of the euro, but that trivial detail is no reason to consider rash actions.

Meanwhile, Ireland is finally following the Greek lead and fishing for haircuts.

"We carried an undue burden for protecting the European banking system from contagion," said finance minister Michael Noonan.

"We are looking at ways to reduce the debt. We would like to see our European colleagues address this in a positive manner. Wherever there is a reckless borrower, there is also a reckless lender," he said, alluding to German, French, British and Dutch banks. Mr Noonan hinted that Dublin is asking for some of interested relief on a €31bn EU promissory noted linked to the Anglo Irish fiasco, among other matters.
Mr Noonan said Ireland's public mood has turned very sour. "We have indicated to Europe's authorities that it will be difficult to get the Irish public to pass a referendum on treaty change," he said.

Nice to see them picking up and running with the referendum blackmail strategy as well. That said, please remain calm, as I'm sure the infinitely wise ECB will soon announce a new quadruple leveraged EFSF structure that will fix everything.

[Surlethe]

When there's a real shock to the economy, production falls, demand for labor falls, but nominal wages are sticky, so unemployment rises. Unexpectedly higher inflation during a recession means nominal wage stickiness falls away, which means that the labor market reaches equilibrium faster, which means the recession ends faster. (The key is expectations, of course, so you get a short-run Philips curve with slope.)

Which leads to the next question: when and where has this worked without destroying living standards?

Living standards have to fall for the labor market to clear. That's kind of the point.

Another way to put it: the economy hasn't recovered from the recession. It's been plodding along at 10-15% under trend since 2008. Eyeball this:

Recall that GDP is consumption + investment + government spending + net exports. If the government borrows $2 trillion and sets it on fire, that amount counts towards GDP. If the government borrows $13 trillion and flushes it down the White House toilets it doubles the GDP of the nation.

Thus to obtain the actual GDP, the component of government spending which was borrowed must be subtracted out. At all levels of government. Since ledgers must balance we know how much was borrowed if we know what the budget deficit was in a given year. And we do.



Which gives us this.

Sure. The point is, whatever accounting identity you want to measure, the economy is chugging along way under trend.

If I were arguing from a Minsky perspective, I would also ask Surlethe whether there is a labour market equilibrium at all that is reached. Is a post-recessionary state an equilibrium, and if so, why?

Nice subjunctive I would reply that I don't think it matters if there's actually an equilibrium. I would then say that equilibria are a useful shorthand for how the economy works, that's all. If you would want, I could phrase my point in terms of partial differential equations instead of thinking of abstract start- and finish-points, but perhaps not as clear or useful.

[Surlethe]

Here is a link to an article about the German bond issue failure. Even the ability of Germany to borrow is now threatened. This is a useful blog post summarizing the financial situation in Europe.

"Hyperventilating", eh?

[Surlethe]

Sorry, took too long to edit this in:

Here's the fork. Either Germany credibly guarantees the debt of the periphery, in which case Germany won't be able to borrow and German voters will have to bear the pain of bailing out the periphery, or Germany lets the periphery go and the Eurozone falls apart with massive recessions on the periphery accompanied by a European financial panic, which will quickly spread to the US. (Of course, the ECB could get its act together and not repeat the mistakes of the 1930 Fed, the 1990 Bank of Japan, or the 2008 Fed. But given their attitude toward inflation, it's not likely.)

"Hyperventilating", eh?

[J]

Going back to the first post, I'm reminded once again of why Krugman is a clueless ditz. His examples of inflation with Germany & Spain completely neglect the costs of nations' forward liabilities, in other words, their social security, health care & other such programs. The costs of these programs are heavily influenced by inflation rates, if we try to run a higher inflation rate to "stimulate" the economy, inflate away debt, or some other reason, the costs of these programs will skyrocket. That is unless we're willing to let seniors & sick people die in the streets by the millions. Germany sees the future costs of its social & health care programs spiral out of control while Spain gets a free lunch. This is actually far worse for the Eurozone since its economic soundness is predicated on a financially solid Germany. Weaken Germany and the rest will fall to pieces.

[Starglider]

Even the ability of Germany to borrow is now threatened.

I wouldn't go that far. Germany's access to credit is not significantly threatened in the medium term, what is in serious doubt is their ability to borrow at ridiculously low, sub-inflation yields. In a sense Germany has been free-riding on flight-to-safety from the periphery, just as it has been profiting from the depressed euro making exports cheaper. Unfortunately for those nice negative borrowing costs are quickly turning into significant premiums at the exact same time that Germany is being asked to borrow a lot more to fund the EFSF, ECB recapitalisation and other mechanicms. The 'borrow, leverage and bail-out' option is becoming financially impossible as well as politically impossible, which just leaves two options : printing a few trillion or mass defaults + eurozone breakup.

[K. A. Pital]

Personally I think the ECB will monetize debt. But I could be underestimating Germany's resilience and willingness to throw the periphery under the bus at this particular stage.

[Surlethe]

Going back to the first post, I'm reminded once again of why Krugman is a clueless ditz. His examples of inflation with Germany & Spain completely neglect the costs of nations' forward liabilities, in other words, their social security, health care & other such programs. The costs of these programs are heavily influenced by inflation rates, if we try to run a higher inflation rate to "stimulate" the economy, inflate away debt, or some other reason, the costs of these programs will skyrocket. That is unless we're willing to let seniors & sick people die in the streets by the millions. Germany sees the future costs of its social & health care programs spiral out of control while Spain gets a free lunch. This is actually far worse for the Eurozone since its economic soundness is predicated on a financially solid Germany. Weaken Germany and the rest will fall to pieces.

Because inflation-indexed costs are proportional to nominal GDP but tax receipts aren't. I see.

[J]

That is true only IF there aren't any funding gaps in the programs and all costs are covered by current & future tax receipts. In reality, all these funds rely on an X% annual compounded growth rate from interest & investments on top of tax receipts to remain solvent. If inflation goes up significantly, these funds will need to make higher risk investments and/or exchange their interest bearing instruments for ones which give a larger coupon, otherwise a funding gap opens up and eventually blows out.

[D.Turtle]

That is true only IF there aren't any funding gaps in the programs and all costs are covered by current & future tax receipts. In reality, all these funds rely on an X% annual compounded growth rate from interest & investments on top of tax receipts to remain solvent. If inflation goes up significantly, these funds will need to make higher risk investments and/or exchange their interest bearing instruments for ones which give a larger coupon, otherwise a funding gap opens up and eventually blows out.

Not true for the German pension system. It is entirely funded out of current and future taxes (specific pension taxes supplemented by general tax revenue). There is only a small reserve kept (currently just a bit more than one month of payments).

There is an automatic yearly adjustment - if it is expected that the reserve will drop under 20% of monthly costs the pension tax is increased, and if it is expected that the reserve will go over 150% of monthly costs the pension tax is lowered.

[Xisiqomelir]

So much for the Tripartite agreement

November 29, 2011 12:35 pm
German exporters shrug off debt crisis
By Ralph Atkins in Frankfurt

German exporters have shrugged off the escalating eurozone debt crisis to forecast robust growth in 2012, while businesses across the country reported credit conditions had actually improved. Highlighting how Germany’s economy has so far remained relatively insulated from the crises hitting much of southern Europe, the BGA exporters’ association on Tuesday forecast exports would rise by at least 6 per cent in 2012 – extending a 12 per cent increase this year.

“Stormy times in financial markets are running alongside remarkable still waters in the real economy,” Anton Börner, BGA president, said in a statement.
His upbeat comments help explain why the eurozone crisis has not created the same drama in Germany as in other European countries, even though financial markets are openly speculating about a possible collapse of the eurozone.

Separately, the Munich-based Ifo institute reported restrictions faced by German businesses in obtaining credit had relaxed this month – despite the weaknesses across much of the eurozone banking system. The percentage of companies complaining about restrictive credit policies fell from 23.1 per cent in October to 22.4 per cent in November – one of the lowest figures recorded since the survey started in 2003, according to Ifo.

“The German capital market is still profiting from investors’ desire to seek a safe haven in a time of crisis,” said Hans-Werner Sinn, Ifo president.
Across the eurozone, economic confidence has taken a further turn for the worse, reflecting widespread expectations that the region had already fallen into a recession, which could prove severe. The European Commission reported on Tuesday that its eurozone “economic sentiment” index had fallen for a ninth consecutive month, from 94.8 in October to 93.7 in November, the lowest in two years.

The drop in German economic sentiment was among the smallest, however, and last week Ifo reported its own “business climate” index for Europe’s largest economy had actually increased slightly this month. This year had been “undoubtedly a boom year for German exports,” Mr Börner said. Overseas sales were expected to break through the €1,000bn level, which they had just failed to breach in 2008. Growth had been particularly strong to countries outside the European Union. But German exports to other EU countries had increased by 11 per cent this year. Demand from north and central Europe offset a fall in sales to crisis-hit countries such a Greece and Portugal.

Mr Börner acknowledged the global economy would slow in 2012 “but we don’t belong to those who talk down economic prospects”. Among Germany’s “Mittelstand” – the companies that make up the country’s industrial backbone – the mood about next year was “cautiously optimistic,” he said. “We think the emerging markets are hardly affected by the debt crisis and continue to invest significantly in future technologies.”

The collapse of the eurozone would have an enormous economic cost – including for Germany, Mr Börner warned. But the BGA supported the hardline taken by Angela Merkel, German chancellor, in insisting the eurozone’s future stability had to be ensured through fiscal discipline. “In particular when it comes to Italy, I say clearly: stay firm, Frau Merkel!”

[Thanas]

"Hyperventilating", eh?

Indeed you are, considering France has actually enjoyed lower rates in its recent bond issue. Spain is paying higher rates but investor backing remains strong, with demand being twice as high as the notes issued. link. This is pretty much the same stuff that went on with you and a certain group of posters when "ZOMG PEAK OIL." started appearing. As I recall, you pretty much played klaxon on that one as well.

The periphery is not important enough to bring Europe down. But, like I did with peak oil, I am willing to put my money were my mouth is: I bet you 500$ right now that the Euro will survive, with or without Greece or the other troubled countries. Are you willing to take that bet, Surly, and put your money where your mouth is?

[K. A. Pital]

The caveat "without Greece" is pretty much making it a non-issue. "Core Euro" is the second alternative in the worst-case scenario. If you'd be willing to bet that Europe keeps the Euro with Greece, on the other hand...

[Thanas]

The caveat "without Greece" is pretty much making it a non-issue. "Core Euro" is the second alternative in the worst-case scenario. If you'd be willing to bet that Europe keeps the Euro with Greece, on the other hand...

Now wait a minute. The whole thread is how the Eurozone is collapsing. I don't think jettisoning the corrupt and least important member equals that.

[K. A. Pital]

Kicking bad debtors out of Europe is a solution that would allow the Euro to remain. It is much easier than simply restoring all former currencies, too. So when will you stop? Only Greece can be kicked out for the wager to remain workable, or does it also include Italy, Spain, Portugal and Ireland? Or if they're kicked out, but the Euro remains in the "core" zone with France, Benelux and Germany plus some Eastern nations, that still counts as a win in your book?

[Thanas]

Kicking bad debtors out of Europe is a solution that would allow the Euro to remain. It is much easier than simply restoring all former currencies, too. So when will you stop? Only Greece can be kicked out for the wager to remain workable, or does it also include Italy, Spain, Portugal and Ireland? Or if they're kicked out, but the Euro remains in the "core" zone with France, Benelux and Germany plus some Eastern nations, that still counts as a win in your book?

I have already stated numerous times in the past that a "true" Eurozone IMO must contain at least the core zone + four of the six periphery nations and at least one of the two larger periphery nations (Spain and Italy). I have not changed that stance. BTW, the OP was how the core group was now facing the dangers of the periphery and impending collapse.

[J]

Indeed you are, considering France has actually enjoyed lower rates in its recent bond issue. Spain is paying higher rates but investor backing remains strong, with demand being twice as high as the notes issued. link.

Perhaps you should digest your own articles a bit more thoroughly.

1) There is no mention anywhere of the bid to cover ratio on the auctions.

2) Some bond yields went down because every OECD central bank renewed and put increased swap lines in place to provide the funding required for buying those bonds. There is also flight to safety to account for, investors will sell out of peripheral nation bonds to buy the ones being issued by core nations. Furthermore, the article states the following:

Euro-area finance ministers said on Nov. 29 they would seek a greater role for the International Monetary Fund and ECB to top up efforts to bolster the region’s European Financial Stability Facility rescue fund.

They agreed on a plan to guarantee up to 30 percent of bond issues from troubled governments and to develop investment vehicles that would boost the facility’s ability to intervene in primary and secondary bond markets.

In other words, co-ordinated government guarantees & backstops + flight to (perceived) safety = lower yields for France.
And it works, until the money or political will runs out.

[Thanas]

Indeed you are, considering France has actually enjoyed lower rates in its recent bond issue. Spain is paying higher rates but investor backing remains strong, with demand being twice as high as the notes issued. link.

Perhaps you should digest your own articles a bit more thoroughly.

1) There is no mention anywhere of the bid to cover ratio on the auctions.

with investors ordering more than twice the amount sold.

In other words, co-ordinated government guarantees & backstops + flight to (perceived) safety = lower yields for France. And it works, until the money or political will runs out.

Yeah god forbid Governments do something.

[J]

with investors ordering more than twice the amount sold.

Ooops, yeah, I somehow missed it.

Yeah god forbid Governments do something.

There's doing something, then there's doing the right thing. What the EU is doing now is the same thing the Fed and US government did in 2008; it doesn't work and more importantly, it cannot work. One cannot get out of debt by paying off one credit card with another and paying for it with bills which were printed on the office photocopy machine, yet that's what was done then and what the EU is trying to do now.

[LaCroix]

There's doing something, then there's doing the right thing. What the EU is doing now is the same thing the Fed and US government did in 2008; it doesn't work and more importantly, it cannot work. One cannot get out of debt by paying off one credit card with another and paying for it with bills which were printed on the office photocopy machine, yet that's what was done then and what the EU is trying to do now.

Actually, the situation is quite different, as Europe is only prolonging the debt, and actively cutting cost, everywhere, in almost every country, in order to get the situation under control.

[J]

Actually, the situation is quite different, as Europe is only prolonging the debt, and actively cutting cost, everywhere, in almost every country, in order to get the situation under control.

And how is that working out for Spain, Portugal, Italy, and Greece?

[Surlethe]

"Hyperventilating", eh?

Indeed you are, considering France has actually enjoyed lower rates in its recent bond issue. Spain is paying higher rates but investor backing remains strong, with demand being twice as high as the notes issued. link. This is pretty much the same stuff that went on with you and a certain group of posters when "ZOMG PEAK OIL." started appearing. As I recall, you pretty much played klaxon on that one as well.

I stand by any recent statements I've made about peak oil as well.

What, by the way, makes you think that this rally is going to be any different than the dozens or rallies that have followed the various bailout promises over the last two years? Does the six CBs making borrowing in new currencies easier somehow fix European structural problems and falling NGDP expectations?

The periphery is not important enough to bring Europe down. But, like I did with peak oil, I am willing to put my money were my mouth is: I bet you 500$ right now that the Euro will survive, with or without Greece or the other troubled countries. Are you willing to take that bet, Surly, and put your money where your mouth is?

When you read the OP, you observe that I'm not claiming the euro will collapse. In my only mention of eurozone breakup, it is contextually clear that I'm not making a definitive claim that it will break up (and I'm obviously not certain enough to put $500 on it). My only strong claim is that the eurozone is about to enter a prolonged, severe recession that is deflationary in the periphery. I'm not willing to gamble with $500, but I will bet you $50 that Europe undergoes a financial collapse and a severe recession within the next two years (unless the ECB / Fed aggressively prints money), or that at least three of Portugal, Ireland, Spain, Italy, Greece leaves the euro.

[Surlethe]

One cannot get out of debt by paying off one credit card with another and paying for it with bills which were printed on the office photocopy machine, yet that's what was done then and what the EU is trying to do now.

The only reason this doesn't work is because printing bills on the office photocopier is illegal. When a central bank does it, on the other hand, it works fine.