With the PBoC’s currency announcement last Saturday and the surge (!) in the value of RMB on Monday (all very kindly timed to add zest to my meetings this week in Boston, New York, and Washington), you would assume that today’s entry would be all about the RMB and the effect of the PBoC announcement. But aside from a brief aside to say that I am a little skeptical that this announcement adds up to much beyond a desire to head off China-bashing at the G20 meeting – bad news for Germany, who will now have to absorb much of the heat – I plan instead to discuss what I think the history of sovereign debt crises might tell us about the recent events in Europe.
The Greek crisis may in many ways seem unprecedented, but of course it isn’t. I think by now everyone already knows that Greece has spent much of the past 200 years – more than half by some counts – in default or in one form or another of debt restructuring, but in fact there are plenty of other periods of sovereign default and restructuring that can tell us something about what is happening and what will happen; online viagra. I would suggest that there at least five things we can “predict” with some degree of confidence from looking at historical precedents:
1 – online viagra. The euro will not survive in its current form.
We should always have been skeptical about the survivability of the euro. There is a history of currency unions from which we can draw two reasonable conclusions. First, without fiscal integration such as occurred in the US after the Civil War or in the German Customs Union under Prussian dominance, currency unions are no more permanent than other forms of monetary integration, such as adherence to gold or silver standards – online viagra.
Without robust mechanisms to absorb imbalances that emerge in different parts of the economy, and Europe embodies many very different economies, countries normally are forced to rely on monetary adjustment. The European currency union eliminates this type of adjustment mechanism, leaving countries with only two, brutally difficult options for adjustment besides opting out – sovereign default or long periods of deflation and unemployment.
So along with very high levels of capital mobility (which Europe possesses to some extent) and labor mobility (of which it has much less), Europe also needed to assign a substantial amount of fiscal sovereignty to some entity. I have already explained elsewhere why I think this was always very unlikely. Difficult as it might be, opting out of the euro is likely to be much less unpalatable for many countries than sovereign default or long periods of high unemployment.
Second, when currency unions are successful, it is almost always during periods of rising global liquidity and expanding international capital flows – online viagra. Online viagra: no currency union has been able to survive the great monetary contractions that spell the end of a globalization period. The 19th Century’s Latin Monetary Union and the Scandinavian Monetary Union, to take the most obvious examples, were both once considered great successes, but were forced into retreat when global monetary conditions turned sour.
So when will countries opt out of the euro? Ernest Hemingway once described the process of going broke as “Slowly. Online viagra: then all at once.” That is not a very precise description, I know, but I would guess that support for the euro will erode very slowly until suddenly it seems inevitable and then the process will happen breathtakingly quickly.
2. This is the big one
One of the myths that we often hear repeated is that financial crises have been occurring with increased frequency in the past one or two decades. Online viagra: i think we only believe this because we remember the big crises of the past, which seem to occur every twenty to thirty years, and then look back all crises of the past two decades – Mexico in 1994, East Asia in 1997, LTCM and Russia in 1998, Brazil in 1999, the Internet Bubble in 2000, the Sub-Prime crisis in 2007, and Greece in 2010 – and conclude that there are an awful lot more crises nowadays.
But in my book, The Volatility Machine, I made sure to distinguish between the short-term liquidity crises that occur within globalization cycles, of which there are a lot and seemed to occur every two or three years, and the long-term liquidity contractions that spell the end of each of the major globalization cycles. The former can be brutal online viagra, but they are usually short-lived and the overall market recovers very quickly.
So, for example, although most of us know that the world experienced a deep and long-lasting crisis in 1873, which began a long period of contracting international trade, reduced capital flows, and the massive bankruptcies of the high technology companies of the period, including most notably the railroads, very few people seem to know about the Overend Gurney crisis of 1866, which seemed pretty horrific at the time but from which the markets recovered fairly quickly. Likewise the great and well-known LDC debt crisis beginning in 1982 was preceded by several smaller crises, most importantly I think in 1976 by a Mexican peso crisis, which two years later had all but been forgotten by the market.
In my opinion the current set of crises, beginning with the sub-prime crisis in the US and spreading throughout the world, is not a short-term liquidity crisis like LTCM, the Asian Crisis, or the Mexican crisis of 1994. I think this is likely to be one of those big events, one that represents a major re-adjustment in the world during which time the massive imbalances that had been built up during the long globalization cycle that started around the late 1980s and early 1990s are finally worked out.
Not only will Greece, in other words, get worse, but it is by no means the end of the crisis – online viagra. Online viagra: a lot more countries in Southern Europe, Latin America and Asia are going to be caught up in this before it ends.
3. Online viagra: the European crisis will be accompanied by a trade shock.
Online viagra: in the early 1980s Latin America countries were suddenly cut off from funding during what was subsequently called the LDC Debt Crisis, or the Lost Decade. These countries had been running large current account deficits, and of course current account deficits require capital account surpluses. These surpluses were financed by the the huge petrodollar recycling of the 1970s, when commercial banks around the world made staggeringly large loans to many developing countries.
Of course after 1981-82 it became clear that the loans exceeded the repayment capacity of the borrowing countries, and suddenly financing dried up – almost overnight. What’s worse, the debt crisis had already been preceded by flight capital, so that when financing dried up, a capital account surplus quickly became a capital account deficit. Of course once Latin America began to experience capital outflows, its trade deficit necessarily had to become a trade surplus. This is exactly what happened.
The deficit countries of Europe, whose combined trade deficits are nearly two-thirds the size of the US trade deficit, will also be forced into a rapid contraction in their trade deficits for the very same reasons – they are going to find it hard enough simply to refinance themselves, let alone receive net capital inflows; online viagra. Online viagra: without a capital account surplus, however, they simply cannot run current account deficits. This contraction must, one way or another, be absorbed by the very unwilling rest of the world. I describe what this will entail in a May 19 entry.
4. The economic recovery in the countries hit by crisis will not begin until they are recognized as insolvent and receive debt forgiveness from their creditors; online viagra.
Preceding every sovereign default is the fiction that the obligor country is simply facing a short-term financing problem, and that with a lot of discipline and a little bit of good will it will be able to work its way out of the crisis. During this period a number of restructuring “solutions” are proposed – all of which involve increasing debt, and often in the most financially destabilising way – which inevitably make the final resolution of the crisis much more difficult and which sharply raise financial distress costs. The most notorious recent example of these terrible “solutions” was Argentina’s disastrous debt swap in 2001, in which it dramatically increased the country’s total obligations while it desperately tried to maintain the fiction that it could somehow grow its way out of its impossible debt burden.
Greece, and probably two or three other countries, simply cannot repay their outstanding debt amounts. Ultimately they are going to default, and then in the restructuring process they will receive enough debt forgiveness that allows them to return to a sound footing and with a reasonable repayment prospect. But as long as they maintain the pretence that they can and will repay the full outstanding amount, and struggle with the burden, the resulting distortions in the economy will mean that businesses will disinvest and the country will not grow; online viagra.
Online viagra: historical precedence makes it clear that as long as the sovereign borrower is forced to struggle with an unrepayable debt burden, it will not grow.Eventually, as has happened in nearly every previous case, creditors and borrowers will acknowledge reality and will work out a debt forgiveness plan that will allow the economy to return to growth. Until then, expect weak growth, high unemployment, and constant battles over debt.
How long will it take for the world to recognize the inevitable? That leads us to the fifth thing we can learn from historical precedents.
5; online viagra. Greece’s insolvency will not be recognized for many years.
When most of the obligations of an insolvent sovereign were widely dispersed among a wide variety of bondholders, market forces acted relatively quickly to force debt forgiveness. Defaulted bonds trade at deep discounts, and it is a lot easier for someone who bought the debt at one-quarter its face value to agree to 50% debt forgiveness than for someone who made the original loan.
But things are different with the current crop of insolvent European sovereign debts, as they were with the sovereign loans of the 1970s. They are heavily concentrated within the banking system, and the banks cannot recognize the losses without themselves collapsing into insolvency; online viagra.
That cannot be allowed to happen. The LDC debt crisis of the 1980s raged on nearly a full decade – a decade of stopped payments online viagra, capital flight, and agonizingly low growth – before creditors formally acknowledged that most struggling borrowers could not repay their debt and would need partial debt forgiveness. The first formal recognition of debt forgiveness occurred with Mexico’s Brady Plan restructuring in 1990. Growth returned to most countries only after it became clear that they would receive debt forgiveness.
Why did it take so long? Were the banks stupid? No, banks knew full well that they weren’t going to get their money back as early as the mid-1980s, but to have acknowledge this would have required them to set aside more capital to absorb the losses than most of them possessed. The recognition of the obvious had to wait nearly a full decade so that banks could build a sufficient capital cushion to absorb the losses.
So too with the European crisis. Much of the Greek debt is held by European banks, and they simply do not have enough capital to absorb losses on Greek debt, let alone if Greece were to be joined by Portugal, Spain and others. The banks will need first to rebuild their capital bases before they can admit the obvious, and this could take several years.
So we are condemned to spend much of the next decade postponing a resolution of the crisis while banks rebuild their capital base. Until they do, we will all pretend that Greece isn’t insolvent and that other European countries will not face a crisis. Meanwhile none of these countries will be able to grow.
[...] This post was mentioned on Twitter by Alexander U Conrad, Michael G. Michael G said: What might history tell us about the Greek crisis? http://bit.ly/9xkrVh $$ [...]
Hi Professor Pettis,
I’d like to make sure I didn’t misunderstand you. In the last sentence “Meanwhile none of these countries will be able to grow”, you mean only the indebted Mediterranean states will not be able to grow right? What is the growth prospect for the rest of Europe and the world as a whole?
I am more worried about contagion than the indebted Mediterranean states since their economies are relatively small. Will the sovereign debt crisis lead to a double dip in the global economy in the near future?
Michael,
That sounds like what’s happening here in the U.S., we are essentially going to allow the banks to work off the bad debt over time. And now, China’s banks will also have a large amount of bad debt to work out.
How does the fact that there are multiple, large deleveraging events occurring simultaneously effect your outlook? While Latin America worked through their crises in the 1980s, we were in a sharp recovery, Japan was still growing rapidly and Europe was doing well. The specific problem of Club Med debt may be similar to that of Latin America in the 1980s, but surely the radically different world situation matters, too.
I had not heard of Overend Guerney, so for readers, here is the brief summary from Wikipedia:
http://en.wikipedia.org/wiki/Overend,_Gurney_and_Company
I think your five predictions are quite probable. We are in for one wild ride.
“The banks will need first to rebuild their capital bases before they can admit the obvious, and this could take several years”
Then does that mean we can be assured of ZIRP for a long time.. Because the only way the Banks can rebuild capital bases without any risk is through the spread. As a corollary does it not make sense to clamp down on bonus and salaries at the bank right away.
What happens if the losses keep mounting … in that case the longer you take to recognise the losses, the lower the asset value and higher the capital requirement
Would today’s global trade interconnectedness make it more difficult as the debts might have been sliced and diced and counterparties could be involved.
It would appear that we are staring down at least 2 lost decades given the time that this recognition take
Currency unions are no more permanent than other forms of monetary integration, such as adherence to gold or silver standards.
Great post!
Except for the sentence above, I should say I agree with everything including the wording of it! Investors beware: this blog is certainly no place anyway to deliver a “practical message” on effective saving strategies during monetary crise
[...] Greece, it’s different this [...]
While I fully agree with the overall conclusions about global growth forecasts and the basics of these five “lessons”, I think there is a major, major misunderstanding both here and in the broader realm of analyses on the Greek situation which could possibly, with some perhaps small likelihood, up-end the entire thesis.
The problem is that everyone seems to view the Greek issue as a macroeconomic problem of debt, interest payments, and overall growth. The debt, though, is the consequence, not the cause of the problem. The problem is micro-economic: deeply ingrained corruption has led to a structurally dysfunctional economy on the ground (it helps to be on the spot and see these things first-hand). I can give you innumerable examples of the vicious cylce of corruption leading to bureacratic attempts to fix the corruption which only provide more (but different) opportunities for corruption which lead to complete lack of faith by citizens in the ability of the governemnt to provide any services whatsoever without the citizens needing to further engage in or necessarily “support” via their own participation in more corruption. It goes round and round and saps enormous resources from every level of society: companies are too small to make serious progress, tax-takes are vastly reduced, services are impoverished, etc.
For as long as they could, they lived “beyond their means” on borrowed money. Now, that debt has blown up in their faces. But the debt per se isn’t the problem and the solution is not “simply” to restructure it. Restructuring, in some sense, would be the worst sort of “solution”: it would just postpone the day of reckoning.
If the strucutral issues in this economy can be at least pushed in the right direction and potential investors can be shown that there is at least a light at the distant end of the tunnel, I think the debt issue (possibly through a voluntary restructuring, i.e. with no haircut and no technical default) can be managed.
The vast amounts of corruption and the dysfunctional microeconomy provide hope in the face of the growing global pessimism in two ways. First, in the case of Greece, even a “small” improvement in the way this economy works will yield enormous benefits in terms of macroeconomic indicators. And second, to whatever extent the debt and macro issues in the UK, Spain, US etc are *not* driven by far-ranging underlying dysfunctional micro-economic issues (beyond, say, subprime, TBTF banks, real estate), to the extent there is a truly dynamic underlying economy that functions properly and produces something of value (say, Facebook, Rolls-Royce jet engines or new clothing retail business models a la Zara), then the debt issues can be managed.
That, of course, is a very big “if” — especially in the case of Greece where the task is truly “Herculean”…
Michael: given the reputation for corruption that China has and the strucutral issues (in China’s case macroeconomic , i.e. subsudies to exports/industry at the expense of individuals/consumption), is it just a matter of time (decades perhaps given the demographics) for China to follow this path?
[...] Michael Pettis, entretanto hace la siguiente colección de afirmaciones en su blog: 1) El euro no sobrevivirá como lo conocemos. 2) Esta es la gorda (el mundo va a cambiar profundamente). 3) La crisis europea irá acompañada de una crisis de comercio. 4) La recuperación económica de un país afectado no comenzará hasta que se reconozca su quiebra. 5) La quiebra de Grecia no será reconocida hasta dentro de varios años. Share and Enjoy: [...]
Hi Micheal,
I agree with much of the post. Only question that remains in my mind is- why can’t a soft default- via- higher inflation solve the problem? Since demand is going to be low, this inflation will need to be manufactured by printing money.
Germany and China, the main capital surplus nations will scream from roof tops, but there is litttle that they will finally be able to do if ECB and US print more money. This would also not allow liquidity contraction to happen in the Euro area, and the EURO might just survive- at maybe half it’s current value in a decade or so- but it will still be Euro!
Also, the tougher financial regulation in the pipeline seems to be preparing for this eventuality. In the coming period of higher inflation, very high liquidty, they just don’t want a new “AIG” writing CDSs without having much capital. They also want the power to “wind down” instituions that cause systemic risk. All this seems to be preparation to start the presses at full speed!
Cheers,
Ronnie
[...] This guest post previously appeared at China Financial Markets > [...]
Great post, thank you very much.
What about the issue of the scale of the problem as compared to the latam difficulties? The banks are much larger relative to the size of both their host economies and the global economy and the debts, unless I am mistaken, are also much larger.
Could you please comment on two possibilities, 1 – that the recapitalization takes much, much longer and requires more profound distortions of the economy, or 2 – that it is not practicable because of its scale.
thanks again, love your work.
Jim Saft
This is to bring your attention to some interesting info about the “depression” that began in 1873. Instead of a depression, living standards actually increased amid a deflationary economic boom. Hear about it 12 minutes into The Post Civil War Era: 1865-1879, segment 24 of A History of Money and Banking in the United States Before the Twentieth Century at http://mises.org/media.aspx?action=category&ID=230
I really enjoy your blog and almost always reference your posts on my financial/economic news site. Keep up the great work. Cheers.
Ah “suspension of disbelief”, that phenomena of theatre that allows us to engage, to fully participate in the drama. The grand convention that paper certificates are actually “worth” anything is the most mystical aspect of the current drama play.
BTU’s and Calories of food stuff, are the currencies we need to worry about, for there are not enough to go around. Steel for war material will also figure but those are an extention of BTU’s value used to mine, refine and propel the steel of war. The most dangerous trading partner is one who has the steel, but is starved for BTU’s and food…beware! this one will upset the market place more than Zorba the beggar -clown- philosopher
Exceptional post Prof. Pettis! Your posts have simply become must reads for me and I have been able to utilize them in my university classroom.
Indeed there are the major structural issues you mention. Additionally, I believe there are the micro structural issues at play as stated in a few comments. Let us all hope this does not devolve into global war as this is sometimes the chosen method in these circumstances.
Continue the fine work!
Very interesting times, in the Chinese sense, unfortunately.
How does the history of the IMF play into point four? My understanding is that the IMF never allowed countries to default and was explicitly a vehicle for non-default restrucuting. Is it that the IMF is useful when their is a true liquidity crisis for a basically solvent nation, or is your veiw that they are nearly always an ‘extend and pretend’ operation. I believe Simon Johnson himself has written that they made things worse in Argentina, though he believes in the organization overall.
Great points!
Perhaps the EU will pass their version of market to market fantasy rule 157 to hide their non-credit losses. This means non-credit losses are NOT included in the bank’s earnings. Note that the bull market within secular bear market started when the get out of jail card gift rule 157 was given to the banks on early April 2009.
Here is an example of rule 157 hide the weenie:
Bank A holds a securitized pool of mortgage-backed assets (MBA) originally valued at $100. After modeling the future cash flow of the pool, the bank projects it will ultimately collect $95. The credit loss is $5. However, due to economic factors, the MBA pool is currently worth only $40, a $60 loss. The difference between the two calculations ($60 – $5) is the noncredit loss – $55.
[...] “What might history tell us about the Greek crisis?“, Michael Pettis (Prof Finacne, Peking U), China Financial Markets, 24 June [...]
I second Bob_in_MA’s question. What are ramifications of this happening currently, on multiple fronts?
I would also like to know your opinion on the validity of the idea that as capital is able to move quicker today than in the past, can we maybe expect a quicker (tough more tumultuous) resolution?
While I was not surprised that this post would not be related to the RMB announcement, I was expecting that the Fitch warning was going to be explored.
Chinese Banks’ Asset Deterioration `Near Certainty,’ Fitch Ratings Says
http://www.bloomberg.com/news/2010-06-23/china-banks-asset-deterioration-near-certainty-due-to-risk-fitch-says.html
@Michael Pettis:
This post is one of the more original views of the current global economic crisis. Thanks for that.
In point #5 you write:
But things are different with the current crop of insolvent European sovereign debts, as they were with the sovereign loans of the 1970s. They are heavily concentrated within the banking system, and the banks cannot recognize the losses without themselves collapsing into insolvency.
That cannot be allowed to happen.
Why not? Why is it permissible for a nation to default on its debt but not a commercial or investment bank? This seems like the economic tail wagging the economic dog. The “dog”, nations, can default with seeming impunity while the “tail”, banks, are held sacrosanct and cannot be allowed to fail. Even more improbable is that the banks in question are, for the most part, the large international banks. Within each nation (certainly in the US) there are numerous smaller banks, some national, most regional and/or local that can provide the necessary banking services when/if the large international banks fail.
In one sense aren’t the banks that hold all this sovereign debt in effect part of the bankrupt nations? That is, if I owe a bank $100k the bank owns me but if I owe the bank $100 billion I own the bank. Why not require the default of the banks right along with the sovereign default? Clear out the whole bankrupt mess and then start over with a far less leveraged and far less indebted system.
[...] The European debt crisis is going to play out over years. (China Financial Markets) [...]
What do you think of Edward Hugh’s idea that Germany should leave the currency union so that the Euro could be devalued to make the remaining countries more competitive in exports and German imports to those countries more expensive ? This would serve to rebalance trade surplus and deficits within Europe.
Suppose some crucial resource of the world economy started to run out, so that prices were high but production declined anyway. Maybe oil! How would that play out in the economy? It seems that banks trying to build up reserves, so that they don’t have to admit insolvency, might never actually complete. Don’t we have to start printing money to make these debts go away? Don’t we, in fact, need 5% growth in the nominal economy, irrespective of the growth or decline in the real economy?
RedSt8r -
Defaulting the banks would also default a large portion of the economy. By pretending that banks are ok these insolvent businesses and pension/investment funds keep the money lent to them. If citigroup defaulted there would be a huge number of real estate funds and businesses for example that would go under immediately – no other bank would offer to lend to them since they are pretending to the value of their assets as well. Obviously once the borrowers run out of cash and the loans become non performing it makes no sense to relend them the money.
Unfortunately I don’t see the possibility of returning to peak asset values and Michael’s answer of taxing the people to capitalize the banks is a massively inefficient allocation of capital. Allowing the deflation to occur is the only way to take the capital away from the idiots and put it into the hands of the new crop of entrepreneurs who will drive the economy forward.
Another great post. The only point I wondr about is whether the crisis will take years to come to a head. Greece may realize that it is in their own interest to default and simply deny the terms offered by lenders to continue the fiction that the loans will be reapid in full. After all, it is still a sovereign country.
On the other hand, what is happening with Iceland’s even more outrageous debt?
Thank you for your great post.
The observation that all monetary unions without fiscal control are doomed to fail in period of contraction is staggering. I through about it for some time and it appears to me that the mere concept of union is always implicitly goal-oriented and goal is often facilitation of trade and increase in current account surplus. As the whole union goes to CA deficit the monetary unions lose it’s purpose.
[...] What might history tell us about the Greek crisis? Michael Pettis. This is a great post, although I have one quibble. He looks at Greece in isolation, and argues at the end that Greece’s insolvency will not be recognized for many years, the reason being that admitting to Greece’s problem blows back to the banking system. But this isn’t just Greece, the other Club Med members also face solvency issues, and austerity is very likely to produce deflation, as it has in Ireland, which will make default more likely. And unlike the Latin American debt crisis, the lenders were in economies are in economies that will be affected by the resolution of the crisis, and some have banking systems too large to be rescued by the government. [...]
[...] http://mpettis.com/2010/06/what-might-hi… [...]
[...] Source [...]
Michael,
1. Wrt the euro: the way you phrase it, you are probably right. There will be changes to the EUR, maybe to its country composition, maybe to its regime (especially the national; macroeconomics constraints, which need to be enforced or abandoned) maybe both. But that observation seems pretty obvious these days. People who want a portion of Europe to acquire scale, critical mass and, if necessary, greater political unity, will not mind if the club gets a different composition. Estonia seems to be well aware of German ideas for the future, and not deterred. Maybe other countries do not like the price of membership if it is no longer free.
2. To suggest that there is strong causality between a “monetarist” response to financial crisis (a crisis which is merely correcting the unsustainable GDP levels of a few years ago that were enabled by too easy money) and prolonged stagnation is not very scholarly. The problems in the “stronger country” banking systems that would be caused by a default of one of the weaker members (or its state-controlled banks as in the case of Spain) can be remedied by nationalizing them (and in Europe that means wiping out the shareholders, as the Belgians found out) are quite affordable, if one compares the gvt finances of “greater Germany” to those of the US and Japan.
Furthermore, the kind of “austerity” measures that have been proposed (with the possible exception of The Netherlands, where things seems to be overdone, probably because of awareness of the futility of stimulus in an extremely open economy wrt to national economic effects) are in fact very mild and will keep these countries in fairly high levels of accumulated deficit, especially if one takes into account the demographics of “greater Germany”. There is not a lot of slack, in Keynesian terms. That may not be very helpful for the rest of the world, but so would be an unproductive suicide.
Ever furthermore, the type of austerity matters: within the politically realistic, everything is being done to make sure that gvt austerity is allocated to areas where total demand may (taking into account a predictable market response to a more conservative fiscal environment) hardly be affected.
The heart of the matter is whether one believes that sticking to a long term cap on net gvt spending in the presence of large accumulations of now unwanted assets on the books of the banking system will inevitably shackle the european economies, as you suggest in the final section. Whether that will be the case, only the future can tell us. German etc gvts will certainly not let ther banks and pension funds go under. The SPV may well end up holding a lot of debt that those institutions would have had to write down heavily, but the same intitutions are not going to buy the same debt again and that may mean a little hardship for the pampered middle classes of the south, where ordering private yachts had a higher priority than upgrading factories (so to speak). Maybe they will transfer that to the most vulnerable locals, maybe not.
I believe that the effects outside the EU will be quite limited (of course it will not be an engine of growth) and that the local governments will grow into the job of managing an economy under these conditions. They have little choice and who knows what kind of competitive advantage countries like Greece may discover. Turning hardship into optimistic entrepreneurialism has never done anyone harm. Meanwhile one can rely on Germany to understand where the limits are, as long as foreign populism does not generate a local response..
Some quotes from reporting on the G8 conference:
Leaders differ on how to nurture a global recovery
By MARTIN CRUTSINGER and JEANNINE AVERSA (AP) – June 25, 2010
http://www.google.com/hostednews/ap/article/ALeqM5is0otwaKSDOX5Jebi__qkBKrVc1gD9GI95HG0
“Obama’s call for more temporary stimulus spending was being rebuffed by leaders in Europe and Japan who instead emphasized cutting government spending and even raising taxes, much as he’s been stymied at home on his pleas to Congress for more jobs and stimulus money.
Britain, Germany, France and Japan have all unveiled deficit-cutting plans. Canadian Prime Minister Stephen Harper, the host for the summit meetings, was urging the countries to agree to concrete deficit-reduction goals as a way of restoring investor confidence following the turmoil caused by the Greek debt crisis.
Some leaders didn’t appreciate being lectured by Obama on the need for countries running trade surpluses, which would include China, Germany and Japan, to do more to boost domestic spending to help the global economy while U.S. consumers, long the driver of global growth, begin to save more.
‘German export successes reflect the high competitiveness and innovation strength of our companies,’ German Chancellor Angela Merkel said in an interview published in The Wall Street Journal. ‘Artificially reducing Germany’s competitiveness would be of no use to anyone.”
Based on the quotes above it appears that Obama understands major reduction of trade surpluses by the persistent surplus countries is necessary to avoid an even bigger debt crisis in the future, and for a healthy global economy in general. But Germany/Merkel and presumably leaders of other surplus countries still seem to be clueless. In my next comment is the dream speech I would like Obama to give to the assembled persistent surplus countries.
My dream speach by Obama to the persistent surplus countries.
Greetings folks. I am here to talk to you on behalf of the trade deficit countries about a serious economic problem that demands your attention. Since the end of WW-II the world has had an unprecedented period of prosperity. Average living standards in most countries (including yours) have increased substantially. This has been due in part to expansion of global trade. But a serious problem has developed that threatens the whole system of international trade, and with it many of the gains we have achieved. We (the trade deficit countries) have accumulated a large amount of external debt that is owed to you (the surplus countries), and the debt accumulation continues at a substantial pace. This debt has grown to the point that frankly, we simply do not want any more. And in fact under the current conditions many of our countries clearly have no way to pay back the debt.
We would like your help in solving this problem. But before I get specific about the help I am requesting I want to make a few points. First I want to congratulate you on your achievements. You have worked hard and diligently, you have saved and invested and have built efficient industries that produce quality goods. I also want to make clear some things that I am not asking you to do. I am not asking you to stop working hard or to stop efficiently making the products that you do so well. I am not asking you to cause widespread unemployment or other economic distress in your countries. I am not asking you to spend beyond your means and put yourselves in debt to us or to each other.
So, what is it that I am asking for? You have developed industries that export goods sold all over the world. This results in a large flow of money coming in. In many cases you have built factories and made other investments in other countries that also result in money flowing into your countries. So here is my request: When money flows in from your export sales and external investments I am simply asking you to SPEND THE MONEY! Why is this so important? Because if we buy something and send you the money, and you do not spend it, it does not come back to us. Then the next time we want to buy something we do not have the money. So if we want to go ahead and keep buying anyway we have to buy on credit, i.e. borrow the money from you. As I mentioned earlier, we already have enough debt to you and really do not want more. In addition, many of us cannot afford to repay the debt we already have. By the way, I want to clarify that when I say “spend the money” I do not mean spend it on putting us in debt (buying our bonds or making more loans), this is not what I mean by “spend the money.” I also do not mean spend the money to buy up our existing assets, our countries are not for sale. If you want to spend the money on building new factories or other productive assets in our countries that is OK. With the exceptions I noted, you can pretty much spend the money on whatever you choose. As long as you spend it, it will find its way back to us.
Now some may say “we do not know how to spend the money,” or maybe “what could we possibly spend the money on,” or maybe “our people and our businesses simply refuse to spend the money so it piles up in our banks and the banks cannot just sit on it, they must lend it out and if no-one in our country wants to borrow it we have to loan it to other countries, our hands are tied, we are helpless to stop this.” Well guys, this is really not rocket science. You have a lot of smart people in your countries. I think that you can figure out how to spend the money. In fact I am convinced that if you put your minds to it you can find plenty of things to spend the money on that actually benefit your people and your countries. But if you cannot figure it out, I can give you lots of suggestions. We have a lot of people in our countries that our very good at finding ways to spend money, and if need be I will arrange to loan you some of those folks to help you find productive and beneficial ways to spend the money.
The objectives of my request are to allow the trade deficit countries to stop going further in debt, and to get our economies growing again. These objectives are essential and we will pursue them aggressively. My request to you is simply a request, because in fact we have no way to force you to spend more money. However, there is another way to get there that we do control. We can reduce the amount of money we send you until it equals what you are willing to spend. This means we will have to reduce what we are buying from you. I know that this will be painful for you, and in the sort term at least it will be painful for us. However, it is clear that the current path is unsustainable and I prefer this pain to that we will have to bear if we let the current situation continue until the whole system collapses in a major crisis. Or, you can reduce the pain for both of us by spending the money, the choice is yours.
Re: my “spend the money” comments above
I want to clarify that the idea to spend the money coming in from export and external investment earnings is not rigid or legalistic, i.e. one for one spend each dollar as it comes in. Obviously the surplus country would need to start ramping up their spending causing the current account surplus to start dropping. This would be continued until the current account surplus is reduced to about zero average over a long period of time.
Some may question the logic or even that it is valid. It is those pesky accounting identities. If your spending equals your income your savings go to zero. Since the current accout surplus is the flip side of aggregate savings, if the aggregate savings go to zero so does the current account surplus. If the surpluses of the surplus countries all go to zero then the sum of the deficits of the deficit countries also necessarily goes to zero. The deficit countries cannot possibly stop increasing their debt unless the surplus countries stop thier surplusses (except possibly if the deficit countries sell their existing assets to pay down the debt, or if the surplus countries forgive the debt).
Professor Pettis, I just began reading your book, and in this regard, am not qualified to say much given how little i know about history. Nonetheless, i consider your conclusion to be at once far-fetched and unequivocally true. What’s true is that of course Greece is insolvent and shall technically be so for years. What’s far-fetched is not to consider just how serious the members of the bailout committee are to collect their freshly minted euros. An appreciation for the extremism of the conditions on the repayment of the new loans and the realization by the people at just how much is set to change, the terrorism and deaths in connection with this realization as evidence, may just mean that the points made above by XELA should not be discounted as hopeful rubbish. With best reagrds,
V.
[...] What might history tell us about the Greek crisis? (Source) [...]
To predict future course of history by looking for pattern in the past may not work if we are not able to understand the dynamics that is driving the history. It is clear from this post that every time globalization had led to a crisis, the resumption of the globalization effort began more vigorously after the resolution of the crisis. In other words there must be some historical forces that is continously propelling the world market based economy to a higher level of globalization with temporary but recurrent setbacks.
So the question is whether the forces that shaped EU have become weaker since its formation or stronger. If they have become stronger, then why they would allow failure of EU. We must go beyond an analytical frame that takes sovereign entities as the deceisive players in the whole.
No what is important for us to anticipate what will be the new form of globalization after the present crisis has runt its course. That is the most interesting question and I have not got any answer to that from this post.
[...] heb ik gisteren nog een interessante opinie gelezen. Er wordt in dit artikel simpelweg gezegd dat de banken al lang weten dat [...]
Very interesting post by Ashok.. I think it somewhat implies innovative ways of recapitalizing banks many of which are international by things such as special drawing rights perhaps issued by an IMF that is more structured along the lines of the G20 ie, globalization but with less of an influence of the US and western banking system…
Very interesting article.
The debt burden explains why Japan hasn’t been growing in the last 20 years. But it also explains why debt restructuring in Japan has been slow or nearly non-existing. Japan has a current account surplus. So, there were no foreign creditors that could force Japan to restructure thier debt at a much higher pace.
No, I am not nearly as optimistic as mr. Pettis. No, I think this time it’s different. Because if the sovereign debt crisis was the only thing that’s weighing on the banks then they could attempt to earn their way out of their financial woes, like in Japan. But alas I see a more disastrous/catastrophic outcome.
Mr Pettis
Nice to see you finally “taken the gloves off”. Best post to date sir.
Ashok
You have to believe that the cycle will start all over again. hopefully minus a global conflict. we could probably see the late 20th Century play over again (70′s and 80′s) High inflation high unemployment was the norm.
[...] were two good articles this week that discussed the crisis within Euroland. Michael Pettis does a wonderful job of outlining the reasons that Greece will default. He provides some [...]
[...] What might history tell us about the Greek crisis? – via China Financial Markets – The Greek crisis may in many ways seem unprecedented, but of course it isn’t. I think by now everyone already knows that Greece has spent much of the past 200 years – more than half by some counts – in default or in one form or another of debt restructuring, but in fact there are plenty of other periods of sovereign default and restructuring that can tell us something about what is happening and what will happen. I would suggest that there at least five things we can “predict” with some degree of confidence from looking at historical precedents: [...]
[...] Analyse von Michael Pettis bekräftigt die Annahme, dass die europäischen Rettungspakete in erster Linie dem Ziel [...]
Kudos.
Europe embodies many very different economies, and thaths the core of the problem.
All:
Hmmmm….well, pointing to Western influence and system institutions, the advance of institutions, greater participation by a larger number of players, assuming that doesn’t lend to dilution (or inaction) should be seen as a benefit. A greater sharing of the global development burden should occur over the coming decades and such should occur upon strength as witnessed over that intervening time, meaning that greater burden sharing and responsibility should eventuate as time shows strength in economic systems and relative to the development of internal and global institutions. It has long been decried that the US has a fiat currency, and that it just prints money, while it does on both accounts, it should be noted that all countries are in a similar position, and that some countries print money 3, 4 and 5 times faster than the US does which is both based upon current growth rates, current economic issues and future growth and or wealth expectations. While, all seem to back into corners, even some looking for a new, even equitable, new philosophy to govern global economic inter-relationships, even interdependencies, it should be noted, even where deficit countries take on debt, and surplus nations take on wealth, that really at the end of the day, this is building bridges, industries, employment opportunities, hospitals, schools, etc…..which of those responsible for that development, the deficit takers or surplus takers is obvious, even if that plays opposite in most local papers globally. While there is some global convergence between nations and regions globally regarding income equality, that which should be watched more carefully is the vast divergence within countries, most notably the most successful nations of late (not that this isn’t a global occurrence). Surely alterations to present models will occur, but at best they should occur modestly, over an extended timeframe while allowing nations to tackle the larger demographic, food, energy, and water security issues they will be confronted with over the coming decades as population and resource efficiency utilization standards will have to be addressed to ensure the hoped for evolution of the global middle class occurs. Truly, the exponential growth in global population, coupled to diminishing resources, requires an emphasis upon technological advances, and more reosurce efficient production methodologies if not greater acknowledgement of other forms of capital such as natural, social, human, environmental and technological which can also add, if devised correctly, to enhance global GDP growth rates while ensuring ever higher standards of living, while not derailing the global growth projectory. A few years back, someone cautioneed not to kill the goose that lays the golden egg, the question is, just who is laying it. We all need to consider that carefully and jettison ideologies, that are posited by those the hit far above our weight class.
The Hemingway quote comes from “The Sun Also Rises”:
“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”
“What brought it on?”
“Friends,” said Mike. “I had a lot of friends. False friends. Then I had creditors, too. Probably had more creditors than anybody in England.”
[...] Michael Pettis writes, In my opinion the current set of crises, beginning with the sub-prime crisis in the US and spreading throughout the world, is not a short-term liquidity crisis like LTCM, the Asian Crisis, or the Mexican crisis of 1994. I think this is likely to be one of those big events, one that represents a major re-adjustment in the world during which time the massive imbalances that had been built up during the long globalization cycle that started around the late 1980s and early 1990s are finally worked out. Pointer from Tyler Cowen. Pettis says five things. [...]
Prof. Pettis, your point (#3) about a trade shock is well-taken. What do you see in terms of implications for capital flows? Historically, one of the first instincts of a government in the throes of a debt crisis has been “Our country is not for sale!”, ergo, capital flow restrictions, nationalizations of foreign-owned assets, etc. Do you see this in the US – the 800 lbs. gorilla in the debt room? Greece might choose to default before they sell an uninhabited island, but can the US afford to? Or will the solution be “Sure, you can buy any US asset, as long as it’s not this, this… (n times)… and this! Basically, buy any US asset, as long as it’s gov’t debt.”
Mr Stegen,
This discussion revolves around national accounts imbalances between states. You and many others suggest that the surplus countries should spend more (most effectively in the deficit countries) /save less. The point that people seem to miss is that states can only spend state money, and that “state money (SM)” is something the state’s citizens have expectations about, especiallly where SM is money to be extracted from the citizens in the future and citizens have also just been educated to expect a much less generous state in the future. Spending more SM entails creating a bigger state in the surplus countries (more spending signals more future extraction in already highly taxed countries) which would not really make citizens more confident of their future capacity to take financial risks, especially during a period of low growth, high unemployment and plausible expectations that collective/state benefits (negative taxes) will decrease autonomously. Hence standard contemporary macroeconomics (embedded in most models that support national decision making, including that of the ECB) suggests that increased deficit spending is highly inefficient in fostering growth and only justified as a short emergency measure to soften the recessionary shock (assuming the shock is exogenous). Unfortunately there are no policy instruments under the control of gvts in very open economies that would do two things required in a democracy: (1) boost aggregate demand (especially for imports? that could be arranged by import subsidies…How would that go down with Herr Mueller?) (2) win the consent of the governed. All modern governments facing highly educated and informed electorates such as in NW Europe (the UK perhaps excepted) can do is to bring private sector confidence back to where it was prior to the shock. One of those things is to reform the financial system in such a way that future excesses (like Sparkassen loading up on credit risk arbitrage (CDOs, Greek debt, etc) are unlikely to happen (by simply limiting their mandate to domestic business) and banks are forced to direct the non-discretionary funds that they attract to their natural market and if that is not profitable enough, become more efficient or disappear. Or doing exactly the opposite of expanding SM spending, by promising the electorate that (a) state finance will not lead to a future fiscal explosion or seignorage and (b) that the pain will be allocated via the democratic process and transparently. Paralels with 1930s events may be superficially tempting but ignore enormous differences in accumulated expertise among policymakers and public. Unfortunately, concentrating simply on what “rational expectations” allow is a very difficult policy approach in any polity and probably suicidal in presidential or Westminster type democracies, despite the theoratically greater power of the executive. The only countries that have more policy flexibility are the ones with large reserves of non-fiscal revenue and high executive capacity (Like China (doubts about the executive capacity though) with its large portfolio of marketable state assets that could be either privatized or forced to spend much more of their cash flow on imputs that would have a high propensity to consume, like labor).
All in all then, talking to countries like Germany about spending more (although perhaps the introduction of a genuine minimum wage might help) is just rhetoric for domestic consumption in the US or even Spain. It will not make the Greek correction less painful but just entrench domestic suspicions in (Greater) Germany. And it is not necessary for maintaining most of the aggregate EU/EUR benefits for the Union (local elites may not like this because in the process the Greater German surplus holders will provide most of the equity (and control) needed for fresh investment in those countries once wage levels have returned to inside the local productivity space and at a very high political price for those elites) (Dr Pettis may have more problems with that than the plight of the Spanish worker).
The only thing that might work globally would be a dramatic increase in take home pay for Chinese workers, combined with greater job/livelyhood security for the rural migrants and commuters. That would not please MNC and Taiwanese firms but by now the option of “going elsewhere” is no longer realistic. Just ask any consumer electronics manufacturer. Textiles may move, but that would probably still be inside China and thus also boost household income/spending. However, that would not be very popular among the people who count in China. Or are recent events in China (industrial action) an indication of change? Or just a little squeeze on the foreigners in order to enlist them for China’s trade political cause? Let’s see if there will be industrial action at Great Wall etc.
Mr Pettis
Couldn’t help wondering if your post connected in some way with Paul Krugman’s piece in the nyt
http://www.nytimes.com/2010/06/28/opinion/28krugman.html?src=me&ref=general
guess misery does love company.
Agreeing with the lost decade reference and gravity of the situation points, couldn’t help laughing at the last point, it’s so true. One thing though, if it really does form a daisy chain, and Asia is hit bad (not talking about the relative calm of the last couple of years or months), the question is whether this will create a wave that returns to hit a recovering USA and Europe. If that does happen, when and how would determine the scale of misery.
Rien Huizer
Thank you for considering my comment, although I do not agree with your conclusions. It appears that in the case of Germany it is not politically feasible for them to spend their export earnings. A bit like the simplified concept I put in my comment:
“our people and our businesses simply refuse to spend the money so it piles up in our banks and the banks cannot just sit on it, they must lend it out and if no-one in our country wants to borrow it we have to loan it to other countries, our hands are tied, we are helpless to stop this.”
I do not believe that they are helpless to stop it. Seems to me the first step is to adjust their thinking and reframe the debate. The leaders of Germany could accept some responsibility and go to the public with something like the following:
We as a group (individuals, companies, goverment, and other organizations of Germany) have a problem. We have worked hard and have built a strong and prosperous country; however, a problem has developed in that we as a group are persistently bringing in a lot more money from other countries than we are spending. We need to work together to find ways to spend that money in beneficial ways. This is essential because many of our trading partners are deeply in debt to us. They can no longer afford, nor are they any longer willing to continue buying from us on credit. Unless we can find ways to spend the money coming in they are going to be forced to substantially reduce what they buy from us until it matches what we are willing to spend. This would be painful for all of us. While some painful adjustments will be required in any case they can be substantially reduced if we can successfully find ways to spend all of the money coming in.
[...] se fait trop discrète et trop chancelante, il se parle de dépression un peu partout ici ici ici et ici J’avais déjà parlé dans une chronique précédente que l’injection de fonds par le [...]
Very similar argument (inevitable Greek debt restructuring) by Nouriel Roubini in the Financial Times, presented yesterday.
Thinking about the comments of R3dSt8r, I keep asking myself: What if the investment banks were allowed to fail, but with a backup plan that would prevent catastrophic freezing of capital…
It would go like this. Each country (I’m thinking in the context of the US, but I think this applies to most individual countries) takes over the largest insolvent commercial / investment / consumer banks and consolidate them into a single national bank. It writes off the bad debt, issues new capital to the bank, and directs them to adhere to fairly strict but ‘open source’ lending standards, but the interest rate would be at some level above market rate. This guarantees liquidity in the market so the gears keep turning. Private banks are still allowed to operate, making money on the margin between the market rate and the government rate. Open source standards and open books prevent shenanigans and political favoritism. As markets stabilize and calm, the role of the government bank is reduced somewhat by widening the market-government window. But the bank continues to exist as a ‘last resort’ lending vehicle to consumers and business so that governments no longer can be held hostage by the ‘too big to fail’ banks.
Does this make any sense?
G. Stegen- I can almost hear Obama making your speech! In fact, if you would have sent it to him instead of posting it on a blog, it most likely would have made it!
In the above discussions, I’d like to add one more element:
None of the so called trade surplus countries are “FUN”. China, Germany, Japan seem to as countries and cities in those countries more “moral” or “right” but definately not more “Fun”. On the other hand, the spenders, US, UK, Spain, Greece definately know how to party hard!
It is actually good for the world that the surplus nations throw the deficit nations a party! The deficit countries are too stressed with their deficit. The surplus countries are too scared about loosing their monies that they’ve lent.
WHAT THE WORLD NEEDS IS A BIG PARTY!!!
G Stegen,
Thanks, it is fascinating that you would want the German gvt (and a few more, I guess, all dour, Nordic fun-less types..(@Ronnie)) to try to use mass-persuasion. From what I know about Germans is that they have been thoroughly inocculated against gvt’s mobilizing persuasion of any kind during an unhappy episode of their recent history (which does not mean that their socialization patterns have remained fairly stable and might offer a politician opportunities, but they would tend to be in the other direction).
But in earnest, apart from using persuasion, (which is far from guaranteed to have a “positive” effect) what a trade partner such as Mr Obama would be looking for is gvt action with a more or less predictable effect that would be mutually agreeable. Where would your policy proposals be? I am convinced that trade diplomacy is unable to prevent the sort of shocks that the market (financial contsraints for instance) in combination with domestic politics (increasing populism in Europe and not of the internationalist kind) and self preservation of non-democratic regimes relying on economic growth will deliver. And those shocks may be as unpleasant for the Germans in the more distant future as they will be for the, say, Greeks or Californians now and tomorrow. The alternative is some form of cooperative world governance with the capacity to allocate losses as well as gains. Such a capacity does not exist and I will show why this is the wrong time to experiment with it.
Since aggregate gains (in the OECD) lifting gdp back to where it was predicted to be only five year ago for instance, may have to wait a few years until “autonomous” private sector demand regains vigor (and without confidence/optimism no vigor), politicians will have no option but trying to toss the losses around in the hope they will escape the blame, while economic snake oil merchants will try to lure voters in all kinds of unproductive directions. That means that a prospective world governance will lack “capital” and thus be unpopular. Since we are dealing with a mainly democratic industralized world, there will he very limited scope for coercion. The result will be that the public will become increasingly antagonistic towards politicians who try to cooperate and maybe the market (populists will blame the market, in Europe certainly) and that the effect of gvt action that is doomed to be ineffective but not costless could be worse than simply letting the thing correct iself, relying on demographics, wear and tear and perhaps more appreciation for (spartan) leisure.
Looking at the almost Japanese scenario that is unfolding in Germany where a weak, but nominally pro-”internationalist” gvt is slowly fading away and the prospect of a trade-diplomatic vacuum looms (for Germany plus most of the EU through budget constraints) for the next two years at least (as the Japanese have successfully managed during most of their post-war history), there is no way the Obama gvt will be able to secure a robust international economy(taking some strain off his gvt) through this kind of diplomacy this ( election) year. It should be better for him to simply prepare his people for a few more years of hardship and pay whatever price China wants for lifting standards of living as fast as it can (which it is clearly not doing now), thus absorbing excess supply where it would be most efficient globally.Much of that price would be nonb-economic (non-interference, Taiwan, etc). Once the China/US imbalance would weaken, confidence in Europe might grow and private sector spending pick up. That would be the time to relax fiscal restraints and reduce entitlements simultaneously. But as said, that would not be timely for poor Mr Obama (but he volunteered for this poisoned chalice, right). Obama’s alternative would be to find a way to start a trade war with China annex Walmart that would coincide with ongoing consumer budget constraints. Politically, that might be a better bet, but it would come at a price in a steeper yield curve. A trade war with Europe would merely push up the price of BMWs..
I am wondering if someone here, either Professor Pettis or some other knowledgeable commentators, could give some hint of where to find more information about the inherrent conflict between foreign lenders (who does not vote) and domestic tax payers (who does vote) in a debt crisis/restructuring phase. Has so far found relatively little information about historical outcomes of this conflict. Thanks.
Rien Huizer
I agree that the evidence suggests that the trade surplus countries are not going to do it on thier own. One policy change I suggest is the change the “free trade”/WTO rules to clearly identify a large trade surplus persisting over an extended period of time as a violation of free trade rules. Viloators would be subject to sanctions by the deficit countries such as tarrifs, quotas, etc. This should be predictable and understood so that the surplus countries know what they are headed for if they do not get thier surplusses trending towards zero. Keynes recognized the problems that can result from large persistent surpluses and proposed at Bretton Woods that they be prohibited, which was apparently vetoed by the US. Without something like this it is hard to see how the free trade era of the past several decades can survive much longer. Looks like a slow motion train wreck that no one is willing to stop.
For individual countries, a number of typical policy changes have been discussed on this blog over the last year. Clearly this needs to be tailored for individual countries.
G Stegen,
Agreed. But that is in economics terms. And since politics trumps economics, a train wreck is a bit more likely than some constructive development. Pity. But someone has to figure out how to preserve some of the liberal achievements of the past golden age that our US brethern threw away so carelessly.
Where some may believe that things have been squandered and that achievements have been lost, others might see, and correctly so I believe, that the current system, even some flexibility in the system, acknowledging the negative aspects of some excesses over longer periods of time tis true, have enabled the very situation that has enabled those excesses. IE The system as it is should be strengthened, but the strength of the system has enabled the rise of countries, industries, and standards of living globally. Sure, there are cultural considerations that can be added into the rise of some countries, especially South Korea, Japan and Germany…yet, the system that has been built since the end of WWII has enabled the lifting of hundreds of millions of people out of poverty over the intervening decades based upon adherence to common principles and institutions that have been the object of some derision, yet have facilitated this rise, if hindsight has enabled criticism to play well in popular media globally, or in some academic circles.
Regardless, as many large new players have entered into the system that has been built, under different terms for each, it should be understood that the system should evolve. Problem is, it does get more complicated, with even the management of different stakeholders within countries difficult. Yet, at the end of the day, there is no other choice. Rien, what may seem to have been thrown away by one, can be easily retrieved, and it should not be forgotten that it has been used by others beneficially, which in the end, if we can all get along, will continue to raise the standard of living of all, if we can jettison the ideologies which sustain dogmatic worldviews, especially those which are divisive.
[...] What might history tell us about the Greeek crisis? – Michael Pettis suggests “that there at least five things we can “predict” with some degree of confidence from looking at historical precedents: 1. The euro will not survive in its current form; 2. This is the big one [understand a 1 in a x00(0?) crisis]; 3. The European crisis will be accompanied by a trade shock; 4. The economic recovery in the countries hit by crisis will not begin until they are recognized as insolvent and receive debt forgiveness from their creditors [fat chance with Europeans]; 5. Greece’s insolvency will not be recognized for many years.“ The EU is dead. All hail to EUrope! [...]