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May 06, 2012


It’s notable, Brian, that in support of your headline you had to take Gopnik out of context. You began your excerpt of his writing with the last sentence of his fifth paragraph, but here is his full thought including the preceding sentence:

“The hope of American liberals that an Hollande victory would vindicate their position that austerity is bad policy—even though that may be the case—seems unlikely to take hold here. To the American right, anything that goes wrong in Europe does so because Europe is wrong, and not because of austerity, because austerity is right.”

In those two sentences Gopnik is saying he believes American liberals and conservatives BOTH see European economic policy as a canary in the economic mine shaft, but that neither is likely to change its thinking even if the ultimate outcome doesn’t support its beliefs.

But does that mean either American liberals or conservatives would prefer to see the European Union fail just to be vindicated? I don’t think so. The US has contributed greatly to European peace and prosperity since WWII – and there’s no better example than the Reagan/John Paul II/Thatcher removal of the Berlin wall. If so many Republicans want to see the EU fail, why do populist politicians (Obama included) try to lure their vote by comparing themselves so favorably to the one President who most contributed to European success?

Big Oil

The voters in Europe have spoken: austerity, if not dead, is dying -- as it should, given that it is a demonstrably failed economic policy. Ask the British how it feels to be in a double-dip recession after they elected a conservative government. Meanwhile, the U.S. is doing much better economically, under Obama's leadership.

Nobel winning economist Paul Krugman tells it like it is:

What is true is that Mr. Hollande’s victory means the end of “Merkozy,” the Franco-German axis that has enforced the austerity regime of the past two years. This would be a “dangerous” development if that strategy were working, or even had a reasonable chance of working. But it isn’t and doesn’t; it’s time to move on. Europe’s voters, it turns out, are wiser than the Continent’s best and brightest.

What’s wrong with the prescription of spending cuts as the remedy for Europe’s ills? One answer is that the confidence fairy doesn’t exist — that is, claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years. So spending cuts in a depressed economy just make the depression deeper.

But insolvent governments can't create fiat currency and debt instruments forever to finance their profligacy. European banks already hold trillions in worthless bonds from members of the insolvent PIGS... Portugal, Italy, Greece and Spain. France and Britain are teetering. You can't kick the can down the road forever and the chickens will come home to roost. I don't care if Krugman has a Nobel Prize an Oscar, a Grammy and a rose pinned to his nose. He's wrong and blinded by ideology.

Krugman’s Nobel Prize doesn’t make him right. Milton Friedman received a Nobel Prize in Economics as well, and he always believed the opposite.

Big Oil

DJ, what makes Krugman right are the facts. Austerity hasn't worked to stimulate the countries that have tried it. Britain's conservative policies have produced two quarters of negative growth, a double dip recession.

Meanwhile, the United States is enjoying much better growth under Obama's leadership, and the stimulus package. The market has spoken: austerity doesn't work. Deficit cutting can't succeed without economic growth, and austerity hinders growth.

A lifetime of living too good gives a patient cancer…the patient receives chemo but dies anyway…Brian blames the chemo.

Decades of deficit spending (stimulus) gives Europe financial cancer…the patient receives a brief dose of austerity but relapses…Brian blames the austerity.

The reality is before the days of massive debt both stimulus and austerity were arguably effective in the short term. That’s really all a reserve bank is doing when it lowers or raises rates…it cycles back and forth between stimulus and austerity…and a relatively healthy patient with stage one cancer will respond. But, sadly, this patient ignored the doctor’s advice and is now in stage four. No course of treatment at this point will likely effect a cure, and certainly not a quick one.

History records many generations that sacrificed entire lifetimes in the hope of advancing the next generation. Many nations are on the brink of requiring that type of generational sacrifice again, but so far they’re in denial about it. Nations can’t spend their way out of the magnitude of debt that Tucson highlights.

Big Oil

I think DJ, unfortuantely, is correct. The key point to understand is that the global debt mountain and parallel derivative mountain are now so big that even with rates close to zero, they cannot ever be paid down, and the interest payments cannot even be made. There are only two ways to deal with these debts - either to pay them off in worthless currency, i.e. create blizzards of money out of nowhere to pay them off [aka QE, (quantitative easing) or fiat] which means hyperinflation, or simply write them off and tell the creditors "Tough luck, you are not getting paid one cent - so go and take a long walk on a short pier".

This process has already started in Greece with the bond 50% devaluation. The problem is that the first loyalty of politicians is to their big business crony pals and sponsers in banks and other large corporations rather than the voters, who not unnaturally are pressuring them to push the bill off onto the voting public via bailouts, the idea being that rather than banks etc taking the hit on bad loans, the man in the street picks up the bill via austerity measures.

As we have seen in Greece the little guy has figured this game out and is decidedly upset about it, and Italy is next. So it's time for the old "rock and a hard place" cliche - either you write the debts and derivatives off and let the banks and other institutions go bust and slam their doors, resulting in chaos, or you exonerate the banks and large corporations via bailouts etc, and then push the bill off onto the public via higher taxes and austerity measures that lead to chaos.

The result either way is pretty much the same and here's the thing - it will also be the same, only delayed, if the "easy way out" of hyperinflation is followed, since this will result in Zimbabwean style collapse and widespread destitution, but as we have seen the forces of deflation are already starting to close in rapidly.

Now here is an analogy. Many of us have experienced using a computer that "locks up" as a result of having loads of applications and programs open at once. You can't solve the problem by trying to close this or that file or program - you quickly find that you can't go forward or back - you have to hit the reset or restart button. That is the situation that we have arrived at with this debt crisis - the world needs a "reset" and however anarchic and unpleasant it will be it is going to get it - the complete elimination of all the dross and overhang of debt and derivatives, and very probably the parasitic entities that foisted all this stuff onto the world as well.

It is appropriate that this could occur in 2012, the year the Mayan Calendar says is the end of civilization. It might be 2013 (close enough) and whie it may not be as dramatic as the west coast dropping off into the Pacific while tidal waves sweep over the Himalayas, it will be dramatic enough.

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