"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Friday, April 8, 2011

Paul Krugman On the Euro

I am not one that often agrees with New York Times columnist Paul Krugman, but recently he made some sense regarding the ECB's rate hike.  In the periphery countries of the EU, debt deflation is a serious risk.  Some would say that it is ongoing, despite the recent rise of the price of oil.

When the ECB raised its rate, it left me perplexed.  Mind you, I am not a Keynesian die hard, nor a Monetarist. But I understand those economic views, and I also believe that one should play the economic game as it is, not as you want it to be.  What I mean by that is, if the rest of the world is devaluing to make exports cheaper and debt repayments easier, why the hell would someone do the opposite?  There is no prize for being the first to crash your economy.  It's economic suicide.

Don't get me wrong, I believe the global fiat system is gradually imploding.  But why hurry things and try to protect your currency by sacrificing your economy?  Well, it looks like German fears of inflation may doom the periphery countries.

From Paul Krugman:
Why People Say “Eeh!” When They Learn About the ECB 
With all the craziness at home, I didn’t have time to comment on the European Central Bank’s decision to raise rates despite continuing very high unemployment. 
The first thing to say is that overall eurozone numbers look very much like US numbers: a blip in headline inflation due to commodity prices, but low core inflation, and no sign of a wage-price spiral. So the same arguments for continuing easy money at the Fed apply to the ECB. And the ECB is not making sense: it’s raising rates even as its official acknowledge that the rise in headline inflation is likely to be temporary.
He continues:
During the eurobubble years, there were huge capital flows to peripheral economies, leading to a sharp rise in their costs relative to Germany. Now the bubble has burst, and one way or another those relative costs need to be brought back in line. But should that take place via German inflation or Spanish deflation? 
From a pan-European view, the answer is surely some of both — and given that deflation is always and everywhere very costly, the bulk of the adjustment should in fact take the form of rising wages in Germany rather than falling wages in Spain. 
But what the ECB is in effect signaling is that no inflation in Germany will be tolerated, placing all of the burden of adjustment on deflation in the periphery. From the beginning, euroskeptics worried about one-size-fits-all monetary policy; but what we’re getting is worse: one-size-fits-one, Germany first and only. 
That’s a recipe for a prolonged, painful slump in the periphery; large defaults, almost surely; a great deal of bitterness; and a significantly increased probability of a euro crackup. 
Aside from that, it’s prudent, reasonable policy.

As I have said in my past post:  The Rise of the Fourth Reich, Germany is making decisions based around its own self interest, disregarding the long term consequences to the Euro, and the EU as a whole.  Nonetheless, I feel that it is a failed experiment anyway, that the periphery countries could never compete with Germany using the same currency.

Maybe Germany's "Germany First" policy will hasten the end of the Euro... and with it, the fiat experiment of the past 40 years.


Dave Narby said...

I have to admit I have no real idea. I suspect though, that Germany may be laying the groundwork for a two tier Euro, or some other advantage (PIIGS leave the EU? Not sure how Germany benefits though.).

Misthos said...

I agree Dave, it's difficult to make sense of it all, and where the EU is heading for a solution. A two tier system may make sense.

But as is, the Euro, in my opinion, is a failure. What success countries enjoyed in the past was based on illusory wealth created from massive debtloads.

Germany sees the disaster unfolding, but is being selfish in its policy responses. That selfishness, in my opinion, only hastens the end of the Euro.

The Euro will likely end, in my opinion, due to political outrage in the periphery countries. This will be a huge blow to fiat money everywhere, as the end of the Euro will also trigger a global sovereign debt crisis.

I'm thinking within two years... and precious metals will go parabolic. We may have a deflationary episode first in the EU, and even a sharp slowdown in China.

Many, many concurrent crises. Japan, the US, EU, Middle East, soon China.... I just don't see global policymakers getting a grip on all these things at once, and agreeing on solutions. It's a slow motion train wreck.

boatman said...

china and japan revisited:


Misthos said...


thanks for the link. I think it's time for me to post on China again. Guys like Hugh Hendry and Jim Chanos that have been short on China for some time now must be getting impatient.

But they will be proven right. Incredible that they are building such huge projects, and they stand empty like the second largest shopping mall in the world that is 99% vacant!!!

Many people say, well, at least China will have infrastructure when their economy tanks. But the question I pose is: What will they do for Act II? It's nice to have all these great rail projects and malls, and office buildings. But if they are already built, what will people do to earn a living to enjoy those projects?

China's growth is just as illusory as the US's debt based consumption growth. Huge malinvestments caused by government policy will surely topple. Reality always has a way of catching up.

By the way, notice the commodity correction we're going thru right now? No surprise, and I'm actually glad to see gold fall a little. I see silver dropping too - it will be interesting to see what the new floor will be on silver.

boatman said...

nothing like a correction in a bull market to get my blood going alright.

he said,rubbing his hands together.

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