Reasons to be cheerful, part three
Apr. 23rd, 2012 02:09 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksSo, there was a response to my last post which said that I appeared to be a bit more optimistic of late. To which I replied, well, yes and no.
Let's take the "yes" part of the equation. As I wrote at the beginning of the crisis, when people still seemed to think that it was about liquidity (not least the board of Lehman Bros), it seemed obvious that this was a solvency crisis rather than one relating to liquidity. Or, rather, just because there's a temporary liquidity problem does not mean that if you solve that then you solve the problem.
In the three and a half years since, it's become increasingly clear that there are several types of "solvency crisis" (four spring to mind) and each of these can be either quite small or very big or anywhere in between.
The key dynamic here is, time.
So, what are the four types of solvency crisis?
1) a crisis that is going to bite you in the arse really soon, but which is getting better
2) a crisis that is going to bite you in the arse very soon, and is getting worse
3) a crisis that isn't going to bite you in the arse very soon, and it's getting better
4) a crisis that isn't going to bite you in the arse very soon, but is getting worse.
It's also possible that various parties will disagree on whether any particular problem needs solving quickly, and whether it's getting worse or getting better.
Let's have a look at these categories, and try to put in some real-life contexts:
(1) Ireland is, I think, a good example of a crisis that was short-term, needed solving quickly, but which is getting better. The Irish have, quite staggeringly, restored their international competitiveness without a devaluation. To achieve this in such a short time is terrifically impressive. So, reason to be cheerful, part one.
2) The obvious example of this is Greece. Indeed, the arse-biting has already occurred, and the world has survived. How has this happened? Simple, by the expedient of kicking the can down the road. Financial services companies were allowed to widen their margins. They used much of this generated cash to write off Greek debt that they held. In other words, the rest of Europe, facing declining living standards, helped pay off the duff Greek sovereign debt held by international companies. This was only possible because the Greek debt is small relative to the global economy. Reason to be cheerful, part two.
3) Long-term crises that are getting better are hard to find, not least because, since the crisis isn't an immediate threat, there's no impetus to solve it. On the plus side, because it's a long-term crisis, it's only a problem now if there is a collapse in confidence.
4) Long-term crises that are getting worse. A fine example of this is Italy. Sure, the economy is a mess, and there's no sign of it getting better. But it's a relatively sustainable mess. And it's no more of a mess than the UK's "pensions time bomb". The "time bomb" analogy is hopelessly misleading. We don't have the money to pay all of the pensions that people think that they are going to collect (whether the worker has contributed to that pension or not is, I fear, an irrelevancy, an accounting foible). Promises, one day, will have to be broken. But they can be broken a bit at a time. And they don't have to be broken tomorrow. That's how it is with Italy. Provided domestic savings goes into Italian debt, and provided young people can leave the country to find work elsewhere, a country whose economic system is laughable and whose production values are pathetic, can carry on for decades. In other words, provided confidence is maintained, Italy is not going to break. Reasons to be cheerful, part three.
There are other plusses. The major factor in putting off some of the recent financial threats has been the Long-Term-Refinancing-Operation (LTRO), a neat trick of free money (€1trn of it) that isn't called cranking up the printing presses. But, what is it really? The only difference between LTRO and just printing shedloads of cash is that the latter is an undated interest-free loan whereas the former is a dated low-interest loan. But if you think about it, this difference disappears, because LTRO a dated loan that, as things appear at the moment, can never been redeemed. When it's time is up in three years, it will quietly be redeemed at the same rate of interests until, in 60 years time, it just becomes part of the money supply.
As I think I wrote a couple of years ago, the problem of solving a "that money never existed" problem is finding someone to pay for it. As I also wrote, it has become clear that the borrowers have won. his might look wrong, in that it's the banks (the "lenders") that got bailed out. But this is smoke and mirrors. Banks are just brokers between those who are consuming more than they are producing and those who are producing more than they are consuming. Notwithstanding all of the public pronouncements, notwithstanding the horrors that are occurring in Greece as I write, the net overall effect of the current "solution" is that those who have consumed more than they produced over the past 12 years are not, indeed, cannot, pay it all back. And even if they tried to pay it all back, the impact on domestic and global economies would be profound. A "solution" of a transfer of wealth from savers to borrowers will "solve" this problem. Of course, it's not a solution to everyone's taste, but that's what happens when you think that a lot of wealth exists somewhere that actually doesn't exist at all.
So, what's the downside? Well, the downside is that there are other examples that are not so easily solvable. As everyone else is writing at great length, the primary one at the moment is Spain -- or, to be more specific, Spain's banks, which are relentlessly refusing to write down the value of property to a realistic value. Spain is bigger than Ireland. Spain is not making itself more competitive. Spain has very high youth unemployment.
Can it fudge through? Perhaps, but it's looking increasingly unlikely. Portugal, of course, is already a dead man walking. It's another country where it could be difficult for democracy to survive. When Portugal goes, will that drag Spain down?
These are big questions that require big solutions, and at the moment there's no sign that anyone is going to come up with them. Most of the other problems in Europe (including France and its horrific exposure to Italian debt) are big problems, but they don't require immediate solutions unless there is a crisis of confidence. Spain could require an immediate solution, relatively quickly.
The question is, what kind of fudge/can-kicking/radical solution can Europe come up with? Strange as it may seem, there are a number of options available. This problem is, after all, no worse than the rural bank crisis that hit China in 1999. How was that solved? By the simple expedient of bringing in foreign cash. The same could be done in Spain, if the Spanish could swallow their pride. And that, of course, is the nub. There are many solutions to what is a not-very-big-problem in the grand scheme of things, but every one of those solutions goes against the grain with at least one interested and powerful party. The IMF fixers, the Eurozone bully-boys, Merkel, the World Bank, and Spain's government itself are all opposed to solutions that might be acceptable to four or five of the other parties. If all of them dif in their heels, then Spain could head perilously close to default or, more likely, a confidence crisis that no number of crisis meetings could solve.
Will that happen? My guess would be, 30:70 (i.e., 70% that it won't). The doomsayers are confusing the long-term threats with the short-term threats, the big dangers with the small dangers. The short-term threat, even a €500bn short-term threat such as Spain, does not have to be solved all at once. As we have seen with Greece, if you can solve a bit now, and a bit next year, then you can stave off the apocalypse.
But the long-term systemic problems remain. The euro as it is is unsustainable -- we are seeing creeping fiscal union, although the one "never" candidate here is likely to be Germany, which is quite happy being part of a group telling another country what to do, but definitely doesn't like the idea of all the other countries pointing out that the German financial system is, er, not that hot, and needs changing.. But the whole euro structure as is, cannot survive. That does not mean that the euro can't survive; it can, and I think that it will. It just won't survive in its current form. The solution that I think might get past all the objections is a kind of "two-track" euro. This will enable two interest rate levels (and you can switch from one to another) and currency movement controls between countries. Sure, there would be cash smuggling, but you could have a "soft euro" and a "hard euro" with stamps on the soft euro, That could have a nominal 1:1 exchange rate that might change down the line. If a country moved from soft euro to hard euro, there could be currency exchanges. It would not need to be an overnight announcement (which is what we would need to head back to pesetas or drachma).
Inflation is coming, equities will be the best long-term bet (especially those with defensive pricing capabilities and with exports to the Far East). Democracy might die in a few Eeuropean countries. Isolationism will gain in popularity. Free movement, free trade, and a rather pleasant globe-trotting world, might become something we look back on fondly. The future isn't bright, or orange, but I don't think that it will be apocalyptic.
++++++++++++
Let's take the "yes" part of the equation. As I wrote at the beginning of the crisis, when people still seemed to think that it was about liquidity (not least the board of Lehman Bros), it seemed obvious that this was a solvency crisis rather than one relating to liquidity. Or, rather, just because there's a temporary liquidity problem does not mean that if you solve that then you solve the problem.
In the three and a half years since, it's become increasingly clear that there are several types of "solvency crisis" (four spring to mind) and each of these can be either quite small or very big or anywhere in between.
The key dynamic here is, time.
So, what are the four types of solvency crisis?
1) a crisis that is going to bite you in the arse really soon, but which is getting better
2) a crisis that is going to bite you in the arse very soon, and is getting worse
3) a crisis that isn't going to bite you in the arse very soon, and it's getting better
4) a crisis that isn't going to bite you in the arse very soon, but is getting worse.
It's also possible that various parties will disagree on whether any particular problem needs solving quickly, and whether it's getting worse or getting better.
Let's have a look at these categories, and try to put in some real-life contexts:
(1) Ireland is, I think, a good example of a crisis that was short-term, needed solving quickly, but which is getting better. The Irish have, quite staggeringly, restored their international competitiveness without a devaluation. To achieve this in such a short time is terrifically impressive. So, reason to be cheerful, part one.
2) The obvious example of this is Greece. Indeed, the arse-biting has already occurred, and the world has survived. How has this happened? Simple, by the expedient of kicking the can down the road. Financial services companies were allowed to widen their margins. They used much of this generated cash to write off Greek debt that they held. In other words, the rest of Europe, facing declining living standards, helped pay off the duff Greek sovereign debt held by international companies. This was only possible because the Greek debt is small relative to the global economy. Reason to be cheerful, part two.
3) Long-term crises that are getting better are hard to find, not least because, since the crisis isn't an immediate threat, there's no impetus to solve it. On the plus side, because it's a long-term crisis, it's only a problem now if there is a collapse in confidence.
4) Long-term crises that are getting worse. A fine example of this is Italy. Sure, the economy is a mess, and there's no sign of it getting better. But it's a relatively sustainable mess. And it's no more of a mess than the UK's "pensions time bomb". The "time bomb" analogy is hopelessly misleading. We don't have the money to pay all of the pensions that people think that they are going to collect (whether the worker has contributed to that pension or not is, I fear, an irrelevancy, an accounting foible). Promises, one day, will have to be broken. But they can be broken a bit at a time. And they don't have to be broken tomorrow. That's how it is with Italy. Provided domestic savings goes into Italian debt, and provided young people can leave the country to find work elsewhere, a country whose economic system is laughable and whose production values are pathetic, can carry on for decades. In other words, provided confidence is maintained, Italy is not going to break. Reasons to be cheerful, part three.
There are other plusses. The major factor in putting off some of the recent financial threats has been the Long-Term-Refinancing-Operation (LTRO), a neat trick of free money (€1trn of it) that isn't called cranking up the printing presses. But, what is it really? The only difference between LTRO and just printing shedloads of cash is that the latter is an undated interest-free loan whereas the former is a dated low-interest loan. But if you think about it, this difference disappears, because LTRO a dated loan that, as things appear at the moment, can never been redeemed. When it's time is up in three years, it will quietly be redeemed at the same rate of interests until, in 60 years time, it just becomes part of the money supply.
As I think I wrote a couple of years ago, the problem of solving a "that money never existed" problem is finding someone to pay for it. As I also wrote, it has become clear that the borrowers have won. his might look wrong, in that it's the banks (the "lenders") that got bailed out. But this is smoke and mirrors. Banks are just brokers between those who are consuming more than they are producing and those who are producing more than they are consuming. Notwithstanding all of the public pronouncements, notwithstanding the horrors that are occurring in Greece as I write, the net overall effect of the current "solution" is that those who have consumed more than they produced over the past 12 years are not, indeed, cannot, pay it all back. And even if they tried to pay it all back, the impact on domestic and global economies would be profound. A "solution" of a transfer of wealth from savers to borrowers will "solve" this problem. Of course, it's not a solution to everyone's taste, but that's what happens when you think that a lot of wealth exists somewhere that actually doesn't exist at all.
So, what's the downside? Well, the downside is that there are other examples that are not so easily solvable. As everyone else is writing at great length, the primary one at the moment is Spain -- or, to be more specific, Spain's banks, which are relentlessly refusing to write down the value of property to a realistic value. Spain is bigger than Ireland. Spain is not making itself more competitive. Spain has very high youth unemployment.
Can it fudge through? Perhaps, but it's looking increasingly unlikely. Portugal, of course, is already a dead man walking. It's another country where it could be difficult for democracy to survive. When Portugal goes, will that drag Spain down?
These are big questions that require big solutions, and at the moment there's no sign that anyone is going to come up with them. Most of the other problems in Europe (including France and its horrific exposure to Italian debt) are big problems, but they don't require immediate solutions unless there is a crisis of confidence. Spain could require an immediate solution, relatively quickly.
The question is, what kind of fudge/can-kicking/radical solution can Europe come up with? Strange as it may seem, there are a number of options available. This problem is, after all, no worse than the rural bank crisis that hit China in 1999. How was that solved? By the simple expedient of bringing in foreign cash. The same could be done in Spain, if the Spanish could swallow their pride. And that, of course, is the nub. There are many solutions to what is a not-very-big-problem in the grand scheme of things, but every one of those solutions goes against the grain with at least one interested and powerful party. The IMF fixers, the Eurozone bully-boys, Merkel, the World Bank, and Spain's government itself are all opposed to solutions that might be acceptable to four or five of the other parties. If all of them dif in their heels, then Spain could head perilously close to default or, more likely, a confidence crisis that no number of crisis meetings could solve.
Will that happen? My guess would be, 30:70 (i.e., 70% that it won't). The doomsayers are confusing the long-term threats with the short-term threats, the big dangers with the small dangers. The short-term threat, even a €500bn short-term threat such as Spain, does not have to be solved all at once. As we have seen with Greece, if you can solve a bit now, and a bit next year, then you can stave off the apocalypse.
But the long-term systemic problems remain. The euro as it is is unsustainable -- we are seeing creeping fiscal union, although the one "never" candidate here is likely to be Germany, which is quite happy being part of a group telling another country what to do, but definitely doesn't like the idea of all the other countries pointing out that the German financial system is, er, not that hot, and needs changing.. But the whole euro structure as is, cannot survive. That does not mean that the euro can't survive; it can, and I think that it will. It just won't survive in its current form. The solution that I think might get past all the objections is a kind of "two-track" euro. This will enable two interest rate levels (and you can switch from one to another) and currency movement controls between countries. Sure, there would be cash smuggling, but you could have a "soft euro" and a "hard euro" with stamps on the soft euro, That could have a nominal 1:1 exchange rate that might change down the line. If a country moved from soft euro to hard euro, there could be currency exchanges. It would not need to be an overnight announcement (which is what we would need to head back to pesetas or drachma).
Inflation is coming, equities will be the best long-term bet (especially those with defensive pricing capabilities and with exports to the Far East). Democracy might die in a few Eeuropean countries. Isolationism will gain in popularity. Free movement, free trade, and a rather pleasant globe-trotting world, might become something we look back on fondly. The future isn't bright, or orange, but I don't think that it will be apocalyptic.
++++++++++++
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no subject
Date: 2012-04-26 09:10 pm (UTC)Greece? I'll leave that one to the side. Too obvious.
Portugal and Spain? This pair is interesting. The line that "they used to be fascist dicatorships within living memory" is bad history. Portugal in 1974 had a massive social upheaval which, I think, persists and will prevent a slide back to an authoritarian government. Spain, at about the same time, didn't, and they're still bickering about that horrible Franco-era mausoleum somewhere back of Madrid. I don't hold out much hope for Spain, to be honest.
Hungary is either going to accept an economy dominated by the Swiss (and also by the Austrians, which sounds unpalatable in historical terms) or else continue on the path to be the Byelorus of Mittel-Europa. I expect the latter.
Italy is in a horrendous mess, in that they have now spent the best part of a hundred and fifty years not dealing with the massive difference between North and South. Clerical fascism is possible, if the Catholic Church gets off its arse, but I'd expect the Forza to build up to be the swing party in national elections for the foreseeable future.
Belgium ... will continue being Belgium. They'll probably even be able to withstand the break-up of the current EU and the consequent loss of €billions in bureaucratic rent money. Holland will probably lurch to what we both agree is not exactly the "far right" and effectively close its borders. This will have a terrible effect on the national soccer team, which largely relies on Surinamese for inspiration, but what the heck.
The Nordic countries (and here I include the Baltics) are the ones to watch. A brief period with the Swedish stock-exchange has convinced me that they have more in common, in terms both financial and in looking to the future, than they do with the rest of Europe. They also seem to have fairly stable political systems (I'm not so sure about the Baltics).
On the whole, if I wanted a peaceful and relatively prosperous old age, I'd be looking in that direction.
(France, like Britain, falls into your third category. You're just not looking far enough back. France has been terminally fucked since 1815, and Britain since at least the 1931 crisis over the Gold Standard, if not fifty years before. Two shining examples of how, historically, you can carry on pretending that nothing is wrong, I feel ... until somebody else notices. Not sure why nobody has. Possibly being in possession of a Universal Language is of more value than people assume?)
no subject
Date: 2012-04-28 06:12 pm (UTC)25% of general unemployment, and bugger the youth. Some weird combination of seven casas that was somehow floated on the markets about six months ago. An absurd overhang of property debt that the individual Spanish investors don't seem to be able to face up to (unlike, say, Ireland. Or even Birmingham).
As you know, I like to preach from on high and make predictions. So here's one, and it's fairly safe: Spain will take the Euro down, inside a year or two. One year would be better. Two years is going to leave an awful lot of mess around.
Look: if, as you correctly say, the problem is becoming political (ie a democratic crisis), then the new European Stability Compact is not worth the rice-paper that Merkozy thought they were writing it on.
We need a new Ionescu, I feel.
no subject
Date: 2012-05-05 11:09 am (UTC)It will be interesting to see how the Germans react to this.
PJ
no subject
Date: 2012-05-13 03:42 pm (UTC)It's incredible to me that the Spanish government seems to have achieved the equivalent of a three-card monte, rationalised the worst-hit Casas, and then invented a "bad bank" solution. Nothing other than Euro-wittering occurred. I suspect that the guys in charge of Spain are far more savvy than the Germans think.
Your point that a single interested party (including, insanely, Merkel, who is mostly interested because it affects her own electoral prospects) can torpedo a deal in Spain that suits all interested parties is well-argued.
I'm beginning to believe that, if there is a solution, it will be based both on politics on the ground and on an actual mathematical model. You need politics on the ground to sell the solution, but you won't have one unless you can actually produce a mathematical model that says something like: "OK, Francois, this 75% tax thing actually seems to work on a marginal basis. But only if you stick the retiremement age back up to 65 and then some."
Don't see either one of these partial solutions happening, myself. The key problem here is not liquidity, not solvency, not even politics. It's the obvious fact that the people in charge are so divorced from reality that it would be best for everybody concerned if they all agreed to a €2 Million pension pot and just sacked themselves.