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Europe’s problems as a symptom
Calling Europe’s problem a balance of payments problem as Martin Wolff and some others are doing is a mistake. It confuses cause with effect. BOP imbalances are the SYMPTOM. The causal variable is ‘competitiveness.’ It is the competitiveness differences across the Zone. The Zone has gone wrong by making itself a slave to the currency instead of to true integration. Economies in the Zone sacrifice everything to hold the euro 'peg'. It makes no sense, especially since the euro peg is now the cause of their pain as it truly is.
We can engage in revisionism but we cannot run time backwards. We are where we are and the Zone cannot undo its terrible mistake. It is all but impossible to heal the rift from within. I do not see Germany relating nor do I see Mediterranean countries undergoing a generation of austerity just to keep the euro peg. I see chaos.
Learning from the Euro-undoing
The e-Zone problem is a microcosm (well maybe a Macro-cosm....) of the world economy where, similarly there are no burdens placed on surplus countries to adjust. In the Zone this manifests itself as competitiveness issues as the ECB held macro inflation in check but country by country results undermined the system probably though fiscal excess but also because of poor integration. Germans took the opportunity to cement their position as the most competitive Zone nation and now seem to be in the cat bird's seat of supreme competitiveness. But it’s still a seat on the good ship Titanic and as things worsen Germany will increasingly be called upon to do the bailing. In the end Germany's maneuvering to be the most competitive did not serve it well. It was poking holes in the sides of the same ship that it occupied. By undermining its neighbors competitive position too badly it undermined itself.
Away from the Zone where exchange rates are flexible competitiveness problems are not such an issue, or at least, they take on a different dimension. In this environment policy options are greater. But the global system has not prospered and has built up its own set of rigidities and imbalances because surplus countries are not forced to adjust and the US, the reserve currency takes the other side of the currency value that other nations select. Some countries select a policy of export led growth and ignore their too-low exchange rate. They ride the trade surplus to prosperity. A country that is piling up forex reserves, and does not take that as a sign of an undervalued currency simply undermines the system. Its surplus takes the form of a deficit elsewhere.
Fixed as in set; flexible but broken
So in EMU the adjustment mechanism is fixed in the sense of being ‘set’ or ‘rigid’ while outside the Zone the adjustment mechanism is flexible but nonetheless is broken.
We have created systems without rules, or at least without rules that any one will obey or will be forced to obey (who would force them?) WTO does not even require market-determined exchange rates for its rules to apply. It’s as mad as the e-Zone having had no real fiscal rules (Mass-trick- right).
While I see lots of fingers being pointed what is clear and consistent is that we have invented systems with flaws. EMU has painted itself into a corner (or coroner?). I don’t’ see how it survives unless it can break apart and reform.
ECB bond buying or more LTRO is just more of the junkies fix; it is not a solution but will deepen and worsen the problem.
Why Free is so expensive
Apart from the Zone there are similar issues that go unresolved and that undermine and destabilize the global trading system. NOT agreeing to anything may be worse than agreeing to something that countries don’t want. But trade, even ‘free trade,’ requires rules. Trade may be free, as in ‘free of restrictions’ but it must also be free it the sense than it is supported by other free markets. And when exchange markets are not free and are meddled with they are not efficient and free trade conducted on such a base is a disaster.
How it actually works
We should ponder how we are getting to equilibrium or what passes for that in this system. Since surplus countries won’t appreciate their currencies to trim their surpluses, deficit countries get larger deficits. And goods stay so cheap that deficit countries simply over-consume. They consume so much that they become debt-saturated while financing their ‘cheap’ purchases. Some figure it out before it is destructive; others don’t. Economists generally defend this excess consumption by looking at the ‘consumer surplus’ accruing to the purchaser of the cheap goods but only because they think in terms of the commodity markets and forget about financing. But it’s in the financing of the excessive consumption where the real evil is being done. In our financial crisis the developed world took it on the chin. China has turned to a domestic demand model, away from a model based on export-led growth, not out of the goodness of its heart, but because it saw that the US has become nearly debt saturated and China does not want to absorb a. lot more US debt. It knows the price of its chronic surplus policy is chromic deficits for the US and more debt issuance. This is how equilibrium is being foisted on the system: It is happening because of debt saturation and because the current account signal is being ignored.
‘No rules’ does not mean no consequences
So in the end having a system without rules is not the same as having a system without consequences. It may be hard to figure out the consequences in such a poorly articulated system, but in time the system will tell you. EMU is finding out. The rest of us are finding out and still we have no solutions.
We need to go back to a rules-based system. We need cops and penalties. We don’t need gold we don’t need fixed exchange rates just need rules and to have them followed.
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A good analogy is that the rich and powerful have acted in a mercantilist manner in the very society they should have been regulating and policing. So instead of governance we have regulatory capture and all kinds of unpunished fraud which has resulted in currency debasement and associated deformation of capital. This is unsustainable of course but seems to be another failure not of free markets or free floating currencies but of policing, viz white collar and political fraud. Perhaps free markets cannot be regulated and sink into mercantilist practices as a result. In this case how does one protect peoples savings and purchasing power?
My view on this is quite different. There is a lot corruption.
But that is not driving the exchange rate regime.
Some of it is 'corpocracy' as US firms can go abroad and exploit cheap foreign labor.
Once they invest in China or XXX they have a vested interest in keeping that lower cost structure in place. (they become defenders of the weak yuan policy). Wal-Mart loves the cheap products it can obtain in China, so it's not just about manufacturing.
US multinational corporations do not want the dollar cheaper here because they do quite well producing over there. A cheaper dollar and stronger yuan (eg) would damage the value of their investment abroad and require them to shift and invest (gasp!) in the US which would become more competitive.
There is also politics. China wants to grow fast and dominate the US. Having a factory sector set up for it on own shores with cutting edge technology from abroad is great for China.
But on the US side it thinks that the development of a Chinese middle class will break Chinese Communism. And so the US sees China's development which is daily revealing itself to be a corrupt and oppressive state will collapse with the development of a middle class.
China itself realizes that it needs grow and social unrest is to be avoided. So growth is China's way of staying ahead of the tiger it has by the tail - at least for now.
The exchange rate is a cog in a political science game of Chicken.
There is a lot going on behind the scenes about this exchange rate issue. Anyone that thinks its Gold or not Gold is not paying attention.
It's about geopolitics, politics, corpocracy, and economics except economics comes in at a poor fourth position at best.
Pole pushing for Gold just do not 'get it'.
?!
Am I reading this right? We need rules and enforcement?
Well, it is Friday the 13th after all. Just 12 days past April Fools Day.
International Rules - who would propose them? Who would get to vote on them? We do have the stunningly effective United Nations to use as a model after all. It's not like anyone would object to sovereignty issues...
No boys and girls - the game you selected was Capitalism and all of its' variations (i.e. mercantilism, colonialism, fraudism). Mal-investment and manipulation will be your lot because capitalism is not about morality. (I do have a profound weakness for watching what passes for a conservative these days try to conflate Christianity with Capitalism though.)
Ricardian Comparative Advantage indeed.
see my comments above
'we don't need gold"
FUCK YOU Robert Brusca.
Thats your(banker) opinion.
Thank you for your high IQ insight
see my comments above - or not.
Or just make another insightful comment that adds so much to our understanding.
I'd say 'GO AWAY.' But Tyler likes traffic, even it's from people driving junkers and spewing pollution.
so spew on!!
A lot of words to simply say that you need a system where fraud is prosecuted and the money has no counterparty risk (gold and silver). You continue to fight you own awakening Robert. Stop fighting and see the truth for what it is and help restore the rule of law. Paper insures corruption, period.
Actually, no. See my comments above
Living assures us of corruption. We don't need paper to do that and Gold is not divine.
Bullshit. Living only provides you an opportunity to compete, period. Please stop contradicting yourself. I never said Gold was divine, but it sure as hell can not be called into exsistance with a fucking keystroke. Do you want the rule of law restablished or not, because you seem to be acting like every other pussy who wants rules and laws, but just for other people, fuck you Robert. The longer the fraud and corruption continue, the more possesion becomes 100% of the law. Fine with me.
Ding Dang Dong but that 'F' word is popular today.
Good luck expanding your vocabulary.
I guess people who like gold are just plain uncouth and unsophisticated.
They like their gold and they like to swear.
I think you are looking for Absolute Zero Hedge, it's a bit chillier there.
Father ted becomes a racist
http://www.youtube.com/watch?feature=player_detailpage&v=iheZM6VBJfE
SOmeone told me that this author is not worth my time. I read the first paragraph and skipped to the last, and where "not having gold" has anything to do with anything is beside me. Mr Brusca, you obviously do not understand money, how you can understand economics and finance is beside me.
Thank you for your insult and for showing me that you did not even read what I wrote before sitting in judgment.
Sentence first verdict later!
I have several new comments above that you probably will want to ignore too.
Why let the facts get in the way of your spewing what you know nothing about?
So stop reading me!
Better still, stop commenting so inanely!
best
Bob
...and God only knows what is really beside you let alone what got into you.
Bob, like I said, somone who does not understand money can not understand finance or economics. I read that you do not understand the importance of money, therefore, yes, verdict drawn.
For your own, and others thoughts, why do all Central Banks hold tens of thousands of tonnes of gold as reserves? Because it is the chief component of finance; it is the loan of first recourse; because gold is money.
And FYI, I DID read your work. As a writer you should be able to contextualize your premise and conclusion in the opening and closing paragraphs. If you can't do that, your work is not worth reading.
-LH
He doesn't. That's the problem.
I skip to the comments section now, when Bobby raises his ugly head on here. Gets right to the "meat" of the matter, if you will.
NEVER - in all the posts I've clicked, is there anything worth scrolling up to read.
How this man makes money from his writings is the real question.
I guess never reading it is the way to know.
I don't know what your specialty is, but I hope I never try to rely on your 'expert advice' since it is not clear to me How you think one acquires knowledge.
Maybe here-say works for you in your profession.
"Calling Europe’s problem a balance of payments problem as Martin Wolff and some others are doing is a mistake. It confuses cause with effect. BOP imbalances are the SYMPTOM. The casual variable is ‘competitiveness.’ It is the competitiveness differences across the Zone."
Well, dear Martin Wolff (FT) is a fan of GDP and growth. I think this says it all.
But competitiveness is shifting and regional, in europe. There are several German Bundesländer that are less competitive than let's say the Italian Veneto region. Again, the FT-led narrative, just from "your" angle - which forfeits the call for eurobonds and eurotaxes. Which would imply that every single region should have an own currency to tactically debase/spend as necessary to achieve competitiveness and equalize Balance of Payments.
Robert, why is it that the US has a dozen FEDs though only one currency? Ask for regional Dollars. Small is beautiful and the hot money leaves you alone...
Sorry- post is confusing.
Fed regions are an artifact of history. Currently they provide a local Fed presence, wholesale banking services and local oversight.
Robert Brusca's solution for international trade and balance of payments imbalances:
« We need cops and penalties. ... »
In other words, some dream 'New World Order' police force.
Reminded me of an old rock song, 'Dream Police' by Cheap Trick:
« The Dream Police, they live inside of my head ... »
http://www.youtube.com/watch?v=MjMCaw4qzjg
Just an admission that you can't have rules and expect them to be obeyed without some enforcement mechanism. One of the problems we have now.
it' not about authoritarianism.
Nice. Here's a live version.
"I do not see Germany relating nor do I see Mediterranean countries undergoing a generation of austerity just to keep the euro peg."
Again, how well do you know the modern German psyche? Do you understand the similarities to the other losers of the last two wars, the cold one included? How well do you know the new generations of europeans - easterner included - to imply that they think that they are entitled to get more goods and services than the equivalent of what they produce? And so is their government entitled to run deficits - per definition?
Or do you belong to those that saw the German Reunification as the plundering of a small, poor nation by a large, rich one?
Med countries unable to budget - impossible? Didn't we all live for generations within our means? There was a time when Treasuries implied warchests full of treasures, you know?
"ECB bond buying or more LTRO is just more of the junkies fix"
Yes, likely. But are we sure? LTROs of this size never happened. They have in theory an end date. You worked for the NY-FED, you should know that the big question is how to transition from ZIRP to a normal environment.
What if they were the right tool to choose? Can we say yet?
Banks are taking cheap LTRO funds buying higher coupon bonds. But now these bold yields are going even higher inflicting losses on those who owe LTRO funds back to ECB that in truth is capitalized by EMU member country central banks.
It is successful in a sense only if it is successful! Like a junkie, who feels good with his next fix and is good until the one after that. But do the fixes help? Is he on the road to recovery?
Since there is no real progress being made in these countries ( no fix at all to their competitiveness dispersion) and since recessions drag on and social unrest increases, it seems unlikely that 'this' will work.
If it does work I have no idea what the remedial process is that is 'in train.' This is a policy of simple can-kicking with the can getting progressive heavier.
It may be too soon to say, but as many can see it is not too early to begin to place bets and to take sides.
Theoretically ZIRP ends when the economy recovers and the US economy shows signs of doing that.
ZIRP has a shot at being successful LTRO has not the chanve of a snowball in Hell
B
Robert, I know that a "target rich environment" is a good thing for the trigger-happy and I should rejoice - but this is too much. It would take weeks to take apart everything...
Let's start in simple terms: my brother makes better shoes than me, and more efficiently (less waste) and faster. This because he honed his skills while I went dancing on Saturday Nights. So I'll tell him I'll pay only 90 cents on the dollar of my IOUs to him (while his are kept at 1).
You, see, he has an advantage, it's only fair...
Summing it up? or can you put in in even simpler terms, like "kill the bloody exporters, they are the guys that kill our credit by forcing us to consume their evil products and services?" Because for your Keynesian narrative, the consumer was first there, and then, magically, the producer sprung up to serve him...
No bad analogy. See my recent comments above.
Sorry not on board with that.
Summing it up? or can you put in in even simpler terms, like "kill the bloody exporters, they are the guys that kill our credit by forcing us to consume their evil products and services?" Because for your Keynesian narrative, the consumer was first there, and then, magically, the producer sprung up to serve him...
___________________________________________________
The environment was there to be consumed before anything else. It is a given.
Save for US citizens who need to deny that very obvious fact through cheap propaganda based on bickerings between US citizen economics churches.
US citizen economics have not decreased waste. On the contrary, US citizen economics is a waste economics.
But hey, the group is all for US citizens.Dont touch their group or they'll sink in denial of even the most obvious facts. With someone else paying for the bad consequences of the denial.
Exporters o not 'force us to consume anything.' This is a stupid straw-man argument
see my comments above.
Bob, Spoken like a true central planner.
Quite the opposite. I like markets but they need an environment in which to work.
Free trade has rules.
It is not a free-for-all.
It's a little more like boxing than cage fighting. But even in cage fighting when the guy taps the mat you are supposed to stop.
"Free trade has rules" <--- you don't have to go far down this road to make it an oxymoron. Americans can't even buy fresh unpasturized milk from a farmer. Is this dialectical bullshit all you got?
"Free trade has rules" Free trade, or where have all the jobs gone? The key word is rules/ enforcement. Free trade is great on paper, but will not ever work for long when man is involved. It's just our nature. So the old "not" free trade, with the taxes on it worked longer, and thus better. The taxes was adjusted as required. It's just easier to change ones own rules, than trying to get others to change theirs too. Not good, but better than free.
What a poorly thought-out and written article.
What is necessary is a debt jubilee, period. It's pretty interesting that Iceland is going to forgive most of the mortgage debt of their citizens and put the bankers on trial. THAT's how you solve the problem of excessive and odious debt.
Iceland forgives mortgage debt of its population
Thank you for your insightful comment -- a comment that has almost nothing to do with what I wrote about!!
If that is your problem?
Did you think I was writing about debt forgiveness?
Where did THAT come from? It's not the point at all.
Good thing its baseball season. That one is right out of left field.
Next time I'll write something shorter so you can digest the topic.
sorry...
Somebody on this site wrote that traditionnally, jubilees came with repos.
Have not checked if it is true.
Yet, jubilees is one other pipe dream maintained by US citizens.
Debt is simple: debt is a sum of two consumption acts, one made in the present and the other to be made in the future.
Jubilee merely surrenders the obligation of providing for the consumption act to be made in the future.
Not that much important in the past as human societies did not have that impact on the environment.
But now, with US citizenism, which imposed the fallacious idea that the more one consumes, the more there will be to consume, the game set has changed. Deeply.
No US citizen elite will risk a jubilee. It is all situational. No US citizen previously from the base and promoted to elite will risk a jubilee.
A debt jubilee is necessary to reset the system but it won't fix the system if we continue having deficit households, deficit governments and unbalanced trade.
Yep, a debt jubilee is whats needed but they bankers can't have that. Because they will lose out on the money and control.
Exactly. But I think a jubilee will become obligatory at some point simply due to the mathematics of exponential debt growth. They can either choose to do this in a calm and relatively peaceful manner, or they can wait until either their castles are surrounded or the people simply repudiate their debts en masse.
Clearly TPTB are desperately trying to figure a way out of this mess in such a way that it avoids social chaos, but they're unable to recognize that they are the problem here, they are the entrenched power that chooses to use force to defend that power to extract wealth from the common people, a la organized crime. This stands in stark contrast to Iceland, where the people are the authority and are prosecuting the criminals, a case study for the rest of the world in how to protect our countries from the rapacious banking cartel. From what I've seen, I am really impressed with the Icelandic people and government and I'm very inspired by their example.
The reason Brusca never points this out and instead gives us this mishmash of subterfuge and obfuscation is because that's the job description of most economists. They are here to draw attention away from the extraction of wealth from the common people to the economic elite, using all sorts of fancy jargon to hide the most basic of facts that even small children could understand. The Tylers, on the other hand, are in a league of their own, and I think part of the reason they post Brusca's stuff is so we can tear his asinine musings to pieces.
You go geek girl.
but next time try to say something on topic.
anything.
I don't think you have the slightest idea what I have been writing about.
I was addressing a fundamental problem whereas you prefer to focus on the symptoms.
Gregory Bateson, in describing the roots of ecological crisis wrote: "We Submit... That all ad hoc meaures leave uncorrected the deeper causes of the trouble and, worse, usually permit those causes to grow stronger and become compounded. In medicine, to relieve the symptoms without curing the disease is wise and sufficient if and only if either the disease is terminal or will cure itself."
Which of these two outcomes do you think is happening here? Do you think this mathematically impossible mess is going to cure itself? Or is it terminal?
Hyperinflatio will be the jubilee that you seek. All debts will be paid for in worthless dollars, a loaf of bread will cost what a house does now!
Made me laugh.
Ah, the propaganda.
Iceland is the result of a long term plan.
Iceland had a currency issue (and still has by the way, they are still looking for an alternative to their krona to allow them to consume more)
Their little carry trade business set up earlier and that allowed them in that theft run, was planned for two decades, including the exit plan.
But US citizens want to sum up all the plan to the exit strategy only, giving up on the all the rest.
Like summing up a bank heist to the car escape drive only.
You keep saying U.S. citizens but your target should be the ruling elite in every country of the world. U.S. citizens have been deceived through mass media propoganda controlled by the elite.
.
He doesn't know what he's talking about because he's stoned out of his gourd. He spends all weekend at his neighbourhood opium parlor, smokes big chunks of opium, and uses the wifi hotspot there to post the meandering drivel he calls US citizenism.
You cannot expect any consistency from him. First he says US citizenism is eternal, then he says US citizenism is not eternal, then he denies saying anything at all.
He floats in his stream of consciousness on the fluffy pillow of the opium smoke cloud. US citizenism? Might as well call it Yangtze River Dolphinism.
You go grrl!
Dat shit be HAWT!
And seriously, it's good to brush up on the arguments TPTB toadies fall back on when our brainwashed brethren bring them to bear.
Buck, as someone (stupid, as it turns out) who saved money, and who earned a pension, I'm not real fond of the idea of a "jubilee" permitting folks to skip out with my savings. This concept is as capable of causing social discord as any of the other bad solutions that are being discussed regarding our predicament.
As the promises made to me can't be kept as made, I expect to receive a haircut on the savings and pension contributions I made during my most productive years. But a total "jubilee" confiscation of my life savings will not be received passively...
yes...
these must be posts from the very young. When you got nothin' you got nothin' to lose.
or if what you got is education debt you got somethin' negative to lose.
For some, this 'jubilee' is a really good idea. But not for people like you.
This argument exposes them for what they are: people with no skin in the game. I'm not one bit surprised given their earlier comments . Letting people out of their obligations because they got in too deep generally is not a good idea.
Why would anyone ever lend if this were part of the regular game?
On what planet are you living?
In our economic system savings will be inflated away, and your pension will not be paid for when you need it.
You do realize that your pension is not some money waiting for you somewhere, right?
It's those millions of young unemployed and indebted people who are supposed to pay it for you...
There is only one way: jubilee. We're all in this together.
This is the biggest problem I see with a jubilee, in that pension plans have invested in things like RMBSs that would go to zero in the case of a jubilee. But those investments would only be a portion of the total pension fund, so I would think it would be a haircut, not a loss of your life savings. (BTW, I'm a saver and renter with no debt, so even this sort of mortgage jubilee would not help me)
I find it interesting that you believe the promises that were made to you regarding your pension. You must be a bit older than me. I have a pension too, it is a small one from when I worked at Motorola before they scrapped pensions for 401k's. I don't expect to see a penny of it. Promises were made that cannot be kept.
I don't think the "system" can be fixed, especially given that it's the most organized form of organized crime ever created.