A Financial Marshall Plan

Avatar

Burt Likko

Pseudonymous Portlander. Homebrewer. Atheist. Recovering Republican. Recovering Catholic. Recovering divorcé. Editor-in-Chief Emeritus of Ordinary Times. Relapsed Lawyer, admitted to practice law (under his real name) in California and Oregon. On Twitter, to his frequent regret, at @burtlikko. House Likko's Words: Scite Verum. Colite Iusticia. Vivere Con Gaudium.

Related Post Roulette

37 Responses

  1. Avatar North says:

    Burt, inflation requires that there be too much money chasing too little economic production. With the massive slack in the economy at the moment that’s a large countervailing effect against inflation. Add in the global flight to what is viewed as the strongest and safest currencies and that adds up to a massive demand for dollars that is hammering inflation into the ground at the moment.

    With regards to Europe I can’t help but be bemused at Al-Jazeera, I mean there’d be fewer more imperial acts the US could take then suddenly taking over Europe’s bond financing, how odd to see them advocating it. More characteristic perhaps though is Al-Jazeera essentially advocating for the US to step in and be the villain so that everyone else can publicly bitch about it while privately being relieved. The writing is on the wall for the Euro and everyone is keenly aware of the unpleasant decisions that have to be made but no one wants to actually make the decision. The Germans really really would like to continue to have the greater Euro market wide open to their industries so they can sell their stuff to it but they really hate having to pay their neighbors for that privilege and be responsible for them. The periphery really really would like to be able to borrow like Germans to buy stuff without actually generating the economic oomph to do so but they really don’t want to cede control of their budgets to a more centralized Euro state.

    I mean it’s obvious what the choices are but the various actors and electorates involved hate their options.

    Choice #1; the Germans (and other industrial states) can pony up the dough, the ECB then can step up to the plate and guarantee the sovereign debt of the periphery becoming in essence the Fed of Europe. The voters of the industrial nations, however, don’t want to pay for it and the voters of the periphery don’t want to cede the control of their finances that would absolutely HAVE to be part of the deal in order for anyone to ever consider allowing it.

    Choice #2; they bust up the Euro and the Euro market. This would be utter chaos and guarantees an absolutely epic recession (global mind, we North Americans and the Asians will eat this too). The Euro-periphery would be looking at collapsing banks, collapsed pensions and quite possible collapsed governments with new currencies with hyper inflation. The Euro-industrial states would be looking at massive investment losses, likely collapsed banks and more keenly a massive blow to their employment as they essentially lose a massive amount of their access to their neighbors markets.  

    Given the choices obviously #1 is preferable in general but the political actors really have conflicting motives. The German pols have every incentive to play hard ball and hope hope hope that something somehow forces them to do option #1 against their will so they can tell their voters there was no other choice. The periphery polls hope hope hope exactly the same thing. The ECB, nervous bureaucrats that they are, are scared to do anything until some politician tells them what’s what. What the whole mess needs really is for some politician to essentially blow up their career and become reviled in order to make this happen. Obviously none of the pols involved are eager to step into that role and so they dither and tinker and hope they can somehow muddle through.Report

    • Avatar Burt Likko says:

      …inflation requires that there be too much money chasing too little economic production.

      Is that not the situation? Dollars are not exactly scarce; the government keeps on generating them. Meanwhile, economic production is down.

      I can’t help but be bemused at Al-Jazeera, I mean there’d be fewer more imperial acts the US could take then suddenly taking over Europe’s bond financing, how odd to see them advocating it.

      It’s not clear that al-Jazeera is itself endorsing the proposal or only running the editorial. Maybe they ran the article in an effort to scare Europeans into getting their collective financial house in order — that is, what you describe as option #1 must surely be preferable to the U.S. stepping in.Report

      • Avatar North says:

        Burt, it very much isn’t, there’re people sitting unemployed everywhere. That is a huge amount of potential slack that the economy has to bring to bear if the demand for dollars were to flag. Unless we somehow get stagflation (and despite Libertarian shrieks to the contrary the US doesn’t have the kind of direct government interference in the ecnonomy that it did to bring on stagflation in the 70’s. I mean the feds were dictating commodity prices and instituting wage and price controls), inflation needs lower unemployment to really rev itself up.

        Remember, every investor in the world wants dollars right now, the dollars’ principle competitor, the Euro, is in the midst of a massive meltdown.Report

      • Avatar Michael Drew says:

        Burt, here’s the thing.  They key word in North’s (simple) formulation: chasing (goods).  Not just “there be.”  The dollars exist; they’ve been created, but not enough of them are actively chasing the goods and services being created to create elevated price inflation.  Instead, as North says, dollars are being sought but not spent or invested by both consumers, who want to pay down debt, and money managers, who have been in a more or less sustained flight to safety/quality (i.e. dollars) since 2008-9, but now with a whole new vigor due to Eurofail.  This problem is exacerbated by the lack of business spending/investment (chasing goods with dollars) that is the result of firms’ low expectations for sales growth due to depressed demand for goods and services that is the flip side of high consumer demand for dollars resulting from the desire to pay down debt faster because of loss of asset value, or the greater difficulty of doing so at the same rate as before because of job loss or hours cuts.Report

  2. I don’t think it’s right to say the US is just as bad as the Eurozone in managing its debt, though awful both may be. And while, ultimately, the US needs to back-up its funds with taxation or cuts, the fact is that we can print our own money — and that is what separates America from the Eurozone nations and gives the former so much more latitude (if it would deign to use it) than the latter. And I’m not going to pretend to be particularly insightful or comfortable when talking about global finance or macroeconomics — but my understanding is that we could use more damn inflation, in both the US and the Eurozone. So the prospect of this plan resulting in that most certainly doesn’t scare me.

    It’ll never happen, of course — the Fed took so much shit for the bailout money that went overseas via Goldman Sachs and the like — but I do think preventing a Eurozone collapse is worth getting considerably outside our comfort zone.

    [Ed.: It’s worth mentioning btw that this piece was written by Dean Baker. So while it is in Al Jazeera (which is increasingly becoming the elite op-ed destination of the American Left, interestingly) I’m not sure the neo-imperial politics are especially relevant, just in this example.]Report

    • Avatar Kimsie says:

      America is bad at managing its debt? BWAHHAHAHA!

      Seriously, does nobody understand the concept of leverage?

      Take a very conservative investment strategy — a substantial downpayment on a house. That’s 5 to 1 leverage. (If you want to compare it against the current income, you’re looking at 3 to 1, or so).

      Seems to me like the current government debt of the united states is A THIRD of what we recommend people do as a Wealth Generation Device.

      The United States has a steadier income than most people these days, its debt is less than what many workers have. And, to top it all off, it’s using the leverage to create more income.

      Someone care to tell me what I’m missing?

      [Full Disclosure: am quite in favor of raising back to clinton tax levels. Just hate to see disinfo]Report

    • Avatar North says:

       I’d say what really differentiates the US from the Eurozone is that the US could very easily fix its financial problems versus the Eurozone can’t. If the US slashes spending and hiked taxes they’d have to do comparatively moderate amounts of both to balance the budget. That’d translate into lost votes and grumbling. The Eurostate on the other hand is looking at riots over the necessary cuts and their taxation is very clearly both being massively evaded and is already very high which means their options are badly limited. All those fundamentals are aside from the bonus ability of the US to print money and be the global reserve currency.

      Really the difference if the US’s budget chrisis is mostly artifically created by politicians while the Euro budget crisis is pretty fundamental to their entire system as it’s currently set up.Report

      • Avatar Kimsie says:

        … here i thought it was because of the global FIRE situation…

        am i wrong?Report

        • Avatar North says:

          With Europe? Yes. Greece was headed for this fiasco from the get go. The “FIRE” thing merely exposed the fact they weren’t wearing any swim trunks somewhat sooner than it otherwise would. The fundamentals were there from the get go and FIRE was mostly incidental to that: The Germans were getting a free trade market without having to pay money to the periphary to buy their German made stuff. The periphary was able to spend like (worse than) Germans without having to work like Germans. Borrowing and cooked government books made up the difference. This couldn’t have gone on forever. Either dissolution of the monetary union or closer political union had to happen.Report

          • Avatar Jesse Ewiak says:

            Well, I agree with you that the current situation of the Euro was doomed to  fail. You can have a free market area with multiple currencies or one nation with one currency, the mix we had in the EU was never going to work long-term.

            But, I’ll disagree with you that “overspending” was the problem. Ireland and Spain were running surpluses before the crash and even their debt as a total of GDP wasn’t all that bad. A massive recession changed things.

            But, what is happening now is a run-on effect. Greece went down first because they were a house of cards. As a result, everybodies interest rates went up and the ECB/German Central Bank refused to step in further. So, now Italy teeters. Not for any real reason, because if their interest rate was what it was in 2007, they wouldn’t have insane long-term problems, but at 7% interest, it’s much worse.

            However, the larger issue is that if this gets even worse is eventually all bonds are going to look bad. Even countries that have been “good” like Finland, Sweden, and even Germany.

            Now, one good kind of side effect is I can continue to laugh at people who seriously think the dollar is doomed/US Treasuries will collapse. Because right now, there is no other choice. But, it’s a sad ‘laugh as the world burns’ type of laugh.Report

            • Avatar Kimsie says:

              Jesse,

              of course the dollar is doomed. We ain’t the global economy power we used to be, and China is INSANE if they want their country’s wealth tied to America, with whom they will likely be at war with  within the next century.

              Still, that’s long term. For right now, there’s gold, and there’s treasuries.Report

              • Avatar Jesse Ewiak says:

                Um, what’s going to replace it as the reserve currency. An India still corruption filled and a bit chaotic? Authoritarian China which could fall apart in a short period of time if their engine gets stuck in third gear? Yeah, China may pass us in pure GDP, but there’s still stuck in the low 80’s when it comes to GDP per capita. Yes, if we continue to act stupid and spend a whole lot of money while having the lowest taxes in the OECD, we may be screwed.

                But the idea China is going to dominate the world while large chunks of it’s population is still in extreme poverty is scare tactics. Yeah, a growing China and India isn’t great for America, but it isn’t the end of the universe either.Report

              • Avatar Kimsie says:

                We may wind up using a basket approach, there may be no reserve currency at all. I don’t think if we had defaulted, that people would still be flocking to treasuries.

                And look at India — they put their money in gold and silver (mostly jewelry). That might be the future too.

                as for china remaining at the bottom… get back to you in a bit on that.Report

              • Avatar North says:

                I’m gonna go with Jesse on this. You don’t buy a billion barrels of oil with jewery and a hodgepodge of Canadians dollars and Israeli Sheckls. There’s an enormous financial demand for a reserve currency and the US is the only currency game on the globe at the moment. The Chinese are too poor, too corrupt and too dictatorial. The Russians are too corrupt and too moribund. The Euro right now is out, in the future it’ll depend on what they settle on. The rest of the currencies are simply tied to economies that’re too small.Report

              • Avatar Kimsie says:

                meh. You’re missing Japan, of course.

                http://hoocoodanode.org/node/11356Report

              • Avatar Jesse Ewiak says:

                Japan has a rapidly aging population, a stagnating industrial sector, and an interlocking political-industrial synergy that makes the military industrial complex look child-like. Oh, and it turns out a large portion of their country may be radioactive thanks to that little nuclear meltdown.

                All of that is with the caveat that Japan’s “Lost Decade” wasn’t really a lost decade, but more of a stagnant decade that only looks bad when you compare it to the previous decades.Report

              • Avatar Kimsie says:

                Jesse,

                you mean kinda like 2002-2010 for the United states?Report

              • Avatar Jesse Ewiak says:

                Pretty much. The difference is Japan is even worse off for the future due to their lack of immigration and their demographics. Also, the stagnation in Japan was better than ours in someways and worse in others. For example, growth was stagnant, but so were things like inequality and such.Report

              • Avatar North says:

                I think the radioactivity is overstated but Japan, while a big economy, is a very aging country which has only its people as resources and they very pointedly do not have an immigrant friendly culture or government. They’re going to be a nursing home country very soon, quite possibly the first nursing home country in fact. The certainly will be in no condition to be a reserve currency.Report

              • Avatar Kimsie says:

                …North,

                the radioactivity is both overstated and understated. I won’t be buying plum wine anytime soon. But the big concern is Demographic armageddon, and the projected infant mortality is concerning for a country that was already on the edge.

                Jews wouldn’t worry about such things… but Japan is far less diasporated. If their country dies, soon there may be no such thing as a Japanese race/cultural identity.Report

              • Avatar North says:

                Unless it’s banned I’ll be drinking plum wine eagerly. God I love that stuff.

                And even in the worst case scenario I don’t see the whole country dying. Fukashima was a nasty mess but it didn’t irradiate the whole country. I also still think that if their population density started really decreasing we’d see a change in their birthrates but only the future will tell us that.Report

              • Avatar Kimsie says:

                North,

                bear in mind this is the country that gave out government grants for television programs which promoted sibling incest. I think it’s safe to say that they’re already desperate to increase birthrate.

                I love plum wine too, but… radioactivity.Report

            • Avatar North says:

              Jesse, we don’t disagree very much actually. I was thinking primarily of Greece with what I said to Kimmie. Ireland is a real outlier, we have a country that was actually managing its spending very well that chose to essentially guarantee their banks even when they didn’t have to and suddenly realized just how bad that promise was. Ireland essentially leaped into a pond to save a drowning maiden and discovered that the pond was actually quicksand and the maiden was a three hundred lb hippo.

              But Greece was utterly inevitable. Accepting that the then collapsing house of cards also was inevitable following from that. The Greece debacle throws doubt onto the periphary bonds, the collapsing banks hike yields, hiking yields cause more defaults etc etc. I’d agree the recession exaberated that problem but there is a spending imbalance that has made most of the periphery countries unable to absorb the blow.Report

              • Avatar Jesse Ewiak says:

                Yeah, in short, we aren’t Greece. Hell, even with it’s problems, even Italy isn’t Greece.

                But, the problem with the spending imbalances, bailouts, and the like is sort of the underlying problem of the Euro in it’s current state. Other than some mutterings about subsidizing rednecks as they bitch about the government, hardcore libertarians, and people who really hate liberal state x. people really don’t mind we send more money to North Dakota than they pay in taxes. Or that essentially, some states paid a little more than others to bail out each other’s state governments in past stimuli.

                On the other hand, there’s connection like that in Europe, so we get what we’ve had in the past few months. The truth is, the ECB and the German Central Bank could’ve stopped this freefall. It still would’ve been bad and Greek might’ve still fallen since they were a terminal patient, but for some reason, they simply would rather face the economic consequences of a European collapse than the political collapses of a massive inter-European bailout.Report

              • Avatar Jesse Ewiak says:

                er, “there’s _no_ connection like that”Report

              • Avatar North says:

                Yes we’re generally on the same page on this. I agree.Report

  3. Avatar Kimsie says:

    All we can really hope to do is control the fall, and then inflate the hell out of everything.

    More inflation would be a fantastic idea right now, but the price of gold continues to rise (aka people aren’t confident in investing in real companies.)

    We’re seeing much less inflation than you might expect because the American Consumer’s wage has dropped by like 15% in the past ten years. We’re only adding population at 1-2%, remember?

    The american consumer drives the economy. Well, if you go with the idea that our government shouldn’t be allowed to spend money on teachers and all that crap (grannydoc wrote an excellent piece about the price for not paying for teachers.)Report

  4. Avatar Kimsie says:

    Financial Marshall Plan? And you aren’t talking about China? China’s been mushing that idea around its head for the past year or two — giving America a ton o fmoney tha twill just wind up back in china’s pockets.Report

  5. Avatar Kimsie says:

    Quote of the day:

    “German trade and currency imbalances are like economic terrorism. The Germans don’t need to ask for bailouts because they are parasitically sucking the economic lifeblood out of the periphery. The Germans are very, very stupid parasites”

    –yuan, from calc riskReport

    • Avatar North says:

      That’s a one sided spin on it, utterly inaccurate since it ignores the periphery’s half of this bargain.Report

      • Avatar Kimsie says:

        … you don’t think this is an instance of Germany rigging the game for itself? They’re gonna run away with most of the chips…Report

        • Avatar North says:

          If Germany does bail them out then they’re paying for it and they got nothing for free. If Germany doesn’t bail them out then they’re going to be utterly wrecked economically for the near future as their hyper strong currency plays Cain with their employment and as their banks take a pasting. And this is assuming that the newly non-unified periphary markets keep up free trade with Germany which is a BIG assumption to make and in my minds a foolish one. Germany hasn’t gotten away with anything yet and I don’t see a scenario where they do.Report

          • Avatar North says:

            Correction: One scenario where Germany gets away with something is if they get the IMF involved. If American and Asian bucks go into the bailout solution then to the extent that happens Germany has scored a coup (but it might still be worth the money to the Americans and Asians to avoid the global recession).Report

            • Avatar Kimmi says:

              try depression. reposting from mp @ hoocoodanode

              —CONJURECAST—

              As predicted, Europe is now in the throes of a financial crisis.

              Europe has one week–one week–in which to fix this problem, no more.

              No more excuses, no more can-kicking.

              If they don’t fix it, expect a global depression in 2012.

              Mr. Market, enjoy the cheap money fix.

              Thank you and have a nice day.”Report