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[Misan]

I'm grabbing a quote from a discussion on the Rote forums because it's excellent and relevant here. Mostly on the subject of the EU, though it applies to the US as well:

Yes and no.

The Euro has always been a Franco-German project. Historically, it has been those two states driving it forward and backing it monetarily (a significant reason for the UK not joining). On starting the Euro, France while smaller was still a 'core' country in the sense that the Euro's legitimacy derived from it. Then Germany's economy left France behind, and worse, people really thought so. then 2008, and we get to today where the Euro's legitimacy is wholly dependent on Germany as noone trusts France to be able to stand behind it. (Numbers are irrelevant here as this is mostly about political and market perception).

The Euro is a political project. Its sole purpose was to drive EU states towards fiscal and political union through monetary union (monetary union doesn't function without the other two, and the other reason the UK did not join). In a sense, the current crisis is designed in. The panic about the collapse of the Euro is because people no longer trust Germany's desire to continue with the project. The other 'AAA' states are economically not strong enough to support it (Netherlands, Finland et al because they're too small, France because it didn't keep up) and the states that had no economic basis for joining (lolgreece) fucked, and the intermediates (Spain, Italy) fucked by association.

Spain actually has one of the lowest debt:gdp ratios in the Eurozone. Italy has run past 90% debt:gdp as long as I can remember. The spread between Greek and German rates on soverign debt collapsed between 1999 and 2003 (implying that market participants were assuming an implicit Franco-german guarantee). That assumption is now under question so the markets are shitting themselves.

There is no necessary crisis (The Eurozone as a whole has a lower debt:gdp ratio than the US, and the collective deficit is also lower). However, there is a crisis in confidence (the implicit guarantee going up in smoke) and a lot of uncertainty.

You have to remember this: when bondholders are asking for guarantees, they're asking governments to say "you know the whole risk:reward balance? Rebalance the risk part so it matches our overoptimistic assumptions. Better yet, just scratch the whole risk thing". At the same time, governments encouraged that behaviour "oh you silly banks, you can hold soverign debt as zero risk weight collateral". That's notwithstanding the risk free rate use within the CAPM being extended and treated as real.

There's a whole bunch of other stuff. The tl;dr is the Euro does not need to be fucked, but the EU and democracy and markets being what they are, will dance along the thin red line for a while. I don't think the German political class is dumb enough to actually let greece default but I have no faith, no confidence, that that is the case. Which is what a lot of people think, (or think other people think) which is why things are so close to fucked. Just to put it in context: Germany alone could purchase every outstanding Greek bond at par (let alone market) and only feel lightly winded. It would barely notice purchasing on the open market, again notwithstanding that to stabilise things it only needs to provide a fraction of the total value.

Debt crises (especially soverign debt crises) are uniformly crises of confidence. Sometimes they're justified, sometimes not. But that is what they are (which is why the US stock markets shat themselves in 2008) and the Euro governments aren't dealing with that.

Real tl;dr: Neither the US or EU needs to be so completely fucked right now (we are a little fucked no matter what, but given 1999-2008, that's understandable). But their respective political classes and atmospheres are putting them in line for some serious pain.

Never thought I'd say this, but the Conservatives in the UK (and the last year of Labour) are actually providing a decent model. I disagree that the cuts here needed to be so severe so soon, but at least they've provided a credible plan and some certainty. The US and EU need to do the same.

[Kaleigh Doyle]

Love the post, Misan.

Well, I'm no economics major, but its pretty clear to me that most of the world was wholly unprepared for the consequences of a global economy and the kind of impact it would have when things go south..because things have been relatively stable since its inception.

http://en.wikipedia.org/wiki/The_great_depression

There have been "recessions" before this also. Capitlism has never been "stable".

Yep. There are certainly ups and downs. It's why professionals are interested in knowing what causes them so we can avoid the heavy down periods. I think the current problems are systemic, and what's worse is the current establishment of politicians lack the understanding/willpower to correct the problem.

[Invelious]

http://www.wired.com/rawfile/2011/10/political-hackathon/

Pretty cool article detailing some of the technical depth behind the encampment of the protesters. This is a solid indication of the dedication happening here. Awesome stuff!

[Z.Sinraali]

Dex. Fair enough. The question is why do you think that? Here I'm going to get into the technical crap and say that it's a question of what we econ types call marginal propensity to consume (MPC). If I give someone a dollar, what percentage of it will they spend, and what will they save? Depending on who you give the money to, that number will be higher or lower. Rule of thumb, the less income you have the less you save. So you have to answer the question, where does that money end up? Given any particular procurement program, some will end up in the hands of the workers and downstream suppliers, some will end up in the hands of management and the company's owners. That'll be a mix of high and low(er) MPCs. However, if you pay unemployment benefits or public worker salaries with that same pile of cash, the average will be higher. So looking strictly at direct stimulative impact, you're really better off giving it away, as long as you give it away to the right people.

Of course, there's other benefits like supporting those industries and such that may push you to support procurement. And to be honest, I'm all for making GSA's fleet more fuel efficient.

Kaleigh: I'm sure you understand this, but I want to make very clear that no serious economist anywhere will claim that you can escape the business cycle. You can nudge it around the edges and mitigate the highs and lows, but it'll be around forever. It's just how human psychology interacts with markets.

As for politicians, I'd say it's not so much them as the incentives our political structure puts into place, with its myriad veto points and the rewards that accrue to ideological rigidity.

[orange]

Dex. Fair enough. The question is why do you think that? Here I'm going to get into the technical crap and say that it's a question of what we econ types call marginal propensity to consume (MPC). If I give someone a dollar, what percentage of it will they spend, and what will they save? Depending on who you give the money to, that number will be higher or lower. Rule of thumb, the less income you have the less you save. So you have to answer the question, where does that money end up? Given any particular procurement program, some will end up in the hands of the workers and downstream suppliers, some will end up in the hands of management and the company's owners. That'll be a mix of high and low(er) MPCs. However, if you pay unemployment benefits or public worker salaries with that same pile of cash, the average will be higher. So looking strictly at direct stimulative impact, you're really better off giving it away, as long as you give it away to the right people.

Of course, there's other benefits like supporting those industries and such that may push you to support procurement. And to be honest, I'm all for making GSA's fleet more fuel efficient.

I prefer the exchange of currency results in a product being provided.  Altruism should be done on an individual level in my opinion.

[Myrhial Arkenath]

Except you shouldn't really judge the US as a single entity either.  *snip*

Well thanks for pointing that out, goes to show we don't know it all either. This is why I like the internet, get some local info from the people who do know.

On a somewhat related note, stumbled upon this while catching up on on wimp. Now it's just one guy saying that and generalizing, but hmm, something to ponder on.

[Lyn Farel]

I'm grabbing a quote from a discussion on the Rote forums because it's excellent and relevant here. Mostly on the subject of the EU, though it applies to the US as well:

Yes and no.

The Euro has always been a Franco-German project. Historically, it has been those two states driving it forward and backing it monetarily (a significant reason for the UK not joining). On starting the Euro, France while smaller was still a 'core' country in the sense that the Euro's legitimacy derived from it. Then Germany's economy left France behind, and worse, people really thought so. then 2008, and we get to today where the Euro's legitimacy is wholly dependent on Germany as noone trusts France to be able to stand behind it. (Numbers are irrelevant here as this is mostly about political and market perception).

The Euro is a political project. Its sole purpose was to drive EU states towards fiscal and political union through monetary union (monetary union doesn't function without the other two, and the other reason the UK did not join). In a sense, the current crisis is designed in. The panic about the collapse of the Euro is because people no longer trust Germany's desire to continue with the project. The other 'AAA' states are economically not strong enough to support it (Netherlands, Finland et al because they're too small, France because it didn't keep up) and the states that had no economic basis for joining (lolgreece) fucked, and the intermediates (Spain, Italy) fucked by association.

Spain actually has one of the lowest debt:gdp ratios in the Eurozone. Italy has run past 90% debt:gdp as long as I can remember. The spread between Greek and German rates on soverign debt collapsed between 1999 and 2003 (implying that market participants were assuming an implicit Franco-german guarantee). That assumption is now under question so the markets are shitting themselves.

There is no necessary crisis (The Eurozone as a whole has a lower debt:gdp ratio than the US, and the collective deficit is also lower). However, there is a crisis in confidence (the implicit guarantee going up in smoke) and a lot of uncertainty.

You have to remember this: when bondholders are asking for guarantees, they're asking governments to say "you know the whole risk:reward balance? Rebalance the risk part so it matches our overoptimistic assumptions. Better yet, just scratch the whole risk thing". At the same time, governments encouraged that behaviour "oh you silly banks, you can hold soverign debt as zero risk weight collateral". That's notwithstanding the risk free rate use within the CAPM being extended and treated as real.

There's a whole bunch of other stuff. The tl;dr is the Euro does not need to be fucked, but the EU and democracy and markets being what they are, will dance along the thin red line for a while. I don't think the German political class is dumb enough to actually let greece default but I have no faith, no confidence, that that is the case. Which is what a lot of people think, (or think other people think) which is why things are so close to fucked. Just to put it in context: Germany alone could purchase every outstanding Greek bond at par (let alone market) and only feel lightly winded. It would barely notice purchasing on the open market, again notwithstanding that to stabilise things it only needs to provide a fraction of the total value.

Debt crises (especially soverign debt crises) are uniformly crises of confidence. Sometimes they're justified, sometimes not. But that is what they are (which is why the US stock markets shat themselves in 2008) and the Euro governments aren't dealing with that.

Real tl;dr: Neither the US or EU needs to be so completely fucked right now (we are a little fucked no matter what, but given 1999-2008, that's understandable). But their respective political classes and atmospheres are putting them in line for some serious pain.

Never thought I'd say this, but the Conservatives in the UK (and the last year of Labour) are actually providing a decent model. I disagree that the cuts here needed to be so severe so soon, but at least they've provided a credible plan and some certainty. The US and EU need to do the same.

I mostly agree with it too, nice post.

Funny thing is I just checked the german public debt, and its over 86% of gdp now. More than France (82%), which means the only reason why people and politics consider germany as the only solid state is mostly due to their economy doing better because of exports. But at the same time they forget that even germans are under the same pressure than everyone concerning their debts. Fact is that maybe with the exception of northern countries one of the problems cited with the euro is the current strenght of the money, definitly not favoring exports while the US and UK are constantly devaluating their currency at the same time, making it harder for all exports in the euro area. Which put Germany in the light for their examplary economics based on strong exports.

And then they all go see if the grass is greener in China.

[Mizhara]

Not exactly unbiased reporting, but it seems like an interesting read nonetheless. Ditching credit cards? That has to hurt people in the 1%.

[Myrhial Arkenath]

Huh, how do people continue to buy things online without one?

That is my main gripe atm which seems to be pushing me towards getting a Visa (or other) card. In The Netherlands we had this great system called iDeal where you could instantly pay from your bank account, rather than the usual delay you face, which makes most online vendors restrict you to credit card only. The closest thing to it is using Paypal, and make sure there is a money buffer on that account, or alternatively when you want to buy something put the money on Paypal and then once it has been moved use it to pay online. A five day delay messes with things like one-day promotions in the Steam store though. And not all stores allow Paypal. Recently buying plane and Eurostar tickets online meant I had to poke my dad to do it for me, with his Visa card, and then bank transfer the money back. Do so many people like buy these things still in traditional ways? (I'm not even sure anymore how you buy them without the internet!)

[Lyn Farel]

Do so many people like buy these things still in traditional ways? (I'm not even sure anymore how you buy them without the internet!)

From what I gather you can still go the old way of the last century : go to the train station or airport and buy it on site.

[Mizhara]

Order by phone. Pay when you pick it up at the airport.

[lallara zhuul]

I use Visa electron, nowadays it pretty much works with just about every site.

[Z.Sinraali]

Never had a credit card, though I do have a debit card, which I'll grant still does make some money for Visa. (Less than previously, of course, given the provisions of the Dodd-Frank Act. But still.)

[Mizhara]

The fact that this was considered a need to be filled speaks volumes.

[Mizhara]

Very stirring, very well edited. My pulse definitely went up.