Apocalypse Later: The End of Europe Has Been Delayed Indefinitely
theatlantic.com
theatlantic.com
This article points out something I hadn't seen before, which is one way in which the unified currency may still end up somehow achieving its goal of unifying Europe: as the strong, fiscally-responsible states bail out the weaker ones, they get to dictate policies in those states as conditions of the bailouts. Politically, the bailed-out states will start aligning more with European interests compared to purely self-interested ones.
It's not the best way to achieve European unity, but it has some advantages. On the one hand, it's a little unfair that Germany gets to strong-arm Greece into doing what it wants, because it's an involuntary loss of sovereignty. On the other hand, it seems like a decent heuristic that the states with the strongest economies get more power to make economic decisions. How well that works out for Greece in the long run depends on the politics and alignment between what's good for Germany, what's good for Greece, and what's good for Europe as a whole. I assume the EU will be making sure German bankers don't simply pillage Greece's economy for decades.
History has shown us that wealth is transferred, not created. And sometimes it's multiplied (when we switched from gold to debt / fractional reserves), but again, never created.
Due to this, the stronger players tend to import the benefit from and export the pain into the weaker players, as that is the only play there is to make.
And then the cycle repeats itself where the rich players get richer and the poor players get poorer until some major event happens (global war, industrial revolution, energy discovery) and things get shuffled a bit).
I'm not sure that part is true. I do believe there is more wealth today worldwide then say in 1700.
If you can't answer that, then it is a result of multiplication rather than creation.
Wealth is a relative term and has remained about the same through time... There are those that are "rich", there are those that are "somewhat comfortable", and there are those that are "poor"...
The amount each group has is irrelevant.
Wealth is about the purchasing power of relative standards of living (between the different groups).
There are ~750 million automobiles in the world today. In 1700, there were none. Thus there is more wealth in the world today (on that one dimension; others similarly).
The amount each group has is irrelevant.
Umm.
Imagine the edge case at the very beginning of civilization. There are two families, and for illustrative purposes they both spend 100% of their time farming without tools, and live in caves.
One day, someone invents the hoe. Let's imagine that this saves both families 50% of their farming time. Now they are each able to build a home, instead of living in a cave.
The families use a currency to trade crops, and there is a total of $100 in the world, $50 for each family's output. One of two things happened here, but they're pretty much the same thing:
- If we hold the money supply as fixed (saying wealth is zero-sum), then the price of the crops would go down, since we can now buy houses with our money too.
- If we hold the price of the crops fixed, then there is now more money/wealth that exists in the world.
It doesn't really make sense for the price of crops to go down -- they're the same thing that existed yesterday. It makes much more sense to say that there is more money in the world. Regardless, wealth was created.
It's a lot more complicated in our currently economy because there are a lot more moving parts, but the fundamentals still apply. Take something that used to take a lot of time and make it take less time and you'll have created wealth. People can now use the extra time they have to go be productive elsewhere in a way that benefits people.
Going back to your comparison about rich/comfortable/poor, you're not arguing that wealth is zero-sum, you're arguing that there has always been wealth inequality. But the presence of wealth inequality doesn't imply that wealth is zero-sum: wouldn't you say that even today's poor Americans are wealthier than the richest Sumerians?
If you want to go that route then boil it down even further and you'll get "well-being" and/or "self-validation".
> wouldn't you say that even today's poor Americans are wealthier than the richest Sumerians
In my argument wealth has always been a relative term, never absolute.
It is about what you are trying to achieve for yourself/ego, which in the human psyche is always relative to the other person. This connection cannot be disputed, you can only dispute the first part...
So is wealth an extension of the ego, or is it a database entry?
I'm claiming that it is the former, since so many people experience it as such.
You are claiming it is the latter.
You can purchase more things that take a lot of time to make, and you can not worry about money issues, but you can't buy happiness.
I'm not sure if there is more global happiness today than there was in Sumerian times; I would imagine there is. As you mentioned though, happiness seems to be relative, so it's pointless to complain about since it's a fundamental human limitation.
"The fact that most people imagine it would be paradise to never have to work does not make the experience any more pleasant in practice." -- http://www.theatlantic.com/magazine/archive/2011/04/secret-f...
Not at all.
Wealth is not a zero-sum game. The new houses built have added actual value, its just that the amount of money to distribute is limited leading to the appearance of the price of crops falling. This is called monetary deflation, the value of the money itself has gone up since there are more things to buy (demand) while there is a fixed amount (supply).
I would argue that the new houses add value. even though I feel that satisfaction is a good measure of wealth and not precisely quantifiable, happiness(Man with house + crops) - happiness(Man with cave + crops) > 0. In short creating wealth. (Some people might argue, his total happiness is a constant and its just dependent on more things now "Simplify Man" http://en.wikipedia.org/wiki/The_Old_Man_and_the_Lisa)
Exactly. By having a single currency weaker economies were propped up at the expense of stronger economies, (yep, this is Germany, esp now); in essence, promoting economic mediocrity. Had the respective economies been similar in strength in regard to each other it would have been more feasible. But now it's too late for that. The Euro happened. In the long run, the Euro failing could be a good thing. By this I mean that those economies more capable might fair better however those that aren't, not so much. If they can escape debt (a Grecian default for instance) and then focus on rebuilding a sustainable economy, that in the long run would be more healthful. For now it's been put off, left for tomorrow, so to speak.
1. The European establishment decreed that no sovereign in the region would ever default on its debts and backed that decree up by allowing banks to hold the debt without allocating capital against it. This was the European equivalent of US rating agencies rubber-stamping toxic mortgage securities with a AAA rating.
2. Member states have been allowed to cheat outrageously on the Masstricht treaty criteria, even before shenanigans like Greece window-dressing its numbers by disguising some debt as currency swaps, without much enforcement.
If these errors hadn't been made, they probably wouldn't be in a situation in which member states were allowed to paper over their problems with cheap credit while digging the entire continent into a very dangerous hole.
By the way, I don't think that a fixed maximum deficit requirement, independent of the external conditions (eg the 2008 crisis...) is such a good idea. But at least during normal times it should have been applied.
Athens has run irresponsible deficits for a decade
on top of an economy operating at a fraction of
the productivity of Germany and France. If it were
in control of its own currency, the solution today
would be simpler. It would print more money to
depreciate the currency until the value of goods
fell relative to trading partners, which would
grow exports. But Greece doesn't control its own
currency. It's stuck with the euro, which bought
ten years of low borrowing costs at the price of
three years (and counting) of difficult, if not
impossible, adjustments.
Now, if the currency was based on a commodity that has no value, then maybe your argument makes some sense, but precious metals were chosen specifically because they are valued irrespective of their role in currency. Besides, if an enormous amount of gold was discovered, sovereigns and governments still had control of the currency through debasement.
"Congress passed the Gold Reserve Act on 30 January 1934;...The act also authorized the president to devalue the gold dollar so that it would have no more than 60 percent of its existing weight. Under this authority the president, on 31 January 1934, fixed the value of the gold dollar at 59.06 cents."
http://en.wikipedia.org/wiki/Gold_standard
debasement even happened when actual phisical coins made from precious metals were being used:
"Throughout history, governments have been known to create more coinage than their supply of precious metals would allow. By replacing some fraction of a coin's precious metal content with a base metal (often copper or nickel), the intrinsic value of each individual coin was reduced (thereby "debasing" their money), allowing the coining authority to produce more coins than would otherwise be possible. Debasement sometimes occurs in order to make the coin harder and therefore less likely to be worn down as quickly. Debasement of money almost always leads to price inflation unless price controls are also instituted by the governing authority, in which case a black market will often arise."
Also, the harsh measures which are necessary now could actually go some way to restoring the imbalances in the Greek public finances, whereas devaluation is just kicking the can down the road.
I would personally be moving my money to a bank somewhere beyond the reach of the Greek government if I were them.
Interestingly, it's also a refutation of BitCoins as a currency. They actually make a very good commodity, but they're useless as a currency. The very scarcity that gave them perceived value in the beginning has led to the hyper-deflation that now makes them unsuitable for commerce. If they could be granularized (so you could pay 150 mBC), then they might be worthwhile. When the smallest transferable amount is $10, however, they kinda suck.
Jim Grant has been calling for a return to the gold standard. He is the publisher of Grant's Interest Rate Observer, which is a very serious publication widely followed by professional investors.
http://online.barrons.com/article/SB500014240527023033924045...
* What is the debt as a fraction of GDP?
* What is the interest rate on the debt?
* What is the growth rate of the economy?
* What was the debt incurred to finance?
If a large public debt finances critical public infrastructure that will promote rapid economic growth and interest rates are reasonably low, the country will be in a situation where the economy is growing faster than the debt and the debt-to-GDP ratio is going down. That's a good situation to be in.
So German banks and the export industry, the two entities with the biggest lobbies, get subsidized with tax money. The weak countries won't ever develop their industries and become competitive.
What is your view?
If Germany was to revert to the Deutsche Mark, or a Euro made up of strong European economies (for example, Scandinavia, Germany, Low Countries, Austria) their currency would appreciate and hurt exports and industry.
German politicians simply think the cost of bailing out Greece will be less than the cost of a strong currency.
I don't know economics, I'm really asking.
Not yet, and probably never.
...
If Europe can't save Greece, why is it trying?
Don't buy this line of reasoning, Greece must be saved or all of Europe is in a for a very difficult period, economically. If the Greeks are allowed to give creditors a haircut, the first thing that any sane (if slightly rapacious) investor/trader (of which there are more than enough) should do is to start shorting the Italian and Spanish bonds, buying credit default swaps on them, and shorting the Euro. Once the seal is broken and one sovereign entity is allowed to default, it becomes obvious that a sustained speculative attack would drive interest rates high enough to force the larger Southern European economies into default as well. The whole thing would play out in a fashion similar to the exit of the British government from the European exchange rate mechanism in 1992 except that the scale is much larger and the global financial sector has more numerous and powerful tools at its disposal.
Europe will play the "austerity" game for a bit (cut this & that, raise taxes, etc), but it will only kill economic growth and make the problem worse.
Inevitably, the "social contract" will be broken. Current working age generations are not willing to live with both "ruinious taxation" AND government "austerity" -- just to maintain the status quo of retiree benefits and government largess.
Old people might vote....but young people fill streets and use firebombs
The guarantees are basically possible, but they are still optional.
Whatever the ESFS contract says, and whatever the EFSF Bureaucrats might decide: before any real money flows from Germany to Greece, the German parliament (or a parl. committee) will have to approve this a second time.
Hyperbole, perhaps. Ridiculous, no.
If the collateral (Greek, Portugese, Irish, etc bonds) defaults, not only do the banks take a huge haircut on their capital, but they also get margin calls on their leverage that they can't pay. Boom, bankpocalypse.
The German government knows this, just as the US government did, which is why they too will proceed with the bailout despite citizens' vehement opposition and at the risk of losing their next election. The alternative is something that, once it occurs, can't be undone easily, and which most citizens would probably regret once it became real.
I'm sure there are tons of details I'm missing, but haven't been following this as closely the past two years. But that's one American's take on it, fwiw.
From an American perspective, somebody--Germany, most likely--needs to step up and take decisive, perhaps even unilateral action, and do so sooner rather than later.