Time For More Eurofudge?
Published on: January 16, 2012
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  • Mrs. Davis

    I’d say it’s more duct tape than fudge. And while you can probably make an aircraft from duct tape that will fly, you can’t make a 747 out of duct tape.

  • Kenny

    ” … whose vision will shape Europe’s future,” the Ant’s or the Grasshopper’s??

    It the long run it has to be the Ant’s.

  • Tom Richards

    Kenny (#2) – On the contrary, the ants will continue to be ants, and the grasshoppers will continue to be grasshoppers, and in consequence “Europe”, construed as a monolithic entity, has no future.

  • WigWag

    I wouldn’t exaggerate the importance of an S&P downgrade. The rating agency downgraded U.S. debt and the market has been laughing in its face ever since. Since the downgrade interest rates in the United States have declined to historic lows and demand for treasury debt both long term and short term is greater than ever.

    Professor Mead misses what the Northern tier of European nations as well as Great Britain are all getting wrong. You can’t repair economic stagnation with austerity. Austerity makes things worse; as long as Europe thinks it can solve it’s problems by cutting government spending it will only be digging itself a deeper hole.

    The reason the American economy is on the mend is because Obama’s stimulatory policies, enacted over the objection of Republican nincompoops actually did what they were supposed to do; stimulate the economy.

    That’s why Obama’s political prospects look marginally better while Sarkozy’s are going down the drain.

    Obama also owes a big thank you to Bemjamin Bernanke who did a brilliant job while the ECB was failing miserably.

  • Andrew Allison

    With respect, I fear that wigwag is misguided. US debt looks good only in comparison to the alternatives.
    Furthermore, when you are broke, as most of the eurozone countries and US clearly are, austerity is the only alternative. Put simply, you can’t spend your way of a debt problem!
    Here’s a simple exercise: instead of looking at the relative values of currencies, look at them (and commodities) in terms how much of them you can get for an ounce of gold (or a barrel of oil, etc.)

  • Cromwell

    WigWag, how, pray, did Obama’s policies “stimulate the economy”? Such as it was, it was no more temporary transfer of largesse from the private economy to the mighty fortress of blue-state public sector unions. Private sector “job growth” of less than 200k/month doesn’t even cover new entrants to the labor force. We may have seen that once since Obama ascended to the White House (I am away from my Bloomberg and can’t check), but a month does not a trend make.

    Helicopter Ben did manage to recapitalize the banks via ZIRP — a 2% yield on a 10-year Treasury isn’t too bad if your cost of funds of 0.15%, or whoever the Fed Funds average has been since Sept 2008. But a bank recapitalization does not address underlying structural imbalances, which is why the ECB’s move to cut rates and offer funds via LTROs won’t help Europe one bit.

    And if the US economy is “growing” then why are Ben’s sock puppets on the Fed (Dudley, Evans, Yellen) preparing the markets for QE3 in the form of mass purchases of MBS? Because they know the economy is truly and totally stagnating, and the best disc the Administration can offer is class-warfare rebop that would embarrass a college freshman.

    I agree with you about austerity — it doesn’t work, and the subtext of S&P’s downgrade is that austerity in and of itself won’t “repair” the sclerotic Euro zone economies. Only pro-growth policies will do that. This is applicable to the US as well. Unfortunately, neither Merkozy nor Obama would know how to unleash the entrepreneurial spirits of the markets if it meant the firing squad.

  • Raymond R

    Maybe they should try an Nanaimo bar?

    see http://en.wikipedia.org/wiki/Nanaimo_bar

  • Yali

    WigWag (#4)austerity makes things worse? Perhaps in the immediate near-term, with the inevitable layoffs of career civil servants, but by shrinking the public sphere, there’s less crowding out of the private sector and market forces can restore to operability the ineluctible law of supply and demand.

    Economic vitality requires investments that pay real returns. That tends to get lost with governments, whereas the private sector doesn’t have the luxury of ignoring this reality. Western governments have – to borrow a phrase from Lady Thatcher – “run out of other people’s money.”

    But wait – there’s more! Not only have they run out of other people’s money, as Mark Steyn points out, they’ve run out of people. Fewer and fewer Europeans are opting to raise families, and if you were a bright kid in Italy, Greece or even Japan, would you stick around to pay off 30 years of greens fees for all the retirees? Or would you, perhaps, decamp for greener pastures?

    This is a huge problem, as Prof. Mead has rightly noted, and it’s not getting better any time soon.

  • Anthony

    “Standard & Poor’s on Monday stripped the eurozone’s bail-out fund of its AAA credit rating, potentially constraining its ability to contain the region’s debt crisis and focusing attention on efforts to create a more robust successor” (WRM’s fudging) – another firewall (ESM).

    17 and 27 are difficult numbers to work around….eurozone bonds are certainly going to further unsettle markets – Financial Markets.

  • Mike M.

    “Since the downgrade interest rates in the United States have declined to historic lows and demand for treasury debt both long term and short term is greater than ever.”

    Interest rates for American debt remain so artificially low because the Federal Reserve is still the entity doing most of the buying.

  • Luke Lea

    @WRM – “France wants the ECB and the currency union to look like the French state writ large: a strong, centralized authority that supports the big corporations and banks at the heart of the French economy, eliminates the interest rate differential between Germany and France, and accepts external devaluation and internal inflation as reasonable ways to solve chronic budget and adjustment problems.”

    Translation: France wants the ECB to have the legal authority to print money? If the alternative is austerity, then, yes, I agree. And in defense of WigWag even Martin Feldstein agrees. We’re all Keynsians in the foxhole. Robert Lucas said that,

  • Jim.


    Obama and Bernanke’s reaction to the housing crash looks a lot like Bush and Greenspan’s reaction to the dot-com crash. Were you cheering then? Should you have been? Bush prevented a major recession ten years ago, after all.

    Obama argued that he was handed a mess when the chickens from Bush/Greenspan came home to roost. Do you think he’s right to argue that? Easy money, low “teaser” interest rates (then on ARMs, now on 10-year T-bills, which can’t possibly be paid off in full when they come due, and so will be rolled over to whatever inflation-killing interest rate we will have in 2021).

    He’s pulling the same tricks, falling for the same temptations.

    Ironic, isn’t it, that Obama should turn out to be Four More Years of Bush.

    I wonder if we’ll survive the fallout, or if better yet we will be able to change course in time.

  • Otiose8

    Spending itself does not create value whereas production has the potential to do so. Government has a horrible record in picking viable economic enterprises to support – too easily politicized. Cutting government spending is the only viable pathway to getting a return to sustainable growth patterns. While in the short term it’s painful to cut government spending and refrain from useless stimulus programs it’s the surest way to reignite real growth.

  • Mahon

    WigWag: The problem with stimulus in a place like Greece is that you can’t blow up a balloon with holes in it. Money pumped into Greek banks winds up in Swiss bank accounts. Higher government spending goes into wages and pensions for marginally productive public employees. It’s not a question of austerity as such, but of seeing that the money that is spent goes to some proper purpose. The only answer to that may be to cut them loose and let nature take it’s course. (I still like the Northern Euro plan.)

  • Jacksonian Libertarian

    “France wants the ECB and the currency union to look like the French state writ large: a strong, centralized authority that supports the big corporations and banks at the heart of the French economy, eliminates the interest rate differential between Germany and France, and accepts external devaluation and internal inflation as reasonable ways to solve chronic budget and adjustment problems.”
    This is where the real problem is, France and the PIIGS have an insane economic policy which is failing. So why should Germany join in a failing policy, which they will have to pay for, and will cause them to fail as well? There just isn’t any room for agreement, and there isn’t any compromising with the losers of France and the PIIGS.

  • Jim.

    @Luke Lea:

    We are not necessarily all Keynesians. A terrible idea does not become a good idea simply because we can’t think of anything else to do. Blowing up the economy via excessive debt (a la Bush) was bad. Obama’s deficits are five times worse.

    As long as pumping money into the economy leads to either debt or inflation, it remains *a bad thing*.

    That said, I can think of one way of pushing liquidity in that might actually help.

    Step 1: Balance the budget via spending cuts. (Seriously.)

    Step 2: Pump dollars into the economy by **paying off our debts early**. Put a little premium on it, as a sweetener, even.

    This is the only way to preserve the public credit of the United States. Imagine if a bank said to you, “We’re going under, so here’s all your money back.” That’s what I’m suggesting.

    Deficit-based spending pushes the problem into the future, when interest rates will be higher. Repayment-based QE, on the other hand, eliminates the future problems even as it eases the problems in the present.

  • Nik

    Austerity due to lack of funds is OK, austerity due to crazy taxation chokes the market. You do not need a PhD in economics to see this.

    Tax led austerity is ruining us southerners. Yet German wind turbine salesmen are promoting their wares, which need more taxation and artifical tarrifs, ie more austerity, touting their vision of the “green economy”.

    As for the German economy being the only efficient one in Europe etc, yes, it is because for two decades it used efficient bribing to gain advantage. So spare us the ethics lectures please!

    The German surplus is everyone else’s deficit. But the market has its ways. German exports to the rest of the EE are down. The neighborhood grocer cannot keep getting rich when all the neighbors are impoverished. It will dawn on them at some point.


  • Buster Bunns

    Someone needs to start thinking outside the box. Hopefully it will be the Germans. They need to initiate secret talks with Sweden, Norway, Denmark, Luxembourg, Austria, Holland and Finland and come up with an alternate Nordic Union – each with their own currency – that practices free trade, low taxes and tight monetary policy. As for the rest of Europe, they are on their own. The UK and Ireland can look to the US. The Latin South to France and the rest to the creation of some kind of Slavic/Magyar block.

    Nothing will change until change is forced upon then. It is now time for the Germans to move.

  • Brian B

    Poor wigwag.
    Keynes wasn’t concerned about the long run and of course now he’s dead.
    Unfortunately goofs like you keep trying to reanimate the corpse of his dead economic theories as well.
    Government spending is always and everywhere a drag on the real economy. It’s amusing how today’s Keyensians describe austerity as only spending cuts when in fact the hopeless IMF style austerity almost all countries use combines spending reductions [good] with massive tax increases [bad to the point of insanity].
    Why is it Keyensians seldom consider or discuss the tax increases as the culprit when austerity fails?
    The fact is when taxes AND government spending are both slashed as Harding did in the early 20’s the result is a boom in the short and long run.
    That’s the austerity the world needs, especially the bloated overtaxed sclerotic Euros, but the US as well.

  • ed

    Mr. Wig Wag

    Interest rates in the US have not been determined by the markets since the Obama admin breezed into Washington.

    The Fed, through QE and QE II have artificially depressed rates as a means of reviving the markets, specifically the housing and mortgage markets.

    There will be a price to be paid for the luxury of deferring the pain of past fiscal irresponsibility, likely when the next presidential admin brings a little sanity to federal monetary and fiscal policy.

    Don’t you remember 1981-1983?

  • JLK

    Dr Mead

    I notice the usual back and forth about the effectiveness of “aausterity” vs “Keynesian” govt stimulus.

    What everyone is missing is TIMING. You cannot force austerity on economies that are already shrinking; such as Greece. By doing that the results have been an accelerating downward spiral of GDP to the current minus 6-7% annually. Thus the national debt increases thru GDP shrinkage making it impossible to “shrink” your way to prosperity.

    That said austerity or at least sane fiscal policies have to be followed when the economies are healthy enough to withstand this type of buffeting.

    And yes I know that govts will never follow this advice as it is to easy to spend when times are good and austerity only comes when forcxed on them when times are bad.

    Lastly for the person that said downgrades don’t matter because the US bond markets ignored S & P’s silly statement. You are not accounting for the SIZE and IMPORTANCE of the US economy vs France. It is much easier to take down the much smaller French market than the huge and massively liquid US market. So in the case of France downgrades do count. Also the US can print money..France cannot. They are dependent on an independent authority to monetize their debt.


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