Bellwether

The Wheels Coming Off The Wagon: Athens, May 2010

[A quote from The Great Curmudgeon, unexpurgated:]

The Madness Of Central Bankers
While they never put it in this way, it of course makes sense for elites to be concerned about tiny upticks in the inflation rate rather then the human suffering of millions of people out of work. A bit of unexpected inflation might erode their fortunes a bit, and if the rest of us have to live in vans down by the river so be it.

The basis for this post was (via the link) discussion by Matthew Yglesias that "the European Central Bank could take decisive action to avert disaster in Europe but almost certainly won’t for no real reason".

Analysts had hoped the ECB might use its almost limitless ability to create money to stanch the crisis (something our own central bank, The Fed, has done here), though doing so could hurt the long-term credibility of the European Central Bank as an inflation fighter that does not yield to politics.

"But I’ve witnessed" (Yglesias goes on), "a prominent European central banker state, live and in person albeit off the record, that the purpose of central bank independence is to allow him to 'fight inflation, regardless of the human cost.' "

"You or I [Matt says]... or someone who’s not a sociopath might say the point of central bank independence is to allow to him pursue technocratically sound monetary policy that advances the long-term interests of the people of Europe. But that’s not necessarily how they see things in Frankfurt. The madness of the European Central Bank is, in my view, the most underexplored and underappreciated aspect of the crisis thus far. The Eurozone, not the United States, is the world’s largest economy and the Eurozone, not China, is America’s largest trade partner."

He's got that right.

UPDATE: I haven't said anything about why the Greek financial crisis is important. And, in brief (very hard, for a dog), here it is (Click on image to enlarge -- Nett und Spass für dich !)

Comparison Of Greek And Eurozone Financial Key Data

>> Greece is part of the Eurozone, the common financial and trading system supporting the European Union. The Euro is its common currency, and the current Greek debt crisis threatens its stability;

>> There is a European Central Bank (ECB), acting much as the Fed does here in the U.S. by arranging loans or financing for member states. This is what's been happening over the past few weeks as the ECB arranged a loan package which includes funds from the International Monetary Fund (another super-bank), and member EU states, like Germany;

>> The IMF-ECB loan package will cover payments the Greek government must make on loans it already holds -- but the loan comes with conditions: Accepting the loan will force Greece to balance its budget and reduce its National Debt, which is equal to 125% of Greece's GDP;

>> There will have to be job cuts and service cutbacks in a country where over 30% of the workforce are in civil service and many public services are taken for granted. The Greek standard of living, expectations for income, vacations, buying foreign goods, will have to be lowered;


Greece's Largest Union Marches In Athens Earlier This Week

>> The Greek on the street is not happy with any of this -- not with their government, not with the EU. There have been strikes and riots over the past few weeks; just a few days ago, crowds set fire to several banks around the country, killing two bank employees in the process. The Greek Communist Party has agitated heavily for support in the past few months;

>> If the Greeks cannot balance their national budget, and default on any outstanding loans (or later default on payments for this IMF-ECB loan package), they may have to drop out of the Eurozone;

>> This means they will no longer use the Euro as their principal currency, and return to the Drachma -- which will not be valued very highly. This can destabilize the entire Eurozone... and much like the interconnected Wall Street investment bank community which were all doing deals with each other, the problems of one Eurozone country can affect all of Europe;

I agree that Europe and the EU is America's largest trading partner. If they suffer, if their economies falter and stock exchanges have selloffs that force EU businesses to fire workers and reduce production, the U.S. will get hit with that as well -- just as we were trying to crawl out of our own terrible Great Recession.

Another fact about Greece's circumstances we should be paying attention to, here in the United States, is what happens when a nation's public debt becomes larger than the value of its domestic goods and services (Gross Domestic Product, or GDP). It generally ends in catastrophic financial collapse, hyperinflation, and a devaluation of its currency -- along with potential political upheavals (revolution, or a coup d'etat).

Paul Krugman, Nobel laureate and general good guy, had this observation to make in the New York Times this morning. He doesn't paint a rosy picture:

So how does this end? Logically, I see three ways Greece could stay on the euro.

First, Greek workers could redeem themselves through suffering, accepting large wage cuts that make Greece competitive enough to add jobs again. Second, the European Central Bank could engage in much more expansionary policy, among other things buying lots of government debt, and accepting — indeed welcoming — the resulting inflation... third, ...fiscally stronger European governments could offer their weaker neighbors enough aid to make the crisis bearable.

The trouble, of course, is that none of these alternatives seem politically plausible. What remains seems unthinkable: Greece leaving the euro. But when you’ve ruled out everything else, that’s what’s left.

If it happens, it will play something like Argentina in 2001, which had a supposedly permanent, unbreakable peg to the dollar. Ending that peg was considered unthinkable for the same reasons leaving the euro seems impossible: even suggesting the possibility would risk crippling bank runs. But the bank runs happened anyway, and the Argentine government imposed emergency restrictions on withdrawals. This left the door open for devaluation, and Argentina eventually walked through that door.

If something like that happens in Greece, it will send shock waves through Europe, possibly triggering crises in other countries. But unless European leaders are able and willing to act far more boldly than anything we’ve seen so far, that’s where this is heading.

As the Curmudegon and Matt Yglesias pointed out, the European Central Bankers don't want to risk any inflation. And that decision, while it protects a small group of Owners and Masters Of The Universe, may put the structure supporting the Euro at risk -- and, ultimately, the EU itself. And because Europe is our largest trading partner, all that will wash up on our own shores, as surely as millions of gallons of BP crude in the Gulf.

But I'm only a Dog, and no one listens to me.

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