Distractions, distractions…

By skepticlawyer

While the country was (is) entertained (ish) by News Ltd shenanigans, pie chucking in parliament and Wendi Deng coming out as one of the Charlie’s Angels, the Euro has been slowly tanking. There are now fairly short odds in various places that the whole thing will go belly-up, or at the very least the weaker economies (Greece, Portugal, Spain, Ireland) will crash out of the European Monetary Union.

While I quite like the idea of the European Union as a handy free trade club, I’ve always thought that the single currency was a very bad idea, and that one of the few good things the Blair government did (admittedly under sufferance thanks to intense pressure from the electorate) was keep Britain out of it. Dodging a bullet and all that.

There has been some good (if limited in quantity) commentary around the traps (everything has been overshadowed by the Murdochalypse), including this thoughtful piece on just why the Euro seems to be worth so much relative to (at least some) other currencies:

A great number of readers have asked how the euro can possibly be so strong given the existential crisis engulfing Euroland.

Let me have a stab at this paradox, noting on the way that the strength of the euro depends entirely on your vantage point: the euro has crashed against the Swiss franc, Brazilian Real, and Japanese yen over the last two years, and is weak against the Aussie, Canada’s Loonie and the Singapore dollar.

The euro is strong only against other deadbeats such as sterling and the dollar (China’s yuan is linked to the dollar in a dirty float, so that rate is rigged), currencies of central banks that are pursuing a policy of deliberate debasement to prevent Fisherite debt deflation.

As they say, read the whole thing (and weep), because this is going to get worse before it gets better.

31 Comments

  1. Patrick
    Posted July 21, 2011 at 8:53 am | Permalink

    As an EU-sceptic and hater of socialists, I for one can’t wait…Greece two-year bonds traded at nearly 40% yield yesterday, youth unemployment in Greece Spain and Portugal is around 40%…I hope you still have AUD assets SL!

    Popcorn anyone?

  2. Posted July 21, 2011 at 12:05 pm | Permalink

    [email protected] – I think Sir Humphrey said the UK was in the EU to make sure it was a mess. Pissing into the tent from the inside as it were.

    Personally, I’d reckon the North should kick out the South, at least over the currency. The Economist said a few years back that getting Italy out of the common currency would be good for Italians and the Franco-German alliance. The natural union IMHO is basically France and Germany then NorthWest without crossing the Channel, with France perhaps the weakest economic link, the bulk of the others being value-add economies with similar philosophical outlooks. (A Hanseatic League on Steroids springs to mind).

  3. Patrick
    Posted July 21, 2011 at 1:22 pm | Permalink

    What is a ‘value-add’ economy? And why isn’t Britain one?

  4. kvd
    Posted July 21, 2011 at 1:55 pm | Permalink

    Patrick, all of this started when Ireland abandoned the Punt, and went for the complete ruckup.

    I just can’t see the problem here. Why don’t they, and Greece, Italy and Portugal band together, and guarantee the US debt, and in return the USA cover theirs? We all know neither side ever has any intention to ever repay any of it, so let’s just cut to the chase, and get the paperwork right – just this once.

  5. Patrick
    Posted July 21, 2011 at 2:46 pm | Permalink

    Because the US doesn’t have a debt problem, kvd, whereas the other three (as well as Spain and France) do.

    The US has a relatively reasonable debt burden.

  6. kvd
    Posted July 21, 2011 at 3:11 pm | Permalink

    [email protected] that reminds me of the old saying about borrow a dollar, you’ve got a problem; borrow a million, your banker has a problem. Or something like that. On this basis you are correct: the US does not have a debt problem.

  7. Posted July 21, 2011 at 3:13 pm | Permalink

    The US is not even in the top 25 of indebted countries (measured by public debt/GDP), thought its debt is understated as the figures do not include State debt..

    The common response to a lot of American economists to the Euro-travail (from Krugman down) is “we said it was a bad idea at the time”. But the Euro-arrogants are so used to riding roughshod over consequences, they thought they could make this work in a Triumph of the Will.

    The EU as free-trade zone which you have to be a democracy to join has done much genuine good, Beyond that, it represents an amazing example of drawing exactly the wrong conclusion from history. Treating the two World Wars as the results of the disease of nationalism, they thought the cure was supranationalism.

    Actually, both World Wars were the result of irresponsible power. So, what do the Euro-arrogants build? Another structure of irresponsible power where the lack of accountability to electorates is a feature, not a bug.

    Supranationalism — the global export of the democratic deficit — is another Bad European Idea. Not as bad as Leninism, Fascism or Nazism, but still a diseased notion. It is hard enough to make power accountable without inventing new ways to avoid accountability.

  8. Posted July 21, 2011 at 3:20 pm | Permalink

    SL: that is a good piece, Ambrose Pritchard is correct, the ECB’s tight money policy is madness. But, then, who is the ECB actually accountable to?

    And Gordon Brown was a disaster. Western politics seems to boil down to a choice between “California” or “Texas”. For all its flaws, at least “Texas” works.

  9. Patrick
    Posted July 21, 2011 at 3:26 pm | Permalink

    No, kvd, the US just hasn’t borrowed that much money. It seems like a lot but that is only because the US is so damn big.

  10. kvd
    Posted July 21, 2011 at 3:47 pm | Permalink

    [email protected] ‘not even in top 25’ – that table is sortable. Sorted by “IMF” as opposed to “CIA, Eurostat” it is 11th. Irrespective – in both table views (excluding Japan) the USA is exceeded in omni-impotence by a gaggle of very minor nations, plus all the Euro nations this present impasse is concerned with.

    % of GDP rolls off the tongue as some sort of reasonable measure – except Saint Kitts, Zimbabwe, Jamaica and Sudan aren’t really in the same market places as the US – are they?

    I am not comforted by the fact that the US has less indebtedness (%GDP) than Zimbabwe, and I would be very (very) surprised if you were.

    [email protected] words fail. What actually is ‘so damn big’ about the US today? Apart from the indebtedness, I mean.

  11. Posted July 21, 2011 at 4:09 pm | Permalink

    [email protected] The table in this Economist article provides support for your perspective. Of course, as the article notes, public debt levels were astronomically high just after WWII.

    Still, Japan is a big country too, and is much more indebted with much worse demographics. And, as the Economist article also notes, the yield rates on US government bonds are still low.

    Moreover, the US seems close to a fairly amazing budget deal, if the House Republicans can settle for much of what they want instead of faux-ideological “purity”.

  12. Posted July 21, 2011 at 4:10 pm | Permalink

    There are different ways to drown in debt. The Europeans have achieved it through bloated welfare states and bloated states full stop, the Americans by playing world policeman and managing to cock up healthcare in really expensive ways. Plus a lot of the individual states are badly indebted (as Lorenzo has already pointed out).

    I’m not very sanguine about anybody at the moment, and I do wish Obama and the Congress would stop playing ‘chicken’ with each other, it’s scary for the rest of us. FWIW I suspect they will both have to raise taxes and cut government programmes (which will make everybody involved about as popular as cancer).

  13. kvd
    Posted July 21, 2011 at 4:26 pm | Permalink

    Well said 12 and 13. Particularly the comment about different ways of drowning. Which is where we are.

  14. Posted July 21, 2011 at 4:48 pm | Permalink

    [email protected] It is looking good to be an Australian rather than a Brit or Yank. (Our bizarre house prices aside.)

    Which makes the Poms voting for their first-past-the-post system as leading to more responsible government pretty silly. I like preferential voting: it anchors results more in public opinion and gives voters more choices.

  15. Posted July 21, 2011 at 4:56 pm | Permalink

    How the world has changed. The words of A J P Taylor seem apposite:

    Until August 1914 a sensible, law-abiding Englishman could pass through life and hardly notice the existence of the state, beyond the post office and the policeman. He could live where he liked and as he liked. He had no official number or identity card. He could travel abroad or leave his country for ever without a passport or any sort of official permission. He could exchange his money for any other currency without restriction or limit. He could buy goods from any country in the world on the same terms as he bought goods at home. For that matter, a foreigner could spend his life in this country without permit and without informing the police. Unlike the countries of the European continent, the state did not require its citizens to perform military service. An Englishman could enlist, if he chose, in the regular army, the navy, or the territorials. He could also ignore, if he chose, the demands of national defence. Substantial householders were occasionally called on for jury service. Otherwise, only those helped the state who wished to do so. The Englishman paid taxes on a modest scale: nearly £200 million in 1913-14, or rather less than 8 per cent. of the national income. … broadly speaking, the state acted only to help those who could not help themselves. It left the adult citizen alone.

    A different world. In the developed world, citizens pay dearly for a great deal less liberty than they used to have.

    If you were white, male and straight … But, of course, so much improvement for the latter has been about getting rid of restrictive state actions.

  16. kvd
    Posted July 21, 2011 at 5:01 pm | Permalink

    [email protected] yes, except for what I think DEM (?) said elsewhere about FPTP anchoring MPs to their electorates. That rang true, as opposed to our ‘parachute’ members, decided by H.O. rather than the people they are supposed to represent.

    Apart from that, (and house prices, and Kevin Rudd’s left ventricle, and Alan Jones) I like preferential voting as well; except it keeps putting up people up with whom we should not have to put.

  17. kvd
    Posted July 21, 2011 at 5:07 pm | Permalink

    Yes it was [email protected] on ‘Stop The World’; went to check because it seemed like a ‘true truth’ as opposed to an unknown unknown.

    Lorenzo, whichever country you’ve just described, I’d like to move there at once.

  18. TerjeP
    Posted July 21, 2011 at 7:53 pm | Permalink

    I’ve always been a big fan of the common currency. I’d like to see a common global unit of account as with the 19th Century gold standard. A common currency would be one way to achieve that.

    The problem with the Euro is that the European Central Bank isn’t sticking to monetary policy but has involved itself in the fiscal policy concerns of individual governments and in issues of solvency for private banks. The problem is they they are a central bank with all the ambiguous objectives that entails and not a pure monetary authority. That is a weakness of the Euro construct however it need not be it’s undoing if sanity prevails. However letting Greece default does not seem to be something they can tolerate and they should. Default will be painful and the knock on effects could be widespread but after the correction things will bounce back quickly if there is open trade, a sound currency and no tax hikes. Default is better than austerity.

  19. Posted July 21, 2011 at 10:19 pm | Permalink

    [email protected]: said “I’ve always been a big fan of the common currency. I’d like to see a common global unit of account”

    OK mate … sit down … draw a deep breath … on this economic issue … I agree. (ok… apart from the bit about no tax hikes).

    The only problem is who administers a global currency… and, um, would you actually need reserves? And if not, why not just give everyone on the planet 10k “Terjes” and let’s see were the capital goes and what is done with it.

  20. Posted July 22, 2011 at 6:23 am | Permalink

    It gets worse:

    http://blogs.telegraph.co.uk/news/peteroborne/100098260/this-crisis-will-give-germany-the-empire-its-always-dreamed-of/

  21. Posted July 22, 2011 at 10:34 am | Permalink

    [email protected]: Deutschmarks, Deutschmarks über alles!

    (Wish I had the links, but I recall this being mentioned quite strongly over at places like The Economist and/or VoxEU)

    Personally, if the Germans were telling the south what to do economically, I reckon everyone would be better off. The old East Germany cost a lot of money to get sorted, but the old West Germany didn’t do that bad a job.

    Germans running things would also be seen as a great victory for more principled capitalism because hegemony wouldn’t be enforced by lots of big guns (unless the germans go all goose-steppy and militaristic again, which they probably won’t do as it would offend everybody including themselves, and the germans have got MUCH more sensible things to do with their money)

  22. Posted July 22, 2011 at 11:26 am | Permalink

    There are different ways to drown in debt. The Europeans have achieved it through bloated welfare states and bloated states full stop, the Americans by playing world policeman and managing to cock up healthcare in really expensive ways. Plus a lot of the individual states are badly indebted (as Lorenzo has already pointed out).

    Bang on the mark SL. I saw an interview with Ron Paul, the Libertarian candidate, last night. He stressed the need for the USA to end militarism but of course Congress won’t do that. He did make an interesting comment though – he receives many letters of support from overseas troops, he inferred from this that they knew what was wrong with sending troops all over the world. Additionally, it seems that in the younger age brackets libertarianism is gaining ground in the USA.

    I think most honest observers are puzzled by why the USA continues to spend so much money on militarism. It is a huge drain on their budget and serves no obvious purpose other than to scare nations. Ironically the USA has an almost ideal geographic location to defend itself, stuck between two huge oceans so it is not like they are going to be easily invaded. Unless of course those evil Canadians have something in mind(cue South Park!).

    Welfare in Europe is a problem but keep in mind that it is the southern European states with problems, from what I can gather most other European states are doing OK. I could be wrong about that because down here in Aus we don’t care about them Europeans, just so long as they don’t drag us into another of their silly wars. After all, we have the USA doing that for us. 🙂

  23. kvd
    Posted July 22, 2011 at 4:16 pm | Permalink

    [email protected], [email protected] a world currency falls down without an underlying universal intrinsic value. Gold is ‘culturally polluted’ as to worth, and allocating 10,000 Terges to everyone on the planet is typically socialist, much like redistributing matches in a game of poker with your kids, after the clever five year old won.

    Barter was good: I’ll give you my 15 healthy pigs for your Leyland P76. Because each side had something worth less to itself than posession of the desired object – and each side thought they got the better/best of the bargain. A world government could set the basics as to ‘health’ or ‘driveability’ – but not the parties’ recognition as to equivalent worth.

    Here’s a comparative ‘worth’ table of petrol prices. No doubt wrong, subject to inconsistencies, etc., but the point is that the underlying base unit has some equivalent usability (hence worth) in each society. Maybe it should be bread, or rice, or a gallon of water – I don’t know.

    Point is, a world currency would not be subject to political manipulation, and certainly not be equally distributed on an “all bets are off” basis.

  24. Patrick
    Posted July 22, 2011 at 7:39 pm | Permalink

    Why is barter different to what we have now, which is barter with a common unit of exchange?

    The only difference I can see is that ‘real’ barter acts as a massive transaction tax/cost which makes it much harder to transact and thus slows the economy down…to the misery of its participants.

  25. TerjeP
    Posted July 22, 2011 at 11:37 pm | Permalink

    Dave – we agree on lots of stuff. Stop being shocked by it.

    The ideal global currency would in my mind not be administered as such. It would not even be a global currency. It would be more like the ECU than the EURO. It would be a fragmented decentralised thing with no ridgid mechanism for compliance but a general acceptance that the system was worth having and preserving. This is in essence what the gold standard was. We had loads of currencies but they all linked to gold at a fixed rate most of the time and by virtue of this most of the world shared a single common unit of account.

    KVD – instrinsic value is either a semantic tactic or a fallacy depending on how it is used. Value is not in or of object in the way that mass or charge is. Value is a subjective evaluation based on perceived utility that generally varies across time and space and from one observer to the next. In terms of commerce value is a relative thing.

    I don’t know what “culturally polluted” means in this context and I can’t begin to imagine how culture could ever be excluded from the mix even if this was desirable.

  26. kvd
    Posted July 23, 2011 at 5:02 am | Permalink

    [email protected] I won’t die in a ditch trying to defend petrol as opposed to gold as some sort of base unit. You picked up on my use of ‘intrinsic value’ whereas what I was badly expressing was more a thought of ‘equivalent usability’ as I later put it. The point being (and Patrick is right about barter) that even if the trade does not eventuate, the base unit remains ‘useful’ in and of itself. Petrol sort of satisfies that; gold does not.

    As to culturally polluted – I think it is a fact that some societies value the hoarding or accumulation of gold more than others. Not so they can use it directly, or use it to buy stuff; just because it is regarded as “good” to have.

  27. Posted July 23, 2011 at 9:58 am | Permalink

    T&kvd: I believe you are trying to resuscitate Keynes’ bancor.

  28. kvd
    Posted July 23, 2011 at 10:28 am | Permalink

    [email protected] I don’t believe in an afterlife. My badly expressed point was more against gold being the useful constant. I keep thinking of all those post-apoclyptic movies – Mad Max, Tank Girl, Terminator, etc, You don’t see the survivors banding together to protect an Armaguard full of gold. Usually it’s a petrol or water tanker, or an oasis. i.e. something actually useful in any society.

  29. Posted July 23, 2011 at 10:34 am | Permalink

    [email protected] Your suggestion is very vulnerable to any dramatic change in technology.

    Peter Jonson (aka Henry Thornton), former chief economist for the Reserve Bank, has recently published a book which includes a proposal for a global, commodity-based, currency.

  30. kvd
    Posted July 23, 2011 at 10:44 am | Permalink

    Yes, it is Lorenzo; I was merely using petrol as a placeholder for an idea. @24 I suggested the possibility of “bread, rice, a gallon of water” in its stead – and finished with “I don’t know”.

    Now, I’m gonna go read your own post. Which are always interesting I must add.

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