Sovereign debt bubble thread

[Tamas]

Also, about that spiegel article. Looks like the Germans might manage to ruin Europe for the 3rd time? Marvelous.

And in each act of their trilogy they were fatally undermined by the Italians.

[Neil]

hehe, well yeah, thats the problem isn't it? We are separating branches of power, except for the economy, which we give to a few officials who can then do whatever they desire with very minimal checks and balances.

And then we wonder we live in a cycle of booming and busting ponzi schemes.

So wait, you're telling me that laissez-faire can defeat the business cycle?  When the major economies were using laissez-faire, did that happen?

[Tamas]

hehe, well yeah, thats the problem isn't it? We are separating branches of power, except for the economy, which we give to a few officials who can then do whatever they desire with very minimal checks and balances.

And then we wonder we live in a cycle of booming and busting ponzi schemes.

So wait, you're telling me that laissez-faire can defeat the business cycle?  When the major economies were using laissez-faire, did that happen?

Laisez faire deprives the business cycles their most powerful tool: the government.

[The Minsky Moment]

Laisez faire deprives the business cycles their most powerful tool: the government.

Put aside for a moment the basic fact that capitalist economies cannot exist without government.

What is the the theory of business cycles that you are propounding that would suggest that laissez faire policy would defeat them?  And is there any empirical evidence to support it?

[The Minsky Moment]

from Spiegel.de:

The Germans are like a man in a hot air balloon preparing to throw a large concrete block out to increase lift, without realizing that it is chained to their leg.

[Admiral Yi]

That seems broadly congruent with what Spiegel described:

What is lacking in the S&P document is any suggestion that a loosening of fiscal policy would increase Spain's credit rating and therefore lower borrowing costs.

The people who are trying to advance the "growth, not austerity" argument all conveniently overlook the question of where the financing for growth is supposed to come from.

[Tamas]

Laisez faire deprives the business cycles their most powerful tool: the government.

Put aside for a moment the basic fact that capitalist economies cannot exist without government.

What is the the theory of business cycles that you are propounding that would suggest that laissez faire policy would defeat them?  And is there any empirical evidence to support it?

Well this is your field, not mine, so it is much easier for me to make grand sweeping statements

In general, I dislike : bailouts, money printing for winning elections/staying in power/bailouts/whatever else short term plan, and too much government influence on the economy.

Where you draw the line for these is subject of debate, granted, especially the last one. But to my layman eyes the crash we are trying to avoid nowadays seems just coded into the present system, and is bound to happen, sooner or later. And a system based on actual savings, and not artifically printed money used as investment, appears to me to be more stable and predictable, even it it means slower growth.

[The Minsky Moment]

The people who are trying to advance the "growth, not austerity" argument all conveniently overlook the question of where the financing for growth is supposed to come from.

They are not overlooking it, they are hiding it.  The logical place for it come from is money creation in one form or another but that is the most foul heresy in the Church of the Eurozone.

The simple fact is that if the euro is stay intact they only way out is Great Depression-level deflations in the weak countries or inflation in the strong.  The former is not politically feasible, as the recent election results in Greece and the Rajoy flip-flops have demonstrated.  Germany faces now the difficult choice between politically toxic inflationism and the collapse of the euro project.  The fact that Schauble is publicly talking up wage increases demonstrates this is sinking in among the senior leadership.

[MadImmortalMan]

When the major economies were using laissez-faire, did that happen?

lol

When was this?

[MadImmortalMan]

Well, I hope that a proper laissez faire economy will be built up after we clear up the rubble of the current one.

You know full well that isn't going to happen.  Agitating for a return to laissez-faire is like advocating to ban the usage of electricity:  Foolish.

Yeah, it's like advocating for unicorn cavalry.

[Tamas]

The people who are trying to advance the "growth, not austerity" argument all conveniently overlook the question of where the financing for growth is supposed to come from.

They are not overlooking it, they are hiding it.  The logical place for it come from is money creation in one form or another but that is the most foul heresy in the Church of the Eurozone.

The simple fact is that if the euro is stay intact they only way out is Great Depression-level deflations in the weak countries or inflation in the strong.  The former is not politically feasible, as the recent election results in Greece and the Rajoy flip-flops have demonstrated.  Germany faces now the difficult choice between politically toxic inflationism and the collapse of the euro project.  The fact that Schauble is publicly talking up wage increases demonstrates this is sinking in among the senior leadership.

Don't we have a scenario C, where Germans attempt to solve this via intense money printing and inflation, but fail, tank their own economy and moderate political parties, and some people will have to eventually start wearing color-coded badges?

[Tamas]

Laisez faire deprives the business cycles their most powerful tool: the government.

Put aside for a moment the basic fact that capitalist economies cannot exist without government.

What is the the theory of business cycles that you are propounding that would suggest that laissez faire policy would defeat them?  And is there any empirical evidence to support it?

I just realized you interpreted my answer as if I envision some kind of anarcho-capitalism. No. Government is of course needed to guard over the rules. What it shouldn't do, is bend them constantly for various interest groups. That's what I meant.

[Admiral Yi]

They are not overlooking it, they are hiding it.  The logical place for it come from is money creation in one form or another but that is the most foul heresy in the Church of the Eurozone.

The simple fact is that if the euro is stay intact they only way out is Great Depression-level deflations in the weak countries or inflation in the strong.  The former is not politically feasible, as the recent election results in Greece and the Rajoy flip-flops have demonstrated.  Germany faces now the difficult choice between politically toxic inflationism and the collapse of the euro project.  The fact that Schauble is publicly talking up wage increases demonstrates this is sinking in among the senior leadership.

I agree that running the presses is a reasonable solution.  I disagree that the advocates of growth over austerity have made the logical connection.  In most of the statements I've read or heard they seem to treat it as a purely ideological choice.

And I also think an absolute prerequisite is to smash up that retarded system of recycling liquidity back to economic dead zones.

In response to your question to Tamas, the empirical evidence for the laissez-faire solution to the business cycle is in every downturn and recovery that preceded the Great Depression.

[Sheilbh]

The people who are trying to advance the "growth, not austerity" argument all conveniently overlook the question of where the financing for growth is supposed to come from.

The mainstream argument isn't 'growth, not austerity'.

But I'd suggest Eurobonds, Euro-QE and a change to the structure of banking in Europe so that there's a lender of last resort - ie. so state's don't have to assume that role which is a big problem for Spain (and Belgium) - and inevitably a common Euro-regulator.  I'd add that I think economies within the Eurozone that can take steps to stimulate demand should.  The other side of that is ongoing structural reforms both national and I think EU wide - we should be, as Monti suggested, pressing forward with a single market in services.

Going along with all of that is austerity.  Remember Rajoy's sin wasn't that he wanted to spend a huge amount of money, he wanted to reduce the pace of deficit reduction this year.  His government proposed reducing the deficit from 8.5% of GDP to 5.3%, the EU insisted he stick to the original plan (made when the Spanish deficit was projected to be 6.6%) of cutting to 4.4%.  The UK is proceeding at a far slower pace and I think because of that our deficit reduction plan is actually far more credible.

The issue that people like me have isn't that Euro-austerity's wrong it's that it's going at an artificially fast pace and there's very little policy support elsewhere such as an expansionary monetary policy, increased demand in countries like Germany or reforms that are likely to stimulate growth in the short-term.

My position in the UK - where we need a plan B - is that the government should do pensions and welfare reform and a shift in defence budget to demonstrate medium term credibility.  But that they should also take advantage of record low gilt prices to fund a temporary VAT cut, or capital investment in public housing for example.

[Sheilbh]

I agree that running the presses is a reasonable solution.  I disagree that the advocates of growth over austerity have made the logical connection.  In most of the statements I've read or heard they seem to treat it as a purely ideological choice.

I think you either need to read more widely or more selectively because what you're describing is SYRIZA's view but not many other people's.