Sovereign debt bubble thread

[MadImmortalMan]

Oh, I thought he meant the state fiscal accounts. I don't see what the trade balance has to do with it.

[Admiral Yi]

Oh, I thought he meant the state fiscal accounts. I don't see what the trade balance has to do with it.

It has to with external accounts because a current account surplus means a capital account deficit--savings moving out of your country to be invested somewhere else.  It's just a fancy-schmantzy Jew way of saying all countries can't dump their saving overseas at the same time.

[DGuller]

I think we should just let the private sector run up its own debt to make room for their deleveraging.  I don't think that government should be involved in this, individuals know much better how much they need to borrow to deleverage.

The private sector, at least here, cannot provide that stimulus. There's no financing to be had, and those few with access to it, don't want it. They'd rather pay down debt or save for a rainy day (outside Spain if possible).

Why do people always think I'm being serious when I say patently stupid things? 

[citizen k]

Five Things I've Learned On The Ground In Portugal
by Simon Black

Portugal is a country that I've always enjoyed, full of warm, welcoming people, excellent wine, and great weather.

I came to Porto, the country's second largest city of some 1.5 million, to get a sense of what's been happening since the eurocalypse.

1. Capitulation of hope

Excluding the city's still-bustling tourist areas, it's very quiet around the city.

Street-level retail shops and restaurants are either devoid of customers or have been vacated. On many blocks I've seen more "for lease" signs than operating businesses.

Officially, the unemployment rate is 15.2% in Portugal, and the economy will contract 3% this year... yet the clear lack of economic activity suggests the real figures are much greater.

Without doubt, reality has set in. Locals have capitulated 'hope' that the good times will magically re-appear and have adjusted their habits accordingly.

2. Austerity: too little, too late

For the last several years, national government spending has contributed nearly 40% of Portugal's GDP.  In Europe, this has only been bested by (you guessed it) Greece and Ireland.

Including local and provincial governments, in fact, total government expenditure here surpasses 50% of GDP. It's insane.

Under the terms of their bail-out last year, they've been forced to cut back. Sort of.

The government recently tried reforming public worker benefits, for example. But Portugal's Constitutional Court overturned the move, ruling that cutting public workers' Christmas bonuses and generous paid holidays is unconstitutional.

They've also made attempts at overhauling the broken pension system. But then the president himself, Mr. Anibal Cavaco Silva, began complaining about his own pension being trimmed.

You really can't make this stuff up.

All the national and local governments have really been able to do is cut small, rounding-error line items from the budget... landscaping, trash collection, things like that.

You can see the results on the streets– the grass is growing knee-high in public areas away from Porto's main tourist spots.

But none of this is going to make a dent in the budget. 'Austerity' here is truly meaningless, and these guys are going to slide right back into insolvency. I'd expect Portugal's 10-year yield (currently 10.3%) to rise.

3. Absurdly cheap.

Portugal is now one of the cheapest civilized places in the world to live. As part of the contraction, both asset prices and many retail prices in Portugal have dropped substantially.

The middle/upper-middle class segments of the real estate market have gone no-bid, and investment property owners with mortgages to service are getting desperate.

To give you an idea, I'm renting a spacious 3-bedroom, 2000 square foot luxury apartment in a new(ish) development that was completed during the real estate boom a few years ago. It's costing me a whopping $60/night.

The complex is a ghost town. I've seen four human beings in as many days, and as I stand on the terrace surveying the other units, most of what I see is vacant.

Property owners I've spoken to say that they don't want to rent to locals under a long-term lease because the locals can't pay. And when they stop paying, the government makes eviction very difficult.

This makes their market of potential lessees quite small, hence cheap prices.

4. Gold businesses are doing well

All over town you can see these new 'cash for gold' type franchises being set up. It's crazy, you'll even see two or three of them on the same block across the street from one another. It's like Starbucks.

Many of them are doing brisk business as locals look to raise spare cash. And the businesses are only buying gold, not selling.

5. Lack of productive youth

There is a noticeable, disproportionate lack of young people between the ages of 15 to 35 or so.

It seems that much of Portugal's youth is heading to greener pastures, most notably to Brazil where they can easily obtain residency, find a job, and integrate into society... or to frontier markets like Angola (a former colony with a booming resource economy).

No doubt, people with skills and courage are getting the hell out.

[citizen k]

Why do people always think I'm being serious when I say patently stupid things? 

I think you know the answer, you just don't like it.

[The Minsky Moment]

Joan: you've repeated the savings and investment accounting identity many times.  The part you fail to address is what to do if governments' need to deleverage is as great or greater than the private sector.  Governments don't have infinite capacity to supply investment opportunities to households and businesses.

Governments of large states with fiat currencies have enormous capacity to supply investment opportunities to the private sector, especially if the private sectors is  operating well below capacity.  (see Abba Lerner's Functional Finance) The government can simply write a checks; the only constraints are the willingness to risk inflation and the political need to maintain appearances vis the Ron Pauls of the world.  And where private resources are badly under-employed, the inflation risk is not significant.

the alternative is that if the government deleverages one of three things must happen: (1) either an investment boom magically materializes (unlikely but one can always hope) or (2) consumers launch a massive spending binge (unlikely and probably not desirable), or (3) the corporate or household sectors go into deficit either due to a collapse in income or profits (deflation).  Not pleasant. 

The problem that Europe has is that while the Eurozone as a whole has a fiat currency, it is not a coherent state, is subject to various artificial rules constraining monetary activities, and has no real Treasury funcion.  The member states on the other hand control various economic policy levers and are coherent state actors, but in effect have hard currencies they can't control. 

[Jacob]

Why do people always think I'm being serious when I say patently stupid things? 

I think you know the answer, you just don't like it.

Yeah. It's kind of depressing to accept that languish in aggregate prefers to think the worst of people

[MadImmortalMan]

Joan: you've repeated the savings and investment accounting identity many times.  The part you fail to address is what to do if governments' need to deleverage is as great or greater than the private sector.  Governments don't have infinite capacity to supply investment opportunities to households and businesses.

Governments of large states with fiat currencies have enormous capacity to supply investment opportunities to the private sector, especially if the private sectors is  operating well below capacity.  (see Abba Lerner's Functional Finance) The government can simply write a checks; the only constraints are the willingness to risk inflation and the political need to maintain appearances vis the Ron Pauls of the world.  And where private resources are badly under-employed, the inflation risk is not significant.

the alternative is that if the government deleverages one of three things must happen: (1) either an investment boom magically materializes (unlikely but one can always hope) or (2) consumers launch a massive spending binge (unlikely and probably not desirable), or (3) the corporate or household sectors go into deficit either due to a collapse in income or profits (deflation).  Not pleasant. 

The problem that Europe has is that while the Eurozone as a whole has a fiat currency, it is not a coherent state, is subject to various artificial rules constraining monetary activities, and has no real Treasury funcion.  The member states on the other hand control various economic policy levers and are coherent state actors, but in effect have hard currencies they can't control.

That's all true, but doesn't really answer the question of how to handle it in the case that the government deleveraging has to happen. You can't just approach it from the standpoint that it's not good. I mean, that's obvious.

[Sheilbh]

An even more extreme example than Ireland is Slovenia, who are expected to need a bailout soon.  Their debt to GDP is under 50%.

[Iormlund]

[Zanza]

Who will bail out Germany next year?

[Iormlund]

Why the ECB, of course.

With a bit of luck we'll see the guillotines in action first, though. Maybe when the Troika gets them to cut pensions at last ...

[The Minsky Moment]

That's all true, but doesn't really answer the question of how to handle it in the case that the government deleveraging has to happen. You can't just approach it from the standpoint that it's not good. I mean, that's obvious.

In the European case, the answer is there: either break up the Euro or do what what was always supposed to happen - move to common economic governance and a joint fiscal and financial regime across the Eurozone.  Ze Germans get bashed a lot, but to give credit to the Merkel government, it appears they get this.  They problem is that for domestic political reasons and to handle the delicate relationship with France, they have moved too slowly under the circumstances.

[derspiess]

Five Things I've Learned On The Ground In Portugal
by Simon Black

Portugal is a country that I've always enjoyed, full of warm, welcoming people, excellent wine, and great weather.

I came to Porto, the country's second largest city of some 1.5 million, to get a sense of what's been happening since the eurocalypse.

1. Capitulation of hope

Excluding the city's still-bustling tourist areas, it's very quiet around the city.

Street-level retail shops and restaurants are either devoid of customers or have been vacated. On many blocks I've seen more "for lease" signs than operating businesses.

Officially, the unemployment rate is 15.2% in Portugal, and the economy will contract 3% this year... yet the clear lack of economic activity suggests the real figures are much greater.

Without doubt, reality has set in. Locals have capitulated 'hope' that the good times will magically re-appear and have adjusted their habits accordingly.

2. Austerity: too little, too late

For the last several years, national government spending has contributed nearly 40% of Portugal's GDP.  In Europe, this has only been bested by (you guessed it) Greece and Ireland.

Including local and provincial governments, in fact, total government expenditure here surpasses 50% of GDP. It's insane.

Under the terms of their bail-out last year, they've been forced to cut back. Sort of.

The government recently tried reforming public worker benefits, for example. But Portugal's Constitutional Court overturned the move, ruling that cutting public workers' Christmas bonuses and generous paid holidays is unconstitutional.

They've also made attempts at overhauling the broken pension system. But then the president himself, Mr. Anibal Cavaco Silva, began complaining about his own pension being trimmed.

You really can't make this stuff up.

All the national and local governments have really been able to do is cut small, rounding-error line items from the budget... landscaping, trash collection, things like that.

You can see the results on the streets– the grass is growing knee-high in public areas away from Porto's main tourist spots.

But none of this is going to make a dent in the budget. 'Austerity' here is truly meaningless, and these guys are going to slide right back into insolvency. I'd expect Portugal's 10-year yield (currently 10.3%) to rise.

3. Absurdly cheap.

Portugal is now one of the cheapest civilized places in the world to live. As part of the contraction, both asset prices and many retail prices in Portugal have dropped substantially.

The middle/upper-middle class segments of the real estate market have gone no-bid, and investment property owners with mortgages to service are getting desperate.

To give you an idea, I'm renting a spacious 3-bedroom, 2000 square foot luxury apartment in a new(ish) development that was completed during the real estate boom a few years ago. It's costing me a whopping $60/night.

The complex is a ghost town. I've seen four human beings in as many days, and as I stand on the terrace surveying the other units, most of what I see is vacant.

Property owners I've spoken to say that they don't want to rent to locals under a long-term lease because the locals can't pay. And when they stop paying, the government makes eviction very difficult.

This makes their market of potential lessees quite small, hence cheap prices.

4. Gold businesses are doing well

All over town you can see these new 'cash for gold' type franchises being set up. It's crazy, you'll even see two or three of them on the same block across the street from one another. It's like Starbucks.

Many of them are doing brisk business as locals look to raise spare cash. And the businesses are only buying gold, not selling.

5. Lack of productive youth

There is a noticeable, disproportionate lack of young people between the ages of 15 to 35 or so.

It seems that much of Portugal's youth is heading to greener pastures, most notably to Brazil where they can easily obtain residency, find a job, and integrate into society... or to frontier markets like Angola (a former colony with a booming resource economy).

No doubt, people with skills and courage are getting the hell out.

A lot of that reminds me of West Virginia, though hope was abandoned there decades ago.

[derspiess]

Yeah. It's kind of depressing to accept that languish in aggregate prefers to think the worst of people

You're kinda guilty of that, you know.