Home » Money » One Crisis at a Time, Please

One Crisis at a Time, Please

There is a deadline – March 20th.  There is a plan – 70% default, much higher than what’s been suggested before.  The Greek Crisis has everything it needs to conclude after two and a half years standing on the edge of a cliff.  Left to negotiate is whether or not Germany will have a man in place in Athens to oversee the Greek budget process as what the Guardian calls a kind of “Viceroy”.  It probably won’t fly but it does beg the question, “What if we had a German overseer to our budget process here in the US?”.

Nevermind, there have been enough diversions.  At the EU summit this week the details should be finalized and the process for bailing out Greece will be in place.  The world can move on to other worries.  There is even the chance that the European Central Bank (ECB) will have some authority to print more Euros shortly.

Don’t care?  You should.  This is very important news to the US for astonishing reasons.  The bigger problem, brewing for generations, is that we have lost control over our currency and have no chance to get it back unless Europe gets its act together.

The Greek Crisis largely comes from Europe’s willingness to look the other way as Greece ran up large deficits over a long period of time.  They announced in October 2009 that they were in trouble and that all the previous figures were, more or less, a lie.  It’s not as though this was a surprise to anyone who watched the situation closely – except for bond traders who somehow weren’t in on it and promptly freaked out.  After the failure of Lehman in 2008 this looked like the situation that was going to finally cause the greatest Depression anyone could ever imagine, all around the globe.

The Eurozone spent about 30 months keeping it all keepin’ on until a permanent fix could be found.  That be what we have now – though it’s hard to blame the Germans for wanting to be sure.

Everyone has been nervous through this entire time – so nervous that the financial system has been utterly paralyzed.  This has caused strange things to happen around the world.  For example, the Federal Reserve’s “Quantitative Easing” of $600B cash should have increased the money supply and thus lowered interest rates.  It had the opposite effect, however.  That money, loaned out at 0%, was picked up by member banks who promptly invested it the only way they thought was prudent – buying more US Treasury notes (T-Bills).  This brought up demand for T-Bills, which raised the price, effectively raising interest rates.  The investors who had access to the new money just dragged this paper into their corner and sat on it like a bunch of scared hamsters.

Everyone has been completely risk-adverse all around the world because it looked like all of Europe might fall any day.  It still does, but if there is confidence in a plan that saves Greece (and then Italy, Ireland, and maybe Spain) investors can move on and look for new opportunities.  Before that, however, they are looking for a safe haven – and the only one anyone known is in the US.

US Dollars are more than just what we use to buy stuff.  They are the standard currency of the world – and as such they are worth quite a bit more than they would be otherwise.  As world trade grew in the last 30 years, so has demand for the dollar.  We can never really default because it would bring down everything – some way would be found to keep it going.  The Euro and everything valued in that currency might cease to exist long before the US Dollar fails, so it represents more risk.

Keeping the US Dollar more valuable than it might be otherwise means we can buy stuff from abroad cheaply, but it makes it much more expensive to manufacture goods here in the US.  In essence, over the last 30 years our economy has become one where we export nicely printed paper in exchange for real things made elsewhere.  Thus over the last decade we shed 8M manufacturing jobs as the purchasing power of the US Dollar remained high.

Some of this effect will remain with us for a long time, given that every international exchange is priced in US Dollars.  The worst of the effects, and the hardest to predict, would go away as soon as confidence was developed in Europe.  And that brings us to today’s news, which hasn’t quite happened yet.  There is a plan in place and the final details are being decided.  But will it fly with investors?

Let’s hope so.  We have no chance of getting control over our own currency – or our economy – if Europe flounders.  At least not until we make some hard choices about running the whole world.  Where is that German “Viceroy”?

15 thoughts on “One Crisis at a Time, Please

  1. I think your blog is eating comments again. I am glad you made this summary and hope you are right that we are moving on from this crisis but there are so many things needed to build investor confidence. This is just one of them but its a big one.

    • Sorry, I think wordpress has been eating them lately. Thanks for the comment, I do want to get this story out into the world and that means boiling it down to what is important. While about half of Barataria readers are outside the US, my main focus is on US readers (sorry!) because we have so much to learn in order to be better citizens. There are some hard choices to be made – choices masked by a lot of noise and BS that has been distracting us. The Euro sovereign debt issue is one distraction but, told a different way, actually highlights the main problem for us.
      Hope people follow some of the links up there because this is a summary of past comments in many ways – some of it won’t make sense to people or have hit their radar before (such as the 8M manufacturing jobs lost in the last decade!).

  2. Yes, let’s not get too optimistic here. Although when you talk about losing control of our currency I guess you are about as pessimistic as anyone but do you really think we can ever get control back? As the standard around the world I think we are going to be subject to global trade for a long time at least.

    • Once again, I’m not trying to be optimistic but to show that there is a way out of this. The Euro crisis all depends on how it is received – and I don’t think trust is very high so it may take a very long time to sink in even if it is solved. What I expect is that a small sense of relief might get those with big piles of money sitting in the Federal Reserve accounts to invest in the US and get us moving again.
      Long term, the only solution is for the US Dollar to lose its standing as the world currency. That will be very painful, even if a way is found to do it gradually. The IMF is working on this so there is, once again, a way out. But it will not be easy. This crisis just highlights the terrible downside of ruling the world as we do – it means we have trouble keeping our own workforce employed. That means we slowly rot from within, as we have been doing. I hope no one sees that analysis as “optimistic”.

  3. This is the only article talking about this solution that does not use the term “haircut”. Can you explain that for me? Thanks.
    I really appreciate how you explain why this is so important because no one else will other than the Ron Paul people who seem to think that the global financial system is about to collapse.

    • The term “haircut” is used to describe a partial default, since they are usually a reorganization of debt with a small default – say, 10% – that represents “a little off the top”. The term is a cliché that has absolutely no business being used around a 70% default. Anyone who uses this term to describe the Greek restructuring should be immediately ignored, IMHO.

      There is still a chance that the world financial system could collapse, yes. That is exactly what the Eurozone is trying to avoid here. I think it’s likely we’ll keep “muddling through”, as Mauldin puts it, but hopefully sentiment will turn a bit in the short term. That’s about all we can hope for.

  4. the guardian article you linked to said it all … governments exist for the banks and not the other way around – the people of greece are going to pay for everyone else’s mistakes. this is how the 1% control everything. the dollar is king because we enforce it with bullets when someone makes a challenge and that is the bottom line.

    • I don’t entirely disagree. Just printing a few more Euros would reflate things rather naturally, even if it would be tough on banks. And yes, the enormous military we have is clearly at least in part about defending the Dollar Standard. Not a pretty thing.

  5. The Federal Reserve is a bit of an overseer to the US economy. They are experts and technocrats. They are to our age what theologians and the pope were to the middle ages. Economic theories are our cathedrals. Paul Krugman gives us our communion.

    Technocratic leadership and processes in Europe aren’t such a bad thing. That’s what policy school and Ph.Ds in the social sciences are for. If you ever met Bob Kudrle or Ed Schuh the Humphrey Institute you know what I mean. John Brandl was a humane-sounding economist turned politician. Brandl used to talk about choice and competition.

    • Brandl was a great guy, knew him as Dean of Humphrey. And yes, he was definitely a free-market Democrat. I hope there are a lot of us still out there (think so, always making sure).
      I have a lot of faith in our Fed and do think that they are doing everything they can. But things do go badly as we move through badly charted territory. Having a Congress that seems to want to manage supply-side and a Fed that seems eager to pump demand is just about exactly bass-ackwards, IMHO.

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