Friday, August 5, 2011

The Road Ahead

The E-Day landing isn't going so well. Right now - with the markets in free-fall - it feels like we are coming to a global fork in the road. One fork leads to a double-dip recession (we managed to avoid that in Ireland by not coming out of the first one), the other leads to something more like The Road. Minus the laugh-out-loud humour.

The economic solution to Europe's difficulties is simple. It's the political solution that is the problem. As Chris Dillow explains:
There is, in principle, a simple solution to it - to convert risky assets into safe ones. This could be done by beefing up the European Financial Stability Facility. It could then issue more of its own bonds - which have a AAA rating as they are guaranteed by the French and German governments - and buy PIGS debt. This would replace low-quality bonds which investors don't want with high-quality bonds which they do want.

...the problem with what I'm suggesting lies elsewhere. Such a move would represent a massive step towards fiscal union. It would mean that, in effect, northern European governments would guarantee the debts of southern ones, and in exchange for this they would demand limits upon how much they could borrow, as federal governments around the world limit states' borrowing. This would represent a huge loss of sovereignty. 
So a choice between penury or sovereignty.

Still, at least we have a choice right now, though that might not last if a Credit-Anstalt moment comes our way. Notes Dan O'Brien:
This August, there are legitimate fears that many governments in the rich world will not be able to fund themselves, leading to outcomes of potentially Armageddon-like proportions which could alter peoples lives more dramatically than any single event in many decades.
I must get a comfortable pair of walking shoes...

2 comments:

  1. Fascinating letter on this subject in today's IT from one Geoff Wales, where he writes:

    'Indebted states and the public generally fail to understand why borrowing costs are rising. It is not the case that “markets” are attacking countries. There is simply not enough credit on supply to meet the voracious demand of governments.

    As government entities refuse to repay their debts, or do so by creating additional legal tender, they ensure the market for their debt vanishes.

    Also, when a debtor fails to meet his obligations, the lender makes losses, which means his supply of loanable funds must fall, and he is no longer in a position to lend additional funds, even if it were his wish.

    It is also particularly galling that the betrayed lender, who cannot sue for compensation, is attacked in the media by the dishonourable debtor when he refuses, or is unable to lend, additional resources to the dishonourable beggar.

    It is important, for the sake of our children and grandchildren, that our Government discontinues deficit spending, so we do not consume all of the capital our descendants need to survive. It is interesting to note also that not a single elected representative in the Dáil or Seanad advocates a budget surplus.

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  2. I think as always, the answer lies between the two extremes.

    The markets are bound to take a short term view. But is that the correct view to take with a state?

    Then, the dynamic of boom and bust is spending too much in the boom. And too little in the bust. We already messed up on one side of the equation. Is it inevitable that we mess up on the other?

    It was during the boom that we needed the voices saying cut, cut, cut, spend less, spend less. The effect of those voices at this point on the curve can only have a markedly different one than the one intended.

    That said, there is a critical need to address underlying productivity issues. In the main, these comprise various aspects of political, business and societal corruption and inequities.

    The restriction of money and credit may be one way to force movement in these regards. But the cost is significant. Most particularly to those at the bottom.

    What would be a much better way in my opinion to bring it about is the right kind and force of political will.

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