Europe On the Ropes

If you look further than the next short while:

  1. Most banks will end up being nationalised. That is the route we are on.
  2. Taxpayers are on the hook therefore for vast amounts of debt.
  3. Huge political pressure to “do something” to avoid Japans lost decade.
  4. Consumers cant spend burdened by debt
  5. Debt is forgiven through inflation
  6. Savers get fucked

This scenario is probably the most hopeful for Ireland. Thing is, most people wont pay the insurance of fixing borrowing costs.

On the subject of Japan, Mr. Krugman has changed his view of the ‘lost’ decade:
ftalphaville.ft.com/blog/2009/03 … ad-really/

I still don’t see how inflation is going to help anyone. Unless there is matching wage inflation, the problem remains - household debt-to-income ratios are too high.

I keep reading opinions like this on here, that inflation is about to destroy savings.

This may not be the case at the moment, as CBs are struggling to stave off deflation according to some. The big question is when does inflation kick in, and in what asset class?

As this is (some might argue nominally at this stage) a website about the Irish property collapse, are those predicting spiking inflation also predicating an increase in the price of houses as a result??

But isnt that the whole point that increases in wages erode the burden of debt. Of course, our wages are too high in real terms so those increases may lag inflation.

I posted the artice as I think medium term inflation is a real possibility. Unlike a lot of people here I have debt and have given a lot of thought to Taleb’s attitude to risk and variable interest rates with income uncertainty are one of my two huge financial risk. It is easy to take the recent decreases to ease off on my current thrift, but have decided to keep the payments the same by fixing the debt.

Couldn’t have put it better myself.

I agree, that’s what increases in wages would do as part of a general inflation; I just don’t see how, with global wage arbitrage depressing wages, that is to be achieved short of:

  1. Protectionism
  2. Capital controls/import controls/job export controls (more protectionism)
  3. Tariffs (eh, protectionism)

I also don’t see how it is possible to have higher inflation without higher interest rates, as you point out above. The risk to debtors therefore doesn’t decrease with high inflation, in fact it increases in the short-term as higher interest rates will demand a payment premium before incomes ‘catch-up’, as you also point out.

Further, I still think it unlikely that the Bundesbank-dominated ECB will allow for high inflation to erode savings. It is a constitutional requirement in Germany that money be sound. The Bundesbank managed to get through the 1970s without severe inflation, despite what the rest of the world was doing. Could it be different this time?

accuracy.org/newsrelease.php?articleId=1944

Link to short video

mediaed.org/cgi-bin/commerce.cgi?preadd=action&key=139

Here is a depressing read from the IMF about gov finances:

imf.org/external/np/pp/eng/2009/030609.pdf

From it:

Add the banks bad debts to government debt and inflation will seem attractive.

That reminded me of a super lecture posted by GB a while back. Skip the intro, about 5 mins.

There is a danger in counting in round numbers. Economic cycles don’t seem to recognise them…

For instance, while workers 1920-1930 earned more by the end of the decade than at the beginning, between about 1925 and 1935 wages fell (IIRC the dates), with a significant amount of that in the late 1920s. This was identified at the time as one of the proximate causes of the depression - the increase in debt relative to wages and the reduction in spending power.

But what seems clear is that spending power has reduced relative to credit outstanding, that this has been going on for a long time, and that deflation in the price of consumer goods, high employment rates and low interest rates have masked this.

I’ve been rambling on about this for years, the 1970s Counter-Revolution and the concerted effort ever since to convince the masses to abandon all the gains in wages, welfare and conditions made by the common man since the end of WWI. This is actually what Reagan and Thatcher (and the PDs) were really all about.

Tis right back to the 18th century the bankers and their pet politicians want to take all of us.

So does this mean that an attempt to induce general price inflation would be unsuccessful, as labour has lost much of it’s compensating pricing power?

Real wages have been stagnant at best pretty much everywhere in the industrialised world for 20 years, the populace in general is maxed out on debt, the demographics are poor, the amount of “wealth” destruction going on dwarfs any printing the central banks can possibly do, and there is a vast amount of misallocated slack capital that was poured into houses, factories and shopping centres during the bling bubble.

For all those reasons I’ve been firmly in the “deflation everywhere” camp for months. I just can’t see how any attempt to engineer an inflation can possibly succeed.

They could do a spot of command economy price and incomes policy.

But without protectionism, european and US labour will be priced out by cheaper labour elsewhere. You can see why it is such a popular cheap trick in a depression. The only way to control price would be to set a floor using import tariffs - is there anything that is made in Europe that isn’t made elsewhere?

Irish Wiskhey
French Cheese
Alfa Romeos
Italian Wine
Marketing of Luxery Goods

and lots of other stuff. Whats made only in Europe does not matter, its how much you can add in value

Mmmm. Tell that to the european wine industry that has been decimated by American, South American, South African and Australian produce.

At least if everyone drove Alfa’s there’d be a lot of mechanics employed…

The point is that substitution would come into effect quite quickly if there was a large price differential. This is why decent French wines are now way cheaper than they used to be. You can get a bottle of St. Emilion for under a tenner and a petit Chablis for the same. But incomes in the wine growing regions have stagnated. Prop up the prices again and you would end up with everyone back to Oxford’s Landing and South African Pinot Grigio.

Most of the luxury goods are made in China (handbags, frocks, slacks and the like). There isn’t a full economy in them.

But wouldnt the currencies devalue?

I see the risk (which the markets dont if you look at swap rates) in that when the banks are eventually nationalsed governments in addition to huge bond market liabilities will have huge deposit liabilities backed by hooky assets. What to do? Be honourable and spend 40 years pays this off (heck the UK is just about now paying off WWII) or cheapen the burden of debt by devaluing money with inflation? If a good chunk of the wealth of deposits was created by dodgy lending, is destroying that wealth by printing money so bad?

(Runs for cover)

It’s not that it can’t be done. It’s not that it hasn’t been done in other countries recently (see Yugoslavia in the 'nineties for instance); it’s that this is German savings we are talking about and probably French, Dutch, Belgian, Austrian etc. savings too. Their economies may be imperiled, but they will be of the view that the problem be worked off. I doubt very much they are going to fall on their swords for fools.

The other thing to bear in mind is that the debts of the banks won’t all come due at once. Even if all the deposits leave every bank in europe, the ECB will stand behind them (I hope :exclamation: ). The deposits will go into other banks and everything will settle down. The money in the system won’t have changed, it’ll have jumped in the air, bounced around a bit and eventually settle down. And eventually in most countries growth will resume once enough of the overhang has unwound. It’ll be at the pace that old europe like too - slow and steady. Banks will be utilities, the old 1930s acts will come back only slightly modified, any financial engineering not specifically permitted will not be permitted.

Anyway, this is a long-winded way of saying “what’s in it for us”, “us” being the holders of the debt (like, ultimately, your pension fund…).

To slightly back up my point, look at this chart from Reggie Middleton’s Boom Bust Blog:
2.bp.blogspot.com/_v824_2sEELc/S … D+Disp.png
France and Germany have hardly moved in the household debt numbers. They have little to be gained by inflating away debt (I’m a bit surprised at the Netherlands, but the Dutch seem to have the same religious fascination with owning a house, despite renting being cheap, stable and long-term). At least their rates are long-term fixed, so low interest rates of recent years might account for it…

And another one - domestic private debt:
3.bp.blogspot.com/_v824_2sEELc/S … v+debt.png

The full piece is here:
boombustblog.com/Reggie-Middleto … -Look.html