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Some predictions for the rest of the decade  |  Michael Pettis  |  Credit Writedowns

My basic sense is that we are at the end of one of the six or so major globalization cycles that have occurred in the past two centuries. If I am right, this means that there still is a pretty significant set of major adjustments globally that have to take place before we will have reversed the most important of the many global debt and payments imbalances that have been created during the last two decades. These will be driven overall by a contraction in global liquidity, a sharply rising risk premium, substantial deleveraging, and a sharp contraction in international trade and capital imbalances.

To summarize, my predictions are:

....

  •  European politics will continue to deteriorate rapidly and the major political parties will either become increasingly radicalized or marginalized.

  •  Spain and several countries, perhaps even Italy (but probably not France) will be forced to leave the euro and restructure their debt with significant debt forgiveness.

  •  Germany will stubbornly (and foolishly) refuse to bear its share of the burden of the European adjustment, and the subsequent retaliation by the deficit countries will cause German growth to drop to zero or negative for many years.

IMO, this COULD be a good thing. Globalization has chiefly served to enable holders of large amounts of capital to confound any attempts at regulation by individual nations, whose average citizens have been regularly and repeatedly raped by the international corporations which are the vehicles for the large holders of capital.

The real basis for creation of capital is the power of the state to creatively reorder the society to suit the needs of the business enterprises within it. This has been done exclusively in the interests of those businesses and with disdainful disregard for the needs and interests of all but those with existing capital. The most recent phase of that process has, effectively, put to sleep the powers of the state to act in the interests of any but those with capital. This has been definitively accomplished by the almost total capture of the states.

Winding down globalization will not cure the problems that afflict our societies, but it does create the space for solutions to be implemented. In order for that space to be utilized large numbers of the electorate in individual countries have to realize the potential they have to shape their society and lives and must use that opportunity effectively. The alternatives are a collection of individual authoritarian states. An individual authoritarian state does not have to have a mad expansionist goal in order to make life miserable for the vast majority of its citizens.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Aug 29th, 2011 at 12:31:24 PM EST
I don't see how
Spain and several countries, perhaps even Italy (but probably not France) will be forced to leave the euro and restructure their debt with significant debt forgiveness.
is going to happen now, at least in Spain, and at least as regards public debt.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Aug 29th, 2011 at 12:44:59 PM EST
[ Parent ]
One can only wonder at Zapatero's motives and beliefs. How did he come to this action? Why does he think it is necessary or beneficial?  Quizling was a bit easier to understand.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Aug 29th, 2011 at 01:04:17 PM EST
[ Parent ]
There is some information here.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Aug 29th, 2011 at 03:50:18 PM EST
[ Parent ]
In the end, the tremendous market instability experienced in August, when Spain's risk premium shot up to 400 basis points, convinced the Socialist that he had to send out a powerful message about the country's commitment to financial solvency. (Emphasis added.)

So, in search of financial solvency they commit financial suicide by strangulation. Please tell me that Zapatero is not from La Mancha.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Aug 29th, 2011 at 04:23:24 PM EST
[ Parent ]
And by writing a suicide pact into the constitution all they do is doom the constitution.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Aug 29th, 2011 at 04:25:33 PM EST
[ Parent ]
But a balanced budget for a sub-sovereign state is by no means unusual or unreasonable ~ its only problematic in this case because the sub-sovereign state has surrendered its sovereignty to a system built broken from the outset.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Mon Aug 29th, 2011 at 04:42:33 PM EST
[ Parent ]
When I wrote
The most important consequence of running the state like a private firm is that the state should not be in the business of providing free or implicit guarantees of any kind, as these are large "contingent liabilities" threatening to bankrupt the state. The threat of bankruptcy is real, as the state must fund itself by borrowing from private lenders, unable as it is to create money to fund necessary expenses deriving from the exercisising of implicit guarantees. One alternative to bankruptcy is default, but this is considered unthinkable as defaulting on obligations to fellow EU member states is "uneuropean". In addition, countries with a large primary trade deficit may find it impossible even to default.

So, what kinds of implicit guarantees are Eurozone governments providing that they shouldn't be in the business of providing? I can think of half a dozen off the top of my head:

  • deposit insurance for banks
  • granting limited liability to businesses
  • disaster relief
  • access to health care
  • access to education
  • access to legal redress
  • public safery
All of these are implicit guarantees that every citizen in Europe expects to enjoy relatively free of charge. These are large contingent liabilities of the state. Any and all of them could not be undertaken by a private entity that didn't charge hefty fees up front and wasn't adequately capitalised in case a particularly large claim presented itself. Would you pay a savings deposit insurance premium to an inadequately capitalised insurance company? (not that "sophisticated investors" didn't do exactly that when they bought CDS "protection" over the past 10 years) Would you incur risks with a full-liability entity having less capital than your potential loss? Would you trust you can be rescued from a disaster by an entity without the capital and operating income to actually fund a rescue operation? How about health insurance from an entity without the resources to pay for the treatment? How about your right to file a complaint to an entity without the necessary money to operate a grievance handling system? How about contracting physical security or firefighting services from an entity without the operating income to actually deploy security or firefighters?
I couldn't imagine we would come to this in less than 4 months.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Aug 30th, 2011 at 02:01:46 AM EST
[ Parent ]
But when the Eurozone blows up and you repatriate your central bank you're left with a broken constitution for a sovereign.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Aug 30th, 2011 at 02:11:56 AM EST
[ Parent ]
So you change it. As we can see right now, it's not too hard to rush an amendment through.
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Aug 30th, 2011 at 02:51:45 AM EST
[ Parent ]
When the centre-left goes insane, it isn't. I don't see a scenario in which the PP would agree to a sane reform.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Aug 30th, 2011 at 02:52:43 AM EST
[ Parent ]
Hmm, I forgot the scare quotes around "centre-left".

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Aug 30th, 2011 at 02:53:08 AM EST
[ Parent ]
Certainly the party political scene, in the event of a eurozone blow-up, would be pretty horrible for some time. But what can't be done in terms of "balancing the books", won't be, any more than the Maastricht Criteria 3 and 60 -- though binding on signatories at a high legal level -- have not been and are not observed, including by Germany.
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Aug 30th, 2011 at 03:11:46 AM EST
[ Parent ]
But this observation does not tell you that sanity will prevail in the end. It is also possible that the right wing wins, which will create an endless string of currency crises for the IMF and its assorted EU clones to "resolve," in a manner that will seem highly familiar to any Latin American expatriates living in Iberia at the time.

Eventually, matters will come to a head and a stable resolution will be found. Unfortunately, installing some pliable tin-pot dictator who rounds up dissidents in football stadiums is one form of "stable resolution."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 30th, 2011 at 03:24:59 AM EST
[ Parent ]
You're quite right, it doesn't tell you what might happen in the end, though repeated currency crises could happen with or without the constitutional amendment. Or, if we assume the right chose to practise the politique du pire, they wouldn't need to call on the constitutional amendment to shrink the state and destroy redistributive policies, thus creating social unrest and leading to a football stadium "stable resolution". And, unfortunately, the PP seems animated by pretty shadowy intentions.

A great deal depends on the extent to which, among the Spanish people as a whole, the C20 history of Spain, starting from the 1930s, is now felt to be a closed book - or, to the contrary, is still unresolved and therefore alive. The right has certainly been pushing the latter term. Which is more worrying, imo, than the constitutional amendment.

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Aug 30th, 2011 at 04:34:57 AM EST
[ Parent ]
Zapatero himself is proof positive that the C20 history of Spain, starting from the 1930s ... is still unresolved and therefore alive. His Law of Historical Memory is, appraised coldly, a Law of damnatio memoriae. Judge Baltasar Garzon was banished from the judicial profession for daring to open a case on Franco's crimes against humanity. The digging up of mass graves from the Civil War continues to be a contentious issue. And just like Thatcher's tories managed to insert into the British conventional wisdom the lie that Britain is no longer a class-based society, the PP and its sociological and voter base are convinced that the wounds of C20 are closed and Zapatero has reopened them, while most of the left is aware that the wounds were never closed. But, IMHO, damnatio memoriae is not the way to go and it is not even feasible since the heirs of Franco have not been defeated to the point where you can apply damnatio memoriae.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Aug 30th, 2011 at 05:58:24 AM EST
[ Parent ]
"Thatcher's tories managed to insert into the British conventional wisdom the lie that Britain is no longer a class-based society"

When people commend the British humour as the master of the absurd, I believe they are referring to that.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Tue Aug 30th, 2011 at 06:21:31 AM EST
[ Parent ]
That appraisal, then, is very worrying.
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Aug 30th, 2011 at 07:16:55 AM EST
[ Parent ]
See this from The Guardian: Spain's World Youth Day has little to do with Catholicism
The church no longer dictates how people live - but its success in lobbying Spain's government should not be underestimated

...

The issue is power, and the Spanish church has an awful lot of it, but it lies somewhere else. Its kingdom is of this world. As a reaction to secularisation, the church has become an American-style political lobby, which no longer shepherds souls but votes. With its radio and TV stations and its vast network of schools and universities, it shapes the conservative political camp. It is its ability to deliver busloads of school children to Madrid that makes rightwing demonstrations possible and massive.

...

And this is what World Youth Day was about: the joy of triumph and the anticipation of more concessions to come from the next government. Journalists scrutinised the long and repetitive speeches of the pope as if they were all about theology, but they weren't. The medium is the message. The message is the massive presence, like a seraphic version of the International Brigades, of the Catholic church on the streets of Spain, the old faithful country gone astray.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Aug 30th, 2011 at 10:25:55 AM EST
[ Parent ]
Or, if we assume the right chose to practise the politique du pire, they wouldn't need to call on the constitutional amendment to shrink the state and destroy redistributive policies

But that is not the point. The point is that the right can call upon the constitutional amendment to enlist the power of the courts against any left-wing restoration effort.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 30th, 2011 at 08:38:22 AM EST
[ Parent ]
Constitutional literalism again. What matters more, as I've said elsewhere, is the balance of power, the ideological climate, the extent to which the people are willing or not to enter into serious conflict. Which is why what Migeru says just above is more worrisome than a constitutional court.
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Aug 30th, 2011 at 09:16:16 AM EST
[ Parent ]
I am talking about the balance of power.

Specifically, whatever power the courts hold has now been firmly wedded to a far-right agenda, until such time as it is possible to restore the constitution or stage a coup d'etat.

And since the insane far-right holds a blocking minority against restoration...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 30th, 2011 at 10:58:26 AM EST
[ Parent ]
afew:
A great deal depends on the extent to which, among the Spanish people as a whole, the C20 history of Spain, starting from the 1930s, is now felt to be a closed book - or, to the contrary, is still unresolved and therefore alive. The right has certainly been pushing the latter term. Which is more worrying, imo, than the constitutional amendment.

IMO, the constitutional amendment is more worrying BECAUSE the right has been pushing issues that keep their interpretation of "the wounds of C20" alive. It is beginning to appear that the death of Franco was more of a stragegic detante accepted by the right in recognition that they could no longer govern with such adamant defiance of others than a real victory by the left. The right may well have just been biding its time until they had the opportunity to tar the left with some bogus smear and reclaim dictatorial power. Chile may be further along in dealing with the legacy of Pinochet than is Spain in dealing with the legacy of Franco.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Aug 30th, 2011 at 01:42:25 PM EST
[ Parent ]
When a dictator dies in bed it's never a victory for the opposition.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Aug 30th, 2011 at 03:47:10 PM EST
[ Parent ]
Franco's death was likely more a "victory" for Juan Carlos than for "socialism".

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Aug 30th, 2011 at 04:54:57 PM EST
[ Parent ]
It's possible that the key turning point was the death of Luis Carrero Blanco.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 31st, 2011 at 02:18:18 AM EST
[ Parent ]
it's probable that ETA were democracy's useful idiots. They were presumably counting on repression creating a backlash etc, creating a situation where secession would be possible.

But by undermining the viability of the regime after Franco, they prepared peaceful regime change.

I remember my joy when I read the news about Blanco. It sort of side-tracked me politically for a while.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Wed Aug 31st, 2011 at 05:38:03 AM EST
[ Parent ]
Salta Franco, salta como o Carrero Blanco.

Jump Franco, jump like Carrero Blanco.

"Jump" being more of a... boom.

Was this said in Spain? In Portugal I am sure it was.

by cagatacos on Wed Aug 31st, 2011 at 07:57:22 AM EST
[ Parent ]
I think this is the major problem and the constitutional amendment secondary, see my comment here.
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Sep 1st, 2011 at 12:42:37 PM EST
[ Parent ]
Constitutions are so Last Century

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Tue Aug 30th, 2011 at 04:16:55 AM EST
[ Parent ]
There's no "but" there. That's what I said: the reason its problematic is because when Spain surrendered its sovereignty, it surrendered it to a sovereignty that was dysfunctional by design. If the sovereignty was not dysfunctional, there'd be no issue of what happens when Spain pulls out of the Eurozone, since there'd by no need to pull out.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Aug 30th, 2011 at 11:19:08 AM EST
[ Parent ]
Debts that can not be repaid will not be repaid. Attempts to repay them that involve throwing a qualified majority of the citizenry into abject poverty will create a constitutional crisis.

If the sanity-based side wins that constitutional crisis, Spain's creditors will be told to fuck off. If the insanity-based side wins the constitutional crisis, there will be another one, and another one and another one, until either the sanity-based side wins or the insanity-based side starts rounding up dissidents and shooting them.

For a federal republic like Spain and Germany, loss of territorial integrity becomes a credible scenario if the federal and some local levels end up on different sides in the constitutional crisis.

One way or another, the Spanish body politic will be writing itself a new constitution before 2050.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Aug 29th, 2011 at 04:21:18 PM EST
[ Parent ]
For a federal republic like Spain and Germany, loss of territorial integrity becomes a credible scenario...

Especially considering the not insignificant centrifugal forces present in Spain today. This could be good news for Catalan and Basque separatists, among others.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Aug 29th, 2011 at 04:29:17 PM EST
[ Parent ]
The Basque and Catalan right-wing nationalists may successfully negotiate themselves some crumbs of devolution in exchange for not ganging up with assorted leftists in asking for a referendum.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Aug 30th, 2011 at 01:59:13 AM EST
[ Parent ]
I am thinking more about effects two or three years on, when conditions have really started to bite all over Spain -- assuming it remains austerity, steady as she goes.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Aug 30th, 2011 at 07:54:47 AM EST
[ Parent ]
The odds are of a 4-year majority PP government. So 4 years of biting austerity is what we're getting.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Aug 30th, 2011 at 10:09:48 AM EST
[ Parent ]
"Germany will stubbornly (and foolishly) refuse to bear its share of the burden of the European adjustment, and the subsequent retaliation by the deficit countries will cause German growth to drop to zero or negative for many years."

What sort of retaliation would that be? Tariffs? Cut off energy or food supplies? Seems to me that if Germany has a globally competitive economy, there's not much that the rest of Europe can do about it.

by asdf on Wed Aug 31st, 2011 at 07:39:40 PM EST
[ Parent ]
asdf:
Seems to me that if Germany has a globally competitive economy, there's not much that the rest of Europe can do about it.

i agree, the rest of europe can suck eggs, from their point of view, the periphery is tapped out as luxury goods market asia and brazil can keep them in the style they're accustomed to.

and just to balance out the germany bashing here a bit, it's not their fault that the PIIGS are less responsible, civic minded, industrious or thrifty, and more corrupt, but it was tolerable when there was money to be made, during which period the euro was a convenient tool, now no longer necessary.

it's not that they want to throw the rest under the bus, it's just time to move on to more avid market, and for that the PIIGS are so much ballast to be jettisoned, nothing personal, just bidnis...

the vaunted european union of common cause was probably a convenient fiction for the movers and shakers all along. that fiction was perceived as reality by millions of dewy eyed believers (myself included), and now there is a huge bureaucracy of EU technocrats geared to protect and ameliorate the lives and rights of EU citizens, setting a good example for the world in many fields, such as alt energy. you're not going to be able to crash all that good will and earnest politicking very easily.

what will be telling is if, faced with the great leap backward that the european state collapsing would be, if enough populist goodwill for the ideal european union project could build to thwart the purely mercenary motives spawned by the neo-lib political capture of those even token leftwing parties here.

i pray that the fiction, born to delude, will have planted itself into so many citizens that they are willing to peacefully take to the streets, to force the hand of those who thought they could dangle a dream in front of gullible, wartorn millions, and then jerk it away as soon as a whole generation has been raised as much 'european' as french or german etc.

perhaps then pols will learn a lesson about keeping promises... europe may need to almost completely founder before mass consciousness awakes to realise what we are in danger of losing, when we had barely begun.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed Aug 31st, 2011 at 08:07:03 PM EST
[ Parent ]
some people seem to forget that Germany still exports more to Belgium (or Italy, or, of course, France) than to China...

Wind power
by Jerome a Paris (etg@eurotrib.com) on Fri Sep 2nd, 2011 at 08:39:06 AM EST
[ Parent ]
Demand destruction. The New DM would probably revalue to twice the value of the New Franc practically overnight if the Eurozone broke up.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Sep 1st, 2011 at 02:00:48 AM EST
[ Parent ]
"Globally competitive" is a function of exchange rates precisely as much as of price levels, and at least as much as it is of the quality of your manufactures. Countries subject to German wage suppression driven mercantilism can retaliate by discounting their currencies until they have restored foreign balance. Indeed, in a true floating currency system they do not even need to actively retaliate, as this is the equilibrium condition for a floating rate system.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Sep 1st, 2011 at 03:32:07 AM EST
[ Parent ]
But we continue to avoid a true floating-rate system. Since Bretton Woods ended we have seen 40 years of surrogates of fixed exchange rate systems. Possibly because Central Banks don't want to, or don't know how to, regulate and then hedge against the foreign currency exposure of their domestic economies.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Sep 1st, 2011 at 04:19:15 AM EST
[ Parent ]
The USA is a good example of a place where a seemingly innocent meme ("tax relief") takes root, and eventually upends the entire country. It happened over 50 years. But still...

Beware these seemingly benign transformations. They tend to metastasize and become religion.

by Upstate NY on Wed Sep 7th, 2011 at 05:15:18 PM EST
[ Parent ]

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