More on Greece and Nationalism

The deal in Greece won’t work. Greece cannot pay. I agree with John Carney; eventually they will leave the eurozone. But not before considerable damage is done and nationalism makes its presence known throughout Europe.

My thesis:

  • Deficit spending on [a large] scale is politically unacceptable and will come to an end as soon as the economy shows any signs of life (say 2 to 3% growth for one year)…
  • Meanwhile, all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with. While the economy is in an upswing, this will create a false boom, predicated on asset price increases. This will be a huge bonus for hard assets like gold, platinum or silver. However, when the prop of government spending is taken away, the global economy will relapse into recession.
  • As a result there will be a Scylla and Charybdis of inflationary and deflationary forces, which will force the hands of central bankers in adding and withdrawing liquidity. Add in the likely volatility in government spending and taxation and you have the makings of a depression shaped like a series of W’s consisting of short and uneven business cycles. The secular force is the D-process and the deleveraging, so I expect deflation to be the resulting secular trend more than inflation.
  • Needless to say, this kind of volatility will induce a wave of populist sentiment, leading to an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government.

Last April I said that unless we see a multi-year recovery economy in which the nagging debt and default issues are entirely removed, economic nationalism will return with a vengeance. And that means political conflict in which the potential for armed responses is high. This is still the case now.

Do see the source images below. The caption for this one reads:

Another cartoon by Stathis Stavropulos. The EU’s bean counters have discovered there are 33 beans in the soup, when there should only be 28. The five extra are to be handed over to the Germans.

Source: Photo Gallery: Anti-German Sentiment on the Rise in Greece – Der Spiegel

5 Comments
  1. paulie46 says

    …”Meanwhile, all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with.”…

    Ed, I value your commentary and agree with your views generally but this is confusing to me.

    What is the alternative to this?

  2. Evangelos says

    Sad but true,Greeks are becoming German haters,and all because of the corrupted politicians at both sides.

    Karatzaferis of LAOS who today quit from coalition government has spoken for the “german boot”.

    Have in mind that Germans had also destroyed our economy during the nazi occupation (WW II).

  3. Dave Holden says

    “Meanwhile, all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate.”

    By this do you mean cause inflation or just counter deflation?

    The mechanics and effectiveness of governments absorbing private sector deleveraging aren’t that clear to me.

  4. David Lazarus says

    When this crisis started five years ago I said then that this would be an L shaped recovery. Even Nouriel Roubini was too optimistic in opting for a U shaped recovery. All I see that has been achieved is a false market in real estate and other assets. It has saved the banks, but as wages are decimated by the inflationary effects of QE the cost of property for most people is increasing as wages fall, or stagnate faster than real estate prices. So property is becoming ever more unaffordable in many countries. So the American dream of owning your own home will evaporate for many.

    I agree with Edward that the economy will have a prolonged period of ups and downs but it will be false booms. These booms will suck in investors into assets that are still grossly overvalued. They will sustain losses over time. This period could go on for many years. In the Uk I think this period will be more than twenty years or even longer. The level of private debts in the UK is far too high and has barely begun deleveraging. It will take a long period of losses for investors to finally realise that they are hanging on to overvalued assets and exit markets, and for home owners to realise that they need to pay down debts. With stagnant wages and high inflation, the debt burden will increase even with low interest rates. Any “booms” will attract in suckers and then as they realise that real estate is overvalued they will exit. The ups and downs will be a result of either QE or fiscal stimulus being added or ending. This could look like Edwards W shaped oscillating economy, but will simply be the starting and stopping of government policy on top of my L shaped economy.

    Long term real estate prices will collapse, even with money printing on a vast scale. Even if it stalls falls for a while. For the US rising property prices have only been boosted over the decades by a massive increase in worker participation and lower interest rates. Though these low interest rates are damaging other sectors of the economy. The fundamentals of many economies will deteriorate as a result of policy.

    All the policy from the Troika will actually end up promoting extreme nationalism with extremist parties the main beneficiaries throughout Europe. If there is a return to dictatorships across Europe it could mean the end of the EU as well as it shrinks substantially. Any civil wars or revolutions that erupt will be the direct result of current German, ECB and IMF policy. Which could cause problems for Germany as its export markets erupt in flames, and refugees flood across its borders.

    There is a solution but it is not even being considered. That is write off of as much debt so that Greece immediately no longer has a deficit. Then that would give Greece a lot more breathing space. Then the banks solvency should become the responsibility of the ECB. If this were done for Ireland much of its new debt liability would be transferred to the ECB and it too would be in surplus. Apply that to Spain and its solvency would no longer be at issue. Italy would also have less of a problem and it would have to undergo some structural changes such as caps on spending it would be much less problematic.
    I agree with Edward that the economy will have a prolonged period of ups and downs but it will be false booms. These booms will suck in investors into assets that are still grossly overvalued. They will sustain losses over time. This period could go on for many years. In the Uk I think this period will be more than twenty years. The level of private debts in the UK is far too high and has barely begun deleveraging. It will take a long period of losses for investors to finally realise that they are hanging on to overvalued assets and exit markets, and for home owners to realise that they need to pay down debts. The “booms” will suck in suckers and then as they realise that real estate is overvalued they will exit. The ups and downs will be a result of either QE or fiscal stimulus being added or ending. This could look like Edwards W shaped oscillating economy, but will simply be the starting and stopping of government policy.

  5. Dave Holden says

    David,

    Excellent comment on some big themes. It’s how I intuitively view things but I don’t really have enough knowledge of the real world numbers and their rate of change to confidently articulate that.

    Basically, a secular deleveraging with government intervention causing intermittent releveraging. The releveraging or even halt in deleveraging causing fake booms also plays well into Steve Keens theory on the role of the rate of change of debt on growth.

    I also agree on the particular case of UK house prices, as I fail to see where the ability to increase leverage will come from given the sudden impact of a massive increase in debt burden that graduates are about to incur.

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