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Conservatism and Great Depression 2.0

Conservatism and Great Depression 2.0

So you think another Great Depression is unthinkable?

Over the next days / weeks / months you will hear many times that Greece will / will not exit the euro and what it will mean to the U.S. and the world economy. In either of the scenarios, it will be disastrous.

But I’m here to tell you right now that the experiment in monetary union without political union was doomed to failure from the beginning. We’re not talking about a distant event either. Things could fall apart with stunning speed, in a matter of months, not years. And the costs, both economic and political will be enormous.

This didn’t have to happen; the euro theoretically could still be saved. But to do so would require that European leaders, especially in Germany and at the European Central Bank, to start acting very decisively and in a very dissimilar way than the way they’ve reacted these past few years. They would have to deal with reality.


Historical Perspective

When the euro was implemented, there was a great wave of optimism in Europe. Investors poured money into Greece, Spain, Italy and most, if not all, of the larger euro zone nations, which were suddenly seen as safe investments. This influx of capital fueled huge housing bubbles and huge trade deficits. Then, with the U.S. financial crisis of 2008, the money dried up, causing severe slumps in the very nations that had boomed before.

At that point, Europe’s lack of political union and fiscal policy became a severe liability. The difference between the U.S. and European bubbles were significant because of the very program Republicans constantly try to crush…Social Security. Nevada and Spain both had housing bubbles, but when Nevada’s bubble burst, retirees could still count on getting their Social Security and Medicare checks from Washington. Spain and European citizens receive no comparable support. So the burst bubble turned into a fiscal crisis, too.

To make matters exponentially worse, Europe’s answer was austerity. Draconian spending cuts were implemented by Conservative Angela Merkel in Germany in an attempt to reassure bond markets. As I’ve said repeatedly, these cuts deepened the depression in Europe’s economies, which further undermined investor confidence, drying up any hope of monetary influx resuming, and led to political instability.

Greece is Getting All the Attention but Larger Deeper Problems Are Exploding

Voters in Greece, who are understandably angry at policies that have produced 22 percent unemployment in general and more than 50 percent among the young, revolted on the parties enforcing those policies. Since the Greek political establishment was, in effect, bullied into endorsing a doomed economic tenet, the result of voter revolt has been the increase in power for extremists. Make no mistake. Regardless of whom stays in power, this game is basically over. Greece simply cannot survive if they pursue the policies that Germany and the European Central Bank are demanding.

Conservative factions in the U.S. say it’s Greece’s fault. That they are lazy, or that they didn’t want to work but ride every other nation in the euro zones coattails. That is simply a simplistic view that makes conservatives feel like they can tie Greece to the poor in America, who they also blame for being “lazy” or unwilling to work as long as they can draw food stamps. Facts bear neither out.

A Bank “Jog”

Greece is now experiencing what’s being called a “bank jog”. A slow-motion bank run is taking place, as more and more depositors pull out their cash in anticipation of a possible Greek exit from the euro. Europe’s central bank is, in effect, financing this bank run by lending Greece the necessary euros. When the central bank decides it can lend no more, Greece will be forced to abandon the euro and issue its own currency again.

This manifestation that the euro is unbinding or unenforceable will lead, in turn, to similar, though much larger runs on Spanish and Italian banks, leaving the European Central Bank to again have to choose whether to provide open-ended financing; if it were to say no, the euro as a whole would collapse.

When this happens, if it happens, financing will not be enough. Italy and especially Spain, must be offered full-throated support; not this “will we, won’t we” to and fro that has been taking place in Greece. They must have some reasonable prospect of emerging from austerity and the depression that austerity has played a large part in causing.

Realistically, the only way to provide such an environment would be for the central bank to drop its obsession with price stability and to accept and even encourage several years of up to 5 percent inflation in Europe and even more than that in Germany.

As one would expect Germany hates this idea. But for the past several years, European leaders have responded to crisis with half-measures that buy time, yet they have made no use of that time and it is now all they have.

It remains to be seen if Europe is ready to swallow their pride and do what’s necessary. Personally I hope that they do. Failure to deal with this crisis in a logical way is critical. Economically, a euro breakup would have negative ripple effects throughout the world. But the biggest concern of European policy failure would be political.

Failure of the euro would amount to a huge defeat for the European project. They had admirably sought a way to bring peace and democracy to a continent with a history of world wars and bitter resentment. It would also serve to irreparably harm the reputation of the political mainstream and could quite possibly lead to the rise once again of extremists.

The failure of the euro will also facilitate the metamorphosis of the Great Recession in the U.S. into the Great Depression 2.0. The U.S. public simply has become so detached that it cannot see history repeating itself in front of their eyes.

I think we are all aware of how that has ended in the past.

Source: HgTransEcon


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