It’s the German Chancellor who has ‘no clue’ about the debt crisis
Posted on 05 October 2011 with 5 comments from readers
German Chancellor Angela Merkel yesterday defied her ‘entire council’ of economic advisers who want to see the Greek debt resturctured in an orderly fashion, telling a meeting of her party members in Magdeburg: ‘Whoever believes that has no clue about the economy’.
This stubborn and some would say ignorant stance in front of the economic reality that is a bankrupt Greece is appalling. It leaves the eurozone in the hands of the financial markets that will therefore have to resolve the Greek debt crisis in their own manner.
Dilemma exposed
Mrs Merkel shows every sign of grasping the severity of the problem and the dilemma it poses. It is true that letting Greece off the hook has disadvantages: ‘If we tell a country ‘We cancel half of your debt,’ that’s a great deal. Then the next guy will immediately show up and say he wants the same.’
But then again she noted that a Greek default would bring unpredictable consequences, lead to speculative attacks on other eurozone countries and cause a recession in Germany. Plus a Greek default would trigger ‘a gigantic loss of confidence’ in eurozone bonds.
Yes that is the dilemma: you are damned if you do allow a Greek default. But you are also damned if you do not because it is going to happen anyway. The country is bankrupt, it cannot pay its public sector staff let alone interest on its huge debts without money from the EU and the eurozone is not going to throw good money after bad forever. Besides the financial markets are running out of patience with this charade.
Can European ’solidarity’ beat the markets and preserve the financial solvency of the eurozone? It seems it is the German Chancellor who has ‘no clue’ about how economies function in the modern world. Perhaps it is her communist background from Eastern Germany and a lack of experience with capitalism.
Bigger crisis
For an unresolved crisis will result in higher and higher interest rates for eurozone bonds, and a total paralysis of inter-bank lending. Stock markets will crash and become highly volatile. The value of the euro will slump but not help trade because trade finance will freeze up.
The German Chancellor says ‘No one can say with certainty’ what happens if Greece defaults. ‘Before I make a nifty step into an adventure, I have to ask whether we can really handle this and can we oversee what we are doing?’
She does not seem to understand that time is running out. The only choice is between managing a Greek default as best possible or leaving it to the markets to resolve. The third option of preventing it entirely just is not possible. This can cannot be kicked down the road any longer.
5 Comments posted by readers:
I suppose her economic advisers (“whole council of”) have little credibility in this brilliant woman’s mind because economists have got SO much wrong in their advice to previous administrations (eg Brown’s).
Economics is a truly dismal science, not only because of its Malthusian potentials, but also because the tussle between Keynesians and von Hayekians shows that not even advisers can be trusted.
She will have other advisers than economic ones. She will have diplomatic advisers, for example, who will advise her to look above the European financial problems to the increasing bellligerence of anti-Israel countries and the almost total geopolitical isolation of Israel for the first time since 1948.
So, she must think in at least two different dimensions whereas the advisers need only do this in one dimension.
She knows war brings hyperinflation either during or after it is finished (or is likely to do so). She may think that a recession in Germany, which has not transferred currency to Greece, is better equipped not only to face a Middle East war but to cope if it goes viral and involves the whole world.
James Turk is on record as saying that about 40% of US expenditure now comes from debt, and that this 40% level has historically been associated with the onset of hyperinflation.
For my part, I prefer that the politicians make the decisions rather than the economists, even though I recognise that the chaos the human race is now in is beyond any professional group of human beings to solve.
As Daniel Hannan blogging on the Daily Telegraph put it so eerily, “We’re doomed! Doomed!” after studying the absolutely enormous debts and deficits.
They will pile up more debt to delay the collapse of the euro. That can go on a lot longer than many people think. Not forever, but for years. Then will come the inflation. That is my guess as to how it will go down. And China and the oil states will own a LOT of Europe in 5 years.
Excellent commentary, Peter!
But of course, you know that I’m gonna add a few remarks.
The General Public Sees the Charade:
The general public, while not familiar with details, knows that the PIIGS can’t survive, and knows the European politicians are re-arranging the deck chairs on the Titanic. Yet it’s doubtful that they understand why this charade has been allowed to endure for so long.
The Markets Have Been Very Patient:
Interestingly, one of the main reasons why the markets have tolerated this charade is because the western banks have, in a very “stealthy” way, propped up these PIIGS nations by selling gargantuan amounts of European sovereign bond CDSs to Europe.
So Why Did Western Banks Sell CDSs Anyway?
And the reasons are twofold:
1. So they can make money on it (as long as they could continue to shift the CDS risk to the AIGs of the world!), and
2. So they can try to “prevent the inevitable” (i.e. a sovereign default), thereby preserving the status quo, which these banks so desperately want.
. . . But Time Has Run Out:
As Peter has stated, This can cannot be kicked down the road any longer. Greece will default, and very soon; but this would be only the first in a series of dominoes to fall. Western banks are facing huge losses, and there’s no way that they (primarily European and US banks) can guarantee the debt of these PIIGS nations. Their CDS derivatives have only a very small amount of “margin” to pay off.
Chaos will ensue.
Just like Margaret Thatcher, the German Chancellor Angela Merkel is now the only shining light of European politics. Hopefully, she won’t buckle under the deluded, self appointed financial experts who don’t have the first clue about economics! Let Greece collapse and enjoy the fall out! For the first time in modern history….those who deserve what’s coming down the pipe will get it good and hard!
Mine is a question, not a comment. Are British banks expected to go bust or virtually bust if Europe is not flooded with more money? Presumably, if a Wall Street style crash occured, the answer is yes.