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May 12

A Slideshow on the European Crisis

Paul Krugman, Nobel Prize-winning Princeton Economics Professor, has placed an upcoming presentation on the European Crisis on his website…please click here.

It is such a simple story as to how badly Europe is going, why it erred, and why to continues to err. Some of the fascinating points in his slideshow include…

  • British GDP has performed worse since the start of 2008 than during the Great depression of the early 1930s.
  • The level of Spanish government debt and fiscal position was much better than Germany’s throughout last decade leading up to 2008
  • what we’ve known for a while but noone seems to care…that Austerity fails with regards to GDP growth and that the problem is a balance of payments problem…not a fiscal problem (Greece being the badly behaved exception)
  • Deflation as a solution, which appears to be Germany’s solution (thanks to their paranoia due to their history of hyperinflation), is many many years of pain.

All of this and more in a very simple slideshow that I ‘m sure I will use parts of in upcoming economic presentations.

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2 comments

  1. BB

    With all do respect to Mr Nobel prize winner, when your banking system is insolvent (but for extraordinary intervention and outright accounting fraud) you have yourself a fiscal problem. When the very GDP that provides the revenue to cover your interest obligations was heavily reliant on the credit provided by your now insolvent banks (aka consumer consumption and massive over construction), future austerity or not, you are going to have a fiscal problem.

    And what’s Krugman’s solution? export more goods at a cheaper price in order to boost GDP? (which is only possible through either massive cost of production adjustments or currency devaluation). Option 1: basically the same economic impact as massive fiscal austerity, flows to incomes -> GDP -> govt revenues -> asset prices -> bank solvency -> bailouts -> more debt pressure and the cycle continues until eventually debt is either inflated away or someone, somewhere actually takes a right down. Oh an lets not forget that such a pipe dream is the goal of every player in this game, therefore its not possible in aggregate. Option 2 = euro breakup and refer to option 1.

    How does any of this debate account for the fact that global debt as grown at a compound rate 3x that of global GDP for the past 10-15 years? That servicing this debt without additional debt or monetary debasement is increasingly difficult if not impossible for some? The notion that debt run-up is not an issue and that it is simply a ‘balance’ problem seems pretty dam silly to me? I’m no economic expert, but given that the theories and models of those whom supposedly are has led us to this point I don’t consider that to be a disadvantage!

    1. michael

      Hey BB…I’m not sure I agree with your interpretation. I don’t believe Krugman has ever said that there isn’t a fiscal problem today. What he points out is that, for example, Spain did not have a fiscal problem leading up to the crisis and the widely held belief that Spain’s problems today are due to running up high debts and that they should have controlled its expenses is false. What Spain experienced was a balance of payments problem whereby the crisis resulted in significant outflow of funds from the country, which destroyed the property market, rapidly increased unemployment, reduced government revenues, increased government debt and the circle continues…note, I spoke in the past tense and not present tense.

      I don’t believe Krugman doesn’t acknowledge that the peripheral countries don’t have a fiscal problem today…in fact the complete opposite. The major part of the European problem is that it is a monetary union and not a fiscal union…hence maybe its still a balance of payments problem because there is limited sharing of the pain like what Australia and USA can do with fiscal policy with the states.

      What Krugman shows is that austerity is a absolute failure is not a solution to the European situation, just like in the 1930s, and it will not help confidence…hence the confidence fairy. He does advocate throwing the fiscal sink at the problem (and targeting higher inflation which is easier when you have your own currency) in an attempt to kickstart the various economies. Don’t forget that it was the biggest fiscal expansion in history, ie. WWII, that got everyone out of the Great Depression.

      Fiscal expansion has not been tried in Europe or even in the US to its full extent when it mattered…they just through a little bit of money and effectively kicked the can down the road.

      The fiscal problem, as Krugman points out (and many others), is a revenue problem, not an expenses problem…and that is why debt has blown out so massively and why its only going to get worse until a new approach to improve the revenue problem can be achieved.

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