How The Euro Exploded, Part 2

Various Euro bills.
Money. It's the root of all ****-ups

Why has the Eurozone gone awry? Why have the economies of Ireland, Greece and – it looks likely – Italy shot off the precipice like runaway trains? Well as in any transport disaster, several things had to go wrong at the same time. Yesterday we looked at Problem one, the credit boom. That was hardly surprising. The next piece of the jigsaw though may be a little more unexpected…

Problem two: The success of the euro. Mad I know, but in many ways the euro crisis was caused by it acting exactly as intended. It immediately improved the economic prospects of the poorer countries of Europe. Well, the poorer ones that were rich enough to join. Currency stability made the ‘peripheral’ economies attractive to money from the richer ‘core’. They became more profitable places to find investment opportunities.

But there were downsides. When a small economy with its own currency enjoys boom times, one immediate consequence is of course inflation. This reduction in the effective purchasing power of the currency generally causes it to drop in value – as if there was a divine law saying the more money you earn, the less it’s worth. But though that’s frustrating, it at least exerts some moderating influence on the economy. It wasn’t long before a strong currency was the very last thing the rapidly-growing peripheral economies of Europe needed. But adjusting it for their sake was out of the question, their interests were secondary at best. The primary goal of the euro, nearly its entire raison d’être indeed, was to be strong. With no possibility of the currency falling it was almost inevitable that these economies would badly overheat.

This was a foreseeable structural problem with the euro. Loosely-attached economies at the fringes were bound to get yanked about violently by the slow but inexorable movements of such a leviathan currency. Yet we still haven’t decided how to deal with it. Had the credit bubble not coincided, we might have had greater time to adjust and put compensating mechanisms in place. But with the bubble and the fluctuation-amplifying mechanism, well, what we got was bursting boilers and third-degree scalding.

And you know what’s the crazy part? With all this turmoil on the bond markets, with all this panic and fear that countries won’t be able to pay their debts, need international aid from the IMF, be forced out of the euro, you might be forgiven for thinking that the euro itself was in trouble. Yet it sails on, imperturbable, as strong as ever. Indeed, many would argue, quite overvalued. Which is really not what you want from the currency that you have enormous debts denominated in.

There is no escaping this: The euro was devised mainly for the benefit of the larger economies, and it is those economies that have benefited most. Yet it is we in the smaller and more vulnerable ones who are being made to suffer for its failings. Here, we’re even expected to return the investments that outside institutions made into our over-inflated property market – the very money that caused it to explode. They want it back.

The enormity of that has still not really sunk in.

How The Euro Exploded, Part 1

Berlusconi-comizio
"I have no idea what I'm doing!"

Italian stock markets rally on rumours that Berlusconi may step down. That says everything really. Usually the forced resignation of a head of government sends the markets plummeting, as a country switches from general predictability into leaderless chaos. But it seems even leaderless chaos would be more relaxing than Silvio Berlusconi. You can actually calculate the millions he’s costing his country every minute he hangs on.

If he does go though, he will be the third national leader directly forced out by the financial crisis. I don’t think there’s been such a wave of regime change across Western Europe since 1968. How did it come to this – and to ask the question that everyone really wants answered, whose fault is it?

You can’t pinpoint a single cause in these things of course, but surprisingly I think we can narrow it down to just three:

Problem one: The credit boom. We’ve spoken of this before, but its origins can be traced back to the liberalisation of the US banking industry, and the creativity this consequently introduced into a previously staid profession. In particular, the creativity about what the term ‘asset’ means.

It’s always been quite acceptable to loan someone some money and then consider their promise to pay you back as an asset you own – as long as the value you give to that asset realistically reflects the risk of them not paying you back at all. Be unrealistic however, and you’re in trouble. Though many complex and obscure mechanisms were applied to the task, I don’t think it’s grossly oversimplifying to say the basic problem was that overvalued loans were used as collateral to raise more money, which was then turned into more overvalued loans, which were used to raise more money, which was… Et voilà, magic money from nowhere. Inevitably this reached the point where it was mutually profitable for everyone involved to overvalue the loans they were all giving to each other.

This free money fountain naturally encouraged borrowing throughout the US and Europe, and indeed about everywhere with access to currency markets. The first I knew something had gone badly wrong was when I got a letter from my bank telling me I’d been ‘pre-approved’ for a loan I hadn’t asked for. I’m a freelance artist for God’s sake. When banks go round pushing loans on poor people, the Emperor is out waving his dangly bits to a cheering audience.

But it wasn’t just private borrowing that got out of control. Countries too found credit temptingly cheap. What’s more, easy credit helped fuel a consumption boom, which upped tax revenues, which encouraged governments to ease off rates and make more promises. The problem is that largely fictitious revenues can dematerialise overnight.  Public borrowings and spending commitments on the other hand are not so easily gotten rid of.

This though merely sets the global scene; in Europe specifically there was further trouble brewing. To follow…

My Twitter Hobby – #ExtendedProverbs

A mother plays the guitar while her two daught...
Children should be seen and not herded onto trucks

A house divided against itself cannot stand Christmas.

Brevity is the soul of wit generally speaking.

If music be the food of love, play on this pork piccolo.

To travel hopefully is a better thing than to arrive on time.

‘Tis better to have loved and lost, than never to have loved a tall Swedish woman.

A cat may look at a king cobra, albeit briefly.

It’s no use locking the stable door after the horse has bolted it.

Too many cooks spoil the broth; ideally, broth should contain no cooks at all.

An apple a day keeps the doctor away but attracts fruitbats.

You can’t teach an old dog new tricks except ‘play dead’.

Genius is one percent inspiration, ninety-nine percent perspiration, three percent error.

It takes a thief to catch a thief disease.

Life begins at forty, according to new sentencing guidelines.

Flattery will get you nowhere, sexyboots.

It is better to give than to receive anal.

If you pay peanuts, you get monkeys to do your bidding. Cool.

Actions speak louder than words, especially if that action is ‘yelling’.

One man’s meat is another man’s poison, which is half the fun of fugu fish.

Spare the rod and spoil the child, if the child requires major spine surgery.

The rain falls on the just and the unjust alike, but the unjust have your umbrella.

Children should be seen and not herded onto trucks.

There are none so blind as those that will not see, nor deaf as will not hear, nor anosmic as will not smell.

Do unto others as you would have them do unto you is no defence in a sexual harassment case.

A drowning man will clutch at a straw, but throw him a lifebelt you bastards it’s not funny.

All’s fair in love and war and Grand Theft Auto.

Do not let your left hand know what your right hand is doing, it gets jealous.

One man’s junk is another man’s treasure, so ask strange men to help you bury your junk.

The boy is father to the man in parts of West Virginia.

 

The Guardian Monster

London Underground roundel logo
Quis Custodiet Ipsos Custodes?

Oh the Guardian, that normally well-regarded major UK newspaper, has had a ****ing brilliant idea. You see, if you read a story in the online version of the paper, you can share it on Facebook using their app.

Actually if you are logged into Facebook – even in another browser window you’ve forgotten is still open – it automatically posts the article you’re reading. It does say when you install it that the app will share what you read, but I don’t think the casual user will immediately realise this means “without even asking”. I certainly bloody didn’t.

So at long last, the Guardian has managed to fully automate the process of having someone reading over your shoulder. In this way online readers all over the world can partake of the authentic crowded London tube experience.

But that’s not even the worst part. The link it posts doesn’t actually go to the article, it – yes – offers to install the app. So you accept because you want to read the story. All your friends will then see what you’ve read and install the app so they can read it, which will tell all their friends what they’ve read… This thing is going to spread exactly like a virus.

Indeed the figures seem to be bearing that out. Two weeks ago, after being out only a month, they had their millionth install. At that rate we have about one week left to enjoy Facebook before it collapses under the sheer weight of Guardian links.

Psychodrachma

Photo of a young Hoagy Carmichael, published b...
My name is Bond. Collapsing Bond

I woke up this morning with just one thought in my head: As James Bond does most of his work outside his home country, he should apply for an International Licence to Kill.

The subconscious mind is weird, yet annoyingly trivial.

Anyway, the G20. Thought this is basically just another of those international showcase conferences where everyone makes the right noises and little of real substance is done, it did act as a deadline for the EU leaders to have their house looking pretty. Like a station mass, if you will. So they – Sarkozy in particular, as host – were not well pleased when Greece crapped on the doorstep. Batting the EU leaders’ kind offer back with a referendum threat has sent the markets into turmoil once more, just when Sarkozy and Merkel wanted to impress the world with their authoritative grip on the situation. It makes them look helpless and incompetent, so naturally they are enraged. It is now all right therefore to talk openly about dumping Greece unceremoniously out of the euro.

Greece will probably not hold the referendum – there is severe doubt that Papandreou could win the parliamentary vote necessary to hold one anyway – but I am making plans in case the opposite manifests, and it returns to its own currency. It’s a nice place to live. It has weather and wine, as well as all the olives and history you can eat. And when its currency is free to float again it will float ever downwards, as their relaxed taxation chases after their optimistic expenditure. So if I move there, but live on what I’m making here, I’m going to be relatively wealthy – increasingly so indeed. I’ll hardly need to work at all.

So that’s my retirement sorted. Unless Ireland leaves the euro too, in which case I’m buggered.

Economics For Dummies

A Kouros, from the Archaic period. Archaeologi...
Beware Of Greeks Bearing Left

The Greeks played a game of brinkmanship and got a huge debt write-down from it. What did they learn from that? To do more brinkmanship.

So they’re getting a referendum on whether they’ll accept better terms, while we give it away without even a vote in parliament. €700 million to people who should, if they were treated like anyone else in a free market, have simply lost their money.

From this the banks learn that they can lend to people who can’t afford it and still make a profit, because those who did not the make the mistake of borrowing will be forced, by their government, to pay them back.

So what do we learn? That major international banks are our enemy, that the only way to fight them is to threaten the whole European economy, and our government is too supine to do that for us so the people will have to do it themselves.

Yes, some interesting lessons today.

Three Billion Between The Couch Cushions

Nuclear weapon test Mike (yield 10.4 Mt) on En...
You can't tell me that's not pretty

What’s three billion here or there?

Well… On the whole I think it’s better over here. If no one minds. Can I help you search for any more loose change? Whatever help you need, just ask. I’m not an accountant, but I could hardly be less competent than the shower you seem to have now.

Maybe it’s time to look more closely at the Department of Finance. While Ministers and Taoisigh must bear primary responsibility, the Department was the enabler of their problem. Could they be, you know, not actually very good? If they can just stumble across three billion here, how can we be sure that another few haven’t fallen through the cracks over the years?

Or maybe we could just forget about that for now and emphasise the upside. It’s three billion we didn’t know we had, the repayments we’re making on our children are already scheduled, so the obvious thing to do is get some real value out of it – with a big treat to cheer us all up.

As it should happen, today is the anniversary of the first hydrogen bomb – “For those times when ordinary nuclear weapons just aren’t enough”. Fifty-nine years they’ve been around, isn’t it high time we had one? And maybe a nice missile to show it in.

Then we’ll see how the bailout renegotiations go.