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11/27/2011

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TANSTAAFL

Posner correctly observes that runaway government spending is at the heart of the PIIGS' current woes. The same is true of America, of course, or soon will be.

Thomas Rekdal

Among the numerous unknowns here, it only seems clear that there can be no resolution of the crisis without the cooperation of the Germans, and the Germans face an absolutely perfect dilemma. If they permit the ECB to essentially print money by buying the sovereign debt of the PIIGS, they may create such enormous moral hazards that any temporary relief is outweighed by an even greater crisis later. On the other hand, if the ECB fails to come to the rescue, the European banking system and perhaps the Euro itself may be at risk. And without the Euro, any resulting German currency would appreciate to a degree that would probably kill their export economy.

With every choice frought with peril and uncertainty, my guess is that the Germans will cleve to principle and insist that the ECB focus on price stability alone, the consequences be damned. But who knows? Since the future cannot be predicted, perhaps, as Judge Posner wrote in an earlier post, it is premature to despair. But this is pretty close.

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There is something more to be of value—something I should find within myself—as peace of mind, patience, grace and being kind.

Jack

Absolutely cheap asset prices will work wonders...at some point.

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The same is true of America, of course, or soon will be.

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All of the sci-fi stories pointed to a shorter work week, more leisure time and industries developing around increased leisure time coupled with the income to enjoy it.

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We have nothing like that in place or even in mind. Instead those desperate for any kind of job are to work longer hours for less pay and be appreciative for their opportunity.

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The bitter truth is that the employment prospects for a recent college grad are far more grim, especially full-time employment in their field of study.

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The Occupy Movement and everyone else worried about earnings inequality should be emphasizing the need to find ways to encourage more high school dropouts and high school graduates to get the required background and study habits so that they can, and want to, continue on for a college education.

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There‘s always going to be people that hurt you so what you have to do is keep on trusting and just be more careful about who you trust next time around.

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As compared to the post-World War II era, Americans with high school diplomas today are much less likely to find manufacturing jobs, because there are 2-3 billion people in emerging economies with similar skills who are willing to work more cheaply in order to have a shot at attaining a middle class standard of living.

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Global demographics instruct that manufacturing job growth in nations with emerging economies will continue to outpace manufacturing job growth in America.

Citizen

While the "profligate" Greeks, Italians, et al. do have some responsibility, the common denominator is the German and French banks that loaned them all the money. Remember that the "profligate" Greeks are not responsible for the problems in Italy, Spain, Portugal, or Ireland. The same as your "profligate" neighbor who took out way too large a mortgage is not responsible for the collapse of our financial system in 2008.

SteveA

If Greece were to leave the Eurozone, the other PIIGS would be totally locked out of the public debt markets, and their wealthier northern neighbors would see their borrowing rates skyrocket (since the full extent of damage to their banks would be unknown).

This is why Sarkozy's and Merkels' "shape up or ship out" threats to Greece rang hollow (great for domestic consumption, but in reality toothless). And it's why all the talk of "fiscal discipline" for the PIIGS comes off as a variation on an old joke: borrow $100, it's your problem; borrow $100k and it's the lender's problem.

It is a complete mess. It's hard to come up with a scenario in which the wealthy north doesn't wind up subsidizing the PIIGS for years and years.

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This is why Sarkozy's and Merkels' "shape up or ship out" threats to Greece rang hollow (great for domestic consumption, but in reality toothless). And it's why all the talk of "fiscal discipline" for the PIIGS comes off as a variation on an old joke: borrow $100, it's your problem; borrow $100k and it's the lender's problem.

It is a complete mess. It's hard to come up with a scenario in which the wealthy north doesn't wind up subsidizing the PIIGS for years and years.


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If Greece were to leave the Eurozone, the other PIIGS would be totally locked out of the public debt markets, and their wealthier northern neighbors would see their borrowing rates skyrocket (since the full extent of damage to their banks would be unknown).

Klaus Kastner

A less sophisticated but common-sense-driven entrepreneur, when in trouble, analyzes which processes got him into trouble and tries to reverse them. Regarding Greece, this could work as follows (the suggested reversed processes are in brackets). What got Greece into trouble since the Euro?
1) Cause: an explosion of imports with the consequence of de-industrializing an economy which never had much of an industry to begin with. (Reversal: reduce imports by making them more expensive through special taxes and, parallel to that, substitute them with new domestic production). Strategy: stagger import taxes according to their importance to the domestic economy: 0% on essential goods; up to 100% on luxury goods.
2) Cause: domestic production has ceased to be competitive because of increased costs. (Reversal: establish a few Free Trade Zones, located near cities/areas with large unemployment, and implement there an internationally competitive business framework where new domestic production, at first primarily for import substitution, should be incentivated).
3) Cause: capital flight has drained the economy of financial resources. (Reversal: establish capital controls).
4) Cause: Greece has financed her current account deficit totally with foreign debt. (Reversal: substitute foreign debt with foreign investment).
5) Cause: Greece is a lousy place to do business. (Reversal: implement a new Investment Law offering investors in the Free Trade Zones exactly the kind of business framework which they desire and, since Greeks laws are possibly no longer trusted, have the EU guarantee compliance with the law).
6) Symptom: the budget deficit has exploded. Note that this pe se is not a cause. It is the result of government expenditures exceeding revenues.
7) Cause: the government has overspent? Wrong diagnosis! Greece’s government expenditures are about 50% of GDP which is quite acceptable compared to some other countries (53% in Austria; 56% in France). Wrong diagnosis leads to wrong medicine (such as cutting expenditures, above all during recession!).
8) Correct diagnosis: government expenditures are very unevenly and unfairly distbributed. (Reversal: keep the total level of government expenditures unchanged but restructure their application. To be cute: stop paying pensions to the dead so that you don’t have to take the money from the living).
9) Correct diagnosis: government revenues are out of whack (39% of GDP compared with about 49% in Austria/France). (Reversal: increase government revenues but do not take more money from the “usual suspects” who have been paying their fair share all along (salaried employees; pensioners; etc.). Instead, use all resources of the executive and the state of law to collect taxes brutally from those who never paid any. No holy cows! Their paying taxes will have no impact on economic activity because they can withdraw the money they need from their foreign accounts).
A more detailed suggestion can be found in this link.

http://klauskastner.blogspot.com/2011/09/endgame-for-greece.html

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Observer

TANSTAAFL adds his meaningless tripe to a very shallow post by Posner

The problem in the South has, contrary to what Tanstaafl wants to say, too much gov't spending. The problem is, as one location economist after another has pointed out, a single currency not accompanied by political union rapidly attracts all economic activity to the most productive region (Germany).

The mere act of joining the Euro is what caused this problem. Everyone, I mean everyone said that what has happened is what was going to happen. The cumulative effective of tens of thousands of micro decisions would bankrupt the South, regardless of what the gov'ts did (and it did).

The same thing would happen in the US except that we have a political union that transfers federal tax dollars to unproductive states, dampening the effect of location theory. If one looked at where economic growth has happened in the US in the last 25 years, it has all be concentrate in a few cities, but we tax them and spend the money everywhere. If we didn't do that, our poor and unproductive states, that free ride on federal taxes, would be in the same shape as Greece, Italy, and Spain.

Europe has a choice. Forget the Euro or political union. The question of the later is always, will Germany's tax payers pay? That is what a political union is. The rich pay taxes that go to their poor neighbors.

This time, they may be able to re-finance, but I believe doing such would be a mistake. They should either go all in or forget about it. GB, watching the events, is not about to go all in, so that pretty much says they should break up the Euro

NEH

Observer, There is one phenomena that various regions have been fighting in the U.S. for years. That is the plundering by "poorer" States of the productive capacity of once more productive regions. That is, the granting of massive tax incentives to companies that relocate production and hence work to the poorer South and Southwest and coupling it with a well engrained and intrenched anti-union anti-worker mindset known as "Right to Work". The end result is production, job flight and increasing unemployment and loss of tax base and revenues. Which says something about our current Budgetary problems...

In the E.U. this flight has yet to occur. Due to the more Nationalistic economic structure and the desire to hold production and jobs in place.

Jack

NEH........ yes, and as we see here in Alaska, it's ever difficult to ascertain where the wealth comes from.

At the state and Federal level Anchorage, Juneau and Fairbanks (and Seattle) are the "wealthy" cities that pay taxes and for their services while we "subsidize" our far flung rural towns.

But! truth is Anchorage does not produce one drop of oil, a CF of gas, a single salmon crab or bottom fish, nor a nugget of gold, and for the most part tourists sluice through here in one day or so on their way to see Alaska. But we do have tall buildings full of managers along with a bit of 5pm traffic.

sallya

The Europe crisis is more and more serious.

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