EUCOM Economic Analysis - Part I

[Watcher In The Middle]

Here's somebody to pay attention to.

And the Smart Money Says....

Now if it's Switzerland that sets down the initial capital controls, then everybody else in the EU will have to follow. No choice.

"Capital Controls" = A ban on money transfers in/out of country. Limits on the amount of cash that can be withdrawn from a bank or ATM.

Think what that immediately does to the business environment. For products like pharmaceuticals or petrochemicals being produced at different facilities located in different nations, imagine the headaches. Think about the effects on a corporation like EADS.

I watched the different Sunday Washington "talking heads' all pontificating over US political fights (like over Bain Capital), and it's more than clear to me that those folks are truly clueless over just how bad and on-the-edge economic issues are in Europe.

If there are nation-by-nation capital controls implemented all across the EU, then the entire EU marketplace start to crumble - and anybody who believes those negative economic effects won't reach US shores is just flat out nuts.

As an aside, now we know why all those US multinationals with all those cash hordes held outside of the US wanted so desperately to cut a deal to be allowed to move that money back into the US at a more favorable tax rate. There's going to be a whole lot of CFO's/corporate treasurers with large cash positions in the different EU countries who are going to be sweating blood.

[Fuchs]

I watched the different Sunday Washington "talking heads' all pontificating over US political fights (like over Bain Capital), and it's more than clear to me that those folks are truly clueless over just how bad and on-the-edge economic issues are in Europe.

Admittedly, wrong continent and the trade relations aren't that huge anyway. Few %GDP.

The more worrying problem is that the talking heads don't have a clue how unsustainable the U.S. economy is and that any recovery of the usual kind is only an acceleration towards the next huge crash.

[Firn]

Smart money has been terribly wrong in so many occasions in those last years that I certainly do not stand in awe. Many top guys of said smart money were smart in the sense that they earned lots of money despite the very mixed bag of performances.

---

Spain is not Greece. It is a modern developed economy with a relative strong national and regional institutions which handled its (national) public debt very well for many , many years. It has also a stable government.

Spains initial crisis was in some ways pretty US-like. A low saving rate, cheap and easy credit and lax oversight led to a great party which inflated the wealth of the citiziens especially due to ever higher housing prices. As everything was on a high investors from abroad wanted to join the fun and kept it going. Then the bubble burst and now the private demand has collapsed, entering a vicious downwards spiral with too little help from the state which hit the austerity brake too soon.

The Spanish banks have, as we have seen still a lot of overvalued assets on the balance sheets as one has to expect during such a terrible local crisis without aggressive action. Bankia has been composed of many regional banks with hardly any relative foreign assets, making them fully exposed to the Spanish crisis. The state will step in, no doubt about that.

Personally I think that Spain must stimulate its economy with help from the ECB. A considerably higher debt of 85% of the GDP with an economy not in deep depression would even make for lower yields, but most important of all it would put so much wasted potential back at work.

[Fuchs]

Spain is not Greece. It is a modern developed economy with a relative strong national and regional institutions which handled its (national) public debt very well for many , many years.

I've read this meme often enough, its popularity seems to stem from Krugman.

No, Spain's fiscal policy has been 100% incompetent and disastrous for a long time. They had faked prosperity and decent budgets like the Greeks, their methods was merely less brazen. They had a huge bubble.
Now either they understood that there was a bubble - then they had horrible policy because they allowed it to grow and blow up.
Or they did not understand there was a bubble - then they were utterly stupid, way below common sense.


This is a country which never got its youth unemployment under control (never below 17%).


I don't get why so many people are so lenient regarding the Spanish and their horrible economic policies whenever the language is English. May it be that the U.S. and London housing bubbles would otherwise create too much cognitive dissonance among anglophones?

[J Wolfsberger]

I've read this meme often enough, its popularity seems to stem from Krugman.

Krugman among others. But the nice thing about Krugman is that he'll reverse course and say exactly the opposite if you wait for a little while. I think of him as the man who argues with himself - and loses.

As for the "cognitive dissonance among anglophones," I think its a language independent epidemic. The root cause is economic illiteracy. But that's probably a topic for another board.

[Fuchs]

Economic policy should be context sensitive.

An economic advisor can contradict an earlier statement and be totally consistent in his economic science at the same time. Most people don't get that, as they're used to ideology instead of scientific models.

[J Wolfsberger]

Economic policy should be context sensitive.

An economic advisor can contradict an earlier statement and be totally consistent in his economic science at the same time. Most people don't get that, as they're used to ideology instead of scientific models.

In general I agree with you. Willingness to change one's position as a consequence of following the data is a necessary component of intellectual integrity.

I also agree that economic policy should be context sensitive. In Mr. Krugman's case, however, the context seems to be ... something other than current world wide economic problems.

As to the use of models, having spent a good bit of my early career developing, maintaining and applying some very complex, high fidelity models and simulations, I can assure you they will lie to you faster than a shady used car salesman.

That is especially true when they are used to bolster an ideological position (ala Krugman) rather than evaluate circumstances.